SANJAY G VADODARIA,MUMBAI vs. ITO 25(3)(4), MUMBAI

आदेश / O R D E R Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 25/03/2013 of the Ld. First Appellate Authority, Mumbai. The first ground relates to disallowing a sum of Rs.2,75,521/-, being disallowance of depreciation on the machinery. During hearing, the crux of arguments advanced by Ms. Zarna P. Chandwani along with Mr. Pradeep Chandwani, is that it was an old machinery and in earlier years, the same machinery was used on which the depreciation was allowed by the Assessing Officer for which our attention was invited to para-5 of the assessment order. It was contended that business was not closed by the assessee and due to slow down in the business, the machinery was kept ready for use.

2.2. Before adverting further, we are expected to analyse the meaning of the word depreciation, which means “a decrease in the value of property through wear and tear, deterioration or obsolescence, meaning thereby, it is inherent decline in the value of the asset. Before coming to any conclusion, we are reproducing hereunder the relevant provision of section 32of the Act for ready reference and analysis:-

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed— (2) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed10; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed11: Provided that no deduction shall be allowed under this clause in respect of— (2) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used— (2) in a business of running it on hire for tourists ; or (ii) outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42 : Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) 12[or the first proviso to clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be : Following third proviso shall be inserted after the second proviso to clause (ii) of sub-section (1) of section 32 by the Finance Act, 2015, w.e.f. 1-4-2016 : Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset:

Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation.—For the purposes of this proviso,— (2) the expression “commercial vehicle” means “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle” and “medium passenger motor vehicle” but does not include “maxi-cab”, “motor-cab”, “tractor” and “road- roller”; (b) the expressions “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-cab”, “tractor” and “road roller” shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988): Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991: Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation 2.—For the purposes of this sub-section “written down value of the block of assets” shall have the same meaning as in clause* © of sub-section† (6) of section 43. Explanation 3.—For the purposes of this sub-section, the expression “assets” shall mean— (2) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. Explanation 4.—For the purposes of this sub-section, the expression “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto). Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Following proviso shall be inserted before the existing proviso to clause (iia) of sub-section (1) of section 32 by the Finance Act, 2015, w.e.f. 1-4-2016 : Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect, as if for the words “twenty per cent”, the words “thirty-five per cent” had been substituted : Provided 13[further] that no deduction shall be allowed in respect of— (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or © any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year; (iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of the assessee. Explanation.—For the purposes of this clause,— (1) “moneys payable” in respect of any building, machinery, plant or furniture includes— (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso; (2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause © of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution. Xxxxxxxxxxxxxx (2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub- section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.”

2.3. If the aforesaid provision is analyzed, it can be said that depreciation is a general principle represents the diminution in the value of a capital asset, when apply to the purpose. Thus, the term depreciation is to be understood in commercial sense then it can be said that it is a normal wear and tear, which required to be replaced at a point of time in future (CIT vs Anand Theaters (2000) 244 ITR 192 (SC), CIT vs Daudayal Hotels Pvt. Ltd. (282 ITR 132)(Guj.)). The position of law is well settled that the depreciation allowance is a normal wear and tear, out of use of the asset/vehicle (CIT vs Crown Products 304 ITR 106 (Guj.)). The Hon’ble Madras High Court in Velimalai Rubber Company Ltd. Vs ITO (1999) 240 ITR 618, 623 (Mad.) held that, where it is found that the assessee is not the owner of the asset in respect of which depreciation is claimed, the assessee is not entitled to claim such depreciation. However, the Hon’ble Kerala High Court in CIT vs Nidish Transport Corporation 185 ITR 669 (Kerala), wherein ,the motor vehicle was purchased by the assessee, use for business purposes, but not registered in the name of the assessee, the assessee was held to be entitled for depreciation. Identical ratio was laid down by Hon’ble jurisdictional High Court in CIT vs Dilip Singh S. Bagga (1993) 201 ITR 995 (Bom.), CIT vs Mirza Ataulla Baig 202 ITR 291 (Bom.), CIT vs Nabdurga Transport Company 235 ITR 158, 160 (All.), Basti Sugar Mills Ltd. (2002) 257 ITR 88, 89,91 (Del.), Hotels Skylark & Restaurant Pvt. Ltd. 221 ITR 283 (Punjab), CIT vs A.P. Paper Mills 225 ITR 262 (A.P.), CIT vs Orient Longman Pvt. Ltd. 227 ITR 68 (A.P.), CIT vs Himachal Pradesh Mineral and Industrial Development Corporation 234 ITR 509 (HP), Mysore Minerals Ltd. 239 ITR 775 (SC), relying on CIT vs Poddar Cements Pvt. Ltd. 226 ITR 625 (SC) held that the assessee is entitled to depreciation. The ratio laid down in CIT vs Revathi 245 ITR 686 (Mad.), CIT vs Thanthai PT Corporation 248 ITR 632 (Mad.), CIT vs WEP Perferals Ltd. (2014) 362 ITR 508 (Karn.) and CIT vs Jawhar Kala Kendra (2014) 362 ITR 515 (Raj.) supports the case of the assessee.

2.5. The ratio laid down in ICDS Ltd. Vs CIT (2013) 350 ITR 527 (SC), Prkash Leasing Ltd. Vs DCIT (2013) 356 ITR 179 (Karn.), CIT vs Biad Leasing and Finance Company Ltd. (2013) 359 ITR 413 (Raj.), CIT vs H.B. Leasing and Finance Ltd. (2014) 360 ITR 362 (Del.), CIT vs Glenmark Pharmaceutical Ltd. (2013) 351 ITR 359 (Bom.), CIT vs Ansal Properties and Industries Ltd. (2013) 352 ITR 637 (Del.), supports the case of the assessee. Even otherwise, in view of the ratio laid down by Hon’ble Apex Court in Vegetable Products Pvt. Ltd. 88 ITR 192 (SC), wherein, it was held that when two views are possible, which favour the assessee, has to be followed, further favours the case of the assessee. Further, it is not the case of the Department that the machinery was never put to use by the assessee for its manufacturing activity as it is an admitted position in earlier year, the claimed depreciation was allowed to the assessee. During the relevant period, due to lull in the business, the manufacturing activity was not carried out. It is not the case that the manufacturing activity was permanently stopped rather due to temporary lull in the business, in a hope of improvement in the market condition, the machinery was kept ready for use. Since, the depreciation is statutory allowance and the manufacturing activity was temporarily stopped, therefore, it has to be allowed. Thus, this ground of the assessee is allowed.

However, we are making it clear that this depreciation cannot be allowed for indefinite period to the assessee and steps should be taken to carry out the manufacturing activity so that the further depreciation, if any, can be availed.

3.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the ld. Assessing Officer rejected the books of accounts of the assessee invoking section 145(2) of the Act and estimated the gross profit at 1.89% on the turnover of the assessee amounting to Rs.8,22,63,831/-. During the relevant period, the assessee broadly traded in plastic beeds, plastic powder and other related articles. The Assessing Officer while estimating the addition of Rs.15,54,786/- at the rate of 1.89% of Rs.8,22,63,831/- observed that the assessee did not got its accounts audited u/s 44AB of the Act. The ld. Assessing Officer did not find the books of accounts of the assessee to be reliable because the primary books and vouchers were not produced before him. However, we find that the assessee duly produced the party-wise details of purchase and sales with the help of register maintained for this purpose and also confirmation from the concerned parties. Ld. Assessing Officer issued notices u/s 133(6) of the Act to all the creditors to which all the parties attended/submitted their replies as is evident from para 5.3 of the impugned order. As is evident from the assessment order itself (para-7) that certain discrepancies were noticed in the audit report, meaning thereby, the audit report was duly filed by the assessee. In the assessment order itself (para-7-II), there is a mention that during assessment proceedings itself, the assessee filed audit report on 13/10/2009. It means the audit report was filed by the assessee, which was ignored by the ld. Assessing Officer. It is also noted that for Assessment Year 2009-10, the same GP was accepted by the Department, while framing the assessment u/s 143(3) of the Act, therefore, there is no reasons to increase the same by 1.89% of the turnover. Therefore, the ld. Assessing Officer is directed to delete the ad- hoc enhancement to the tune of 1.89% and accept the gross profit accepted for Assessment Year 2009-10 as there is no reason to increase the gross profit, without bringing contrary facts on record, thus, this ground of the assessee is allowed and disposed off in terms indicated hereinabove.

Finally, the appeal of the assessee is disposed of in terms indicated hereinabove.

This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 21/02/2017.