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Income Tax Appellate Tribunal, BENCH – “A”, AHMEDABAD
Before: SHRI PRAMOD KUMAR & SHRI RAJPAL YADAV
आदेश/O R D E R
PER RAJPAL YADAV, JUDICIAL MEMBER Assessee is in appeal before the Tribunal against order of ld.CIT(A)-II, Ahmedabad dated 5.12.2013 passed for the Asstt.Yar 2009-10.
In the first ground of appeal, the assessee has pleaded that the ld.CIT(A) has erred in confirming disallowance of depreciation amounting to Rs.22,71,970/-.
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Brief facts of the case are that the assessee-company has filed its return of income electronically on 24.9.2009 declaring total income at Rs.2,51,39,767/-. The assessee has claimed depreciation of Rs.34,03,491/-. The ld.counsel for the assessee has pointed out to us that correct figure is Rs.22,71,970/-. This claim of the assessee was disallowed by the ld.AO on the ground that the business of the assessee was closed down and there is no business income during the year. The ld.AO further observed that these assets were not used for the purpose of business, therefore the assessee is not entitled for depreciation. Appeal to the ld.CIT(A) did not bring any relief to the assessee.
The ld.counsel for the assessee took us through the order of the ld.CIT(A) and submitted that there was dispute with regard to trade mark “BABUL”. Manufacturing process was stopped by the Court and on account of that there was no business income during the year. According to the assessee, it was a deemed suspension. The business has not been closed down permanently. In subsequent year after litigation is over business has commenced. The ld.DR was unable to controvert this contention of the ld.counsel for the assessee.
We have duly considered rival contentions and gone through the record carefully. A perusal of section 32 would indicate that for grant of deprecation this section contemplates two conditions. The assessee should be owner of the assesst, and the asset has been used for the purpose of business. According to the AO the expression “used” employed in this section would construed as actual user and in case in any year the asset is not used then the assessee will not be entitled for the depreciation. However, in a large number of authoritative pronouncements it has been observed that expression “used”
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employed in section would embrace deemed user of the asset. The assessee has not closed its business, rather on account of stay operation from the Court manufacturing activities were stopped. The assets were ready for use for the purpose of the business and there was constructive user of the asset. Therefore, depreciation ought to be granted to the assessee. We allow this ground of appeal and delete the disallowance.
Next ground of appeal by the assessee is that the ld.CIT(A) has erred in confirming the addition of Rs.54,24,294/- which was added by the AO with the aid of section 41(1) of the Income Tax Act, 1961.
Brief facts of the case are that the assessee has shown liabilities under the head sundry creditors for goods, sundry creditors for expenses, advances from customer and other liabilities. The ld.AO formed an opinion that there is no manufacturing activity in the business since 13.3.2005, therefore, this liability is to be assumed as ceased. Accordingly, he made an addition of Rs.54,24,294/-.
Appeal to the ld.CIT(A) did not bring any relief to the assessee.
With the assistance of the ld.representatives, we have gone through the record carefully. The section 41(1) applies where a trading liability was allowed as a deduction in an earlier year in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in a later year by way of remission or cessation of the liability. In such a case the section says that whatever benefit has arisen to the assessee in the later year by way of remission or cessation of the liability will be brought to tax in that year. The principle behind the section is that the provision is intended to ensure that the assessee does not get away with a
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double benefit - once by way of deduction in an earlier assessment year and again by not being taxed on the benefit received by him in a later year with reference to the liability earlier allowed as a deduction. At this stage it is pertinent to take note of finding recorded by the Hon’ble Gujarat High Court in the case of CIT Vs. Bhoghilal Ramjibhai Atara, 43 taxmnan.com 55 (Guj). It reads as under:
“8. We are in agreement with the view of the Tribunal. Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”
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The AO has not brought any evidence on the record to show that liability has ceased. The assessee has not written off the liability in the accounts. Therefore, there would not be any addition under section 41(1) of the Act. Hon’ble High Court in the case of Bhogilal Ramjibbhai Atara (supra) considered this aspect and observed that even if debt itself is found to be non-genuine from the very inception that also in terms of section 41(1) of the Act, there is no solution for that. In other words, addition cannot be made unless liability in the accounts has been written off. Therefore, following the decision of the Hon’ble Gujarat High Court in the case of Bhoghilal Ramjibhai Atara (supra), we allow this ground of appeal and delete disallowance.
In the result, appeal of the assessee is allowed. Order pronounced in the Court on 9th October, 2017 at Ahmedabad.
Sd/- Sd/- (PRAMOD KUMAR) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER