The Bench of the Income Tax Appellate Tribunal (ITAT) recently held that the claim for depreciation under Section 32 of the Income Tax Act requires the fixed asset to be used for business purposes.
The assessee M/s. LTIM indtree Limited filed return of income for the Assessment year 2006-07 declaring total loss of Rs.2,24,61,220/-. The case was selected for a scrutiny under CASS and statutory notices were issued to the assessee. The counsel Tata Krishna, Chartered Accountant appeared from time to time and the documents were furnished. During the course of assessment proceedings, the Assessing Officer observed that the assessee has acquired new assets of Rs. 4,22,01,852/- during the previous year and claimed total depreciation as 2,23,01,237.
The assessee was asked to furnish evidence in respect of the acquisition of new assets. The assessee furnished details of the list of fixed assets addition during the Financial Year 2005-06 and enclosed copies of two invoices indicating the purchase of assets worth of Rs. 64,480/- and Rs. 93,600/- and in regard to balance of assets, the counsel for the assessee stated that it was very difficult to produce the copies of all the new assets purchased and contended that sample of two assets have already been furnished and requested to complete the assessment on the basis of evidence furnished.
The Assessing Officer (AO) referred to section 32 of the Income Tax Act and concluded that depreciation can only be claimed when assets are owned by the assessee and used for business purposes. The Assessing Officer requested evidence of ownership for the new assets acquired by the assessee but received only two sample invoices. Based on this, the Assessing Officer presumed that the assessee did not own the properties and disallowed the depreciation claimed, adding it to the income returned.
Additionally, the Assessing Officer noticed that the assessee had reduced Rs. 10,62,493 from the total assessable income as an extinguishment of liability in the income statement. The assessee explained that the amount was a net gain resulting from the return of a software tool purchased from M/s. Magma Design Automation Inc. The Assessment Officer, however, found the explanation insufficient and added the entire amount as income for the assessment year.
Aggrieved assessee filed an appeal before first appellate authority and after considering the entire material, the CIT (A) allowed the appeal of the assessee. In respect of the issue on the income earned by the assessee through extinguishment of liability, the CIT (A) dismissed the ground raised by the assessee and enhanced the income of the assessee by Rs.15,41,161. 6. Aggrieved from the above assessment order, the assessee filed appeal before the Tribunal.
Counsel for the revenue argued that during the course of assessment proceedings the assessee could not prove the ownership of the assets as well as the active/passive user of the assets. He submitted that section 32 clearly says that first the assets should be owned by the assessee and it should be used for the purpose of the business, but the assessee could not substantiate the ownership of the assets as well as whether the assets were used by the assessee during the impugned year and date of put to use even in the rejoinder to the remand report before the CIT (Appeals).
The single Bench Accountant Member Laxmi Prasad Sahu observed that the CIT (Appeals) had rightly disallowed the depreciation on the assets by observing that the assessee was unable to prove that the assets were used for business purpose with cogent evidence. The ground raised by assessee was dismissed.
The disallowance made by the assessing officer regarding the treatment of certain income as business income has not been examined in the context of section 10A of the Income Tax Act. In light of the documents submitted by the assessee, it is necessary to remit this issue back to the assessing officer for a thorough examination considering the provisions of section 10A and making a decision in accordance with the law. The assessee is advised to cooperate and not seek unnecessary adjournments to ensure the timely resolution of the case. The ground was allowed.
In result, the appeal filed by assessee was partly allowed for statistical purposes.
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