ITAT upholds PCIT Order on Depreciation Disallowance, holds AO Ignored Rental Terms and Asset Usage Facts [Read Order]

The ITAT Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has upheld the revisionary order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. The Tribunal held that the Assessing Officer (AO) had disallowed depreciation based on an incomplete understanding of the property usage and rental terms, thereby warranting action from the PCIT.

The appellant, Shreeji Associates, is a real estate firm engaged in the construction of residential bungalows and was subject to investigation for Assessment Year (AY) 2017–18.

The assessee had claimed depreciation of ₹20.68 lakh on a building that was partly used for its business activities and partly let out. The AO, during assessment, disallowed depreciation of ₹6.20 lakh on the ground that 30% of the property, which comprised the ground floor banquet hall, was let out and therefore not eligible for depreciation.

However, during proceedings under Section 263 of the Act, the PCIT found that the AO had missed important facts.

On examining the rent agreement, the PCIT observed that the assessee had let out not only the banquet hall on the ground floor but also eleven fully furnished guest rooms on the first floor, a hall named "Pearl Hall" on the second floor, and additional fixtures and open terrace areas. The PCIT held that the AO had failed to make any enquiry into these aspects and had incorrectly computed the area for let out, depreciation only on the banquet hall was disallowed.

In the PCIT's view, this constituted a lack of enquiry from the side of AO, which resulted ‘in the assessment order being both erroneous and prejudicial to the interest of the Revenue’. As a result, the order was revised with directions for appropriate disallowance on the entire let-out portion of the building.

The assessee contended before the tribunal that while the banquet hall and rooms were mentioned in the rent agreement, their actual use was mixed. The assessee claimed that it retained rights to use the rooms and halls when not booked by the lessee and that these areas were used for club-related activities during off-peak periods. The assessee further argued that the AO had made due enquiries and had taken a legally reasonable view by disallowing depreciation only on the ground floor.

The Tribunal bench comprising Dr. B.R.R. Kumar (Vice President) and Siddhartha Nautiyal (Judicial Member) held that the AO’s basis for disallowing depreciation was incorrect and not connected with the contents of the rent agreement.

“The Assessing Officer was of the view that only the ground floor had been let out, which is clearly contrary to the terms of the Rent agreement,” the Tribunal noted. It further pointed out that the AO had not examined whether the guest rooms and other facilities were in fact used by the assessee for business when not occupied by the lessee. This aspect was completely missing from the AO’s assessment order.

The ITAT held that the PCIT had rightly used its powers under Section 263 of the Act to disallow depreciation and thus dismissed the assessee’s appeal.

The Appellant was represented by Manish J. Shah, Jimi Patel and Rushin Patel, while Prothviraj Meena represented the department.

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