ITAT Upholds Revenue Appeal on Depreciation: Allows on Building, Not Land; Affirms No Underpricing on Jewellery Sales.

The ITAT partially upheld the Revenue's appeal. It affirmed the deletion of the Rs. 1,13,54,683 addition in gross profit on jewellery sales, agreeing with the CIT(A) that there was no evidence of underpricing. However, the ITAT reversed the CIT(A)'s decision on depreciation, ruling that it cannot be applied to the land portion, only to the building, based on the distinct pricing in the conveyance deed.

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Issues:
1. Addition of gross profit on the sale of jewellery
2. Allowance of depreciation on the value of undivided right in land

Analysis:

Issue 1: Addition of Gross Profit on the Sale of Jewellery
The appeal by the Revenue challenged the deletion of an addition of Rs. 1,13,54,683 in gross profit on the sale of jewellery to M/s. Rajesh Associates. The Assessing Officer observed a significant decrease in the GP rate and questioned the cost of import of gold and jewellery sold to M/s. Rajesh Associates. The Revenue argued that the sale was at a lower price compared to the cost incurred by the assessee, leading to a loss. However, the CIT(A) found no evidence of underpricing and highlighted that market rates fluctuate. The CIT(A) also noted that M/s. Rajesh Associates reported substantial profit, indicating no profit siphoning. The ITAT concurred with the CIT(A) and upheld the deletion of the addition, emphasizing the lack of evidence supporting the Revenue's claims.

Issue 2: Allowance of Depreciation on the Value of Undivided Right in Land
The second issue revolved around the alleged depreciation on the cost of land. The Revenue contended that depreciation should only apply to the building, not the land. The conveyance deed showed a separate consideration for the land and building portions. The ITAT analyzed legal precedents and clarified that depreciation is applicable to tangible assets like buildings, not land. Despite the composite nature of the transaction, the distinct pricing for land and building in the deed led to the conclusion that depreciation could only be allowed on the building. Consequently, the ITAT set aside the CIT(A)'s decision and upheld the Revenue's appeal on this issue.

In conclusion, the ITAT partially allowed the Revenue's appeal, supporting the deletion of the addition in gross profit on jewellery sales but overturning the allowance of depreciation on the cost of land.

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