ITAT Mumbai: Assessee's Appeal Partially Allowed, Revenue's Appeal Dismissed. Depreciation Upheld, Reopening Dismissed

The ITAT Mumbai partially allowed the assessee's appeal and dismissed the revenue's appeal. The tribunal upheld the depreciation claim for machinery used in trial production and supported the deletion of the addition related to provision for ECC jobs in the book profit calculation. The ground regarding the reopening of the assessment order was not pressed and was dismissed.

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Issues:
1. Reopening of assessment under section 147
2. Disallowance of claim of depreciation in respect of cement factory machinery

Analysis:

Reopening of Assessment under Section 147:
The cross appeals were filed by the assessee and revenue against the order of CIT(A) for the assessment year 1997-98. The assessee contested the reopening of assessment under section 147 and the disallowance of depreciation claim for its cement factory machinery in Gujarat. The Assessing Officer (AO) disallowed the depreciation claim of Rs. 34,79,40,576, stating that the trial production of clinker was minimal and the commercial production was not initiated within a reasonable time. The CIT(A) upheld the disallowance, emphasizing the need for actual, effective, and real use of assets for depreciation claims. However, the ITAT Mumbai found that the machinery was indeed used for trial production, which is essential for the business of manufacturing clinker. Citing judicial precedents, the tribunal held that even trial production falls under "used for the purpose of business" and directed the AO to verify the period of use for depreciation calculation.

Disallowance of Depreciation Claim:
The CIT(A) confirmed the AO's action of disallowing the depreciation claim, citing a substantial gap between trial runs and commercial production. However, the ITAT Mumbai disagreed with this reasoning, noting that trial production is a valid use of machinery for business purposes. Referring to judicial decisions, the tribunal emphasized that even a short duration of machinery use qualifies for depreciation benefits. The tribunal directed the AO to verify the actual period of use and restrict the depreciation claim to 50% if the machinery was used for less than 180 days during the relevant year. The tribunal also found no fault in the CIT(A)'s decision to delete the addition made on account of provision for ECC jobs while computing the book profit under section 115JA. The provision for ECC jobs was considered an ascertained liability and not an item of profit and loss account.

Conclusion:
The ITAT Mumbai partially allowed the assessee's appeal and dismissed the revenue's appeal. The tribunal upheld the depreciation claim for machinery used in trial production and supported the deletion of the addition related to provision for ECC jobs in the book profit calculation. The ground regarding the reopening of the assessment order was not pressed and was dismissed.

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