Depreciation denied for unused assets; partial penalty u/s 271(1)(c) upheld for wrongful 80IB and 10(38) claims

ITAT Mumbai dismissed the assessee's claim for depreciation on certain assets forming part of a block of assets, holding that actual use for business during the relevant previous year is a condition precedent for allowance, and mere "ready for use" status is insufficient. Relying on binding HC precedent, the Tribunal found no evidence of use and upheld disallowance of depreciation. On penalty u/s 271(1)(c), ITAT confirmed penalty relating to wrongful claims u/s 80IB and 10(38), noting that non-payment of STT and ineligible deduction were within the assessee's knowledge and amounted to concealment and furnishing inaccurate particulars. However, penalty imposed on disallowance of depreciation was deleted, as two views were reasonably possible and the assessee's explanation was bona fide.

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Issues Involved:
1. Validity of notice under Section 143(2).
2. Interpretation of Section 10(38) related to exemption from tax on long-term capital gains.
3. Disallowance of the claim of depreciation.
4. Suppression of taxable income and levy of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Validity of Notice under Section 143(2):
The appellant initially raised the issue that no valid notice under Section 143(2) was issued and served. However, during the hearing, the Authorized Representative (AR) did not press this ground. Consequently, this ground was dismissed as not pressed.

2. Interpretation of Section 10(38) Related to Exemption from Tax on Long-Term Capital Gains:
The appellant claimed exemption under Section 10(38) for long-term capital gains (LTCG) amounting to Rs. 49,829. The Assessing Officer (AO) disallowed this exemption on the basis that the appellant had not paid the Securities Transaction Tax (STT) on the transaction, which is a prerequisite for claiming the exemption. The First Appellate Authority (FAA) upheld the AO's decision, stating that the appellant knowingly claimed the exemption despite not fulfilling the conditions. The tribunal confirmed that this was a case of concealment of income and filing of inaccurate particulars, thus justifying the penalty under Section 271(1)(c).

3. Disallowance of the Claim of Depreciation:
The AO disallowed the depreciation claim of Rs. 3.57 lakhs for the factory building and Rs. 10,272 for plant and machinery, as the assets were not used during the year. The FAA upheld this decision, referencing the jurisdictional High Court's ruling in the case of Dineshkumar Gulabchand Agrawal, which stated that assets must be "actually used" for business to claim depreciation. The tribunal agreed with this interpretation, noting that the appellant failed to provide evidence of asset usage during the year. However, regarding the penalty, the tribunal found that two views were possible at the time of filing the return, making the appellant's explanation bona fide. Consequently, the penalty for the depreciation claim was deleted.

4. Suppression of Taxable Income and Levy of Penalty under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) for the following additions:
- Disallowance of depreciation (Rs. 3.67 lakhs)
- Disallowance of exemption under Section 10(38) (Rs. 49,829)
- Disallowance of deduction under Section 80IB (Rs. 2,62,323)
- Disallowance of miscellaneous expenditure (Rs. 50,000)

The FAA held that the appellant intentionally claimed depreciation and other deductions despite knowing they were not allowable, thus concealing taxable income. The tribunal upheld the penalties for the disallowance of Section 10(38) and Section 80IB deductions, agreeing that these were not simple disallowances but intentional claims of wrong deductions. However, it reversed the penalty for the depreciation claim, acknowledging that the appellant's belief in the claim's validity was bona fide.

Conclusion:
The appeal regarding the disallowance of depreciation was dismissed, and the penalties for the disallowance of Section 10(38) and Section 80IB deductions were confirmed. However, the penalty for the depreciation claim was deleted. Appeal no. 3348 was dismissed, and appeal no. 3349 was partly allowed. The order was pronounced in open court on June 11, 2014.

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