Reassessment and depreciation principles: reopening upheld, interest on capital work-in-progress disallowable in principle, and temporary inactivity did not bar depreciation.

ITAT Chandigarh upheld reassessment under sections 147 and 148 because the assessee had not fully and properly disclosed the material facts relating to diversion of funds, so the reopening was not barred by the proviso to section 147. Interest attributable to borrowed funds used for fixed assets or capital work-in-progress before put to use was disallowable in principle, but the flat-rate computation was rejected and the matter was remitted for pro rata recomputation on a day-product basis after verification. Depreciation on assets at the Baddi unit was allowed because temporary non-operation did not by itself disentitle the assessee where the assets remained part of the block and available for use.

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Issues: (i) validity of reassessment under sections 147 and 148; (ii) disallowance of interest under section 36(1)(iii) on capital work-in-progress; (iii) allowability of depreciation on assets at the Baddi unit when the unit had no manufacturing activity during the year.

Issue (i): validity of reassessment under sections 147 and 148

Analysis: The assessee was permitted to raise the legal challenge to reopening even though it had not been pressed earlier, the issue being pure question of law. The reassessment was upheld because the material facts regarding diversion of funds were not fully and properly disclosed, and the reopening was therefore not hit by the proviso to section 147.

Conclusion: The reassessment proceedings were held to be valid, against the assessee.

Issue (ii): disallowance of interest under section 36(1)(iii) on capital work-in-progress

Analysis: Interest relatable to borrowed funds deployed in fixed assets or capital work-in-progress before the assets are put to use is liable to disallowance. At the same time, the Assessing Officer's flat-rate approach was not accepted, and the disallowance was directed to be reworked on a pro-rata day-product basis after verification of the actual deployment of funds and transfer of amounts, where relevant.

Conclusion: The interest disallowance was sustained in principle, but the matter was remitted for recomputation, partly in favour of the assessee.

Issue (iii): allowability of depreciation on assets at the Baddi unit when the unit had no manufacturing activity during the year

Analysis: Depreciation on assets forming part of a block of assets cannot be denied merely because the unit was temporarily not operational, so long as the machinery remained available for use and had not ceased to be part of the business asset block. The temporary suspension of activity did not disentitle the assessee to depreciation.

Conclusion: Depreciation on the remaining fixed assets at the Baddi unit was allowed, in favour of the assessee.

Final Conclusion: The appeals were disposed of by sustaining the reopening and the principle of interest disallowance on capital work-in-progress, while granting relief on recomputation and allowing depreciation on the Baddi unit assets.

Ratio Decidendi: Interest on borrowed funds used for capital work-in-progress is disallowable until the asset is put to use, but depreciation cannot be denied on assets forming part of a block merely because the unit is temporarily inactive if the assets remain available for use.

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