Depreciation and stock adjustment principles clarified: bank statements are not conclusive, and business use drives depreciation claims.

A bank stock statement is not conclusive where the stock difference is reasonably explained by samples and sales timing, so an addition based solely on that statement is unsustainable. Printing activity may qualify as manufacture for additional depreciation, and unsupported assumptions that machinery is second hand cannot justify disallowance. Interest disallowance on advances to directors requires a finding of diversion of interest-bearing funds; absent that, relief is warranted. Depreciation depends on ownership and business use, not merely on sales figures or formal commercial production. Written down value cannot be substituted without requisite approval, and pre-operative receipts cannot be treated as profit without deducting related expenditure.

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Issues: (i) Whether the addition made on account of difference between the closing stock shown in the books and the stock statement furnished to the bank was sustainable; (ii) Whether the assessee was entitled to additional depreciation on the plant and machinery used in the printing business and whether the machinery was second hand; (iii) Whether the disallowance of interest on advances to directors was justified; (iv) Whether depreciation could be denied on the ground that the UV machine had not been put to use; (v) Whether depreciation on old machinery could be disallowed by substituting written down value without the requisite approval; (vi) Whether depreciation could be restricted to 50% on the footing that commercial production commenced only in the latter half of the year; (vii) Whether the addition made on account of alleged profit from pre-operative sales was sustainable.

Issue (i): Whether the addition made on account of difference between the closing stock shown in the books and the stock statement furnished to the bank was sustainable.

Analysis: The difference was explained as arising from samples and from sales effected on 31 March but reflected differently in the bank statement and the books. The stock statement furnished to the bank was not treated as conclusive, and a higher figure in that statement could not by itself justify an addition when the sale date and accounting treatment were not in dispute.

Conclusion: The addition was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether the assessee was entitled to additional depreciation on the plant and machinery used in the printing business and whether the machinery was second hand.

Analysis: Printing activity was treated as manufacture for the purpose of the claim. The finding that most of the machinery was second hand was unsupported by material, and the manufacturer's certificate showed the relevant machines to be new and unused. The disallowance was based on surmise rather than evidence.

Conclusion: The assessee was entitled to additional depreciation and the disallowance was deleted in favour of the assessee.

Issue (iii): Whether the disallowance of interest on advances to directors was justified.

Analysis: There was no finding that interest-bearing funds were diverted for the interest-free advances. The record also showed receipt of interest-free funds from directors, which supported the conclusion that the disallowance was not warranted on the facts.

Conclusion: The disallowance of interest was not justified and the relief granted to the assessee was upheld.

Issue (iv): Whether depreciation could be denied on the ground that the UV machine had not been put to use.

Analysis: Ownership and installation of the machine were not in dispute. Depreciation depends on ownership and user for business, and the mere absence of production figures in the audit report or absence of sales as a condition precedent did not establish non-use. The factual finding was that the machine was ready for use and was used for business purposes.

Conclusion: Depreciation was allowable and the disallowance was rightly deleted in favour of the assessee.

Issue (v): Whether depreciation on old machinery could be disallowed by substituting written down value without the requisite approval.

Analysis: The adjustment of the written down value in the hands of the predecessor could not be made without the requisite approval. Since that approval had not been obtained, the basis adopted by the Assessing Officer could not stand.

Conclusion: The disallowance was unsustainable and was deleted in favour of the assessee.

Issue (vi): Whether depreciation could be restricted to 50% on the footing that commercial production commenced only in the latter half of the year.

Analysis: The relevant test was whether the machinery was owned and used for the purposes of business. Trial production had commenced and the assets were put to use; commercial production in the technical sense was not decisive for denying full depreciation.

Conclusion: The restriction to 50% depreciation was unjustified and the relief granted to the assessee was upheld.

Issue (vii): Whether the addition made on account of alleged profit from pre-operative sales was sustainable.

Analysis: The addition was made without accounting for the expenses incurred in earning the receipts. Once the associated expenditure was considered, the basis for treating the entire amount as profit did not survive.

Conclusion: The addition was unsustainable and was deleted in favour of the assessee.

Final Conclusion: The assessee succeeded in its appeal and the Revenue's appeal failed, resulting in complete relief to the assessee on the disputed additions and disallowances.

Ratio Decidendi: A bank stock statement is not conclusive against the books when the difference is reasonably explained; depreciation turns on ownership and business use, not on the absence of sales figures or formal commercial production alone; and unsupported assumptions about second-hand machinery or diversion of borrowed funds cannot sustain disallowances.

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