2018 (7) TMI 2095 - HC - Income Tax

Tribunal Decision Upheld on Depreciation Disallowance & Liability Cessation

Principal Commissioner of Income-tax-1 Versus Babul Products (P.) Ltd.

Principal Commissioner of Income-tax-1 Versus Babul Products (P.) Ltd. - TMI Issues:1. Disallowance of depreciation under Section 32 of the Income Tax Act.2. Addition under Section 41(1) of the Income Tax Act on account of cessation of liability.Analysis:Issue 1: Disallowance of Depreciation under Section 32The appellant challenged the order of the Income Tax Appellate Tribunal (ITAT) which allowed the appeal by the assessee and deleted the addition made on account of disallowance of depreciation of Rs. 34,03,491. The Assessing Officer disallowed the depreciation claimed by the assessee as the factory was closed, and assets were not being used. However, the Tribunal considered that the assessee was still in business, could not operate the factory due to a court stay order, and continued its business activities. The Tribunal held that the assessee did not stop or close the business, thereby justifying the depreciation claim under Section 32 of the Income Tax Act. The High Court agreed with the Tribunal's view, stating that the assessee's business continuity warranted the depreciation claim.Issue 2: Addition under Section 41(1) for Cessation of LiabilityThe second proposed question of law pertained to the addition of Rs. 54,24,294 made by the Assessing Officer under Section 41(1) of the Income Tax Act concerning the cessation of liability. The High Court noted that the Tribunal's decision to delete this addition was in line with a Supreme Court ruling in the case of Commissioner v. Mahindra & Mahindra Ltd. The Tribunal found that the liability with respect to debtors had not been written off in the books of accounts, indicating that the liability had not ceased. Since the assessee had carried forward and continued the liability without writing it off, the Tribunal's decision to delete the addition under Section 41(1) was upheld by the High Court. Consequently, the High Court concluded that no substantial question of law arose in the case, leading to the dismissal of the Tax Appeal.In conclusion, the High Court upheld the Tribunal's decisions regarding the disallowance of depreciation under Section 32 and the addition under Section 41(1) for the cessation of liability. The judgment emphasized the importance of business continuity and proper accounting treatment in determining tax liabilities under the Income Tax Act.