Tribunal allows set-off of unabsorbed depreciation and rejects addition under section 36(1)(iii)

The Tribunal upheld the CIT(Appeals) decision to allow the set-off of unabsorbed depreciation against deemed income and to delete the addition under section 36(1)(iii). The Tribunal emphasized the applicability of legal precedents and the lack of evidence linking borrowed funds to the construction of the building, ultimately dismissing the revenue's appeal on both grounds.

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Issues Involved
1. Set-off of unabsorbed depreciation against deemed income under sections 69, 69A, 69B, and 69C of the Income Tax Act.
2. Deletion of addition under section 36(1)(iii) of the Income Tax Act.

Detailed Analysis

Issue 1: Set-off of Unabsorbed Depreciation Against Deemed Income
Background: The revenue challenged the order of the CIT(Appeals) allowing the assessee to set off unabsorbed depreciation up to Rs. 50 lacs against deemed income under sections 69, 69A, 69B, and 69C of the Income Tax Act. During survey proceedings, discrepancies were found, leading the assessee to voluntarily disclose additional income of Rs. 50 lacs. The Assessing Officer (AO) treated this as deemed income and disallowed the set-off of business loss/depreciation loss against it, citing the case of Kim Pharma Pvt. Ltd.

CIT(Appeals) Decision: The CIT(Appeals) allowed the set-off of unabsorbed depreciation, referencing the ITAT Chandigarh Bench decision in Liberty Plywood Pvt. Ltd., which permitted such set-off. The CIT(Appeals) noted that the Punjab & Haryana High Court's decision in Kim Pharma Pvt. Ltd. did not address the issue of setting off depreciation under section 32(2).

Tribunal's Analysis: The Tribunal upheld the CIT(Appeals) decision, reiterating that the set-off of unabsorbed depreciation is permissible. The Tribunal emphasized that the decision in Kim Pharma Pvt. Ltd. dealt with the set-off of losses under sections 70 and 71, not depreciation under section 32(2). The Tribunal also referenced the Special Bench decision in Times Guaranty Ltd., which allowed the set-off of unabsorbed depreciation from deemed income. Therefore, the Tribunal dismissed the revenue's appeal on this ground.

Issue 2: Deletion of Addition Under Section 36(1)(iii)
Background: The revenue contested the deletion of an addition of Rs. 3,79,158 under section 36(1)(iii). The AO noted that the assessee had shown a building under construction and questioned why the interest should not be capitalized since the building was not yet put to use. The AO disallowed the interest, citing the Punjab & Haryana High Court decision in Abhishek Industries Ltd., which mandates capitalization of interest paid for the acquisition of assets before they are put to use.

CIT(Appeals) Decision: The CIT(Appeals) deleted the addition, noting that the assessee had sufficient interest-free funds available and that the AO had not established a nexus between borrowed funds and the construction of the building. The CIT(Appeals) also highlighted that the AO did not find the building to be for the expansion of existing business, thus not attracting the proviso to section 36(1)(iii).

Tribunal's Analysis: The Tribunal agreed with the CIT(Appeals), emphasizing that the AO failed to demonstrate that borrowed funds were used for the construction of the building. The Tribunal noted that the assessee had sufficient interest-free funds and that the term loans were old and against machinery installed in earlier years. Additionally, the Tribunal found no evidence that the building was for the expansion of existing business. Consequently, the Tribunal dismissed the revenue's appeal on this ground as well.

Conclusion
The Tribunal dismissed the departmental appeal, upholding the CIT(Appeals) decision to allow the set-off of unabsorbed depreciation against deemed income and to delete the addition under section 36(1)(iii). The Tribunal's decision was based on the interpretation of relevant legal precedents and the specific facts of the case.

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