Tribunal allows depreciation on machinery and deletes ad-hoc profit enhancement

The Tribunal allowed the assessee's appeal, directing the allowance of depreciation on machinery and the deletion of the ad-hoc enhancement to the gross profit percentage. The decision emphasized that since the machinery was kept ready for use and the business was not permanently shut down, depreciation should be allowed, albeit not indefinitely. The Tribunal also instructed the acceptance of the gross profit percentage from the previous year, noting compliance with notices and audit reports.

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Issues Involved:
1. Disallowance of depreciation on machinery.
2. Ad-hoc addition to gross profit and enhancement of gross profit percentage by rejecting the books of account.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation on Machinery:
The assessee contested the disallowance of Rs. 2,75,521/- as depreciation on machinery. The primary argument was that the machinery, although not used for manufacturing during the relevant period due to irregular power supply and adverse market conditions, was kept ready for use. The assessee emphasized that the business was not closed but only temporarily suspended, and depreciation had been allowed in previous years for the same machinery.

The Revenue defended the disallowance, asserting that no manufacturing activity was conducted during the relevant period, and thus, the machinery was not put to use.

Upon reviewing the submissions and records, it was noted that the assessee continued trading activities and had not completely shut down the business. The Tribunal analyzed Section 32 of the Income Tax Act, which allows depreciation on tangible and intangible assets used for business or profession. The Tribunal referenced various judicial precedents, including CIT vs. Anand Theaters and CIT vs. Daudayal Hotels Pvt. Ltd., which support the notion that depreciation represents a normal wear and tear of assets.

The Tribunal concluded that since the machinery was kept ready for use and the business was not permanently shut down, the depreciation should be allowed. However, it was clarified that this allowance could not be indefinite and steps should be taken to resume manufacturing activities.

2. Ad-hoc Addition to Gross Profit and Enhancement of Gross Profit Percentage:
The second issue pertained to an ad-hoc addition of Rs. 8,20,203/- to the gross profit and the enhancement of the gross profit percentage to 1.89% by rejecting the assessee's books of account. The assessee argued that the gross profit percentage for the relevant assessment year was consistent with the previous year (2009-10), which the Department had accepted. The assessee also pointed out that the tax audit report was filed but ignored by the Assessing Officer.

The Revenue contended that there was no compliance with the notice issued to the assessee and that the books of accounts were not audited, justifying the estimation of gross profit.

The Tribunal reviewed the facts and noted that the assessee had produced party-wise details of purchases and sales, and confirmations from concerned parties. Notices issued to creditors were responded to, indicating compliance. It was also observed that the audit report was indeed filed during the assessment proceedings, contradicting the Assessing Officer's claim.

Given that the same gross profit percentage was accepted for the previous year and no contrary facts were brought on record, the Tribunal directed the deletion of the ad-hoc enhancement and instructed the acceptance of the gross profit percentage from the previous year.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal directing the allowance of depreciation on machinery and the deletion of the ad-hoc enhancement to the gross profit percentage. The order was pronounced in the open court on 21/02/2017.

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