Tribunal overturns disallowance of depreciation & addition under Income Tax Act

The Tribunal allowed the appeal, overturning the disallowance of depreciation amount and the addition under section 41(1) of the Income Tax Act, 1961. The disallowance of depreciation was deleted as the business was not permanently closed, and assets were ready for use, indicating constructive user. The addition under section 41(1) was deemed inappropriate as there was no evidence of liabilities ceasing or being written off in the accounts. The judgment was pronounced on 9th October 2017 at Ahmedabad.

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Issues:
1. Disallowance of depreciation amount
2. Addition under section 41(1) of the Income Tax Act, 1961

Issue 1: Disallowance of Depreciation Amount

The assessee appealed against the confirmation of disallowance of depreciation amounting to Rs. 22,71,970 by the ld.CIT(A). The AO disallowed the depreciation claim as the business was considered closed with no business income during the year. The assessee argued that the business was not permanently closed but had a deemed suspension due to a dispute over a trademark. The assets were ready for use, indicating a constructive user. The Tribunal observed that the term "used" in section 32 includes deemed user, and as the business was not permanently closed, depreciation should be granted. The ground of appeal was allowed, and the disallowance was deleted.

Issue 2: Addition under Section 41(1) of the Income Tax Act, 1961

The second ground of appeal was against the confirmation of an addition of Rs. 54,24,294 under section 41(1) by the ld.CIT(A). The AO assumed liabilities had ceased due to no manufacturing activity since 2005. The Tribunal noted that section 41(1) applies when a trading liability allowed as a deduction earlier benefits the assessee due to remission or cessation in a later year. The Hon'ble Gujarat High Court's decision emphasized that unless liabilities are written off in the accounts, no addition can be made under section 41(1). As there was no evidence of liabilities ceasing or being written off, the addition was deemed inappropriate. Citing the High Court's decision, the Tribunal allowed this ground of appeal and deleted the disallowance.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning both the disallowance of depreciation and the addition under section 41(1) of the Income Tax Act, 1961. The judgment was pronounced on 9th October 2017 at Ahmedabad.

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