2017 (12) TMI 990 - AT - Income Tax

ITAT affirms CIT(A)'s decision on depreciation, criticizes AO's disallowances as speculative.

ACIT, Circle-17 (1), New Delhi Versus Venus Industrial Corporation Pvt Ltd.

ACIT, Circle-17 (1), New Delhi Versus Venus Industrial Corporation Pvt Ltd. - TMI Issues Involved:1. Disallowance of depreciation on assets transferred to Gurgaon Unit.2. Disallowance of depreciation on electrical fittings.3. Disallowance of electrical expenses.4. Addition on account of suppression of stock.5. Addition on account of estimation of gross profit.6. Disallowance of payment to ESIC.7. Disallowance of bad debts.8. Disallowance of freight and cartage expenses.9. Disallowance of club subscription expenses.Detailed Analysis:1. Disallowance of Depreciation on Assets Transferred to Gurgaon Unit:The Assessing Officer (AO) disallowed Rs. 19,92,000 in depreciation, arguing that the Gurgaon unit was not operational during the year, and hence the assets were not used for business purposes. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the depreciation, citing that the assets were transferred to another unit and used for manufacturing. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, agreeing that the assets were part of the block of assets and eligible for depreciation.2. Disallowance of Depreciation on Electrical Fittings:The AO disallowed Rs. 2,77,343 in depreciation on electrical fittings, applying a 15% rate instead of the 25% claimed by the assessee. The CIT(A) allowed the higher rate, noting that the electrical fittings were integral to the plant and machinery. ITAT confirmed this decision, finding no error in the CIT(A)'s order.3. Disallowance of Electrical Expenses:The AO disallowed Rs. 4,50,567 in electrical expenses, arguing that the building was not used for business and the expenses were not allowable under Section 37(1) of the Income Tax Act, 1961. The CIT(A) allowed the expenses, stating they were incurred to protect business assets. ITAT agreed with the CIT(A), noting the expenses were necessary for business purposes.4. Addition on Account of Suppression of Stock:The AO added Rs. 8,97,391 for alleged suppression of stock, claiming that certain dies and molds shown as opening stock were not accounted for in the closing stock. The CIT(A) deleted the addition, accepting the assessee's explanation that the items were sold or scrapped. ITAT upheld this decision, finding the CIT(A)'s reasoning sound.5. Addition on Account of Estimation of Gross Profit:The AO added Rs. 1,00,97,203 due to a lower gross profit rate, rejecting the assessee's books of account. The CIT(A) deleted the addition, noting that the books were properly maintained and audited, and the lower gross profit was due to decreased selling prices and increased raw material costs. ITAT agreed with the CIT(A), finding no defects in the books of account.6. Disallowance of Payment to ESIC:The AO disallowed Rs. 9,332 paid to the Employees' State Insurance Corporation (ESIC), treating it as a penalty. The CIT(A) allowed the deduction, clarifying that it was an additional payment for temporary staff and not a penalty. ITAT upheld the CIT(A)'s decision.7. Disallowance of Bad Debts:The AO disallowed Rs. 1,06,127 in bad debts, as the assessee could not provide copies of the accounts from the books of the debtors. The CIT(A) allowed the deduction, finding the necessary conditions for bad debts were satisfied. ITAT confirmed the CIT(A)'s order.8. Disallowance of Freight and Cartage Expenses:The AO disallowed Rs. 5,00,000 in freight and cartage expenses, considering them excessively high compared to the previous year. The CIT(A) deleted the disallowance, noting that the AO made the disallowance on an ad hoc basis without pointing out any specific errors. ITAT upheld the CIT(A)'s decision.9. Disallowance of Club Subscription Expenses:The AO disallowed Rs. 11,405 in club subscription expenses, arguing there was no nexus with the business. The CIT(A) deleted the disallowance, noting the AO did not provide any reason for it. ITAT confirmed the CIT(A)'s order.Conclusion:The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The tribunal criticized the AO's approach, noting that many disallowances were made on conjectures and surmises, and the appeal itself was not justified, resulting in a waste of public resources.