2022 (4) TMI 670 - AT - Income Tax

Tribunal modifies directions on WIP & depreciation in Commissioner's order

The Tribunal upheld the Commissioner of Income-Tax's order under Section 263 but modified the directions regarding the understatement of closing ... Revision u/s 263 - AO allowing the claim of the assessee for loss on sale of shares as well as loss on future trading - HELD THAT:- As found by the learned CIT on examination of the relevant assessment records, the relevant details to ascertain the exact nature of transactions effected by the assessee in shares or future trading were not called for by the Assessing Officer during the course of assessment proceedings and there is nothing brought on record on behalf of the assessee to rebut or controvert this finding of fact specifically recorded by the learned CIT during the course of proceedings u/s 263 - It is thus clear that the claim of the assessee for loss on sale of shares and loss on future trading was allowed by the Assessing Officer without making the necessary inquiry which was called for in the facts and circumstances of the case and there was an error in the order of the Assessing Officer passed under Section 143(3) of the Act on this aspect of the matter as rightly pointed out by the learned CIT which was prejudicial to the interest of the Revenue. Understatement of closing WIP shown by the assessee in respect of Andhra Project - As assessee has contended that the said amount received during the year under consideration represented the liability of the assessee and there being nothing to show that the same represented income of the assessee for the year under consideration from Andhra Project, the learned CIT was not justified in treating the same as an income of the assessee for the year under consideration. We are inclined to accept this contention of the learned Counsel for the assessee. Moreover, this amount treated by the learned CIT as an income of the assessee for the year under consideration from Andhra Project has already been included by the assessee in the amount declared as his income from Andhra Project in the immediately succeeding year, i.e. AY 2010-11, and the addition of the same again in the year under consideration has clearly resulted in double addition which is not justified. After treating the amount as an income of the assessee for the year under consideration for Andhra Project, the balancing figure was treated by the learned CIT as a closing WIP in respect of Andhra Project as on 31.03.2009. Having held that the said addition made in the year under consideration is not sustainable, the balancing figure representing closing WIP in respect of Andhra Project and the amount understated on account of closing WIP in respect of Andhra Project would consequently be increased to that extent. Once this amount is treated as closing WIP of Andhra Project as on 31.03.2009 and added to the total income of the assessee for the year under consideration, it follows that the same would be taken as opening WIP in respect of Andhra Project for the immediate succeeding year, i.e. AY 2010-11. AO allowing wrongly the claim of the assessee for depreciation in respect of the block of asset of 'plant and machinery' pertaining to Andhra Project and Earth-work project - As rightly contended by the learned Counsel for the assessee, even the maintenance work and labour work carried out by the assessee in respect of Earth-work project during the year under consideration involved use of plant and machinery and the assumption of the learned CIT, to the contrary, is without any basis. Moreover, as further contended by the learned Counsel for the assessee, the plant and machinery pertaining to Andhra Project as well as Earth-Work Project were kept ready for use by the assessee and, keeping in view the passive use, the assessee was entitled to claim depreciation in respect of the said plant and machinery. It is also pertinent to note here that, as per the concept of block of assets, individual item of plant and machinery losses its identity once it enters the block and the user condition is not required to be satisfied vis-à-vis every item of plant and machinery for claiming the depreciation in respect of the entire block. In our opinion, the claim of the assessee for depreciation on plant and machinery pertaining to Andhra Project and Earth-work Project thus was rightly allowed by the Assessing Officer in the order passed under Section 143(3) of the Act and there was no error in the said order calling for any revision by the learned CIT under Section 263 of the Act. Issues Involved:1. Verification of loss on sale of shares and future trading.2. Understatement of closing Work-In-Progress (WIP) for Andhra Project.3. Incorrect allowance of depreciation on plant and machinery.Detailed Analysis:1. Verification of Loss on Sale of Shares and Future Trading:The learned Commissioner of Income-Tax (CIT) identified an error in the assessment order under Section 143(3) of the Income-tax Act, 1961, where the Assessing Officer (AO) allowed the assessee's claim for a loss on the sale of shares amounting to Rs. 58,47,211/- and a loss on future trading amounting to Rs. 50,64,731/-. The CIT noted that the AO did not verify whether these losses were business losses, capital losses, or speculation losses as required under Section 43(5) of the Act. The Tribunal upheld this view, stating that there was no evidence of any inquiry by the AO to ascertain the nature of these transactions, making the assessment order erroneous and prejudicial to the interest of the Revenue.2. Understatement of Closing Work-In-Progress (WIP) for Andhra Project:The CIT found that the assessee had an opening WIP of Rs. 3,72,00,700/- and purchases of Rs. 19,30,911/- for the Andhra Project but only declared an income of Rs. 2,00,44,922/-, leading to an understatement of closing WIP. The CIT noted that the assessee received Rs. 74,99,454/- during the year from two parties, which was shown as a liability instead of income. The Tribunal, however, found that this amount was already included in the income declared in the subsequent year (AY 2010-11), and adding it again would result in double taxation. Consequently, the Tribunal modified the CIT’s direction, increasing the understated closing WIP to Rs. 1,90,86,689/- and clarifying that this amount should be treated as the opening WIP for the next year.3. Incorrect Allowance of Depreciation on Plant and Machinery:The CIT observed that the AO wrongly allowed depreciation of Rs. 17,44,750/- for the Andhra Project and Rs. 98,85,362/- for the Earth-work project. The CIT argued that no work was carried out in Andhra during the year, and the Earth-work involved only maintenance and labor, which did not require plant and machinery. The Tribunal disagreed, noting that maintenance and labor work also involved the use of plant and machinery. Furthermore, under the concept of block of assets, individual items lose their identity, and the user condition does not need to be satisfied for each item. The Tribunal upheld the AO’s allowance of depreciation, stating there was no error in the assessment order on this point.Conclusion:The Tribunal upheld the CIT's order under Section 263 but modified the directions regarding the understatement of closing WIP and the allowance of depreciation. The appeal of the assessee was partly allowed, providing a balanced resolution to the identified errors. The order was pronounced in the open Court on 1st April 2022 at Ahmedabad.