Tribunal allows depreciation, legal fees for business, refers TDS issue back to Assessing Officer

The Tribunal partially allowed the appeal, stating that depreciation cannot be disallowed if assets were used for business in earlier years. Legal fees for civil suits were considered related to business activities and not disallowable. The issue of TDS deduction on professional fees was referred back to the Assessing Officer for further examination.

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Issues involved:
The appeal against the order dated 25.03.2019 for the quantum of assessment passed u/s 143(3), for the AY 2011-12 involving the disallowance of expenses and depreciation.

Disallowed Expenses:
The assessee, a partnership firm in the business of "Manufacture and Export of Diamonds," filed a return of income showing a total loss. The Assessing Officer disallowed expenses and depreciation as there was no business activity during the year. The assessee argued that the expenses were administrative and allowable, citing a temporary suspension of business due to global economic conditions. The Assessing Officer and CIT (A) disallowed the expenses, citing lack of direct nexus with income. The Tribunal noted that the business was not permanently closed and distinguished between temporary suspension and complete closure of business.

Depreciation Disallowance:
Depreciation was claimed on assets used for business, with no new assets purchased during the year. The Tribunal found that the expenses were general and administrative, incurred in the normal course of business. The CIT (A) observed that the assessee did not engage in commercial activity after the year in question. The Tribunal held that since the business was not permanently closed and expenses were not claimed in subsequent years, the expenses were allowable. Legal fees for civil suits were found to be related to business activities and thus not disallowable.

Legal Fees and TDS Disallowance:
The legal fees incurred for civil suits were found to be related to business activities and not disallowable. However, the issue of TDS deduction on professional fees was raised. The matter was referred back to the Assessing Officer to determine if TDS was deducted, and the disallowance was treated as partly allowed for statistical purposes.

Conclusion:
The Tribunal partially allowed the appeal for statistical purposes, stating that if assets forming part of the block were used for business in earlier years, depreciation cannot be disallowed. The issue of TDS deduction on professional fees was referred back to the Assessing Officer for further examination.

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