AO cannot disallow electricity charges based on assumptions without evidence; unabsorbed depreciation adjustable against other income under section 32(2)

The ITAT Amritsar allowed the assessee's appeal regarding ad hoc disallowance of electricity charges, finding the AO made additions based on mere assumptions without supporting material evidence. The AO completed assessment under section 143(3) without rejecting books of account but disallowed expenses assuming electricity usage in other units. Regarding unabsorbed depreciation claims for AY 1997-98 and 2002-03, the tribunal held that under amended section 32(2), unabsorbed depreciation becomes part of current year depreciation and can be adjusted against other income. The matter was remitted to AO for verification of quantum and proper allowance as per law.

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Issues Involved:
1. Ad hoc disallowance of Rs. 6,81,920/- under the head electricity charge.
2. Disallowance of unabsorbed depreciation of Rs. 33,65,948/-.

Issue-wise Detailed Analysis:

1. Ad hoc Disallowance of Rs. 6,81,920/- under the Head Electricity Charge:
The appellant contested the ad hoc disallowance of Rs. 6,81,920/- made by the Income Tax Officer under the head electricity charge. The appellant argued that the Assessing Officer (AO) made this disallowance without rejecting the books of account, which were fully vouched, and without invoking Section 145(3) of the Income Tax Act, 1961. The appellant relied on several case laws, including "The Batala Co-op Sugar Mills Ltd. Vs. The DCIT" and "Alumaunium Industries (Private) Ltd. Vs. CIT," to support the argument that such an ad hoc disallowance was not warranted without rejecting the books of account.

The respondent, on the other hand, argued that the appellant must have used the electricity connection from the meter installed at the appellant's premises for two other units belonging to the appellant, thus justifying the addition.

Upon reviewing the material on record, the Tribunal observed that the AO completed the assessment under Section 143(3) of the Act and did not reject the books of account. The AO made the addition on an ad hoc basis, merely assuming that the appellant might have used the electricity in its other units without any supporting material. The Tribunal referred to the case of "M/s. Batala Co-operative Sugar Mills Ltd. Vs. DCIT," where it was held that the AO cannot make any estimate addition without rejecting the books of account. Respectfully following this precedent, the Tribunal concluded that the disallowance was not warranted and allowed ground No. 1 and 2 of the appeal.

2. Disallowance of Unabsorbed Depreciation of Rs. 33,65,948/-:
The appellant claimed unabsorbed depreciation amounting to Rs. 33,65,948/- for the years 1997-98 to 2002-03, which the AO disallowed. The appellant argued that, as per the amended provisions of Section 32(2) of the Act, the unabsorbed depreciation of earlier years becomes part of the depreciation of the current year and is eligible for adjustment against other income. The appellant cited case laws, including "ITO Vs. Suraj Solvent and Vanaspati Industries Ltd." and "General Motors India (P) Ltd. Vs. DCIT," to support this claim.

The respondent countered that the appellant had filed a revised chart of unabsorbed depreciation before the AO and surrendered the claim for the years 1997-98 to 2002-03, justifying the disallowance.

The Tribunal reviewed the facts and judicial precedents, including the case of "General Motors India (P) Ltd.," where it was held that the unabsorbed depreciation available on 1st April 2002 would be governed by the amended provisions of Section 32(2) and could be carried forward indefinitely. The Tribunal concluded that the appellant was eligible for the adjustment of unabsorbed depreciation for the years 1997-98 to 2002-03. However, since the quantum of unabsorbed depreciation was not verified by the AO, the Tribunal remitted the issue back to the AO for verification and adjustment as per the law.

Conclusion:
The appeal filed by the appellant was partly allowed. The Tribunal allowed the grounds related to the ad hoc disallowance of electricity charges and remitted the issue of unabsorbed depreciation back to the AO for verification and adjustment. The order was pronounced in the open court on 11.09.2017.

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