Recorded liabilities and depreciation on business assets cannot be denied on suspicion when books and supporting records substantiate the claim.

A recorded liability arising from the purchase of a cinema hall could not be treated as unexplained sundry creditors merely on suspicion, where the sale deed, books, audit records and banking confirmations supported the deferred payment; the addition was deleted. Depreciation on the cinema hall was also held allowable because the asset was owned, capitalised and put to use for business, and the allowance did not depend on the level or estimation of income; that disallowance was deleted. Repair expenses relating to the lodging business were similarly allowed as business expenditure linked to an existing asset. The disallowance of unpaid statutory liabilities was, however, sustained because the ground was not pressed and the amount remained unpaid beyond the relevant due date.

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Issues: (i) whether the addition of Rs. 22,20,500 as unexplained sundry creditors was sustainable, (ii) whether depreciation on the cinema hall was rightly disallowed, (iii) whether repair expenses of Rs. 1,17,473 relating to the lodging business were allowable, and (iv) whether the disallowance of Rs. 3,29,643 towards unpaid statutory liabilities was justified.

Issue (i): Whether the addition of Rs. 22,20,500 as unexplained sundry creditors was sustainable.

Analysis: The liability arose from the purchase of the cinema hall and was reflected in the books and balance sheet. The assessee explained that the apparent balance represented the unpaid portion of the purchase consideration and that the later payments were made through banking channels. The registered sale deed, audit records, and supporting confirmations showed that the transaction could not be treated as a cash credit or unexplained investment merely on suspicion. An addition under the income-tax provisions could not be sustained without a finding that the liability was bogus or unsupported by the record.

Conclusion: The addition of Rs. 22,20,500 was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether depreciation on the cinema hall was rightly disallowed.

Analysis: The cinema hall was purchased, owned, capitalized in the fixed asset schedule, and put to use for earning income. Depreciation is a statutory allowance on an asset once it forms part of the block and is used for business purposes. The allowance does not depend on the quantum of income generated from the asset or on whether the income is shown on an estimated basis. The disallowance proceeded on an incorrect factual premise and could not stand.

Conclusion: The disallowance of depreciation of Rs. 9,58,210 was deleted in favour of the assessee.

Issue (iii): Whether repair expenses of Rs. 1,17,473 relating to the lodging business were allowable.

Analysis: The lodging was an existing business asset and the assessee produced details of civil and repair expenditure incurred on it. The finding that the income was merely estimated was not accepted on the record, and the repairs were linked to the ongoing business asset. The expenditure was therefore not liable to be disallowed on the assumption that the income was estimated or that the claim lacked basis.

Conclusion: The disallowance of Rs. 1,17,473 was deleted in favour of the assessee.

Issue (iv): Whether the disallowance of Rs. 3,29,643 towards unpaid statutory liabilities was justified.

Analysis: The assessee did not press this ground and the liability remained unpaid beyond the due date relevant for the statutory allowance. On that basis, the disallowance was sustained.

Conclusion: The disallowance of Rs. 3,29,643 was upheld against the assessee.

Final Conclusion: The assessment was interfered with only to the extent of the additions relating to unexplained creditors, depreciation, and repair expenses, while the disallowance relating to unpaid statutory liabilities remained undisturbed.

Ratio Decidendi: A liability arising from a recorded purchase transaction cannot be treated as unexplained merely because of a deferred payment narrative, and depreciation is allowable once the asset is owned, capitalized, and put to use, irrespective of the level of income generated from it.

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