2007 (7) TMI 373 - AT - Income Tax

Appeal partially allowed, depreciation claim disallowed for non-existent assets, section 80-I deduction upheld.

The department's appeal was partly allowed, disallowing the depreciation claim on assets not in existence, while upholding the partial deduction under ... Depreciation Issues Involved:1. Depreciation on assets not in existence.2. Deduction under section 80-I for manufacturing activities.3. Cross-objection by the assessee regarding construction activities and section 80-I deduction.Detailed Analysis:1. Depreciation on Assets Not in Existence:The department contended that the CIT(A) erred in allowing depreciation on assets that were not in existence as per the findings of the Assessing Officer. The assessee had declared additional income of Rs. 30 lakhs during a search, with Rs. 7 lakhs attributed to plant and machinery and Rs. 3 lakhs to furniture and fixtures. The Assessing Officer disallowed the depreciation claim due to the lack of inventory details provided by the assessee, which was upheld by the Accountant Member. The Judicial Member, however, supported the CIT(A)'s view, stating that the assets were owned and used for business purposes, and the department had accepted the investment during the search. The Judicial Member cited the Kerala High Court's decision in Geo Tech Construction Corpn., emphasizing that assets kept ready for use qualify for depreciation. The Third Member concurred with the Accountant Member, highlighting that the assessee failed to furnish necessary details to prove ownership and usage of the assets, thus not satisfying the conditions of section 32. Consequently, the department's ground on this issue was allowed.2. Deduction Under Section 80-I for Manufacturing Activities:The department challenged the CIT(A)'s decision to allow partial deduction under section 80-I, arguing that the assessee was not engaged in manufacturing activities. The CIT(A) determined that making steel pipes from steel plates constituted manufacturing, eligible for section 80-I deduction, but laying these pipes did not. The CIT(A) restricted the deduction to 70% of the total turnover, considering the manufacturing activities. The Tribunal upheld the CIT(A)'s decision, noting that the department did not provide cogent reasons to contest the findings. Thus, the department's ground on this issue was rejected.3. Cross-Objection by the Assessee:The assessee's cross-objection argued that construction activities were incidental to the main manufacturing activities and should be fully eligible for section 80-I deduction. The Tribunal upheld the CIT(A)'s order, which had already considered the construction activities separately from manufacturing activities, and rejected the cross-objection.Conclusion:The departmental appeal was partly allowed, disallowing the depreciation claim on assets not in existence, while upholding the partial deduction under section 80-I. The assessee's cross-objection was dismissed. The Third Member's decision aligned with the Accountant Member, emphasizing the necessity of furnishing details to claim depreciation, thereby resolving the difference of opinion.