2025 (10) TMI 339 - AT - Income Tax

Appeal upholds tax disallowance for depreciation and R&M after inspection, reverses adhoc additions for jewellery and vendor expenses

ITAT DELHI - AT upheld the CIT-A's disallowance of depreciation and repairs & maintenance deductions where inspector field reports showed assets not ... Depreciation on fixed assets allegedly not utilized for business purpose - assessee is engaged in the business of manufacturing of automobile parts - HELD THAT:- CIT-A had vehemently relied on the examination carried out by the AO during the course of assessment proceedings by deputing the inspectors for field visit twice to the factory premises and wherein the inspectors had given a factual report that the concerned assets were not at all installed in the factory cum office premises of the assessee company and the entire factory was in a dilapidated condition indicating no fresh installation of assets being made there on during the year under consideration. Accordingly, the Learned CIT-A reiterated the findings of the AO and had confirmed the disallowance made on account of depreciation. AO was not able to point out any contrary material to this effect. Hence, we do not deem it fit to interfere in the order of the Learned CIT-A disallowing the depreciation on fixed assets. Disallowance on account of repairs and maintenance expenditure towards personal usage - AO during the course of assessment proceedings by deputing the inspectors for field visit twice to the factory premises and wherein the inspectors had given a factual report that the concerned assets were not at all installed in the factory cum office premises of the assessee company and the entire factory was in a dilapidated condition indicating no fresh installation of assets being made there on during the year under consideration. CITA reiterated the findings of the AO and had confirmed the disallowance made on account of depreciation. Before us, AO was not able to point out any contrary material to this effect. Hence, we do not deem it fit to interfere in the order of the CIT-A disallowing the depreciation on fixed assets. Disallowance on account of repairs and maintenance expenditure towards personal usage - Assessee was duly given the copy of statements of vendors to submit its rebuttal. The Chairman and Managing Director of the assessee company was only exhibiting non-cooperative attitude throughout the assessment proceedings by not securing his personal attendance in response to the summons issued to him. Taking into account all these factors and the non-cooperative behavior of the assessee during the course of assessment proceedings and also during the appellate proceedings by not producing any fresh contrary material there on, CIT-A upheld the disallowance made on account of repairs and maintenance expenditure towards personal usage there on. We do not deem it fit to interfere in the said order. Disallowance of expenses made on account of diamond / gold jewellery and vendor meeting expenses - We find that these disallowances were made absolutely on adhoc basis by the lower authorities. In the earlier two disallowances, the personal usage of the assets was duly brought on record by the field report of the inspectors and also statements of vendors. Whereas, no such supporting evidences were brought on record by the lower authorities in the instant case. We also find that CIT-A had deleted the addition made on account of fall in gross profit during the year. The books were not rejected by the Learned CITA. Hence there is no question of making any adhoc disallowance of expenses at the rate of 20% or 25% as the case may be - Ground raised by assessee allowed. Issues: (i) Whether the disallowance of depreciation of Rs. 3,18,710 on assets alleged to be not used for business is sustainable; (ii) Whether the disallowance of repairs and maintenance expenditure of Rs. 11,62,513 as personal expenditure is sustainable; (iii) Whether adhoc disallowances of sales promotion and vendor meeting expenses (25%/25%/20% rates) are sustainable.Issue (i): Whether the assessee's claim of depreciation of Rs. 3,18,710 on newly capitalised assets used for business must be disallowed as assets were not found installed or used for business purposes.Analysis: The adjudicatory bodies relied on two on-site inspection reports, photographs, material receipt/inspection reports, and statements of vendors recorded under Section 131, which indicated absence of the claimed assets at the factory premises and supported personal use or non-existence of installations. The assessee failed to produce contrary material or successfully rebut the departmental evidence and the principal officer/director showed non-cooperation with summons.Conclusion: In favour of Revenue the disallowance of depreciation of Rs. 3,18,710 is sustained.Issue (ii): Whether repairs and maintenance expenditure of Rs. 11,62,513 should be disallowed as personal expenditure.Analysis: The findings of field inspections, vendor statements under Section 131, attached photographs and inspection reports supported the conclusion that portions of repairs/maintenance related to personal use. The assessee was given copies of evidence and opportunity to rebut but did not produce convincing contrary evidence and the director did not cooperate with summons.Conclusion: In favour of Revenue the disallowance of Rs. 11,62,513 for repairs and maintenance on account of personal usage is sustained.Issue (iii): Whether adhoc percentage disallowances applied to sales promotion, diamond/gold jewellery and vendor meeting expenses by the assessing authority are maintainable.Analysis: No supporting on-site or vendor evidence linked these expenses to personal use; the appellate authority did not reject books and deleted the gross profit disallowance. The Tribunal found no basis for applying adhoc percentage disallowances where the record did not establish personal use.Conclusion: In favour of Assessee adhoc disallowances in respect of sales promotion, diamond/gold jewellery and vendor meeting expenses are deleted.Final Conclusion: The appeal is partly allowed disallowances supported by inspection reports and vendor statements are sustained, while adhoc percentage disallowances without evidentiary foundation are deleted, resulting in a mixed outcome favourable in part to the assessee.Ratio Decidendi: Findings based on contemporaneous on-site inspection reports and vendor statements under Section 131, if unrebutted and coupled with assessee's non-cooperation, justify sustaining disallowances for assets or expenditures shown to be not used for business; adhoc percentage disallowances are impermissible absent specific evidentiary foundation.