In the ITAT Pune Bench (Third Member)

Deputy Commissioner of Income-tax, Special Range 3

v.

Sheth & Sura Engg. (P.) Ltd.

Vimal Gandhi, President (As a Third Member)

H.L. Karwa, Judicial Member

And Ahmad Fareed, Accountant Member

IT Appeal No. 748 (Pune) of 1997

C.o. No. 2 (Pune) of 1998

[Assessment year 1993-94]

July 30, 2007

Section 32 of the Income-tax Act, 1961 - Depreciation - Allow­ance/rate of - Assessment year 1993-94 - Whether for claiming depreciation, assessee has to satisfy conditions laid down in section 32; mere disclosure of amount and investment in some assets, whose description is withheld, is not sufficient to claim deduction of depreciation - Held, yes - Whether where during search of its premises, assessee-company surrendered certain amount represent­ing ‘undisclosed income’, which included investment in plant and machinery and furniture and fixture, but failed to furnish neces­sary particulars of those assets, Assessing Officer was justified in disallowing assessee’s claim for depreciation on those assets, though disclosure was accepted and taxed by department - Held, yes

Facts

The assessee-company was engaged in the business of laying pipe lines. A search was carried out in its premises under section 132, during which it agreed to surrender Rs. 30 lakhs for the period relevant to the assessment year 1993-94, which included Rs. 7 lakh as value of plant and machinery and Rs. 3 lakh as value of furniture and fixture. The disclosed amount had been accepted by the department. The assessee, in the return, disclosed the above amount as income and also claimed depreciation on the value of said assets declared under section 132(4). When asked by the Assessing Officer to furnish necessary details of said assets, the assessee expressed its inability to furnish the same. The Assessing Officer, therefore, disallowed the claim for deprecia­tion as the assessee had failed to furnish necessary details and held that assets, on which depreciation was claimed, were not in existence. On appeal, the Commissioner (Appeals) allowed the claim of the assessee.

On revenue’s appeal, the Accountant Member of the Tribunal nega­tived the assessee’s claim by observing, inter alia, that amounts of Rs. 7 lakh and Rs. 3 lakh surrendered represented ‘undisclosed income’ and assessee did not produce any evidence to show that those amounts represented cost of plant and machinery and furni­ture and fixture to qualify for depreciation. As against that, the Judicial Member upheld the view of the Commissioner (Appeals) by observing, inter alia, that once the department had accepted undisclosed investment in those assets and taxed the same, there was no justification in rejecting the rightful claim of deprecia­tion. Thus, there being a difference of opinion between the two members of the Tribunal, the matter was referred to the Third Member under section 255(4).

Held (As per Third Member)

On equitable principle, the assessee was entitled to relief. However, depreciation cannot be allowed merely based on equity or on commercial principle. It has to be allowed as per statutory provision. Mere disclosure of amount and investment in some assets, whose description is withheld, is not sufficient to claim deduction of depreciation. The assessee has to satisfy the condi­tions laid down in section 32. Further, reference to rule 5 of the Income-tax Rules, read with appendix to Rules, would show that deprecia­tion at different rates is allowed on different items of plants and machinery. The twin conditions are required to be satisfied : 1. Ownership of asset; and 2. User of the asset for the purposes of business. In that connection, the assessee had specifically stated that he was unable to furnish inventories in respect of said assets declared at the time of search action under section 132. That being the position, the finding of the Judicial Member that amount disclosed represented enhanced value of existing plant and machinery, furniture and fixtures and that after the search, the value was modified and changed in the books of ac­count as per declaration under section 132(4), based on changed stand, did not reconcile with the admission made in the said letter. The assessee could have very well explained what was disclosed by the assessee and whether whole or part of it represented machin­ery, furniture and fixture available with it or whether it repre­sented the difference in the value of machinery/fixture already disclosed by the assessee. No clear stand was taken. It could have given inventory or details of the assets sought to be disclosed. Why that afterthought plea was permitted to be raised was not at all clear from record. In the depreciation chart, only amounts disclosed had been added without further claim. Be that as it may, the assessee was not entitled to claim depreciation even if the finding of Judicial Member was accepted without any objection to the changed and new claim made by the assessee. The assessee was to prove ownership of assets and depreciation was to be allowed with reference to its cost or written down value. Without details of assets, neither depreciation could be worked out, nor allowed. Therefore, merely saying that the assessee was entitled to depreciation as disclosure of Rs. 7 lakh and Rs. 3 lakh had been accepted in the sense that above amount had been charged to tax, was not correct. Even if that ground was accept­ed, the assessee must prove that second condition relating to user of asset for the purposes of business was also satisfied. The assessee failed to furnish details of the assets. Without details, the Assessing Officer could not examine that the so-called assets were used for the purposes of the business. No enquiry into the claim was possible. Therefore, the assessee could not be said to have established second condition. Therefore, to enable the Assessing Officer to examine the question of ownership and user of asset, the statutory provisions and rules insist that the assessee should furnish prescribed particulars of assets. Without details of particulars, the question regarding depreciation could not be examined. Therefore, it could not be held that the asses­see satisfied conditions of section 32 and was eligible for claim of depreciation. Liberal construction of provisions cannot imply that conditions of section 32 are to be given a go-bye. Hence, the view taken by the Accountant Member, that the assessee’s claim for depreciation could not be allowed, was to be upheld. [Para 10]

Editor’s note

The Tribunal upheld the order of the Commissioner (Appeals) holding that making of steel pipes from steel plates was a manufacturing activity eligible for deduction under section 80-I, but restrict­ing the assessee’s claim for deduction under section 80-I to 70 per cent of total turnover on the ground that laying of those pipes was not a manufacturing activity.