Despite the lack of manufacturing activity, unabsorbed b/f depreciation and business loss were allowed.
Facts and Issue of the case
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-6, Ahmedabad in Appeal no. CIT(A)-6/125/2018-19 vide order dated 14/11/2018 passed for the assessment year 2014-15.
The assessee has raised following (revised) Grounds of Appeal:-
- Ld. CIT (A) erred in law and on facts in confirming disallowance of depreciation by AO of Rs. 1,71,24,757/- in absence of complete plant and machinery being put to use for the purpose of business by the appellant.
- Ld. CIT (A) erred in law and on facts in not appreciating the submissions that the assets existing in the opening block of WDV, depreciation has to be allowed since individual assets loose their identity and hence even if there is no business income, depreciation is allowable.
- Ld. CIT (A) erred in law and on facts holding ground challenging action of AO not deducting unabsorbed brought forward depreciation and ordinary business loss as infructuous in absence of business activity during the year.
- Levy of interest u/s. 234AB C & D of the Act is not justified.
- Initiation of penalty proceedings u/s 271 (l)(c) of the Act is not justified.”
The assessee is engaged in the business of producing energy. During the course of the assessment proceedings, Ld. Assessing Officer observed that the assessee had not generated any revenue for the year from business operations. Further, the assessee had claimed shifting and dismantling expenditure for Rs. 14,97,804/- and the assessee had shifted its plants and machinery in the year under consideration. Therefore, Ld. Assessing Officer held that it is evident that during the year under consideration, there was no business activity and assessee had not used its plants and machinery for business purposes. Hence, Ld. Assessing Officer disallowed certain expenditure and depreciation of Rs. 1,71,24,757/- on plant and machinery claimed by the assessee during the year under consideration.
In appeal before Ld. CIT(A), he dismissed the assessee’s appeal by holding that the assessee had no business activity during the year under consideration and had not used its Plant and Machinery during the entire year at all. In fact, as per assessee’s own admission, the Plant and Machinery of the assessee was dismantled and shifted during the year under consideration and the assessee had claimed shifting and dismantling expenditure in respect of the same. Accordingly, since no part of entire block of Plant and Machinery was put to use in the entire year, assessee’s claim for depreciation on Plant and Machinery of Rs. 1,71,24,757/- cannot be allowed.
Observation of the court
Court has heard the rival contentions and perusal the material on record. The issue for consideration before us are two-fold: First, whether depreciation amounting to 1,71,24,757/- can be allowed to the assessee, when admittedly, the plant and machinery was not put to use during the year under consideration, since assessee was in process of shifting the unit to a new location. Secondly, whether the assessee can be allowed set-off of unabsorbed brought forward depreciation and business loss in absence of business activity during the year.
Court shall first deal with the first issue mentioned above.
In the case of Nirma Credit & Capital Ltd. v. ACIT  82 taxmann.com 109 (Gujarat), the facts were that the assessee company is engaged in the business of manufacture of detergents. During the year under consideration, manufacturing activity was not carried out by the assessee. Therefore, the assessee claimed depreciation on the block of Plant & Machinery from the earlier year. However, the Assessing Officer passed the assessment order disallowing the depreciation. The CIT(A) allowed the assessee’s appeal. Being dissatisfied with the same, the Revenue filed appeals before the Tribunal. However, all the appeals filed by the Revenue were dismissed. Hence, Revenue filed Appeal before the Gujarat High Court.
Now, on appreciation of facts of the present case, court notes that during AY 2011-12 and 2012-13, the assessee was having substantial revenue from operations and it is not the case that the assessee was not having business operations for many years or had closed down its operations altogether. The Notes forming part of Balance Sheet mentions specifically states “The company is in transition period and has not finished restructuring of power plant at Panoli and hence could not made sales during the year by generation and supply of power”. So this is not a case, where the unit had not been in operation for several years or has not been generating any revenue at all for many years altogether. Though, subsequently the unit closed down eventually (in 2016), but so far as the present assessment year is concerned, there is no observation either in the assessment order or CIT(A) order that relocation was purpose of closing down the unit altogether. Though, the unit could not generate revenue during the year on account of relocation of plant to Panoli, but the fact that the assessee did not earn revenue or did not put the assets to use on account of fact that it was in process of shifting of plant to Panoli, would not, in our view, disentitle the assessee to claim depreciation on plant and machinery forming part of block of assets. Thus, in absence of any finding to the effect that the purpose of shifting was to close down the unit altogether, in our view, it respectfully following the decision of Gujarat High Court in the case of Nirma Credit & Capital Ltd supra and PCIT v. Babul Products (P.) Ltd supra and various other judicial precedents cited above, in our view, Ld. CIT(A) erred in disallowing the claim of the assessee in respect of depreciation on plant and machinery forming part of block of assets on the ground that assets were not put to use in the present year. In the result, Ground No. 1 and 2 of the assessee’s appeal are allowed.
The second issue for consideration before us is whether the assessee can be allowed set-off of unabsorbed brought forward depreciation and business loss in absence of business activity during the year. Now, in the case before this court there is no specific finding either in the assessment order or CIT(A) order that the assessee had abandoned/ closed his business during the year. Though during the year, admittedly the assessee could not generate revenue on account of relocation of plant to Panoli, but that fact by itself, would not, in our view, ipso facto lead to the conclusion that the business of the assessee has ceased altogether. In our view, respectfully following the decisions of jurisdictional High Courts cited above and the decision of Mumbai ITAT in the case of Dwarka Cements supra, which has held that merely because there was no manufacturing activity in relevant previous year, that could not be reason enough to come to conclusion that unabsorbed appreciation of assessee in earlier years was not entitled to be set off against its business income in current year, we are of the considered view that assessee should be allowed set-off of unabsorbed brought forward depreciation and business loss during the year.
In the result, Ground No. 3 of the assessee’s appeal is allowed.
Ground Nos. 4 and 5 of the assessee’s appeal are general in nature and do not require a specific adjudication.
The court allowerd the appeal of the assesse.Meghmani-Energy-Ltd.-Vs-DCIT-ITAT-Ahmedabad