Court Allows Depreciation Claim Despite Factory Closure Due to Court Stay Order

For a comprehensive understanding, check out the original judgement of the court order here."

Case Name:

Principal Commissioner of Income Tax Vs Babul Products P. Ltd (High Court of Gujarat)

Tax Appeal No.734 of 2018

Key Takeaways:

1. An assessee can claim depreciation even if their factory is not operational due to a court order, as long as the business continues.

2. The court emphasized that temporary closure doesn't equate to stopping or closing the business entirely.

3. Liabilities not written off in books of accounts are not considered ceased for tax purposes under Section 41(1) of the Income Tax Act.

Issue:

Can an assessee claim depreciation under Section 32 of the Income Tax Act when their factory is closed due to a court stay order but the business continues?

Facts:

- Babul Products P. Ltd. couldn't run their factory during the assessment year due to a stay order granted by the court.

- The assessee claimed depreciation of Rs. 34,03,491/- under Section 32 of the Income Tax Act.

- The Assessing Officer disallowed the depreciation claim, which was confirmed by the CIT(A).

- The ITAT allowed the assessee's appeal and deleted the addition made by the Assessing Officer.

- The tax department appealed to the High Court against the ITAT's decision.

Arguments:

Tax Department:

- The factory was closed, so the assessee wasn't using the assets for which depreciation was claimed.

- The assessee shouldn't be entitled to depreciation under Section 32 of the Income Tax Act.

Assessee:

- Although the factory couldn't operate due to the court order, the business continued.

- The temporary closure doesn't mean the business stopped or closed entirely.

Key Legal Precedents:

The court cited the case of Commissioner Vs. Mahindra and Mahindra Ltd. reported in [2018] 93 taxmann.com 32(SC) while discussing the issue of cessation of liability under Section 41(1) of the Income Tax Act.

Judgement:

The High Court agreed with the ITAT's decision, stating:

1. The assessee was in business but couldn't run the factory due to the court's stay order.

2. The business continued despite the factory closure.

3. The ITAT correctly allowed the depreciation claim under Section 32 of the Income Tax Act.

4. The court dismissed the tax department's appeal, finding no substantial question of law arising from the case.

FAQs:

Q1: Can a company claim depreciation if its factory is closed due to legal issues?

A1: Yes, if the business continues despite the factory closure, depreciation can still be claimed.

Q2: Does temporary closure of a factory mean the business has stopped entirely?

A2: No, the court clarified that temporary closure doesn't necessarily mean the business has stopped or closed completely.

Q3: What was the significance of the Mahindra and Mahindra Ltd. case in this judgment?

A3: The Mahindra case was cited regarding the issue of cessation of liability under Section 41(1) of the Income Tax Act, supporting the court's decision on this aspect of the case.

Q4: How did the court view liabilities not written off in the books of accounts?

A4: The court agreed that liabilities not written off and carried forward in the books of accounts are not considered ceased for tax purposes under Section 41(1) of the Income Tax Act.

Q5: What was the final outcome of this case?

A5: The High Court dismissed the tax department's appeal, upholding the ITAT's decision to allow the assessee's depreciation claim.

[1.0] Feeling aggrieved and dissatisfied with the impugned order passed by the learned Income Tax Appellate Tribunal Bench “A”, Ahmedabad (hereinafter referred to as “the learned Tribunal”) dated 09/10/2017 in ITA No.553/Ahd/2014 for the Assessment Year 2009-10 by which the learned Tribunal has allowed the said Appeal preferred by the assessee and deleted the addition made on account of disallowance of depreciation of Rs.334,03,491/- made by the learned Assessing Officer confirmed by the learned CIT(A) on account of contravention of provisions of Section 32 of the Income Tax Act and deleted the addition of Rs.54,24,294/- made by the learned Assessing Officer under Section 41(1) of the Income Tax Act on account of cessation of liability, revenue has preferred the present Tax Appeal with the following proposed questions of law;

(a) “Whether the Appellate Tribunal has erred in law and on facts in deleting the addition made on account of disallowance of depreciation of Rs.34,03,491/- which is in contravention of the provision of Section 32 of the Act?”

(b) “Whether the Appellate Tribunal has erred in law and on facts in deleting addition of Rs.54,24,294 made u/s 41(1) of the Act on account of cessation of liability?”

[2.0] We have heard Mrs Mauna Bhatt, learned advocate appearing on behalf of the revenue. So far as proposed question no.(a) is concerned, learned Assessing Officer disallowed the depreciation claimed by the assessee of Rs.34,03,491/- on the ground that the factory of the assessee is closed, and therefore, the assessee is not using the assets for which the depreciation was claimed, and therefore, the assessee shall not be entitled to the depreciation under Section 32 of the Income Tax Act. However, considering the fact that the assessee was in business however could not run the factory in the year under consideration because of the stay order granted by the Court and even otherwise, the business of the assessee was continued, and therefore, the learned Tribunal allowed the claim of the assessee of depreciation under Section 32 of the Income Tax Act by observing that it cannot be said that the assessee stopped /closed the business, we are in complete agreement with the view taken by the learned Tribunal.

[3.0] Now so far as proposed question no.(b) is concerned, the same is squarely covered against the revenue in view of the decision of the Hon’ble Supreme Court in the case of Commissioner Vs. Mahindra and Mahindra Ltd. reported in [2018] 93 taxmann.com 32(SC). The factual matrix, which came to be considered by the learned Tribunal is that the learned Tribunal while deleting the addition made under Section 41(1) of the Income Tax Act on account of cessation of the liability, namely, the assessee had not written off the liability in the books of accounts, and therefore, the liability with respect to debtors is not ceased is concerned, considering the aforesaid factual matrix and when in the books of accounts the assessee carried forward and continued the liability and has not written off, no error has been committed by the learned Tribunal in deleting the addition of Rs.54,24,294/- made by the learned Assessing Officer under Section 41(1) of the Income Tax Act on account of cessation of liability.

[4.0] In view of the above and for the reasons stated hereinabove, no substantial question of law arises in the present Tax Appeal and hence the present Tax Appeal deserves to be dismissed and is accordingly dismissed.

(M.R. SHAH, J.)

(A.Y. KOGJE, J.)