ITAT upholds CIT(A)’s deletions of depreciation, excess stock, and GP additions.

ITAT upholds CIT(A)’s deletions of depreciation, excess stock, and GP additions.

Issue

1. Whether the Ld. CIT(A) was justified in deleting the disallowance of depreciation and additional depreciation amounting to Rs. 12,15,02,719/- when the AO alleged failure to prove assets were “put to use.”

2. Whether the CIT(A) was correct in deleting the addition of Rs. 2,47,75,785/- for alleged excess stock found during survey.

3. Whether the CIT(A) rightly deleted the trading addition of Rs. 23,08,56,610/- made by estimating a higher Gross Profit (GP) rate after rejecting books of accounts under Section 145(3).

Facts

• Context: A survey u/s 133A was conducted on 14.03.2018. The return for AY 2018-19 was scrutinized.

• Depreciation: The AO disallowed depreciation on machinery at the new Machiwara unit, claiming it was under construction and not put to use before 31.03.2018.

• Excess Stock: The AO treated 1373 bales of cotton as unaccounted excess stock, alleging non-recording in books, leading to an addition u/s 69.

• GP Rate: The AO observed a fall in the GP rate compared to earlier years. Citing this and the “excess stock,” the AO rejected the books u/s 145(3) and estimated GP by averaging the last three years, resulting in a massive addition.

• CIT(A)’s Relief: The CIT(A) deleted all additions after examining electricity consumption records (proving production), stock registers (reconciling the 1373 bales), and finding no specific defects in the audited books to warrant rejection.

Decision

• The Income Tax Appellate Tribunal (ITAT) dismissed the Revenue’s appeal.

• Depreciation Allowed: The Tribunal upheld the CIT(A)’s finding that documentary evidence (electricity bills, production details) proved the machinery was installed and put to use, even if for a short period (trial run/commercial production).

• Excess Stock Deleted: The Tribunal agreed that the 1373 bales were fully accounted for in the stock register. The AO had accepted the issue of bales but inexplicably rejected their receipt, which was impermissible.

• GP Addition Deleted: The Tribunal affirmed that a mere fall in GP rate is not a ground to reject audited books of accounts under Section 145(3). Since no specific defects were pointed out and the “excess stock” allegation failed, the enhancement of profit was unjustified.

Key Takeaways

• “Put to Use”: For claiming depreciation, assets need to be “ready for use” and preferably “used” for the business. Evidence like power consumption and trial production logs are critical. Even use for a single day entitles the asset to 50% depreciation.

• Rejection of Books: Section 145(3) cannot be invoked lightly. A lower GP rate alone is not a “defect.” The AO must identify specific errors, omissions, or irregularities in the books.

• Consistency: An AO cannot cherry-pick data—accepting the consumption (issue) of stock while denying its purchase (receipt) from the same records is legally unsustainable.

• Burden of Proof: Once the assessee produces audited books and reconciliations, the burden shifts to the Revenue to prove they are incorrect.

THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “A”, CHANDIGARH
The DCIT
Central Circle-1
Ludhiana
Vs
Aarti International Ltd.
Aarti Complex, GT Road
Miller Ganj, Ludhiana-141003
Punjab