No Requirement Of Disallowing Part Of Director’s Remuneration And Depreciation When The Business Was Stopped Due To Temporary Lull: ITAT

The Jodhpur bench of the Income Tax Appellate Tribunal (ITAT) has held that there is no requirement for disallowing part of the director’s remuneration and depreciation when the business is stopped due to a temporary lull.

The bench of Dr. S. Seethalakshmi (Judicial Member) and B. R. Baskaran (Accountant Member) has observed that the only condition for allowability of depreciation is that the business should not have been closed out once and for all and that the assessee should demonstrate that hopes of the business being revived are alive and real.

The assessee company is engaged in manufacturing synthetic fabrics on a job-by-job basis for other parties. It is also engaged in the trading of synthetic fabrics during the year. It filed its e-return, declaring a total loss. The return was processed at the declared income. The case was selected for complete scrutiny under CASS. Notice u/s 143(2) of the Income Tax Act, 1961 was issued on April 12, 2016, and duly served upon the assessee on April 20, 2016, fixing the case for hearing on April 22, 2016.

Subsequently, notice u/s 142(1) of the Act with a query letter dated July 6, 2017, was issued, fixing the case for hearing on July 20, 2017. In compliance with notices issued to the assessee company, it attended from time to time and furnished the required details and information, which were placed on record. During assessment proceedings, books of accounts were produced, which were examined on a test-check basis.

The assessing officer noticed that the business of the assessee has been carried on only since July 2014. However, the assessee has paid remuneration of Rs. 5,10,000 to the directors for the whole year. The assessee had also claimed depreciation for the full year. Since business operations have been stopped, the AO took the view that the directors’ remuneration and depreciation cannot be allowed for the whole of the year. The AO restricted the salary expenses and disallowed the balance amount. Since the assets were put to use for less than 180 days, the AO disallowed 50% of the depreciation claimed by the assessee. The AO also disallowed a sum of Rs. 2,00,000 from other expenses since some of the expenses were supported by self-made vouchers.

The assessee preferred an appeal before the CIT (A), who concurred with the view taken by the AO in respect of the disallowance of remuneration paid to directors and the disallowance of depreciation. However, he reduced the disallowance made out of expenses to Rs. 1 lakh.

The assessee submitted that it has not; the assessee has not completely stopped the business, and there was only a temporary suspension of business. The business has been revived in the succeeding year. The tax authorities are not justified in making disallowances out of the director’s remuneration, out of depreciation, and out of other expenses.

The tribunal set aside the order passed by CIT (A) and directed the AO to delete the disallowances.

Case Title: Shri Devkripa Textile Mills (P) Ltd. Versus ACIT

Case No.: ITA Nos. 467/Jodh/2018

Date: 05/04/2023

Counsel For Appellant: Gautam Chand Baid

Counsel For Respondent: Nidhi Nair

Click Here To Read The Order