ITAT Rules in Favor of Sambhav Energy Ltd: Depreciation Cannot be Disallowed if Business Assets are Kept Ready for Use During Unfavorable Market Conditions

In the case of Sambhav Energy Ltd. v. ACIT, the issue before the Income Tax Appellate Tribunal (ITAT) was the disallowance of a depreciation claim of Rs. 52.48 lakhs made by the assessee for Assessment year 2014-15. The Assessing Officer had disallowed the claim on the grounds that the assessee had not carried out any business activity during the relevant year, and had not used its fixed assets for any part of the accounting year. The assessee had submitted that it had stopped its business activity since the production of electricity had become unviable due to low selling prices. However, the Assessing Officer had taken the view that the assessee did not have the intention to carry on its business activity, and had accordingly disallowed the depreciation claimed.

The ITAT considered the decisions of various High Courts and the Supreme Court on the issue of depreciation, particularly in cases where assets were not actually used for business purposes during the relevant accounting period. In the case of Pepsu Road Transport Corporation, the Punjab and Haryana High Court had held that an assessee who was a transporter and had to keep spare engines in store was entitled to depreciation on the spare engines, as they were meant to be used in the case of need. The Delhi High Court had similarly held in Refrigeration and Allied Industries Ltd. that the assessee was entitled to depreciation allowance on a cold storage plant, even though the machinery had not actually worked during the accounting period. The Supreme Court had also held in Mysore Minerals Ltd. that section 32 of the Income Tax Act, which deals with depreciation, should be interpreted in favour of the assessee, and that the term “owned” should be given a wide meaning.

In light of these precedents, the ITAT held that the disallowance of depreciation was not justified in the case of Sambhav Energy Ltd. The ITAT noted that the tax authorities had not shown that the assessee had completely abandoned the business of generation of electricity, and that the assets in question were being kept ready for use. The assessee had maintained its business establishment and was generating other types of income, besides servicing a loan taken for business purposes. Under these circumstances, the ITAT found no reason to disallow the depreciation claimed by the assessee.

The ITAT’s decision in Sambhav Energy Ltd. v. ACIT provides a helpful illustration of the principles governing the allowance of depreciation under the Income Tax Act. The case highlights the importance of the two requirements for claiming depreciation under section 32 of the Act – that the asset must be owned by the assessee, and that it must be used for the purposes of business or profession. CA in gurgaon It also underscores the need to interpret tax provisions in favour of the assessee, particularly where there are two possible interpretations.

Overall, the decision in Sambhav Energy Ltd. v. ACIT is a welcome reminder of the importance of ensuring that tax assessments are based on a proper understanding of the relevant legal principles. The case serves as a reminder that tax authorities must take a nuanced and contextual approach to assessing depreciation claims, and should not automatically disallow such claims merely because assets have not been used during the relevant accounting period. CA in Gurgaon Ultimately, by ensuring that assessments are grounded in a proper understanding of the law, taxpayers and tax authorities can work together to create a more stable and predictable tax environment, which benefits everyone involved.

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