Depreciation on Genuine Fixed Assets Cannot be Disallowed Merely for Alleged Source Deficiency: ITAT [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) deleted a disallowance of depreciation amounting to ₹2,14,45,821 and ruled that when the ownership, existence, and business use of assets were undisputed, the depreciation cannot be denied merely because the Assessing Officer (AO) is unsatisfied with the explanation of the source of funds.

Scania Commercial Vehicles India Private Limited (assessee) engaged in the business of dealing in heavy-duty trucks, buses, and coaches, filed a return showing a total loss. During the assessment proceedings, the AO noted additions to fixed assets totaling ₹17,80,37,774, which included software for inventory control and other intangible assets.

The AO initially invoked Section 68 of the Income Tax Act, 1961, treating the investment in these assets as unexplained credit because the assessee allegedly failed to provide sufficient proof of the mode of payment and business necessity.

The Dispute Resolution Panel (DRP) directed the AO to re-examine the facts. The AO ultimately disallowed the depreciation claim of ₹2,14,45,821. The AO’s primary reasoning was that the assessee had not satisfactorily explained the source of the funds used to purchase these assets.

The assessee contended that the assets were purchased through banking channels and recorded in audited books of accounts. The counsel explained that capital expenditure was financed through loans from its holding company and available internal business sources. The assessee argued that the disallowance was based merely on suspicion.

The two member bench comprising Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member) observed that the revenue of the company amounted to ₹673 crores and the receipt of share application money amounted ₹600 crores were significant enough to support such investments.

The tribunal observed that the AO did not claim the assets were “bogus” or that they were not used for business purposes. The tribunal observed that the disallowance was solely due to a perceived deficiency in explaining the source of the ₹17.80 crore investment.

The tribunal observed that as there was no doubt about the actual cost of the assets, user of the assets and ownership of the assets. It further observed that there was no reason to sustain the disallowance of depreciation.

The tribunal directed the Assessing Officer to delete the disallowance. The tribunal allowed the appeal of the assessee.