There is no need to disallow part of the director’s remuneration and depreciation if the business is stopped due to a temporary lull, the Jodhpur bench of the Income Tax Appellate Tribunal (ITAT) ruled.

The mere pre-requisite for the permission of depreciation would be that the business must not have been closed out once and to all and the taxpayer must show that the expectancies of the business are restored are alive and real, The bench of Dr S. Seethalakshmi (Judicial Member) and B. R. Baskaran (Accountant Member) witnessed.

The business of the taxpayer is committed to manufacturing synthetic fabrics on a job-by-job foundation for other parties. It is involved in the trading of synthetic fabrics in the year. It filed its e-return, showing the total loss. The return was processed at the declared income. The case was chosen for thorough scrutiny beneath CASS. Notice u/s 143(2) of the Income Tax Act, 1961 was provided dated April 12, 2016, and duly served on the assessee on April 20, 2016, appointing the case for a hearing date of April 22, 2016.

Following that, a notice under Section 142(1) of the Act was issued, together with a question letter dated July 6, 2017, setting the matter for hearing on July 20, 2017. In accordance with notifications given to the assessee company, it attended on a regular basis and provided the necessary facts and information, which were recorded. Books of accounts were produced throughout evaluation hearings and were tested and checked.

The assessing officer saw that the taxpayer’s business has functioned only since July 2014. But the taxpayer would have paid the remuneration of Rs 5,10,000 to the directors for the entire year. The taxpayer has claimed the depreciation for the complete year. As the business functionality would have been suppressed, AO sees the view that the director’s remuneration and depreciation could not permit for the complete year.

AO limits the salary expenses and restricted the balance amount. 50% of the depreciation was restricted by the AO which the taxpayer claimed since the assets were made for usage for less than 180 days. Since certain expenses were supported by self-made vouchers hence the AO disallowed the sum of Rs 2,00,000 from the additional expenses.

The taxpayer files a petition to CIT(A) who concurred with the opinion opted via AO for the disallowance of the remuneration paid to the directors and the depreciation disallowance. But he lessens the disallowance incur out of the expenses to Rs 1 lakh.

The taxpayer filed that the same does not; the taxpayer did not suppress the business wholly and there was a temporary suspension of business. The business would have revived in the next year. While making the disallowance of the remuneration of the director out of depreciation, and out of additional expenses, the tax heads do not get justified.

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