Depreciation: Date of Use is the Day Lessee Receives Machinery

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During the assessment year 1997-98, the assessee claimed depreciation at 100% on 70 MTPH boiler, amounting to Rs. 3,85,38,500/-, stating that the boiler was given on lease to M/s. Thiru Arooran Sugars Limited (TASL) as per the lease agreement dated 29.03.1997. The boiler is located at Kollumangudi Village, Nannilam Taluk in the premises of TASL. Since the said asset was put into use on 26.03.1997, the assessee claimed depreciation for the second half of the assessment year The Assessing Officer disallowed claim of the assessee on the ground that the said boiler was put to use by ‘T’ only on 6-5-1997. However, the Tribunal allowed the depreciation on the leased boiler.

The issue before , Madras High Court in Sundaram Finance Ltd.* vs CIT 18 taxman 197 was

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the depreciation on leased assets can be allowed in a year when the assets had not yet been put to use by the lessee

The Madras High Court held vide its order 12/8/2011 as under :

13. This Court, in CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455/1 82 Taxman 536 (Mad.), has held as follows:

“In other words, while the relevant provisions in section 33 provide that machinery or plant should be installed by the assessee in the premises used by it, or it is an asset or the said machinery or plant is an asset relating to the business carried on by the assessee, as the case may be, section 32A(2B) does not have any such stipulation. That is why the said Karnataka decision CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409 , concludes by saying thus (at page 416) :

“The benefit is given with reference to the actual user of the machinery, though the benefit may go to a person who does not exploit the machinery himself for manufacturing or producing any article. Such a situation is not entirely unknown in the field of taxation. If the object behind section 32A is understood as to encourage industrial activities and investment in capital goods to facilitate industrial developments, the provision would certainly bear the meaning we have attributed to it.”

Learned counsel for the Revenue also relies on section 32A, sub-section (5)(a), and contends that since the plant or machinery in the present cases has been leased out by the assessee, it is hit by the abovesaid provision in view of the fact that the terms “otherwise transferred” found therein would include such lease. So, according to him, the said allowance “shall be deemed to have been wrongly made”. But, we are unable to accept this contention also. First of all, even on the footing that the term “otherwise transferred” would include such “leases” as given in the present cases, the said provision will not disentitle the assessees herein from securing investment allowance, since the said provision only speaks of “machinery or plant transferred by the assessees” at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed”. In all the present cases, admittedly, the leases were only during the previous year in which the plant or machinery was acquired and not in the above referred to eight year period beginning from the end of the previous year”.

The dictum laid down in the above judgments would show that as and when the assets are installed at the place of the lessee, it could be presumed that they had been used and that such actual use was a condition precedent for the lessee to claim depreciation.

14. In view of the legal position, we are unable to appreciate the contentions made by the Revenue that actual date on which the asset was put to use alone has to be taken into consideration. We do not find any infirmity in the common order passed by the Appellate Tribunal, allowing the claim of depreciation on leased assets. Therefore, the second substantial question of law is answered in the negative i.e. against the revenue.