Depreciation on plant & machinery is allowance to be reduced as per section 32 of the Income Tax Act .Apart from the ownership , the second most important condition for allowance of depreciation on plant & machinery is that it should be used for the purpose of business or profession. But in practical and real life situation , there are many instances when the facts and circumstances will show that the assessee was forced not used the plant & machinery because of compelling situation . So , will he get the depreciation on the basis of such facts and circumstances ? While the Income Tax Act is totally silent on that aspect of allowance of depreciation, , fortunately Courts and Tribunals have given wider meaning of use of plant and machinery for the purpose of depreciation claim u/s 32.
Section 32 : Use is A condition for Depreciation
32 of the Income Tax Act states it clearly as under :
32. (1) In respect of depreciation of—
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,
owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—
Thus, the two conditions under section 32 of the Income-tax Act for allowing depreciation are :
(a)The assets should be owned, wholly or partly by the assessee; and
(b)It should be used for the purpose of business or profession.
Used for Business – Interpreted to Mean Even Passive Use
If one literally reads the provision of law , ( as most Revenue Officers read ) , it looks like the word “use: means use actively or prove that the machines were actually used . But , fortunately ,the second condition “used for business or profession” , has been interpreted by High Courts liberally to mean even a passive use of plants & machinery will fulfill the conditions of machines being used .
So, if the assessee shows that the plant & machinery were , although was not used directly , but was Kept ready for the use for businesses , then also it is considered that the machines were used for the purpose of business or profession and the depreciation in such case are allowable. Following case laws , can be relied upon for such interpretation
In CIT vs Escorts Tractors Pvt Ltd [2015] 56 taxmann.com 333 (Delhi), the facts involved were that the assessee-company claimed depreciation on the plant and machinery which was handed over to it for trial run two days before the end of the relevant previous year. The Assessing Officer disallowed the depreciation on the ground that the said machine was not installed before the close of the relevant previous year for the purpose of production of goods.
On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer holding that the most important witness who had signed the commissioning/try out report for the machines was not produced and no production sheet or log sheet in respect of the machine were filed.
On appeal, the Tribunal allowed the depreciation holding that the machine was installed before the close of the year.
Delhi High Court held that depreciation on the buses which were in fact not used by the assessee is fit for depreciation claim on grounds of passive use . The relevant extract of the order of Hon’ble High Court is as under :
This Court in the case of Capital Bus Services (P.) Ltd. v. CIT [1980] 123 ITR 404/4 Taxman 309 (Delhi) has held as under:—
“Though it is true that a machinery generally depreciates with actual user, the decision indicate that it is not necessary to import this concept in interpreting the expression “used” is the statute. In the first place, a machinery may well depreciate even where it is not used in the business and even due to non-user or being kept idle. Secondly, a very strict correlation between the actual use of machinery and the concept of depreciation would lead to several anomalies and difficulties, for a machinery cannot be used throughout the day and night or even throughout the working hours or even during the days when the business is in full scale operation. Thirdly, there will be no strain on the statutory language by interpreting it widely and not limiting it to the actual working or actual employment of the machinery in the business. On the other hand, it would be more appropriate to envisage the expression as comprehending cases where the machinery is kept ready by the owner for its use in the business and the failure to use it actively in the business is not on account of its incapacity for being used for that purpose of its non-availability.”
12. From the above it is seen that the terminology used would envisage comprehending cases where the machinery is installed, checked and made fully operational. Thus, depreciation is not denied on the ground of non “use” when trial has taken place. On this aspect, we note for benefit the judgment of the Madhya Pradesh High Court in the case of CIT v. Vindhyachal Distilleries (P.) Ltd., [2005] 272 ITR 583/147 Taxman 127, wherein the assessee claimed that it installed and put to use a bio gas plant at the cost of Rs. 90,41,057/- in May, 1992. In the return for the assessment year 1993-94, it claimed depreciation. The Income Tax Officer while passing the order of assessment; restricted the depreciation to 50% on the ground that the bio gas plant was commissioned and put to use for less than 180 days; that is only from October 9, 1992. The Commissioner (Appeals) upheld the disallowance. The Tribunal found that the bio gas plant was installed and put to use in May 1992, as was evident from the assessee’s letter dated May 19, 1992, to the supplier of the bio gas plant that during trial run, it developed some leakage and other problems, that there was some correspondence with the supplier of the plant in July and August, 1992, and thereafter, the plant was repaired and leakage and other teething problems were solved and normal flaring of methane gas started in October 1992. The Tribunal recorded a finding of fact after examining the relevant documents that the entire equipments had been installed and commissioned and put to use in May 1992. The High Court, while dismissing the appeal of the revenue was of the view that it was not in dispute that the plant was installed in May, 1992 and records clearly shows that on installation, it was commissioned in May 1992 but on account of certain leakage during trial run, repairs had to be carried out and regular production started in October 1992. The assessee was entitled to full depreciation. Similarly, the High Court of Kerala in the case of CIT v. Geo Tech Construction Corpn. [2000] 244 ITR 452/112 Taxman 373 on similar lines, wherein the Tribunal held that the margin of time was enough for tippers to move from Pondicherry to the work site and even if it is accepted, as was the case put up by the revenue, there was no actual user, the fact that they were kept ready for use would be enough for grant of depreciation on the principle of passive user of the asset, allowed the claim of the assessee for depreciation.
Suffice to state, from the above two judgments, we note that if plant and machinery is kept ready for use, that would be enough to grant depreciation.
Another judgment in this regard is again that of Hon’ble Delhi High court in CIT v. Refrigeration & Allied Industries Ltd. [2000] 113 TAXMAN 103 (DELHI), in which the Hon’ble High Court referred other two judgments the facts were that The assessee owned a cold storage. During the assessment year 1971-72, the machinery installed was not put to use because of poor potato crop during the season. The Assessing Officer, therefore, disallowed the claim for depreciation.
On appeal, the AAC noted that the word ‘user’ embraced passive as well as active user and depreciation was allowable even though the machinery had not actually worked during the year, as the plant was kept in operational condition.
The Tribunal upheld the conclusions of the AAC and noted that since the Assessing Officer himself had allowed expenses claimed on account of business of cold storage, there was no justification to disallow the claim of depreciation.
The High Court held as under :
The principal factors responsible for, reduction in value of a capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear; (ii) unusual damage; (iii) inadequacy; and (iv) obsolescence. These factors include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time. The depreciation allowance under section 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed, if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice – CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672 (Guj.). The two ingredients for depreciation allowance are : (i) that the depreciable asset is owned by the assessee, and (ii) that it is used for the purpose of the assessee’s business or profession subject, however, to the provisions of section 34. These aspects have been elaborately dealt with by one of us (Arijit Pasayat, CJ.) in CIT v. Geo Tech Construction Corpn. [2000] 244 ITR 452 (Ker.).
6. In view of the conclusions arrived at by the AAC and the Tribunal about the obligation to keep the machinery in good working condition so that it can be used at any moment and the additional fact as noted by them that all expenses relating to the cold storage business were allowed, we find that the view of the Tribunal is irreversible. Accordingly, we answer the question referred in the affirmative, in favour of the assessee and against the revenue.
Yet another judgment which can referred is that of Allahabad High Court decision in CIT vs Raj Kumar Sing & Co 295 ITR 81 in which the fact involved was that the assessee had certain dumpers and tippers which it gave on hire to the contractors on a daily basis. It claimed depreciation and repair expenses on 14 tippers and one recovery van.
The Assessing Officer disallowed the assessee’s claim on ground that they were not used during the relevant year for the purpose of business.
The Tribunal had allowed the depreciation and repair expenses of these tippers and recovery van on the ground that they were used by the hirer-company constructively and kept in readiness for being used by the hirer at the site in case of any breakdown of the dumpers and tippers or due to some other emergency.
The Hon’ble High Court confirmed the decision of ITAT stating that under the agreement, the assessee was required to provide 14 tippers and one tipper recovery van as a standby so that in the event of any major breakdown or otherwise if any vehicle on hire was not capable of being used, extra tipper provided as a standby could have been used. The depreciation and repair expenses were clearly admissible on such vehicle which was provided as a stand by
So, higher judicial forum have held that the word “ used “ includes active as well as passive user.In following cases , it has been held that even if the plant & machinery had actually not been used , depreciation is still allowable on the basis of passive use.
Conclusion
If an assessee justify the claim of depreciation on P & M by producing evidence that the machines were used passively.In other words, if the assessee proves that the plant & machinery could not be used on account of compelling reasons – temporarily for paucity of raw materials……or because of extraneous reasons like govt or court orders or was always kept ready for other integrated jobs, the depreciation is allowable. Its another matter that the department will always challenge such claims