By TIOL News Service

CHENNAI, SEPT 04, 2013: THE issues before the Bench are - Whether depreciation can be claimed when business is a going concern and the machinery could not be put to use due to raw material paucity and Whether the word "used" in Section 32 should be understood in a wider sense so as to embrace passive as well as active use. And the verdict goes against the Revenue.

Facts of the case

The assessee claimed depreciation on Gas Sweetening Plant in the previous year relevant to the AY 1998-99. The claim was, however, rejected by the AO on the ground that the plant was not used at any time for the purposes of the business, as required u/s 32(1). The plant was built during the previous year relevant to the AY 1997-98, but on account of non-availability of raw material viz., sour gas, the same was not put to use. The plant was commissioned by running a test run for the first time during the previous year relevant to the AY 1997-98. Considering the trial run as equivalent to putting the said plant to use, depreciation was allowed for the AY 1997-98 by the Department. However, on the ground that the assessee had not disclosed the material fact that plant was not in use during the whole of the previous year relevant to the AY 1998-99, the assessment was reopened by issue of notice u/s 148. The assessee contended that the plant was ready for use for the year under consideration and the non-availability of raw material was an impediment to put the plant to use. Hence, the claim for depreciation could not be denied. It was further contended that the only requirement under law was that plant was ready for use; hence, depreciation should be allowed. The expression 'used' in the Statute, hence, should be understood in wider sense and that 'actual use' must be understood to include passive use as well as active use. However, the AO rejected the claim of the assessee.

On appeal, the CIT(A) rejected the claim. So the assessee made an appeal before the Tribunal. Before the Tribunal, the counsel of the assessee contended that the machinery, even though was not working on account of non-availability of raw material, yet, in view of its readiness to function, the relief should have been granted. For substantiating this contention, the counsel placed reliance on several case laws. On the other hand, the DR also relied on several case laws and contended that unless the machinery have been actually put to use, the requirements of law thus not satisfied. The Judicial Member of the Bench relied upon the decision of Commissioner of Income Tax Vs. Vayithri Plantations Ltd, Accountant Member agreed with the contention of the assessee that once the plant was ready, the same was entitled to depreciation. Thus he rejected the contention of the Revenue. In support of its reasoning, the Accountant Member also referred to definition of 'block of assets' and ultimately held that once admittedly the gas plant was ready to use, it must have suffered some wear and tear, hence, the assessee was entitled to the claim for depreciation. In the circumstances, the Accountant Member allowed the appeal.

However, the Judicial Member took a different view based on the decision in the case of CIT Vs. Maps Tours and Travels as well as in the case of CIT Vs. Vayithri Plantations Ltd. Judicial Member pointed out that after the amendment to Section 32(1) of the Income Tax Act, 1961 made by Taxation Law (Amendment and Miscellaneous Provision) Act, 1986, assets should be such, as has been used for the purpose of the business, profession or vocation for at least a part of the year. Thus, unless the assets have been put to use, the claim of the assessee could not be granted. Thus the Judicial Member rejected the claim of the assessee.

The matter was referred to the Third Member- Vice President of the Tribunal, who agreed with the view taken by Accountant Member in favour of the assessee. In coming to this conclusion, Vice-President referred to the decision of the Bombay High Court in the case of Whittle Anderson Ltd Vs. CIT. He also distinguished the cases relied upon by the Judicial Member. Thus, the Third Member-Vice President agreed with the Accountant Member and granted the relief.

Aggrieved, the Revenue has filed this appeal before the High Court.

Having heard the parties, the High Court held that,

++ in the decision in Whittle Anderson Ltd Vs. Commissioner of Income-tax , Bombay City I., the word 'used' as found in Section 10(2) of the Act, was considered by the Bombay High Court. Bombay High Court held that even though two out of the four presses which were directly in the pooling arrangement were to remain idle, while the two presses worked, the owners of those presses which were idle, had to keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time. Having regard to the above meaning of the word "used", even these presses which remained under forced idleness, were held as in use during the entire period of the year. Thus, the assessee continued to use its machinery within the meaning of the word "used" under Section 10(2)(vii) and the word "used" in the Section should be understood in a wider sense so as to embrace passive as well as active use;

++ we are in entire agreement with the view expressed by the Bombay High Court in the decision in Whittle Anderson Ltd Vs. Commissioner of Income Tax, Bombay City I. following the decision in Bhikaji Venkatesh Vs. Commissioner of Income-tax in the light of the decision of this Court in CIT Vs. Vayithiri Plantations Ltd;

++ even though Standing counsel appearing for the Revenue contended that such decision related to the case of development under Section 33 of the Income Tax Act, yet, this Court referred to the decision under Section 32 of the Income Tax Act in the context of the expression 'used for the purpose of business' as explained in Liquidators of Pursa Ltd Vs CIT and held that so long as the business was going and the machinery got ready for use but due to certain extraneous circumstances, the machinery could not be put to use, the said fact could not stand in the way of granting relief under Section 32 of the Act;

++ under the stated circumstances, on the admitted case that business was a going concern and the machinery could not be put to use due to raw material paucity, we reject the Revenue's contention, thereby, confirm the majority view of the Income Tax Appellate Tribunal.

(See 2013-TIOL-664-HC-MAD-IT)