2016 (11) TMI 1504 - AT - Income Tax

Disallowance of depreciation on plant and machinery belonging to the appellant company and installed at customers premises for the business of the assessee - Held that - We vacate the consequential finding of the CIT(A) which had so emerged on the basis of his aforesaid misconceived and ill founded observations that the diagnostic machines installed by the assessee at the customers site under the reagent rental contracts were not from the assesses Block of assets , but formed part of the latters Stock in trade . We thus being of the view that the installation of the diagnostic machines owned by the assessee and forming part of its Block of assets at the customers site, being a part of the business of the assessee, and rather as a matter of fact a modus operandi adopted by the assessee to boost its sales of reagents, therefore the latter being found to have duly satisfied the requisite conditions contemplated u/s 32(1) of the Act , is thus entitled to deprecation on the said diagnostic machines. We thus in light of our aforesaid observations set aside the order of the CIT(A) and allow the appeal of the assessee.

Issues Involved:
1. Disallowance of depreciation on plant and machinery installed at customers' premises.

Detailed Analysis:

I. A.Y. 2007-08:

1. Disallowance of Depreciation: The primary issue pertains to the disallowance of depreciation amounting to ?13,10,650/- on diagnostic machines owned by the assessee but installed at customers' premises. The Assessing Officer (A.O.) disallowed the depreciation on the grounds that the machines were not used for the assessee's business, as they were installed at customers' sites and no rental was charged, thus failing to meet the conditions under Section 32(1) of the Income Tax Act, 1961.

2. CIT(A) Observations: The CIT(A) upheld the A.O.'s decision, stating that the assessee failed to provide evidence that the machines were part of its block of assets. The CIT(A) also noted that the machines were considered part of the stock in trade rather than fixed assets.

3. Assessee's Appeal: The assessee contended that the diagnostic machines were installed at customers' premises under agreements that required customers to purchase reagents exclusively from the assessee, which is a common practice in the diagnostic industry. The assessee argued that this arrangement was a strategic business decision to boost reagent sales and that the machines were indeed part of its fixed assets.

4. Tribunal's Findings: The Tribunal observed that the installation of diagnostic machines at customers' sites was a strategic business move to enhance reagent sales. The machines were part of the assessee's fixed assets, as evidenced by the records. The Tribunal concluded that the assessee met the conditions under Section 32(1) of the Act and was entitled to depreciation. The Tribunal set aside the CIT(A)'s order and allowed the assessee's appeal.

II. A.Y. 2008-09:

1. Similar Issue: The issue for A.Y. 2008-09 was identical to that of A.Y. 2007-08, involving the disallowance of depreciation amounting to ?12,52,731/- on diagnostic machines installed at customers' premises.

2. Tribunal's Decision: The Tribunal adjudicated the issue based on the same reasoning and findings as in A.Y. 2007-08. The appeal for A.Y. 2008-09 was allowed, following the same terms and reasoning.

III. A.Y. 2009-10:

1. Similar Issue: The issue for A.Y. 2009-10 was identical to that of A.Y. 2007-08, involving the disallowance of depreciation amounting to ?10,64,821/- on diagnostic machines installed at customers' premises.

2. Tribunal's Decision: The Tribunal adjudicated the issue based on the same reasoning and findings as in A.Y. 2007-08. The appeal for A.Y. 2009-10 was allowed, following the same terms and reasoning.

IV. A.Y. 2010-11:

1. Similar Issue: The issue for A.Y. 2010-11 was identical to that of A.Y. 2007-08, involving the disallowance of depreciation amounting to ?9,05,098/- on diagnostic machines installed at customers' premises.

2. Tribunal's Decision: The Tribunal adjudicated the issue based on the same reasoning and findings as in A.Y. 2007-08. The appeal for A.Y. 2010-11 was allowed, following the same terms and reasoning.

Conclusion:

In conclusion, the Tribunal allowed the appeals for all four assessment years (2007-08 to 2010-11), holding that the assessee was entitled to claim depreciation on diagnostic machines installed at customers' premises. The Tribunal found that the machines were part of the assessee's fixed assets and that their installation at customers' sites was a strategic business decision to boost reagent sales, satisfying the conditions under Section 32(1) of the Income Tax Act, 1961. The orders of the CIT(A) were set aside.

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