2011 (3) TMI 620 - HC - Income Tax

Deduction - Whether the I.T.A.T. erred in granting depreciation in respect of the factory in which no operation was carried out during the relevant previous year - the assessee was ready for doing his business. But for the adverse law and order situation, he could not actually run the factory although all the machineries were ready for use and the valuation of such machinery also depreciated notwithstanding its non-user -Notwithstanding such adverse law and order situation, the assessee did not abandon its business but suffered loss for such a state of affairs prevailing in that State over which he had no control with an expectation of resuming the business - Decided in favour of assessee.

Summary

Issues:
1. Entitlement to claim depreciation on machinery and plant when factory operations were suspended due to adverse law and order situation.

Analysis:
The judgment by the High Court of Calcutta involved the issue of whether an assessee could claim depreciation on machinery and plant despite the suspension of factory operations due to adverse law and order situations. The case revolved around the interpretation of Section 32(1) of the Income-tax Act, 1961, which requires the plant and machinery to be owned and used for business purposes by the assessee to claim depreciation.

The assessee in this case had started its business in Jammu and Kashmir but had to suspend operations due to the prevailing adverse law and order situation. The assessee filed for depreciation in its income tax return, which was disallowed by the Assessing Officer on the grounds that the factory operations were suspended. The CIT (Appeals) upheld this decision, but the Income-tax Appellate Tribunal set aside the orders, stating that the assessee, being the owner of the machinery and willing to operate the factory, should be entitled to depreciation under Section 32 of the Act.

The Revenue, dissatisfied with the Tribunal's decision, appealed to the High Court. The Revenue argued that since the factory remained closed during the relevant year, depreciation should not be granted. On the other hand, the assessee contended that the machinery was ready for use, but external circumstances prevented actual operation. The Court considered previous judgments and emphasized that the word "used" in Section 32(1) should be interpreted broadly. It stated that the machinery should be considered "used" if it is kept ready for business purposes, even if not actively operated during the assessment year.

The Court highlighted that the assessee did not abandon its business but faced losses due to circumstances beyond its control. It distinguished the case from situations where an assessee declares a lockout, indicating no intention to run the business. The Court concluded that the assessee was entitled to depreciation as the machinery was owned and ready for use, despite the inability to operate due to the law and order situation. Therefore, the Court dismissed the appeal, ruling in favor of the assessee and granting depreciation under Section 32 of the Income-tax Act.