2007 (10) TMI 262 - HC - Income Tax

Tribunal hold that the appellant is entitled to depreciation @ 50 percent u/s 32- machinery was required to be put to use for a period of 180 days in order to get the full depreciation - held that if the date of first user of the machinery, i.e. September 28, 1992, was taken into consideration for the purpose of this case, till March 31, 1993, the block of assets was used for more than 180 days assessee is entitled to full depreciation order of Tribunal is set aside

Summary

Issues Involved:
1. Entitlement to full depreciation under Section 32 of the Income-tax Act, 1961.
2. Interpretation of the term "put to use" in the context of depreciation claims.

Issue-wise Detailed Analysis:

1. Entitlement to Full Depreciation under Section 32 of the Income-tax Act, 1961:
The assessee, a company incorporated under the Companies Act, completed its assessment for the year 1993-94 with a total taxable income of Rs. 11,34,15,530. The Assessing Officer allowed depreciation of Rs. 6,90,204.56 for a new unit, VSF-III, an export-oriented unit. However, the Commissioner of Income-tax, upon reviewing the records, found that the machinery of the VSF-III unit had only worked for 112 days from September 28, 1992, to March 31, 1993. According to the proviso to Section 32 of the Income-tax Act, the Commissioner concluded that the depreciation should have been restricted to 50% of the normal depreciation since the asset was used for less than 180 days. Consequently, the Commissioner regarded the assessment as erroneous and prejudicial to the interests of the Revenue, issuing a notice under Section 263 of the Income-tax Act and directing the Assessing Officer to restrict the depreciation to 50%.

The assessee appealed to the Income-tax Appellate Tribunal, which upheld the Commissioner's order. The primary question of law formulated was whether the Tribunal was right in holding that the appellant is entitled to depreciation at the rate of 50% under Section 32 of the Income-tax Act, 1961.

2. Interpretation of the Term "Put to Use" in the Context of Depreciation Claims:
The court examined Section 32(1) of the Income-tax Act, which provides for depreciation of buildings, machinery, plant, or furniture used for business or profession. The proviso in question stipulates that if an asset is put to use for less than 180 days in a previous year, the depreciation is restricted to 50% of the normal rate.

The court emphasized the significance of the term "put to use." According to Webster's Encyclopaedic Unabridged Dictionary of English Language, the term means "to apply, employ to advantage." The court opined that if the block of assets acquired by the assessee during the previous year is applied or employed for business purposes for 180 days, the assessee is eligible for full depreciation. The court rejected the interpretation that "put to use" means "exploited for 180 days," noting that machinery cannot be used continuously every day throughout the year. The court highlighted that the assets were used intermittently from September 28, 1992, to March 31, 1993, and concluded that the block of assets was used for more than 180 days.

The court referred to the Delhi High Court's decision in Capital Bus Service P. Ltd. v. CIT [1980] 123 ITR 404, which dealt with a similar provision in the old Act of 1922. The Delhi High Court held that the term "used" includes both passive and active use, and machinery kept ready for use in business qualifies for depreciation even if not actively used. The court also cited the Supreme Court's decision in Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265, which interpreted "used for the purposes of business" to mean enabling the owner to carry on business and earn profits.

The court concluded that the machinery was required to be put to use for 180 days to qualify for full depreciation and agreed with the Delhi High Court's liberal interpretation. The court set aside the Tribunal's order, allowing the appeal in favor of the assessee and against the Revenue.