2008 (10) TMI 98 - HC - Income Tax

Machinery depreciation - machinery that was installed was found to be defective - therefore, AO held that the machinery was not used for the purpose of business as required under section 32 - When the assessee bona fide installs any machinery and to his misfortune, it becomes defective and non-functional, it cannot be said that it is not put into use for the purpose of business merely because it did not effectively function is not a ground to reject the depreciation - depreciation entitled

Summary

Issues:
1. Entitlement to depreciation for defective machinery installed by a company.
2. Interpretation of "used for the purpose of business" under section 32 of the Income-tax Act, 1961.
3. Applicability of precedents in determining depreciation claims for non-functional machinery.

Analysis:
1. The case involved the respondent-assessee, a company operating a sugar factory, seeking depreciation for pollution control machinery installed during the assessment year 1992-93. The Assessing Officer denied the depreciation claim, citing the machinery's defectiveness during trial runs as a reason for non-business use. However, the Commissioner of Income-tax and the Tribunal ruled in favor of the assessee, stating that the mere ineffectiveness of the machinery does not justify rejecting the depreciation claim.

2. The State appealed against the depreciation order, with the appellants relying on the Supreme Court's decision in Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265. The Supreme Court's observation emphasized that machinery must be used for the business's purpose to qualify for depreciation, regardless of whether it was actively or passively utilized during the accounting year. The court highlighted that if machinery was not used at all during the year, no depreciation allowance could be claimed.

3. The appellants also referenced the Deputy CIT v. Yellamma Dasappa Hospital [2007] 290 ITR 353 case to argue that defective and non-functional machinery cannot be considered as being used for business purposes. However, the court distinguished this case from the current scenario, noting that in Yellamma Dasappa Hospital's case, there was no evidence of the machinery's use during the assessment year, unlike the present situation where the machinery was installed but became defective.

4. The court emphasized the interpretation of "used for the purpose of business" by the Supreme Court, underscoring that the installation of machinery is crucial. The judgment clarified that the Supreme Court's observation did not address situations where installed machinery becomes defective and non-functional, raising the question of whether such machinery can still be considered as being used for business purposes.

5. Ultimately, the court concluded that the law on depreciation, as outlined in section 32 of the Income-tax Act, 1961, should be interpreted in line with its intended purpose. It noted that when an assessee genuinely installs machinery that later turns out to be defective and non-functional, it cannot be deemed as not being used for business purposes. The court upheld the Tribunal's decision to grant depreciation, dismissing the appeal.