2007 (8) TMI 327 - HC - Income Tax

Depreciation on plant, machinery and building commercial production of sugar has commenced during the relevant period - On the bare interpretation of section 32 it cannot be claimed that the machinery or plant was not used by the assessee for the purposes of business - depreciation is allowable by granting deductions in respect of building, machinery, plant, etc., if it is used for the purpose of business or profession - order of the Tribunal allowing the assessee s appeal does not suffer from any legal infirmity order of AO granting deduction not prejudicial to revenue

Summary

Issues:
Challenge to order under section 260A of the Income-tax Act, 1961 regarding depreciation allowance for plant and machinery in the assessment year 1996-97.

Analysis:
1. The Revenue challenged the order of the Income-tax Appellate Tribunal regarding the allowance of depreciation on plant, machinery, and building to the assessee for the assessment year 1996-97 under section 260A of the Income-tax Act, 1961. The Commissioner of Income-tax set aside the initial assessment, directing the disallowance of depreciation as the assessee had not started commercial production of sugar during the relevant period. The Tribunal later set aside the Commissioner's order, holding the assessment order not erroneous or prejudicial to Revenue's interests.

2. The main argument by the Revenue was that the assessee did not start full-fledged production during the relevant period, and hence, depreciation on plant and machinery should not have been allowed. They contended that trial production does not qualify as commercial production necessary for claiming depreciation under section 32 of the Act. However, the assessee's counsel relied on a judgment by the Gujarat High Court, stating that the law only requires the use of plant and machinery for business purposes, not necessarily optimum production, to claim depreciation.

3. The High Court analyzed section 32 of the Income-tax Act, which allows depreciation on assets used for business or profession. Considering that the assessee had commenced sugar production, consumed raw material, and incurred manufacturing expenses, the court found no basis to deny depreciation. Referring to a Supreme Court judgment, the court emphasized that machinery must be used for at least part of the accounting year to qualify for depreciation. The court upheld the Tribunal's decision, citing the Gujarat High Court's precedent, and dismissed the Revenue's appeal as lacking merit.