2012 (2) TMI 213 - HC - Income Tax

Depreciation on Plant & Machinery - sugar mill - Revenue contending that same is not allowable on ground that mill was non-functional during the period 29.02.2000 to 19.12.2006 A.Y. 2002-03, 2005-06 and 2006-07 Held that - Mill was not functional in the intervening period for the reasons beyond the control of the assessee company but immediately after the revival scheme was sanctioned by High Court, the mill started working in the beginning of next sugar season. Since, Plant and machinery were kept ready for use with the intention and desire to make it operational as soon as liquid funds were made available and the fact that the factory was ultimately made operational depreciation is therefore allowable Decided against the Revenue.

Summary

Issues:
- Disallowance of depreciation claim by the Revenue for assessment years 2002-03, 2005-06, and 2006-07 due to the sugar mill being non-operational.
- Interpretation of the term "used" in Section 32 of the Income Tax Act, 1961 regarding depreciation allowance.

Analysis:
1. Disallowed Depreciation Claim: The Revenue contended that the claim of depreciation was rightly disallowed as the sugar mill was not operational due to lack of funds, rendering it incapable of functioning. However, the assessee argued that the machinery was kept ready for production, justifying the depreciation claim. The CIT(Appeals) and the tribunal found that the machinery was indeed ready for use despite the mill being non-operational for a period. The tribunal noted various reasons for the closure, such as the company becoming sick, non-availability of sugar cane, lack of funds, and non-payment of wages. The Hon'ble Delhi High Court had sanctioned a revival scheme, and after its implementation, the mill resumed operations. The tribunal emphasized that the plant and machinery were available for use during the non-operational period, justifying the depreciation claim.

2. Interpretation of "Used" for Depreciation: The tribunal referred to the term "used" in Section 32 of the Act and cited precedents to explain that it includes both passive and active user. The tribunal highlighted that the objective of granting depreciation allowance is to account for wear and tear suffered by assets used in business. Precedents like Machinery Manufacturers Corporation Ltd. v. CIT and CIT v. Dalmia Cement Ltd. supported the interpretation that depreciation can be allowed even if the machinery is not actively in use but kept ready for use. The tribunal concluded that the plant and machinery being ready for use, with the intention to operate as soon as feasible, fulfilled the criteria for depreciation allowance.

3. Final Judgment: Considering the factual background and the readiness of the plant and machinery for use, the High Court dismissed the appeals by the Revenue. The Court found no substantial question of law arising from the case, as the machinery being available for use during the non-operational period justified the depreciation claim. The decision was made in favor of the assessee, and no costs were awarded.

In conclusion, the High Court upheld the depreciation claim for the non-operational period of the sugar mill, emphasizing the readiness of the plant and machinery for use and interpreting the term "used" in a broader sense to include passive readiness for operation.