2015 (9) TMI 850 - HC - Income Tax

Entitlement to depreciation claimed in respect of Unit-II - AO held that the Assessee failed to prove that it had undertaken any manufacturing activity during the AY in question - CIT(A) allowed claim - Held that - On facts, it is not in dispute that the building was constructed in the previous year 1988-89. Further, the plant and machinery was installed in the factory in the previous year ending 31st March 1990. The Court in of the view that the installation of the plant and machinery in the building would amount to use of the building so as to justify the claim for depreciation on the building. Further, the plant and machinery installed in the building during AY 1989-90 was ready for use for the purpose of business of the Assessee. The electricity connection was given on 6th February 1990. Another important fact was that the Assessee was already conducting its business and this was Unit II which was by way of expansion of an existing business. It is not the Revenue s case that the building and plant and machinery were not for the purpose of business of the Assessee. Therefore, it is concluded that the building and machinery in Unit II were used for the purpose of the business of the Assessee during the AY in question. - Decided in favour of assessee.

Summary

Issues:
- Interpretation of depreciation claim for Unit-II
- Requirement of actual use for depreciation claim

Interpretation of depreciation claim for Unit-II:
The appeal by the Assessee, Stitchwell Qualitex (RF), under Section 260-A of the Income Tax Act, 1961, challenged the order passed by the Income Tax Appellate Tribunal regarding the depreciation claimed for Unit-II for the Assessment Year 1990-91. The Assessee, engaged in manufacturing bag stitching machines, claimed depreciation on the factory building and machinery installed in Unit-II. The Assessing Officer disallowed the depreciation claim citing lack of sales, minimal purchases, absence of manufacturing activity, and no separate staff or power bill for Unit-II. However, the Commissioner of Income Tax (Appeals) accepted that the assets were ready for use and profit-making apparatus, allowing the depreciation claim.

Requirement of actual use for depreciation claim:
The Revenue appealed the CIT (A) decision before the ITAT, which relied on the Supreme Court's decision emphasizing the actual use of assets for claiming depreciation. The ITAT concluded that the assets must be actually used for business purposes to claim depreciation, contrary to the CIT (A)'s decision. The High Court, referring to previous judgments, highlighted the necessity of ownership and user of assets for business to claim depreciation under Section 32 of the Act. The Court rejected the Revenue's argument that assets must be put to actual use, citing cases where assets kept ready for use were considered as used for business purposes. In the present case, the Court found that the building and machinery in Unit II were used for the Assessee's business during the relevant assessment year, justifying the depreciation claim.

In conclusion, the High Court answered the question of law in favor of the Assessee, setting aside the ITAT's order and allowing the appeal with no order as to costs.