2017 (11) TMI 1607 - HC - Income Tax

Denial of depreciation on plant and machinery - asset was to be used for trial production business of manufacture of Clinker - period of time asset being used - Held that - In facts of the present case, we find that the issue is no longer res integra in view of the decision of Industrial Solvents & Chemicals (P) Ltd. (1978 (6) TMI 20 - BOMBAY High Court). We have no hesitation in holding that the Order of the Tribunal cannot be faulted inasmuch as the jurisdictional High Court has already held that once plant commences operation and even if product is substantial and not marketable, the business can said to have been set up. Mere breakdown of machinery or technical snags that may have developed after the trial run which had interrupted the continuation of further production for a period of time cannot be held ground to deprive the assessee of the benefit of depreciation claimed - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of depreciation claim for clinker/cement factory machinery.
2. Computation of book profit under Section 115JA of the Income Tax Act.

Issue 1: Disallowance of Depreciation Claim:
The appeal under section 260A of the Income Tax Act, 1961 pertains to the disallowance of a depreciation claim for machinery in a clinker/cement factory. The Assessing Officer disallowed the depreciation claim as the machinery was allegedly used only for trial runs, not for business purposes. The Commissioner of Income Tax (Appeals) upheld this disallowance, emphasizing the necessity of actual, effective, and real commercial use of assets for depreciation claims. However, the Tribunal overturned these decisions, citing a previous court order that allowed depreciation even for machinery used in trial production. The Tribunal held that trial production falls within the scope of "used for the purpose of business," entitling the assessee to claim depreciation. Referring to the decision of the Gujarat High Court, the Tribunal emphasized that even short-term use for trial production qualifies for depreciation benefits. Following the precedent set by the court in a similar case, the Tribunal directed the Assessing Officer to verify the duration of machinery use and limit depreciation to 50% if the usage was less than 180 days in the relevant year.

Issue 2: Computation of Book Profit under Section 115JA:
Another issue raised by the Revenue was the computation of book profit under Section 115JA of the Income Tax Act. The Assessing Officer contended that a particular provision should be added to the book profit as an unexpected liability. However, the CIT (Appeals) disagreed and deleted the addition, noting that the item in question belonged to the Trading Account, not the profit and loss account. This decision was influenced by a previous Income Tax Appeal, which, although dismissed due to limitation grounds, questioned the treatment of such items. Consequently, the High Court found no substantial legal questions to consider and dismissed the appeal, emphasizing that the provision in question was not a profit and loss item, leading to the rejection of the addition to the book profit under Section 115JA.

In conclusion, the High Court upheld the Tribunal's decision regarding the depreciation claim for the clinker/cement factory machinery, emphasizing the legitimacy of claiming depreciation even for assets used in trial production. Additionally, the High Court dismissed the appeal concerning the computation of book profit under Section 115JA, stating that the provision in question did not qualify as an item for addition to the book profit.