DEP BEFORE COMMERCIAL OPERATIONS

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Amarjeet Singh (Querist)
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14 November 2007 Assets has been puted into the floor of factory,but no commercial operation is yuet started .Can I claim the depreciation.AO is questioning on Put To use.

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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14 November 2007 The ‘user’ test

‘Use’ means ‘kept ready for use’ and not ‘actual use’ - Allowance for normal depreciation allowance does not depend upon the actual working of the machinery. It is sufficient if the machinery in question is employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use in the profit-making apparatus the moment a need arises - Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi)/Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker.).

Even passive use will suffice - The expression ‘used’ for the purposes of section 32 should have a wider meaning so as to include not only actual but passive user - CIT v. India Tea & Timber Trading Co. [1996] 221 ITR 857 (Gauhati).

Steps taken to set building into gear are ‘putting it to use’ - After arranging for the building, any steps taken by the entrepreneur to set the building into gear for running the unit, would be nothing but putting it to ‘use’ - CIT v. O.P. Khanna & Sons [1983] 140 ITR 558 (Punj. & Har.).

Vehicles under repairs are eligible - An assessee is entitled to depreciation on written down value of trucks which were under repairs throughout relevant accounting years but were used for the purpose of business earlier and later years - CIT v. G.N. Agrawal [1994] 75 Taxman 30 (Bom.).

(Per Contra)

‘Used’ denotes actually used and not merely ready for use - The word ‘used’ denotes actually used and not merely ready for use. The expression ‘used’ means actually used for the purposes of the business - Dineshkumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768/ 141 Taxman 62 (Bom.).

For purpose of depreciation, machinery has to be actually used in terms of statute and kept ready theory is not available to assessee, as Legislature has chosen to use word ‘used’ - Dy. CIT v. Yellamma Dasappa Hospital [2007] 159 Taxman 58 (Kar.).

Mere preparations for use will not suffice - Mere preparation for the user cannot amount to user. There must be actual, effective and real user in the commercial sense. And the user must be so linked with the business that it can be said that there is an immediate nexus between the user and the business, i.e., the real business of the assessee - CIT v. Suhrid Geigy Ltd. [1982] 133 ITR 884 (Guj.)/CIT v. Jiwaji Rao Sugar Co. Ltd. [1969] 71 ITR 319 (MP)(App.).

Where assets were not at all used due to lock-out, depreciation cannot be allowed - Where, the factory of the assessee remained under lock-out throughout the previous year and during the lock-out period, the plant and machinery had not been actually used for the purposes of the business for a single day, depreciation on machinery was not allowable for the relevant previous year - CIT v. Oriental Coal Co. Ltd. [1994] 206 ITR 682/76 Taxman 240 (Cal.).

‘Use’ must be during relevant accounting year - The expression ‘used for the purposes of the business’ means used for the purposes of the business during the accounting year. In order to attract the operation of clauses (v), (vi) and (vii) of section 10(2) of the 1922 Act the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed under clause (vii) in respect of them and the second proviso also does not come into operation - Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC).

User during full year - In section 32(1) there is no requirement that assets should be used for whole of assessment year in question - CIT v. Refrigeration & Allied Industries Ltd. [2000] 113 Taxman 103 (Delhi).

Factory need not be worked by owner himself - To claim depreciation it is not necessary that the factory should be worked by the assessee himself, and it is enough if the factory is worked on by a licensee or a hirer - CIT v. Sarveshwar Nath Nigam [1963] 48 ITR 853 (Punj.).

Trial production amounts to ‘use’ of the asset - The trial run of a machinery is obviously for the purpose of business and not for any other purposes. What is required to be seen is that the machinery must be ‘used’ for the purpose of business, and keeping in mind the wider meaning ascribed judicially for the term ‘use’, even trial production of a machinery would fall within the ambit of ‘used for the purpose of business’. Further, as the statute does not prescribe a minimum time-limit for ‘use’ of the machinery, the assessee cannot be denied the benefit of depreciation on the ground that the machinery was used for a very short duration for trial run - Asstt. CIT v. Ashima Syntex Ltd. [2002] 122 Taxman 230/251 ITR 133 (Guj.).

Whether commercial production has commenced is not relevant - Commencement of commercial production by the assessee during the relevant previous year is not a condition for allowing deduction as investment allowance or depreciation. What is needed is that the machines must be used for the assessee’s business. Whether the assessee is able to successfully commence commercial production or commercial production is delayed on account of defect in trial production does not affect the allowability of deduction on account of depreciation and investment allowance if from the material on record, it can reasonably be inferred that machines were used for the assessee’s business during the relevant previous year. The user of machines for trial production, before giving full throttle is as much use of machines for the purpose of business - CIT v. Nakoda Metals [2006] 204 CTR (Raj.) 514.

Magnitude of production is not determinative of ‘use’ - Law does not require that there must be optimum production for granting the benefit of depreciation. Law only require ‘that there must be use of plant and machinery for the purpose of business. Use of such words that plant and machinery was run more extensively or was required to be used for larger production’ is not to be found in the Act or Rules. Whether the plant and machinery is used to the extent of its efficiency is irrelevant for the purpose of allowing depreciation. The test is that the building, plant and machinery are used for the purpose of business - Asstt. CIT v. Ashima Syntex Ltd. (supra).

Spare engines kept by transport operator - Where the appellate authorities allowed the claim of the assessee, a transport corporation owning a fleet of buses, for depreciation on spare engines kept in the store for emergency use, it could not be said that the opinion of the appellate authorities was perverse or untenable. The engines were meant to be used in case of need. It could not therefore be said that the spare engines kept in store were not meant for use. Everything ages with the passage of time including engines which gather dust in the store room. There is a normal depreciation of value even when a machine or equipment is merely kept in a store. Further, keeping in view the nature of the assessee’s business, it had to necessarily keep certain spare engines in store to meet an emergent situation. There was nothing on record to indicate that an engine which was purchased a year or two earlier would fetch the same price in open market. In this situation, the appellate authorities had taken a possible view - CIT v. Pepsu Road Transport Corporation [2002] 121 Taxman 232/253 ITR 303 (Punj. & Har.).

Continuous use for same purpose is not necessary - It is not the requirement of section 32 that depreciation claim in respect of any asset has to be allowed only if it continues to be used for all purposes for which it was being used earlier - CIT v. Udaipur Distillery Co. Ltd. [2004] 135 Taxman 487 (Raj.).

Application of section 32 is not confined only in respect of plant required for manufacturing purpose - The expression used in both sections 32(1) and 32A(1) is ‘in relation to the business’, viz., for the purpose of the business. It does not make out anything to the extent that such business has to be related to manufacturing purpose. The section does not make any such provision circumscribing the application only in respect of the plant required for manufacturing purpose. If it is related to the business of the assessee, namely, used for the purpose of the business, the provisions of sections 32 and 32A would be attracted - CIT v. Birla Jute & Industries Ltd. [2003] 260 ITR 55/133 Taxman 337 (Cal.).

Where the asset was bought on the last day of the accounting year - Where the cars were bought on the last day of the accounting year and had not been registered for being brought on roads, and there was no evidence of the assessee having used those cars before the end of the accounting year in the business of the assessee, the Tribunal was clearly in error in holding that the assessee was entitled to depreciation in respect of these vehicles - CIT v. Maps Tours & Travels [2003] 260 ITR 655/[2004] 141 Taxman 38 (Mad.).

Contract carriage becomes “ready for use” only after receipt of permit - Only after getting a vehicle registered as contract carriage and obtaining contract carriage permit, it can be concluded that vehicle is kept ready for use for carrying passengers for hire - CIT v. Air Travel Enterprises India Ltd. [2004] 136 Taxman 194 (Ker.).

KAAPIL

KAAPIL (Expert)
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14 November 2007 Thans Sampat Sir for very useful information.

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o.velavan

o.velavan (Expert)
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18 November 2007 In CIT vs Kanoria General Dealers P.Ltd 1986-159-ITR-524-Calcutta-this case it was held that depreciation could not be disallowed on the ground that,assessee has not commenced commerical production.