UNDERSTANDING DEPRECIATION UNDER SECTION 32 OF INCOME TAX ACT, 1961 WITH LATEST CASE LAWS. Part – II

Earlier in the part 1  we had discuss in length about various depreciation under section 32 of the Income tax act 1961.  You can refer the same here at

http://taxbymanish.blogspot.in/p/understanding-deprecation-under-section.html

Given below the few more summary of recent judgements in respect of depreciation which

enable yourself with better understanding of the subject.

Higher rate  :                        Vibro bed dryer is entitled to hundred per cent depreciation.(ITA No. 254 of 2001 dt 10-02-2014). Refer, CIT .v. McLeod Russel (India) Ltd, 361 ITR 663.

                                                Assessee put up temporary wooden structure and partition for running computer centres, 100 per cent depreciation on partition and structures was to be allowed. Refer, CIT .v. Amrutanjan Finance Ltd, 363 ITR 135.  

                                                Assessee claimed depreciation at the rate of 60% on computer accessories and peripherals. Assessing officer rejected the claim of the assessee. CIT(Appeals) and Tribunal allowed the claim of the assessee on the contention that computer accessories and peripherals are integral part of computer systems. On appeal by revenue to High Court, Tribunal’s order was upheld. Refer, CIT .v. BSES Yamuna Powers Ltd, 358 ITR 47. Same also confirmed in the decision of Dy.CIT .v. CNB Finwiz Ltd, 159 TTJ 146.

                                                Tanker mounted on chassis of truck is not part of truck, and hence, is entitled to 100 percent depreciation and  Assessee entitled to depreciation at higher rate of forty percent on leased vehicles instead of normal rate of thirty percent. Refer, CIT .v. H.B. Leasing and Finance Ltd, 360 ITR 362.

                                                Power evacuation facilities and transmission and distribution lines is entitled higher rate of depreciation at 80% as applicable to wind mills and One time payment to electricity Board to earn right to use power evaluation facilities is eligible depreciation as the assessee being beneficial owner. Refer, ACIT .v. Rakesh Gupta, 60 SOT 81.

                                                In the case of Baliapatam Tile Works Ltd. v. Deputy CIT, VOL 33 PG 396, it was held that since taxpayer is not engaged in the business of hiring, he is not entitled for higher rate of depreciation.

                                                Assessee, being the owner of vehicle and engaged in the business of hiring and leasing of vehicles to third parties was entitled to charge higher rate of depreciation. Refer, Parle Soft Drinks P. Ltd. .v. JCIT, 27 ITR 663.

                                                Machinery purchased under Textile Upgradation Fund Scheme (TUFS) and used for embroidery purpose on grey cloth used in textile industry is eligible for higher depreciation of 50%. CIT .v. S.S. Embroiders, 218 Taxman 237. 

                                                Assessee engaged in business of civil construction work would be entitled to 100% depreciation on shuttering material which was ready to use but remained unused. CIT .v. U.P. State Bridge Corporation Ltd. 218 Taxman 92.

                                                Since assessee was owner of vehicles leased out, its claim for depreciation was rightly allowed. CIT .v. Baid Leasing & Finance Co. Ltd. 218 Taxman 243. 

                                                In the case of Asst. CIT v. Bharat Scans P. Ltd., VOL 31 PG 103, it was held that Medical equipments entitled for higher rate of depreciation.

Conditions:                          In light of finding that assessee had acquired possession of asset and was using it for the purposes of business, assessee was held entitled to depreciation. Refer, CIT, Large Taxpayers Unit .v. India Railway Finance Corporation Ltd., 362 ITR 548. 

                                                Held, transferee was put in possession of building, plant and machinery in terms of agreement to sell and running undertaking in its own right. Hence, it was entitled to depreciation. The fact that legal title conveyed under lease agreement and deed of sale was executed in subsequent years is not material. Refer, CIT .v. WEP Peripherals Ltd, 362 ITR 508.

                                                The assets had been transferred by the Government of Rajasthan to the assessee-society and for that purpose the value had been adopted as the value to the previous owner. The assessee-society became the owner of the assets and was actually using the property in its own right as an owner on and from the date of order of the Governor and formation of the society. It was entitled to depreciation. Principle laid down in Mysore Minerals Ltd..v. CIT (1999) 239 ITR 775 (SC), is applied. Refer, CIT .v. Jawahar Kala Kendra, 362 ITR 515.

                                                In the case of Vinod Bhargava v. CIT (T & AP), 367 ITR 122, it was held that since machines were purchased but not put to use and hence not entitled for depreciation. 

                                                Assessee purchased equipment to start business of FM broadcasting. However, the licence was obtained only in following year. Therefore, business could not be commenced in year in question. In the absence of material to show that programmes were prepared during the year, depreciation on assets was not allowed / Additional depreciation was not allowable on assets used in the business of broadcasting as the same was available only for assets used for purpose of manufacture. Refer, Malayala Manorama Co. Ltd. .v. ACIT, 28 ITR 144.

                                                Mining equipment and consumables which were kept ready for use when machines of sub-contractor broke down, can be said to be in use and assessee was entitled to depreciation. Refer, ACIT .v. Ashok Doshi, 28 ITR 389.

                                                Since spare parts were supplied along with equipments to keep them in workable condition, and they could not be utilized independently, depreciation was allowable to assesse. Refer, CIT .v. U.P. RajyaVidyutUtpadan Nigam Ltd, 218 Taxman 153.

                                                So long as assessee's business was a going concern and plant got ready for use but due to certain extraneous circumstances it could not be put to use, said fact could not stand in way of granting claim under section 32. Refer, CIT .v. Chennai Petroleum Corpn. Ltd. 218 Taxman 228.

                                                The business of the assessee is a going one and the machinery is ready for use but due to certain extraneous circumstances, the machinery could not be put to use, the fact would not stand in the way of granting relief under section 32. Refer, CIT .v. Chennai Petroleum Corporation Ltd, 358 ITR 314.

Investment Allowance:     A hotel building is not a "plant" and is not entitled to investment allowance. Refer, CIT .v. SB Properties and Enterprises Ltd, 362 ITR 483.

                                                Creation of reserve in next year is held to be sufficient compliance. Refer, Kisan Sahkari Chini Mills Ltd. .v. ITAT, 220 Taxman 117 

                                                Assessee is entitled to investment allowance on account of the additional expenditure in the cost and machinery on account of fluctuations in the currency rate. Refer, CIT v. Gujarat State Fertilizer Co. Ltd, 262 CTR 404 (SC).

Sale & Lease back:            Depreciation--Sale and lease back agreement--Purchase of machinery by assessee, a finance company, on payment of sales tax--Lease of machinery back to manufacturer--Lease income disclosed as business income--Assessee owner of machinery--No material to show transaction of sale and lease back not genuine--Assessee entitled to depreciation. Refer, CIT v. TVS Finance and Services Ltd, 366 ITR 487.

                                                The Assessee purchased a boiler and subsequently leased it out to sister concern of seller. In return of income, assessee claimed depreciation on said boiler. Assessing officer found that boiler was attached to land and sale could not be completed by mere issue of sale bills. It was further noticed that boiler was still lying and functioning in factory of the seller and it was not installed in its sister concern. Assessing  officer thus taking a view that transaction in question was a loan transaction and it was wrongly given colour of lease transaction, disallowed assessee’s claim. Tribunal  upheld the assessment order. The High Court observed that the Assessee had not questioned the findings of facts as regards the genuineness of the lease transactions. Thus when the finding of the fact on genuineness being not challenged in the manner known to law the same having attained finality, there exists no ground to interfere with the order of lower authorities rejecting the claim of depreciation. On the submission of the counsel of the assessee,  to raise additional grounds on genuineness of lease transactions, the court held that question regarding genuineness is a pure and simple factual one and considering the materials discussed by authorities below, the court did not find any justifiable ground to interfere with the order. Refer, Upasana Finance Ltd. .v. Jt. CIT, 220 Taxman 6.

                                                Where the statement given by the managing director of the assessee company as well as, the record of the assessee Company clearly depicted / established that the purchase and lease back transaction were lacking genuineness, further, the records showed that the funds were received back by the assessee within a few days. On basis of the facts the High Court held that depreciation on the assets was not allowable. Refer, MARG Constructions Ltd. v. ACIT, 102 DTR 113.

                                                Assessee (Bank) is entitled to depreciation on assets given on lease. Refer, ICICI Bank Ltd. v. JCIT, Mum ITAT.

                                                The very fact that sale was accepted as between assessee and Electricity Board and after settlement of lease amount, assessee would continue to retain its ownership in no uncertain terms stipulated in  agreement, and when such a transaction was not against law, there was no reason to doubt transaction. Therefore, depreciation claimed by assessee was to be allowed. Refer, First Leasing Co. of India Ltd. v. ACIT, 218 Taxman 144. 

                                                As the assessee, in the instant case, is the lessor, it is the owner thereof, it is consequentially entitled to depreciation on its assets leased out during the currency of its business. Refer, CIT .v. Baid Leasing & Finance Company, 359 ITR 553.

Software :                             Depreciation on software cannot be declined where valuation report of assets indicated that software was developed and installed by assessee in system and assessee produced all vouchers and receipts for same. Refer, CIT .v. Shree Ram Multi Tech Ltd, 220 Taxman 76.

                                                Claim of depreciation on intangible asset, being software, was allowable on the basis of assessee's own case., Refer, CIT .v. Shree Rama Multi Tech Ltd, 219 Taxman 162.

Forex valuation:                  Assessee claimed depreciation on account of foreign exchange rate difference capitalized to plant and machinery. Assessing Officer rejected assessee's claim holding that amount was not actually paid at end of accounting year and same was allowable only at time when liability was actually paid. Commissioner (Appeals) and Tribunal had allowed depreciation in case of assessee in earlier assessment years on similar facts. Since facts in relevant year were identical, the High Court, following principle of consistency, allowed assessee's claim. Refer, Addl. CIT .v. Gujarat Narmada Valley Fertilizers Co. Ltd, 220 Taxman 117.

Classification:                     Toll roads and bridges are to be considered as building for the purpose of granting depreciation. Refer, CIT .v. Noida Toll Bridge Co. Ltd, 220 Taxman 06.  Same also confirmed by Hyderabad ITAT in the case of DCIT .v. Swarna Tollway Pvt. Ltd.

                                                Temporary sheds for parking vehicles. Depreciation allowable at rate applicable to building. Refer, CIT v. TVS Motors Ltd, 364 ITR 1.

                                                The Assessee company was engaged in the business of tissue culture activities and open fill activities relating to agriculture projects. The assessee had constructed a greenhouse and claimed depreciation at the rate of 25 per cent. The A.O. held that ‘greenhouse’ was in the nature of factory building and could not be considered as plant & machinery and thereby granted depreciation of 10 percent. The CIT(A) upheld the A.O.’s order. The Tribunal held in favour of the assessee that greenhouse performs a manufacturing process (hardening) and is an integral part of assessee’s business process and it can’t be considered as a simple building. The Assessee was right in considering greenhouse as part of plant & machinery and claiming depreciation at rate of 25 per cent. Refer, Gujarat Green Revolution Co. Ltd. .v. ACIT, 145 ITD 161.

                                                In depreciation table, 'airplane-aeroengine' which is entitled to 40% depreciation, cannot be given a restrictive interpretation so as to include aeroengine only; it will also include 'aircraft' which gives a broader description which includes all manner of craft or means of transport aided by flights such as balloons, planes, etc. Refer, CIT .v. SRC Aviation (P.) Ltd, 218 Taxman 62.

Others :                                 The Tribunal held that the assessee did not claim depreciation in A. Y. 2001-02. Therefore, the WDV of the assets as on 31st March 2001 has to be taken for considering the depreciation to be allowed to the assessee in A.Y. 2002-03. Refer, Reliance Industries .v. Addl. ACIT, 159 TTJ 349.

                                                Customer base of the micro-finance business of SKS was acquired by the assessee as a part of transfer of entire business. Commercial assets of SKS facilitate the assessee to carry on the business smoothly and effectively and was in the nature of business and commercial rights and, therefore, the client acquisition cost paid by the assessee was eligible for depreciation u/s. 32(1)(iii). Refer, SKS Microfinance Ltd. .v. Dy.CIT, 98 DTR 321.

                                                The A.O. held that assessee was entitled to depreciation on basis of straight line method on basis of assessment for earlier years and not on WDV basis as claimed by assessee. The Tribunal held in favour of assessee following decision of Tribunal in assessee’s own case in Jindal Steel & Power Ltd. v. Addll. CIT [2006] 10 SOT 106 (Delhi), assessee could be allowed depreciation on WDV basis. Refer, ACIT .v. Jindal Steel & Power Ltd., 145 ITD 277.

                                                The assessee claimed depreciation on tenancy rights. The A.O. rejected the assessee’s claim. The CIT(A) upheld the order of the A.O. The Tribunal upheld the order of the CIT(A), tenancy rights cannot be construed as “intangible assets” falling within meaning of Explanation 3 to Sec. 32(1) and hence no depreciation can be granted on said rights. Refer, Dabur India Ltd. .v. ACIT, 145 ITD 175.

                                                Assessee must own asset and use the asset for the purpose of business in order to claim depreciation. Since assessee was not able to claim depreciation due to seizure of assets by bank, notional depreciation cannot be attributed. Hence, it was directed that grant of notional depreciation from the year 2003 for calculation of written down value as on April 1, 2006 was not warranted and computation of capital gains by assessee u/s 50 confirmed. Refer, KLN Agrotechs P. Ltd..v.ITO, 27 ITR 648.

                                                Since motor car was used for less than 180 days, full depreciation was not allowable. Depreciation was allowable at rate of 50% of the prescribed rate. Refer, DCIT .v. Sanghi Jewellers P. Ltd, 27 ITR 317.

                                                Assets were taken over in scheme of amalgamation and the transferor company did not claim depreciation for earlier assessment years. Written down value was to be arrived at after reducing depreciation actually allowed. Held, allowance cannot be thrust upon assessee in the absence of claim as Explanation 5 in s.32 was applicable only from AY 2002-03 onwards. Refer, Addl. CIT .v. Nicholas Piramal India Ltd, 27 ITR 182.

                                                Imported car (Foreign made cars)–Concerns purchased foreign made car before 31.03.2001 – merged with the assessee company with effect from 01.04.2004 – Accordingly, the foreign cars became the property of the assessee from 01.04.2004 – Held assessee was entitled for depreciation on foreign cars and the prohibition in clause (a) to proviso to section 32 (1) was not applicable. Refer, CIT .v. Mira Exim Ltd, 262 CTR 441.

Additional Depreciation:   Additional depreciation allowed on setting up of wind electric generator to a chemical manufacturer. Refer, CIT .v. Diamines & Chemicals Ltd, 222 Taxman 218.

                                                The assesse is engaged in business of processing of iron ore in the plant and also generation of windmill energy. It claimed additional depreciation on machinery and wind mill. The said claim was allowed by AO. CIT revised the order of AO under section 263 and directed to disallow the claim of additional depreciation. On appeal Tribunal allowed the claim of additional depreciation to assesse. On appel by revenue, dismissing the appeal the court held that the activities of assesse, ie. processing of iron ore in plant and generation of wind energy / eligible for additional depreciation.[S.32(1)(iia)]: Followed the ratio in CIT v. Sesa Goa Ltd. Refer, CIT v. V.M. Salgaonkar & Brothers (P) Ltd, 225 Taxman 27.

                                                Inadmissible, claim of depreciation could not be allowed merely on ground that assessee had reversed same in succeeding year-Computer insattled in supervisory offices of factory compound-Could not prove dedicated to supervision of manufacturing activity and henceAdditional depreciation was not allowable.Refer, Hero Moto Corp Ltd. v. ACIT, 60 SOT 25.

                                                Electricity falls within definition of Sale of Goods Act, 1930 and process of generation of electricity is akin to manufacture or production of an 'article' or 'thing'. Use of electricity in manufacturing activity of core business of assessee is not a precondition for grant of additional depreciation under statute. Additional depreciation on windmill cannot be denied for want of use of such electricity in manufacturing of core business of assesse. Refer, DCIT .v. Hutti Gold Mines Co. Ltd, 60 SOT 147.

                                                Company was engaged in extraction of iron ore and its processing, and had installed new plant and machinery, additional depreciation was to be allowed on same. Refer, Sesa Goa Ltd. .v. JCIT, 60 SOT 121.

Damage of assets:             Glow sign boards owned by assessee got damaged. Assessee debited the amount in profit and loss account representing value of glow sign boards written off. AO held that since assessee-company's block of 'furniture and fixtures' was still appearing in its schedule of assets, expenditure on account of damage to glow sign boards could not be charged to profit and loss account. Assessee should have applied provisions of section 32(1)(iii) for treating said loss. Tribunal held that Glow sign boards pertained to block of assets of "furniture and fixtures" which was still appearing in schedule of assets in balance sheet, issue was remitted to the file of AO to state allowance of depreciation. Refer, Haier Appliances India (P.) Ltd. .v. Dy.CIT, 146 ITD 730.  

Trust Assets :                      The assessee, a Charitable trust registered u/s. 12AA, claimed depreciation in respect of capital assets, the total cost of which had already been claimed as an application of income u/s. 11(1). The A.O. disallowed the claim. The CIT(A) upheld the order of the A.O. The Tribunal held in favour of the assessee that the depreciation could be allowed to assessee society on assets which came into  existence by application of income, which was exempt u/s. 11. Refer, Chaman Vatika Educational Society .v. Dy.CIT, 145 ITD 105.   

Unabsorbed Depreciation:  During the relevant Assessment year, assessee claimed set off of amounts of unabsorbed depreciation pertaining to Assessment years: 1990-91 to 1992-93. AO was of the view that in view of amendment in S/32(2) carried out by Finance Act (No.2) Act, 1996 rejected assessee’s claim of set off of unabsorbed depreciation holding that period of eight years had already expired. On appeal before CIT (A), CIT(A) allowed the appeal by relying on the Circular No. 762 Dt 18/2/98 & opined that unabsorbed depreciation relating to A.Y.: 1990-91 to 1992-93 , by cascading effect would become part of allowance of A.Y.: 1997-98 & since instant Assessment year fell within period of eight years from A.Y.: 1997-98, assessee’s claim for set off of unabsorbed depreciation was to be allowed. Tribunal confirmed the view of CIT (A).Refer, ACIT v. ECIL Ltd, 56 SOT 237 (Hyd.)(Trib.).      

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