Facts of the Case

The petitioner, National Thermal Power Corporation Ltd., incorporated on 7th November 1975 as a public sector undertaking, was engaged in the development of thermal power stations, including construction, operation, and maintenance. For the construction of major projects at Singrauli, Korba, and Ramagundam, the petitioner purchased costly construction equipment which contractors could not procure. This equipment was leased to contractors to facilitate timely construction.

The petitioner claimed depreciation not only for equipment actually used in construction and leased to contractors but also for other machinery kept ready for use. The Assessing Officer allowed depreciation for leased equipment but disallowed it for equipment merely kept ready for use. This disallowance was upheld by the CIT(Appeals) and the Tribunal.

Issues Involved

  1. Whether the petitioner is entitled to claim depreciation on machinery and equipment kept ready for use but not actually used in construction during the relevant assessment years 1979-80 and 1980-81.
  2. Determination of the correct head of income for hire charges received from leasing construction equipment.

Petitioner’s Arguments

  • Depreciation should be allowed for all machinery and equipment acquired for construction, including those kept ready but not yet used.
  • The income from hire charges should have been assessed under “profits and gains of business” rather than “income from other sources”.

Respondent’s Arguments

  • Depreciation can only be claimed for equipment actually used in business activity.
  • Income from hire charges arises under “income from other sources”, not business income.
  • Equipment kept idle, though purchased for future construction, is not eligible for depreciation.

Court Order / Findings

  • The Delhi High Court held that depreciation under Section 32 can be claimed for assets owned and kept ready for use even if not actually deployed, citing judicial precedents including:
    • Capital Bus Service P. Ltd. vs. CIT, (1980) 123 ITR 404 (Del)
    • CIT vs. Yamaha Motor India Pvt. Ltd., (2010) 328 ITR 297 (Del)
    • CIT vs. Refrigeration and Allied Industries Ltd., (2001) 247 ITR 12 (Del)
  • The Court concluded that the Tribunal erred in denying depreciation for capital construction equipment kept ready for use.
  • The common question of law was answered affirmatively in favor of the assessee, with no order as to costs.

Important Clarification

  • Depreciation is allowable not only on assets in active use but also on those kept ready for use for business purposes.
  • The decision distinguishes between equipment acquired for construction purposes and power generation equipment, confirming only construction-related assets were involved.
  • Hire charges for leased equipment correctly fall under “income from other sources”, as the activity does not constitute a separate business.

Sections Involved

  • Section 32 – Depreciation
  • Section 57(ii) – Income from other sources
  • Section 256(2) – Reference to High Court 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:6420-DB/RVE15102012ITR43-441998.pdf

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