Facts of the Case

  • Business Background: The Assessee, Stitchwell Qualitex (RF), is a registered firm engaged in manufacturing bag-stitching machines in Noida since 1981.
  • Business Expansion (Unit-II): In 1987, the Assessee was allotted a plot (Plot No. A-11, Sector-57, Noida) to construct a new factory building (styled as Unit-II). The factory building construction was completed in the accounting year ending March 31, 1989 (AY 1989-90) at a cost of ₹9,77,775.58.
  • Installation of Assets: Plant and machinery worth ₹1,10,825 were installed in Unit-II during the previous year 1989-90 (AY 1990-91).
  • Depreciation Claim: For the Assessment Year (AY) 1990-91, the Assessee claimed a total depreciation of ₹1,97,458 under Section 32, which included claims for the factory building, plant & machinery, furniture & fixtures, and office equipment under Unit-II.
  • Disallowance by AO: The Assessing Officer (AO) disallowed the depreciation claim entirely on the grounds that no manufacturing or sales took place at Unit-II. The AO cited that there were nominal purchases (₹361.70), no staff or separate wages paid for Unit-II, no manufacturing expenses, and no electricity bills received during the period, proving the asset was not put to "actual use".
  • First Appeal (CIT(A)): The Commissioner of Income Tax (Appeals) reversed the AO's decision. The CIT(A) noted that while the plant was not actively used for manufacturing, the assets were fully installed, kept ready for actual use, and constituted a profit-making apparatus.
  • Tribunal Order (ITAT): On the Revenue's appeal, the Income Tax Appellate Tribunal (ITAT) reversed the CIT(A)'s order and restored the disallowance. Relying on the Supreme Court judgment Federation of Andhra Pradesh Chambers of Commerce and Industry v. State of Andhra Pradesh, the ITAT ruled that an asset must be "actually used" to qualify for depreciation. The Assessee appealed this order before the Delhi High Court.

Issues Involved

  • Whether the Income Tax Appellate Tribunal (ITAT) was legally correct in holding that the Assessee-firm was not entitled to a depreciation claim under Section 32 in respect of Unit-II on the grounds that active manufacturing had not commenced.
  • Whether the expression "used for the purposes of the business" in Section 32 of the Income Tax Act, 1961, mandates active, operational usage, or if it encompasses assets "kept ready for use" in an expansion setup.

Petitioner’s Arguments

  • The learned counsel representing the Assessee argued that the plant and machinery were fully installed in the newly constructed building during the relevant previous year.
  • It was contended that an electricity connection was duly established on February 6, 1990, making the factory completely ready for operations.
  • The petitioner emphasized that Unit-II was a strategic expansion of an already existing, operational business. Therefore, keeping the assets operational-ready qualifies them as being "used for the business" under established legal precedents, even if active production figures were not recorded in that specific assessment year.

Respondent’s Arguments

  • No one appeared on behalf of the Revenue (Respondent) before the High Court during the final hearings.
  • However, as per the record of lower authorities, the Revenue’s primary stand was that the statutory condition of "user of the assets" requires actual manufacturing and operational activity. The absence of staff, missing power bills, negligible raw material purchases, and zero sales from Unit-II during the AY demonstrated that the facility was completely unutilized.

Court Order / Findings

  • Two Essential Conditions: The Delhi High Court reiterated that under Section 32 of the Act, an allowance for depreciation requires the fulfillment of two criteria: (i) ownership of the asset, and (ii) the user of the asset for business purposes.
  • Interpretation of "Used": The Court rejected the Revenue's narrow interpretation that assets must be actively operational. It held that the expression "used for the purpose of business" includes cases where the asset is "kept ready for use" but cannot be actively run during the period.
  • Deemed Usage of Building: The Court specifically noted that installing plant and machinery inside a building inherently constitutes a physical "use" of that building, thereby instantly justifying a depreciation claim on the structure.
  • Distinction of ITAT’s Precedent: The High Court observed that the ITAT erroneously applied the Supreme Court decision in Federation of Andhra Pradesh Chambers of Commerce, which interpreted the term "used" under a regional Non-Agricultural Lands Assessment Act in a completely different context. That ruling could not be imported to deny beneficial depreciation provisions under the Income Tax Act.
  • Final Ruling: The Court found that Unit-II was an expansion of an ongoing business, the machinery was ready for use, and electricity was connected. Consequently, the question of law was answered in the negative (in favor of the Assessee). The ITAT's order was set aside, and the depreciation claim was fully allowed.

Important Clarification

  • "Passive User" vs. "Active User": This judgment clarifies a vital corporate tax concept: an asset does not need to yield immediate commercial production or revenue to claim depreciation. If a business expands, and its new machinery or infrastructure is fully installed and kept in a state of readiness for operational deployment, it satisfies the statutory "user" requirement under Section 32.

Sections Involved

  • Section 32 of the Income Tax Act, 1961 (Depreciation allowance).
  • Section 260-A of the Income Tax Act, 1961 (Appeal to the High Court).
  • Section 143(3) of the Income Tax Act, 1961 (Scrutiny Assessment).

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:7715-DB/SMD16092015ITA3462002.pdf

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