Facts of the Case

Yamaha Motor India Pvt. Ltd. had capitalized certain assets amounting to Rs. 4,71,51,016. The Written Down Value (WDV) of these assets at the end of the relevant financial year stood at Rs. 2,32,07,141. During Assessment Years 2000-01 and 2001-02, the company claimed depreciation on machinery and assets that had been discarded and written off in its books of account.

The depreciation claim was initially allowed during assessment under Section 143(3). Subsequently, the Assessing Officer reopened the assessment under Section 147 and issued notice under Section 148, contending that depreciation on discarded assets was not allowable because those assets were not used for business purposes during the relevant previous year.

The assessee maintained that depreciation remained allowable because the discarded machinery had formed part of the block of assets and had been used for business purposes in earlier years.

The Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee and directed recomputation of depreciation after reducing the scrap value from the WDV of the block of assets. Aggrieved by the Tribunal’s decision, the Revenue preferred appeals before the Delhi High Court.

Issues Involved

  1. Whether the ITAT was correct in directing the Assessing Officer to recompute depreciation after reducing the scrap value of discarded assets from the Written Down Value of the block of assets.
  2. Whether Sections 32(1)(iii) and 43(6)(c)(B) apply where the assessee had allegedly not fulfilled the condition that the machinery must be used for business purposes during the relevant year.
  3. Whether the expression “used for the purposes of the business” includes passive use and extends to machinery that has been discarded during the relevant previous year.

Petitioner’s Arguments (Revenue)

  • Depreciation under Section 32 is available only where the machinery is actually used for the purposes of business.
  • Discarded machinery cannot be regarded as being used during the relevant assessment year.
  • Since the machinery had been discarded and written off, the basic condition for claiming depreciation was not fulfilled.
  • The provisions relating to depreciation could not be invoked where actual use during the relevant year was absent.

Respondent’s Arguments (Assessee)

  • The expression “used for the purposes of the business” includes passive use and does not necessarily require actual operational use in the relevant year.
  • The machinery had already been used in earlier years and depreciation had been allowed on the block of assets.
  • Section 32(1)(iii) specifically contemplates depreciation treatment for discarded machinery.
  • Once an asset forms part of a block of assets, depreciation must be computed after adjusting scrap value from the WDV.
  • Actual use during the year of discarding is not a prerequisite for depreciation.

Court Findings

The Delhi High Court observed that earlier Division Bench decisions of the Court had already recognized the principle of passive use. Machinery that is kept ready and available for business use may satisfy the requirement of being “used for the purposes of the business” even if not actually operated.

The Court further held that the provisions of Section 32 must be read harmoniously with Section 32(1)(iii), which specifically refers to discarded machinery. The expressions “used” and “discarded” cannot be interpreted in a manner that defeats the legislative intent.

The Court emphasized that where machinery had been used in earlier years and depreciation had already been granted, the condition of business use stands satisfied. In the context of discarded machinery, the requirement of use relates to prior years and not necessarily to the year in which the machinery is discarded.

The Court also noted that insisting upon actual use of discarded machinery would produce an impractical and inconsistent result because machinery is often discarded due to age, obsolescence, technological advancement or other commercial reasons.

Court Order

The Delhi High Court upheld the order of the Income Tax Appellate Tribunal and held that:

  • Depreciation is allowable on discarded machinery forming part of a block of assets.
  • Scrap value must be reduced from the Written Down Value of the block of assets while recomputing depreciation.
  • Actual use of discarded machinery during the relevant previous year is not necessary.
  • For discarded machinery, the requirement of use for business purposes is satisfied if the machinery had been used in earlier years and depreciation had been allowed thereon.

Accordingly, both appeals filed by the Revenue were dismissed.

Important Clarification

The judgment clarifies that for machinery discarded during the relevant year, the expression “used for the purposes of the business” under Section 32 does not require actual use in the year of discard. If the machinery had formed part of the business assets and had been used in earlier years, depreciation remains available subject to statutory adjustments, including reduction of scrap value from the WDV of the block of assets.

The decision reinforces the concept of passive use and adopts a harmonious interpretation of Sections 32(1), 32(1)(iii), 43(6)(c)(B) and 50(2), ensuring that depreciation provisions are applied in a commercially realistic manner.

Relevant Sections Involved

  • Section 32(1) – Depreciation on assets used for business purposes
  • Section 32(1)(iii) – Depreciation relating to discarded machinery, plant or furniture
  • Section 43(6)(c)(B) – Written Down Value (WDV) of block of assets
  • Section 50(2) – Capital gains computation in respect of depreciable assets
  • Section 143(3) – Assessment
  • Section 147 – Reassessment
  • Section 148 – Notice for reassessment

 

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:3339-DB/VJM19082009ITA2032009.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared for educational and informational purposes only.