Facts of the Case

The assessee company, Yamaha Motor India Pvt. Ltd., claimed depreciation during Assessment Years 2000-01 and 2001-02 on assets that had been written off. The assets had originally been capitalized at Rs. 4,71,51,016/- on 01.11.1996. The Written Down Value (WDV) at the end of the financial year ending 31.03.1999 was Rs. 2,32,07,141/-. Depreciation claimed during the relevant year amounted to Rs. 58,01,785/-.

The depreciation claim was initially allowed in the assessment completed under Section 143(3) of the Income-tax Act, 1961. Subsequently, the Assessing Officer reopened the assessment under Section 147 and issued notice under Section 148. The Assessing Officer sought an explanation as to why depreciation should not be disallowed on the assets written off during the relevant year on the ground that such assets were not used for the purposes of business.

The assessee contended that it was entitled to depreciation despite the assets having been discarded.

Issues Involved

  1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in directing the Assessing Officer to recompute depreciation after reducing the scrap value of the assets discarded and written off from the Written Down Value (WDV) of the block of assets.
  2. Whether Section 32(1)(iii) read with Section 43(6)(c)(B) applies where the assessee had not complied with the primary condition of actual use of the asset during the relevant year.
  3. Whether depreciation can be allowed on machinery that has been discarded and is not actually used during the relevant previous year.
  4. Whether the expression “used for the purposes of the business” under Section 32 includes the concept of passive use.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that depreciation under Section 32 can be allowed only when the machinery is actually used for business purposes.
  • Since the machinery had been discarded and was no longer used in business, depreciation could not be claimed on such assets.
  • The Revenue contended that passive use should not be included within the expression “used for the purposes of the business.”
  • Reliance was placed on:
    • Deputy Commissioner of Income-Tax v. Yellamma Dasappa Hospital (290 ITR 353)
    • Commissioner of Income-tax v. Oriental Coal Ltd. (206 ITR 682)
    • Dineshkumar Gulabchand Agrawal v. Commissioner of Income-Tax and Another (267 ITR 768)

Respondent’s Arguments (Assessee)

  • The assessee argued that the concept of passive use is recognized for claiming depreciation.
  • Once the machinery formed part of the block of assets and had been used in earlier years for business purposes, depreciation could not be denied merely because the machinery was discarded during the relevant year.
  • The assessee relied upon:
    • Commissioner of Income-Tax v. Nahar Exports Ltd. (296 ITR 419)
    • Commissioner of Income-Tax v. Vir Khanna (306 ITR 14)

Court Findings

The Delhi High Court examined the meaning of the expression “used for the purposes of the business” appearing in Section 32 of the Income-tax Act.

The Court noted that two aspects required consideration:

  1. Whether passive use is included within the expression “used for the purposes of the business”.
  2. Whether actual use is required when machinery has already been discarded but forms part of a block of assets.

The Court relied upon its earlier Division Bench decisions in:

  • CIT v. Refrigeration & Allied Industries Ltd. (247 ITR 12)
  • Capital Bus Services v. CIT (123 ITR 404)

The Court agreed with the principle laid down in those decisions that machinery available for use, though not actually used, falls within the expression “used for the purposes of the business” and qualifies for depreciation.

The Court further observed that Section 32 must be read harmoniously with Section 32(1)(iii) dealing with discarded machinery. If the Revenue’s interpretation were accepted, the provision granting depreciation on discarded machinery would become unworkable because a discarded asset, by its very nature, is not capable of actual use.

The Court held that where machinery had been used in business in earlier years and depreciation had already been allowed on the block of assets, actual use in the relevant year was not necessary for claiming depreciation on discarded machinery.

The expression “used for the purposes of the business” in the context of discarded machinery refers to use in earlier years and not necessarily in the relevant previous year.

Court Order

The Court answered both questions of law in favour of the assessee and against the Revenue.

It held that:

  • The ITAT was correct in directing recomputation of depreciation after reducing the scrap value of discarded assets from the Written Down Value of the block of assets.
  • Actual use of discarded machinery during the relevant previous year is not a mandatory condition for claiming depreciation.
  • Machinery that formed part of the block of assets and had been used for business purposes in earlier years remained eligible for depreciation even after being discarded.

Accordingly, the appeals filed by the Revenue were dismissed.

Important Clarification

The judgment clarifies that:

  • The concept of passive use is recognized under Section 32.
  • For discarded machinery forming part of a block of assets, actual use in the relevant assessment year is not necessary.
  • Use of machinery in earlier years is sufficient to satisfy the requirement of “used for the purposes of the business.”
  • Depreciation provisions must be interpreted harmoniously with the block of assets scheme under the Income-tax Act.
  • Depreciation cannot be denied merely because the machinery has become obsolete, discarded, or incapable of actual use during the relevant year.

Relevant Sections Involved

  • Section 32(1) – Depreciation on assets used for the purposes of business
  • Section 32(1)(iii) – Depreciation relating to discarded, demolished, destroyed or transferred assets
  • Section 43(6)(c)(B) – Written Down Value (WDV) of block of assets
  • Section 50(2) – Capital gains in relation to depreciable assets
  • Section 143(3) – Assessment
  • Section 147 – Reassessment
  • Section 148 – Notice for income escaping assessment

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:7256-DB/AKS09072009ITA602009_161521.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 with the assistance of AI tools.