Kalpesh Classes

The machinery and plant must be​​ such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed in respect of them. The other words ‘used for the purposes of the business’ are capable of a larger and a narrower interpretation.​​ If the expression ‘used’ is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or​​ building in the business.​​ On the other hand, the wider meaning will include not only cases where the machinery, etc., is actively employed but also cases where there is, what may be described as, a passive user of the same in the business.​​ The word ‘used’​​ in this section may be given a wider meaning and embraces passive as well as active user.

The assessee owned a sugar mill. The Assessing Officer denied depreciation in respect of the factory, plant and machinery as there was no production and no user of machinery during the year. The Tribunal upheld the claim of the assessee on the basis of passive user by keeping the machinery in readiness. On a reference held, that the expression "used" should have a wider meaning so as to include not only actual but also passive user and depreciation was allowable. [1996] 221 ITR 0857- ​​ CIT vs. India Tea and Timber Trading Co. (Gauhati High Court)

The assessee-company which owned two cotton ginning and pressing factories and two other concerns, owning in all four presses, entered into a pooling agreement. As the agreement clearly provided that, although two out of the four presses which were directly in the pooling arrangement were to remain idle while the two presses worked, the owners of those presses which were idle had to​​ keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time and having regard to the above meaning of the word "used", it is clear that even these presses which remained under forced​​ idleness were in use during the entire period of the year. [1971] 079 ITR 0613- Whittle Anderson Ltd. vs. CIT (Bombay High Court)

Where the material on record showed that (i) the trucks in question were used by the assessee for the purpose of his business;​​ (ii) the said trucks were used for the business of the assessee during the relevant years as well as earlier and later years; (iii) during the relevant assessment years, some of these trucks were under repair. Held, that the vehicles continued to be in use for the business of the assessee even though the same were under repair. The assessee was entitled to depreciation in respect of them. [1996] 217 ITR 250 Commissioner of Income-tax Vs. Agrawal (G.N.) (Individual)

 Section 32(1) lays down two conditions to be satisfied by an assessee before claiming any depreciation. These two conditions are, firstly, that the plant and machinery must be owned by the assessee and, secondly, the plant and machinery must be used for the purposes of business of the assessee.​​ In certain cases of a pooling arrangement or where plant and/or machinery is kept as standby to provide against breakdown, even a passive user may entitle the assessee to claim depreciation under section 32 because in both these cases, the machinery is kept ready for use in the factory. Where the factory of the assessee remained under lock-out throughout the two previous years during the lock-out period, the plant and machinery had not been actually used for the purposes of the business. Held, that depreciation under section 32 of the Act was not allowable on such plant and machinery. [1994] 206 ITR 0682- ​​ CIT vs. Oriental Coal Co. Ltd. (Calcutta High Court)

Used for business 

Sections 30, 31 and 32 uniformly use the expression “used for the purposes of the​​ business or profession”. The emphasis here is on the user for business or profession and it excludes user for purposes other than the business or profession. To the extent of such user for non-business or non-professional purposes, the benefit allowed under sections 30, 31 and 32 is required to be reduced proportionately.​​ If payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may benefit a third party. The fact that a benefit is obtained by a​​ third party by reason of an expenditure incurred by an assessee does not ipso facto result in the assessee not being regarded as having incurred the expenditure solely and exclusively for its business. What is important is the intention of the assessee and​​ the user by the assessee of the machinery in relation to his business. ​​ 

 The words “used for the purpose of business” are capable of a larger and narrower interpretation. If the expression “used” is construed strictly it could be taken as connoting or requiring the active employment or the actual working of the machinery, plant or building in the business.​​ On the other hand the wider meaning would include not only cases where the machinery or plant are actively employed but also cases where there is passive user of the same in business. An asset could be said to be in use when it is kept ready for use.​​ 

[1996] 221 ITR 0857- ​​ CIT vs. India Tea and Timber Trading Co. (Gauhati High Court)

 The assessee owned a sugar mill. The Assessing Officer denied​​ depreciation in respect of the factory, plant and machinery as there was no production and no user of machinery during the year. The Tribunal upheld the claim of the assessee on the basis of passive user by keeping the machinery in readiness. On a reference held, that the expression "used" should have a wider meaning so as to include not only actual but also passive user and depreciation was allowable.​​ 

User also incluses passive user

[1971] 079 ITR 0613- ​​ Whittle Anderson Ltd. vs. CIT (Bombay High Court)​​ The assessee-company which owned two cotton ginning and pressing factories and two other concerns, owning in all four presses, entered into a pooling agreement. As the agreement clearly provided that, although two out of the four presses which were directly in the pooling arrangement were to remain idle while the two presses worked, the owners of those presses which were idle had to keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time and having regard to the above meaning of the word "used", it is clear that even these presses which remained under forced idleness were in use during the entire period of the year.

[1994] 206 ITR 0682- ​​ CIT vs. Oriental Coal Co. Ltd. (Calcutta High Court)

Section 32(1) lays down two conditions to be satisfied by an assessee before claiming any depreciation. These two conditions are, firstly, that the plant and machinery must be owned by the assessee and, secondly, the plant and machinery must be used for the purposes of business of the assessee.​​ In certain cases of a pooling arrangement or where plant and/or machinery is kept as standby to provide against breakdown, even a passive user may entitle the assessee to claim depreciation under section 32​​ because in both these cases, the machinery is kept ready for use in the factory.​​ Where the factory of the assessee remained under lock-out throughout the two previous years during the lock-out period, the plant and machinery had not been actually used for​​ the purposes of the business. Held, that depreciation under section 32 of the Act was not allowable on such plant and machinery. ​​ 

[2002] 253 ITR 0303- ​​​​ COMMISSIONER OF INCOME-TAX VS. PEPSU ROAD TRANSPORT CORPORATION (PUNJAB AND HARYANA HIGH COURT)

The assessee was a transport corporation. It had a large fleet of buses. These can normally be seen standing by the road side. Thus, it had to keep spare engines in store. The engines are meant to be used in case of need. There is a normal depreciation of value​​ even when a machine or equipment is merely kept in a store. Secondly, keeping in view the nature of the assessee’s business, it had to necessarily keep certain spare engines in store to meet an emergent situation. There was nothing on record to indicate that an engine, which was purchased a year or two earlier, would fetch the same price in the open market. The Tribunal was right in law in allowing depreciation on the spare engines lying in the stock of the assessee.​​ 

[2002] 255 ITR 0068- ​​​​ Commissioner of​​ Income-tax vs. Indian Express (Madurai) Pvt. Ltd. (Madras High Court)

Is it necessary that the assessee should use the plant and machinery on which depreciation is claimed exclusively by it ? In CIT v. Indian Express (Madurai) Pvt. Ltd. [2002] 255 ITR 68 (Mad), it was held that the fact that the product of the machinery is used by a sister concern should not stand in the way of the claim being allowed.​​ 

If the investment is made by the assessee and ownership vests in the assessee, expense is incurred by the​​ assessee, the machine is used for the business of the assessee, and the machine has not been used by the assessee for any non-business or non-professional use, the expenditure incurred on the machinery is commercially expedient from the point of view of the business of the assessee, and if the business of the assessee is benefited from the user of the machine, then the identical sharing of the benefits obtained from the user of the machine with an associate would not render the user of the machine non-exclusive for the purpose of section 38(2).

Conclusion​​ 

In present day context user must include passive user, however no use can not be passive use.​​