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Motichand S Gupta

Motichand GuptaDepreciation under Income tax is governed U/s 32 of the IT Act. The primary condition to claim the depreciation in the assessment year is that a) assets is owned by the assessee  & b) assets is used for the purpose of business or profession. Both these conditions are cumulative in nature. Once these conditions are established, assessee is eligible for the depreciation.

As per the second proviso to sub section 1, if the assets is acquired and put to use for the  purpose of business or profession for the period of less than one hundred and eighty days in that previous year , the depreciation allowance will be fifty percent of the amount calculated at the percentage prescribed for the assets. It implies that if the assets is owned by the assessee and put to use as on 31st march of the financial year, that assets will be eligible for depreciation at fifty percentage of the rate prescribed for the assets.

There are many case law on the word  ‘used’ for the purpose of business. As held in case of Pr. Commissione rof income Tax V/s Larsen & tourbo Ltd., (SLP dismissed), Court ruled that once the plant commenced operations and a reasonable quantity of product is produced, the business is set up even if product was sub- standard and not marketable. In the present case, assessee had claimed depreciation in respect of the machinery installed and put to use in the production of the cement. A trial run was conducted for one day. After the trial run, commercial production of cement was initiated within reasonable time.  According to AO, trial production was continued beyond the end of the financial year and therefore, he disallowed depreciation. However, ITAT and High Court held that depreciation will be allowed even if the plant and machinery was used for trial run and some quantity was manufactured.

As held in case of Commissioner of Income Tax V/s Escorts Tractors Ltd, Delhi High Court [2015] 56 333 Delhi, Court held that Section 32 does not contemplate that manufacturing or production should have actually commenced nor does it contemplate that assets should be used for whole of the assessment year.  Depreciation would be allowed when the machinery was installed before the end of the financial year and used only for the trial run, though not for the production.

Those cases where commercial production was not started in the previous year, following precaution to be taken in previous  year –

a. Ensure that entity has installed commercial electricity meter. If commercial meter was not there then  at least it has generator ;

b. There was sufficient purchase of raw material and material was issued for production. Proper record showing inward and outward of material has been shown.

c. If trial product was sent for lab then lab report should be maintained;

d. Necessary compliance certificate was available during the year like, Fire safety, Factory license, if not at least assessee had applied for it.

e. There should be proper documentation in the form of date of trial run, engineer signature and remarks if any on the trial run.

f. There could be report of erection and commissioning if done by the third party.


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June 2024