Allowability of depreciation on a plant which was ready for use but not used

RELEVANT PARAGRAPH

6. Coming to the first point of difference it seems to me that even after the introduction of block of assets concept, there is no change in the legal position to the effect that the assessee^ would be entitled to depreciation even though the assets in question were not actually put to use in the relevant previous year, but were kept ready for being put to use for the purpose of the business. The judgment of the Hon’ble Madras High Court, on this question is in C1T vs. Vayithri Plantations Ltd. (1981) 128 ITR 675. In this case, the Hon’ble High Court was concerned with the assessment year 1971-72 and with the claim of development of rebate made by the assessee, Sec.33 of the Act dealt with development rebate. An assessee can claim development rebate in the year in which the asset was installed or in the immediately succeeding previous year in which year the asset was “first put to use*. The claim of the assessee for the year ended 31.3.1971 was that the machinery had been installed in the New Tea Factory but it could not start regular manufacture with the aid of the machinery because of frequent labor unrest. The Assessing Officer did not allow the claim, saying that the machinery was not used in the relevant previous year and that he would allow deprecation in the next year, when according to him, the regular production of tea with the aid of the machinery had commenced. It is in the light of this controversy and in the context of section 33 that the matter reached the Hon’ble High Court and the argument of the Department was that since the machinery had not been used in the relevant previous year, the main condition of sec.33 was not satisfied. The contention of the assessee was that the condition was satisfied because the machinery was kept ready for use but; could not be used only because of frequent labor unrest. The Hon’ble Madras High Court, in order to resolve the controversy, referred to the relevant provisions relating to depreciation in the 1922 Act arid compared the same with sec.32 of the 1961 Act. After ‘ observing that sec.32 of the1961 Act ha§ practically re-enacted sec.10(2)(vi) of the old Act, it was further observed that both under the old Act and under the view Act, it was provided that the assessee must be the owner of the machinery and must have used the same for the purposes of the business. After referring to the judgment of the Bombay High Court in CIT vs. Viswanath Bhaskar Sathe (1937) 5 ITR 621 where it was held that the word “used” appearing in sec.T0(2)(vi) of the old Act embraced passive as well as active user and after referring to the later judgment of the Bombay High Court in Whittle Anderson Ltd, v. CIT (1971) 79 ITR 613, it was noticed by the Hon’ble Madras High Court that the view taken by the Bombay High Court is the more appropriate view to take on the construction of the provision, as against a contrary view expressed by the Madhya Pradesh High Court in CIT v. Jiwaji Rao Sugar Co. Ltd. (1969) 71 ITR 319 thus, the decision of the Hon’ble Madras High Court in CIT vs. Vayithri I Mentations Ltd.(supra) is a binding precedent so far as the Tribunal is concerned in favour of the view that in. order to claim depreciation under sec.32 of the Act it is not necessary that toe machinery in question should have been actually used in the relevant previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year, though not actually used due to circumstances beyond the assessee’s control

7. Sec.32 of the Act has received several amendments but our attention was not drawn to any amendment which has clarified that depreciation would be allowed only if the asset in question was actually used during the relevant previous year and mere keeping ready for being used in the business was not sufficient It seems to me that when the interpretation of sec.32, especially of the word “used” appearing in that section was the subject matter of a judgment of the Bombay High Court as long back in i§37 in the old Income-tax Act, the same word which is used in sec.32 of the 1961 Act must receive the same construction. In this connection it is not out Of place to mention that the same view was expressed by the Patna High Court in CIT v. Dalmia Cement Ltd. (1945) 13 ITR 415. A contrary view was however expressed in Bhikaji Venkatesh vs. CIT (5 ITR 626)(Nag.) and in Central Provinces Manganese Ore Co. Ltd. vs. CIT (1937) 5 ITR 734(Nag.). Thus, despite contrary views having been expressed by different High Courts there was no amendment in sec.32 to clarify the position and the same word was used.

8. Be that as it may, so far as this case is concerned, the view taken by the Hon’ble Madras High Court in CIT vs. Vayithri Plantations Ltd. (supra) has to be given effect to as it is the judgment of the jurisdictional High Court. In this case, the High Court has referred to the cleavage of opinion on the interpretation of the word “used” but still preferred, to follow the judgment of the Bombay High Court in GIT vs. Viswanath Bhaskar Sathe (supra) as “the more appropriate view” to take on the construction of the provision.

9. I will now refer to the judgment of the Hon’ble Madras High Court in

CIT vs. Heera Financial Services Ltd. (2008) 298 ITR 245. This case arose under sec.32 of the 1961 Act in relation to the assessment year 1997-98. One of the two questions that was sought to^ be raised before the Hon’ble y Madras High Court at the instance of the Revenue was whether the Tribunal was, right in allowing depreciation on an asset which was neither used nor kept ready for use, applying the theory of passive user. It was found as a fact that the film rolls leased out by the assessee could not be used by the lessee, even though kept ready for use, on account of strike in the film industry. The Hon’ble Madras High Court held that the film rolls kept under forced (idleness, were in use during the entire period of the year and consequently the assessee, even though a passive user, was deemed to be an active user within the meaning of the word “used” and therefore, the Tribunal was right in allowing depreciation. It is noteworthy that the Hon’ble Madras High Court did not decide the question on the ground that it is the business of the assessee to lease out film rolls and therefore once the film rolls were leased out they must be taken to have been used for the purpose of the business, applying the ruling of the Supreme Court in the case of GIT vs. Shaan Finance (P) Ltd. (231 ITR 308). The Tribunal had allowed the assessee’s claim only on the ground that the film rolls were kept ready for use by the lessee though they could not be actually used due to strike. Accordingly, it was held by the Tribunal that the assessee has to be given depreciation allowance on the ground of a passive user. The High Court affirmed the decision of the Tribunal by a reasoned judgment and dismissed the appeal, finding that no substantial question of law arose for consideration. I am unable to accept the argument put forward by the Department before me that this judgment cannot be taken as an affirmation of the Tribunal’s order on merits. The last paragraph of the judgment clearly shows that the appeal of the Department was dismissed. Further the dismissal is by an elaborate judgment considering J several authorities and the legal position. The earlier judgment in VayfthriK Plantations Ltd. (supra) was followed and applied to the case which arose under sec.32 of the Act and in respect of a year in which the concept of block ‘ of assets was applicable. In the light of two binding judgments of the Hon’ble Madras High Court and respectfully following them, that the assessee before me is entitled to the claim of depreciation on the Gas Sweetening Plant which was kept ready for use during the entire previous year, though not actually used due to lack of raw material.

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