Depreciation can be allowed even if the machinery is not put to use

ITO V/s Tropicana Beverages Company (ITAT Delhi)- when it is established that the machinery on which depreciation has been claimed by the assessee, had been provided by the assessee to Dynamix for the purpose of manufacturing the product of the assessee, necessarily the machinery was used for the purpose of the business of the assessee. That being so, “used for the purposes of the business” in section 32 of the Act is applicable to the assessee.

The words “used for the purposes of the business” in section 10(2)(iv) of the Indian Income Tax Act, 1922, which expression is the same as that employed in section 32 of the I.T. Act, 1961, under which the assessee has made the claim of depreciation in the present case, meant that the machinery and plant is used for the purpose of enabling the owner to carry on the business and earn profits in the business; and that therefore, the assessee was entitled for claiming depreciation.

Income Tax Officer V/s. Tropicana Beverages Company

Decided By – ITAT Delhi

ITA NO. 4631 (Del)2010

Assessment year: 2006- 07

Decided on – 17.06.2011

ORDER

PER A.D. JAIN, J.M.

This is Department’s appeal for the assessment year 2006-07 contending that the learned CIT(A) has erred in deleting disallowance of depreciation amounting to ‘ 15,83,047/-, when the assets were not put to use for the business of the assessee company.

2. During the year under consideration, the assessee Private Limited Company derived income from the trading of packed fruit juices under the brand name “Tropicana”. It purchased packed fruits from M/s. Dynamix Dairy Products Ltd., Pune. It claimed depreciation of ‘ 15,83,047/- on plant and machinery stated to have been used for business purposes. The AO disallowed this claim, observing that the assessee had not derived income from the trading of packed fruit juices and had never indulged in any sort of manufacturing activities during the year; that the machinery had been installed at E-94, MIDC, Baramati (Pune); that the said premises belonged to M/s. Dynamix Dairy Product Ltd., which was supplier of packed juices to the assessee company; that the plant and machinery was actually being used by M/s. Dynamix Dairy Product Ltd. and the same was not used by the assessee; that on query, the assessee had failed to prove that it had actually put the machinery to business use as defined u/s 32 of the Income Tax Act; that actually, the entire machinery had never been used during the relevant previous year by the assessee; that the assessee had failed to produce any evidence in respect of its claim of depreciation on plant and machinery; that as such, the depreciation claimed was not allowable to the assessee; and that the depreciation on plant and machinery had also been disallowed in the earlier years, on similar grounds.

3. By virtue of the impugned order, the ld. CIT(A) deleted the dis allowance.

4. The ld. DR has contended that while wrongly deleting the dis allowance correctly made, the ld. CIT(A) has failed to consider the fact that the assets, i.e., the machinery was never put to use by the assessee for its business premises.

5. The learned counsel for the assessee, on the other hand, has strongly relied on the impugned order. Besides, he has placed on record, a copy of the Tribunal order dated 18.2.10, passed by the Tribunal, in the assessee’ s own case for assessment year 2004-05, in ITA Nos. 482(Del)2009 and ITA No. 810(Del)09, reported at 2010 – TIOL – 292 – ITAT – DEL.

6. The ld. CIT(A), it is seen, has deleted the dis allowance by following the aforesaid Tribunal order in the assessee’ s own case for assessment year 2004-05. Therein, the Tribunal has observed, while deciding the assessee to be entitled to the claim of depreciation, as claimed herein, inter alia, that the assessee was in the business of trading in packed fruit juices; that as per the assessee’ s Product Supply Agreement with Dynamix from 18.2.99 Dynamix was to manufacture fruit juices as per the requirement of the assessee and juices were to be packed in accordance with the specified packing instructions; that packing material and design had to be approved by the assessee; that the manufacture and packing were to be as per the specifications and quality standards decided by the assessee; that the trade mark belonged fully to the assessee; that even the raw material and other inputs required for the manufacture of fruit juices, were to be sourced from the sources as specified by the assessee, as per the assessee’ s specifications; that in these facts, Dynamix was manufacturing fruit juices for and on behalf of the assessee and it had no say in the method of manufacture, product mixed, sourcing of quality of raw material, method of packing, design of packing, etc.; that it was not that Dynamix manufactured fruit juice and the assessee was a dealer thereof; that the Equipment Supply Agreement between the assessee and Dynamix evinced that Dynamix manufactured the fruit juices as per the requirement of the assessee; that as agreed to between the assessee and Dynamix in the Product Supply Agreement, Dynamix required the assessee to provide the Equipment; that Dynamix wanted to place the responsibility on the assessee so that the assessee did not terminate the agreement with Dynamix after Dynamix had invested a substantial amount of money in the machinery, which would remain a liability in the hands of Dynamix, if the assessee were to back out of the agreement; that the assessee had provided the machinery to Dynamix, as per the request of the Dynamix, for the purpose of manufacturing the products under the Product Supply Agreement; that it was clearly understood by both the assessee and Dynamix, that the machinery would belong to the assessee and not to Dynamix and Dynamix had no charge or claim over the machinery; that even the servicing, maintenance and supply of spare parts of the machinery was to be done in the presence of the representative of the assessee even though the cost for the same was to be borne by Dynamix; that the assessee and Dynamix had also arrived at a clear understanding that Dynamix could not use the machinery provided by the assessee for the purpose other than that of manufacturing the products as agreed upon between them in the Product Supply Agreement; that thus, the machinery had been provided by the assessee to Dynamix for the purpose of manufacturing the product of the assessee; that in “The Liquidators Of Pursa Limited v. CIT”, 25 ITR 265(SC), the Hon’ble Supreme Court had held that the words “used for the purposes of the business” in section 10(2)(iv) of the Indian Income Tax Act, 1922, which expression is the same as that employed in section 32 of the I.T. Act, 1961, under which the assessee has made the claim of depreciation in the present case, meant that the machinery and plant is used for the purpose of enabling the owner to carry on the business and earn profits in the business; and that therefore, the assessee was entitled for claiming depreciation.

7. The aforesaid Tribunal order has not been shown to have been set aside, quashed or even stayed on appeal. No decision to the contrary has also been placed before us. The facts for the year under consideration have also not been shown to be any different from those before the Tribunal for assessment year 2004-05(supra).