Depreciation on ships and sale-expense adjustment: de facto ownership, business user, and net sale consideration govern block computation.

Depreciation under section 32 may be claimed where the assessee has acquired de facto ownership and the asset is used, or kept ready for use, in business; later registration under the Merchant Shipping Act does not by itself defeat ownership, and the absence of freight income in the same year does not negate user. The note also states that incidental expenses incurred on the sale of ships reduce the real sale consideration for block-of-assets computation, because such expenses are part of the transfer process rather than separate capital expenditure. On that basis, the depreciation claim and the reduction of sale expenses from consideration were treated as allowable.

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Issues: (i) Whether depreciation under section 32 of the Income-tax Act, 1961 was allowable on two ships acquired during the previous year, despite registration under the Merchant Shipping Act, 1962 being completed later and despite no freight income being credited in the same year; (ii) Whether incidental expenses incurred on the sale of ships were deductible from the sale consideration while computing the written down value of the block of assets.

Issue (i): Whether depreciation under section 32 of the Income-tax Act, 1961 was allowable on two ships acquired during the previous year, despite registration under the Merchant Shipping Act, 1962 being completed later and despite no freight income being credited in the same year.

Analysis: Depreciation is a statutory allowance dependent on ownership and user of the asset. The ownership test for depreciation is satisfied by de facto ownership where the assessee has acquired full dominion over the asset, even if formal registration is completed later. The ships were purchased, delivery and sale documents were executed, log entries recorded the transfer, and the vessels were operated in the assessee's shipping business during the relevant period. The absence of registration in the assessee's name by the end of the year did not defeat ownership for depreciation. The user requirement was also satisfied because, in shipping business, vessels may be bought and sold on high seas and the asset need only be kept ready for use or passively used in the business. Absence of freight income in the same year did not negate use, since income recognition depended on completion of loading and the issue was a timing difference.

Conclusion: Depreciation was rightly allowed to the assessee, and the disallowance was unsustainable.

Issue (ii): Whether incidental expenses incurred on the sale of ships were deductible from the sale consideration while computing the written down value of the block of assets.

Analysis: The sale consideration for block computation is the net amount actually received after sale-related expenses that are incidental to the transfer. Such expenses are not capital expenditure incurred for acquisition of an asset, but a charge against the sale proceeds. Since the expenses were necessarily incurred to effect the sale, they reduced the consideration and could not be treated as a separate capital disallowance.

Conclusion: The incidental sale expenses were allowable and could be reduced from the sale consideration.

Final Conclusion: The revenue's challenge failed on both issues, and the allowance of depreciation and deduction of incidental sale expenses stood confirmed.

Ratio Decidendi: For depreciation, actual de facto ownership and business user are sufficient, and formal registration is not ative; sale-related incidental expenses that directly reduce real consideration are deductible in computing the block value.

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