Depreciation and banking deduction rules turn on asset timing, banking status, and verification of statutory eligibility.

Depreciation under section 32(1) is restricted to half only where an asset is acquired or first put to use during the relevant previous year for less than 180 days; for assets acquired before the year, depreciation is allowed on a block basis without separate examination of each asset's use. On the facts, pre-existing assets used for more than 180 days were eligible, while assets acquired during the year remained subject to the proviso and factual verification. A banking company whose licence is cancelled continues to be governed by the Banking Regulation Act until the section 36A(2) notification is published, so banking status does not end immediately. Deduction under section 36(1)(viia), however, depends on the nature of the assets and statutory limits, and eligible components require verification.

---

---

Issues: (i) Whether depreciation under section 32(1) of the Income-tax Act, 1961 was to be restricted to half in respect of assets acquired prior to the relevant previous year and, if so, whether the restriction applied to assets acquired during the year; (ii) Whether the assessee was entitled to deduction under section 36(1)(viia) of the Income-tax Act, 1961 in view of the cancellation of its banking licence and the later notification under section 36A of the Banking Regulation Act, 1949.

Issue (i): Whether depreciation under section 32(1) of the Income-tax Act, 1961 was to be restricted to half in respect of assets acquired prior to the relevant previous year and, if so, whether the restriction applied to assets acquired during the year.

Analysis: The restriction in the second proviso to section 32(1) applies only where an asset is acquired or first put to use during the relevant previous year for less than 180 days. For assets already acquired before the year, depreciation is to be allowed on the block of assets basis without examining the user of each individual asset separately. On the facts, the assets were used for more than 180 days before the banking operations were suspended, and the assessee's claim for pre-existing assets was therefore maintainable. As regards assets acquired during the year, the proviso would apply, and the claim would depend on the actual details of acquisition and user.

Conclusion: The assessee succeeded in full for assets acquired prior to the relevant previous year, while the claim relating to assets acquired during the year remained subject to the second proviso and verification.

Issue (ii): Whether the assessee was entitled to deduction under section 36(1)(viia) of the Income-tax Act, 1961 in view of the cancellation of its banking licence and the later notification under section 36A of the Banking Regulation Act, 1949.

Analysis: A banking company whose licence is cancelled continues to remain governed by the Banking Regulation Act until the Reserve Bank publishes the notification contemplated by section 36A(2). The assessee was therefore still a banking company for the relevant year for purposes material to accounting, balance-sheet preparation, audit, returns, and application of banking norms. However, the deduction under section 36(1)(viia) depends on the nature of the assets and the statutory limits, and the record did not contain clear findings on whether each component of the claim represented doubtful or loss assets. Some components were prima facie outside the provision, while others required factual verification. The matter was therefore restored to the Assessing Officer for fresh adjudication on the permissible components after verification.

Conclusion: The assessee was held eligible in principle to claim deduction under section 36(1)(viia), but the actual allowance depended on verification of the qualifying assets and compliance with the statutory conditions.

Final Conclusion: The appeal resulted in partial relief to the assessee: depreciation was allowed in principle for pre-existing assets, while the deduction claim under section 36(1)(viia) was sustained only in principle and sent back for factual verification of the eligible portion.

Ratio Decidendi: For depreciation under section 32(1), the half-depreciation restriction applies only to assets acquired or first put to use in the relevant year; for banking deductions, cancellation of a licence does not by itself terminate the banking company status until the statutory notification under section 36A(2), but the deduction remains subject to proof that the claim fits the statutory description and limits.

---