High Court denies initial depreciation claim on unused machinery under Income-tax Act

The High Court of Bombay ruled in favor of the Revenue, denying the assessee's claim for initial depreciation on machinery not put to use during the relevant year. The court held that depreciation allowance under section 32(1)(vi) of the Income-tax Act is contingent upon actual use of the machinery for business purposes. It rejected the argument that depreciation could be claimed in the year of installation, emphasizing that if there is a gap of more than one clear previous year between installation and use, no depreciation can be claimed. The court's decision was in line with the interpretation that depreciation is only allowable when the machinery is utilized for business activities.

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Issues involved:
The issue involves the claim of initial depreciation by the assessee for plant and machinery not put to use during the year, under section 32(1)(vi) of the Income-tax Act, 1961.

Judgment Details:

The High Court of Bombay considered the assessee's reference under section 256(1) of the Income-tax Act, 1961, regarding the disallowance of the claim for initial depreciation on machinery not put to use during the relevant year. The machinery in question, including a crankshaft grinding machine and an air compressor, was installed in 1975, but production commenced in 1977. The Income-tax Officer denied the allowance citing non-fulfillment of conditions in section 32(1)(vi) as the machinery was not utilized in the accounting year preceding the assessment year.

The court analyzed section 32(1) which allows deductions for depreciation of assets used for business purposes owned by the assessee. It was observed that as per the language of clause (vi), depreciation allowance is contingent upon actual use of the machinery for the business. Referring to a Gujarat High Court decision, it was emphasized that unless the machinery is put to use for the business, depreciation allowance cannot be granted.

The court rejected the argument that the assessee could choose to claim depreciation either in the year of installation or the year of first use for business purposes. The scheme indicates that deduction can be claimed for the assessment year relevant to the previous year when the machinery was installed and used for business. If there is a gap of more than one clear previous year between installation and use, no depreciation can be claimed.

Various precedents were cited to distinguish the interpretation of "use" in different sections of the Income-tax Act, emphasizing that the context and objectives of each provision differ. Ultimately, the court answered the question in the affirmative and in favor of the Revenue, denying the depreciation claim for the year in question. No costs were awarded in this matter.

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