Discarded machinery can attract depreciation under Section 32; scrap value to be deducted from block's WDV on recomputation

HC held that discarded machinery may still qualify for depreciation under Section 32 if it was used for business in earlier years; actual physical use in the relevant previous year is not required. The court followed prior Division Bench rulings, endorsed the ITAT, and directed recomputation of depreciation by reducing the scrap value of discarded assets from the written down value of the block. The decision rejects Revenue's contention that discarded machinery cannot attract depreciation merely because it was not in use in the assessment year.

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Issues:
1. Interpretation of the expression "used for the purposes of the business" in Section 32 of the Income Tax Act, 1961.
2. Application of provisions of Section sub-clause (iii) to Section 32(1) R/W Section 43(vi)(c)(B) when primary conditions for eligibility of depreciation are not complied with.

Issue 1 - Interpretation of "used for the purposes of the business":
The primary issue in this case revolves around the interpretation of the expression "used for the purposes of the business" as per Section 32 of the Income Tax Act, 1961. The Revenue argues that depreciation cannot be allowed for machinery unless it is actively used in the business, contending that discarded machinery does not qualify. On the other hand, the assessee argues that passive use should also be considered as fulfilling the criteria. The case references various judgments to support both viewpoints, highlighting the debate over whether passive use should be included or excluded from the definition.

Issue 2 - Application of specific provisions:
The case also delves into the application of specific provisions such as Section 32(1), Section 32(1)(iii), Section 43(6)(c)(B), and Section 50(2) concerning the claim of depreciation for discarded machinery. The court examines whether the discarded machinery, which was part of a block of assets, needs to be actively used in the current year for depreciation eligibility. The judgment emphasizes the need to harmoniously interpret the expressions "used for the purposes of the business" and "discarded" to determine the eligibility criteria for depreciation.

Detailed Analysis:
The court analyzes the concept of passive use and concludes that as long as the machinery is available for use, even if not actively used, it falls within the definition of "used for the purposes of the business." Additionally, the judgment emphasizes that a harmonious reading of the expressions "used for the purposes of the business" and "discarded" indicates that the machinery need not be actively used in the current year as long as it was used for business purposes in earlier years. This interpretation aims to avoid incongruous situations where depreciation is allowed on discarded machinery, yet active use is required, which may not be feasible due to various reasons like age or obsolescence.

Conclusion:
The court answers the framed questions of law by affirming that the ITAT was correct in directing the Assessing Officer to re-compute depreciation for discarded assets by reducing the scrap value. The judgment clarifies that actual user of the machinery is not a prerequisite for discarded machinery, and eligibility for depreciation is based on past usage for business purposes. Consequently, the appeals against the ITAT judgments are dismissed based on the court's interpretation and analysis of the relevant legal provisions and precedents.

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