2009 (11) TMI 2 - HC - Income Tax

Tribunal allows depreciation & investment claims on leased property & machinery

The Commissioner of Income Tax Versus M/s Rieta Biscuit Co. (P) Ltd.

The Tribunal allowed the depreciation claim on workers' quarters leased out by an assessee company, emphasizing the quarters' connection to the business ... Higher depreciation on workers’ quarters – investment allowance on plant and machinery leased out to another concern – held that - the workers’ quarters were let out as a part of the plant and income so derived was assessed as business income. The claim for depreciation, thus, had nexus with the business of the assessee. There is, thus, no error in the view taken by the CIT(A) and the Tribunal. The question is answered against the revenue and in favour of the assessee - once three conditions of owning a machinery, use for the purpose of business of the assessee and the nature of machinery being of the specified category are fulfilled, Section 32A will be attracted - Where business of the assessee is of leasing, even according to the learned counsel for the revenue there will be no difficulty in view of judgment in Shaan Finance. Where the income so derived is assessed as business income, in our view, the same principle will apply - Accordingly, the questions referred are answered against the revenue and in favour of the assessee Issues:1. Depreciation claim on workers' quarters leased out.2. Investment allowance claim on leased machinery.Depreciation Claim on Workers' Quarters Leased Out:The case involved an assessee company in the manufacturing business that leased out new machinery and plant to another entity. The dispute centered around whether depreciation claims for the cost of workers' quarters were valid when the quarters were not used by the assessee's workers but were leased out. The Assessing Officer disallowed the claims, but the CIT (A) and the Tribunal upheld them. The CIT (A) emphasized the obligations towards the lessee during disturbed conditions, indicating that the quarters were later used by the assessee's workers after the lease period. The Tribunal affirmed this view, concluding that the depreciation claim had a nexus with the assessee's business, as the quarters were part of the plant. Therefore, the claim was allowed.Investment Allowance Claim on Leased Machinery:Regarding the investment allowance claim on leased machinery, the Tribunal relied on previous orders and judgments, including one from the Andhra Pradesh High Court. The Tribunal held that if income from leased properties is treated as business income, investment allowance should be admissible. The Supreme Court also reiterated this view in subsequent cases. The Supreme Court outlined three requirements for Section 32A to apply. It was observed that even when machinery is leased out as part of the plant, it can be considered used for the assessee's business. The Karnataka High Court emphasized that giving machinery on lease is a recognized business mode. The judgment in Sivananda Colour Works, where investment allowance was denied, was distinguished as the leasing was not for the assessee's business. The Court held that fulfilling the conditions of machinery ownership, business use, and specified category qualifies for investment allowance. The judgment favored the assessee, emphasizing that not using the machinery directly did not preclude claiming investment allowance if it was used for the business. The Court concluded that the questions were answered against the revenue and in favor of the assessee, disposing of the reference accordingly.