Depreciation Disallowed Under Income Tax Rules Due to Lack of Evidence on Machinery Use and Installation

The ITAT Visakhapatnam allowed the revenue's appeal disallowing depreciation claimed by the assessee. The tribunal found no evidence that the machinery was put to use or installed during the assessment year, as raw materials were only included in capital work-in-progress without allocation to fixed assets. The assessee failed to produce an installation certificate and inauguration expenses were held insufficient to prove commencement of business. Consequently, the assessee was not considered a passive user of the assets, and depreciation was rightly disallowed.

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ISSUES:

Whether depreciation under section 32 of the Income Tax Act, 1961 can be allowed on machinery that has not been put to use for the purpose of business during the relevant assessment year.Whether incurring inauguration expenses or keeping machinery ready for use constitutes commencement of business or use of assets for business purposes.Whether passive use of machinery, without actual installation or commencement of production, qualifies for depreciation claim under the Income Tax Act.Whether absence of installation certificate and lack of evidence of machinery installation affects the allowance of depreciation.

RULINGS / HOLDINGS:

The Court held that depreciation claimed on machinery not put to use during the impugned assessment year cannot be allowed, emphasizing that there was "nothing on record to show that the business has been actually commenced and the assets on which depreciation was claimed were really put to use for the purpose of business."The Court rejected the argument that inauguration expenses or machinery being "kept ready for use" amounts to commencement of business or use of assets for business purposes under section 32.The Court declined to consider the assessee as a "passive user of the assets," holding that mere readiness or incurring expenses without installation or production does not satisfy the requirement of "used for the purpose of business."The Court ruled that absence of installation certificate and failure to produce evidence of machinery installation during the relevant year justified disallowance of depreciation.

RATIONALE:

The Court applied the statutory provisions of section 32 of the Income Tax Act, 1961, which permits depreciation only on assets "used for the purpose of business."Precedents and judicial pronouncements were considered, but the Court emphasized the necessity of actual use or installation of machinery to claim depreciation.The Court interpreted "used for the purpose of business" strictly, rejecting the notion of passive use or readiness without operational use.The decision reflects adherence to the principle that capital assets must be put to use in business to attract depreciation, and mere capital work-in-progress or pre-operative expenses do not qualify.No dissent or doctrinal shift was noted; the Court restored the original order disallowing depreciation due to lack of evidence of use.

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