DEPRECIATION UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Introduction

The  very concept of the depreciation suggests that the tax benefit on account of depreciation belongs to one who has invested in the capital asset is utilizing the capital asset and thereby losing gradually investment caused by wear and tear and would need to replace the same by having lost its value fully over a period of time.  Section 32 of Income Tax Act, 1961 (‘Act’ for short) provides for depreciation.   Section 32(1) provides that depreciation in respect of-

• buildings, machinery, plant or furniture, being tangible assets;
• know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

• in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
• in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.

The various issues involved in Depreciation are discussed as below with reference to decided case laws.

Ownership                      

In ‘Commissioner of Income Tax and another V. WEP Peripherals Limited’ – 2014 (3) TMI 935 - KARNATAKA HIGH COURT the assessee came into possession of the industrial undertaking from WIPRO by virtue of the agreement to sell and since then, was in possession thereof in its own right, exercised dominion over it and had the right to use, occupy and to enjoy the usufruct in its own right.   In other words, WIPRO transferred its ownership right over the building, plant and machinery to the assessee, and since then the assessee has been using it in its own right for the purpose of the business, though legal title was conveyed by the Karnataka Industrial Areas & Development Board initially in 2003 by executing lease deed and then in 2009 by executing a sale deed in favor of the assessee.  The High Court held that the Tribunal had rightly allowed the depreciation          

In ‘Mysore Minerals Limited V. Commissioner of Income Tax’ – 1999 (9) TMI 1 - SUPREME Court the Supreme Court was of the opinion the term ‘owned’ as occurring in Section 32(1) of the Act must be assigned an wider meaning.   Any one in possession of property in his own title exercising such dominion over the property as would evade others being excluded there from and having right to use and occupy the property and/or to enjoy it usufruct in his own right would be the owner of the building though a formal deed of title may not have been executed and registered as contemplated by Transfer of Property Act, Registration Act, etc.,  ‘Building owned by the assessee’ – the expression in Section 32(1) of the Act means the person who having acquired the possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of law, but nevertheless is entitled to hold the property to the exclusion of all others.

The Supreme Court further held that it is well settled that there cannot be two owners of the property simultaneously and in the same sense of the term.   The intention of the legislature in enacting Section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession.   Assigning any different meaning would not subserve the legislative intent.

In ‘Deputy Commissioner of Income Tax V. Swarna Tollway P Limited’ – 2014 (1) TMI 981 - ITAT HYDERABAD  the assessee was awarded the contract by NHAI for widening, rehabilitation and maintenance of the existing two lane highway into a four lane and the existing two lane highway on two sections of the national highway on build, operate and transfer basis.  The entire cost of construction was borne by the assessee.   The construction was completed during 2004 – 05 and after that the assessee denied depreciation from 2005 – 06 onwards.   The Assessing Officer held no ownership, leasehold or tenancy rights ever vested in the assessee for the asset in question.   The Assessing Officer disallowed the claim.   The Commissioner (Appeals) held that the assessee was entitled to depreciation.   The Tribunal dismissed the appeal filed by the Revenue holding that NHAI granted the assessee not merely possession but also right to enjoyment of the site and the assessee had the power to exclude others and therefore the assessee was entitled depreciation.

Condition Precedent

In ‘Commissioner of Income Tax V. Jawahar Kala Kendra’ – 2014 (6) TMI 292 - RAJASTHAN HIGH COURT the assessee claim for depreciation for the year 2005 – 06 and 2006 – 07 in respect of the assets and the same were accepted by the department.   However for the assessment year 2007 – 08 it was disallowed on the ground that there was no evidence to prove the change of ownership of the building from the Government of Rajasthan to the assessee-society and in the records, the title still continued to be with the State of Rajasthan.   The Commissioner (Appeals) and the Tribunal held that the assessee was entitled to depreciation.

On appeal the High Court held that the assets had been transferred by the Government of Rajasthan to the assessee society and for that purpose the value had been adopted as the value to the previous owner.   The assessee became the owner of the assets and was actually using the property in its own right as an owner on and from the date of order of the Governor and formation of the society.   It was entitled to depreciation of the assets for the assessment year 2007 – 08.

Passive User

The Delhi High Court in ‘Commissioner of Income Tax V. Oswal Agro Mills Limited’ – 2010 (12) TMI 947 - Delhi High Court  considered that even the passive user qualifies for depreciation and held that the passive user of the assets is also recognized that the passive user is interpreted to mean that the asset is kept ready for use and if this condition is satisfied, even when it is not used for certain reasons in the concerned assessment year, the assessee cannot be denied depreciation.

In ‘Mahindra and Mahindra Limited V. Additional Commissioner of Income Tax’ – 2013 (12) TMI 139 - ITAT MUMBAI the assessee claimed depreciation on intangible assets being know how acquired for advance system not debited to Profit and loss account at 25%.   The technology could not be put to use because orders for the concerned products were not placed with the assessee.   The Assessing Officer disallowed the depreciation in the absence of any evidence of using the technology knowledge.   The High Court held that the existence of an agreement to acquire technology was not sufficient to claim depreciation.   There had to be some active or passive use of technology know-how during the year.    The depreciation was held not to be allowable.

In ‘Commissioner of Income Tax V. Metalman Auto P Limited’ – 2011 (2) TMI 330 - PUNJAB AND HARYANA HIGH COURT the High Court held that even if the air conditions though purchased in the name of Managing Director and his wife, were for the assessee and were to be used for the business of the assessee and not for the personal use of Managing Director or his wife, depreciation was allowable.

In ‘Commissioner of Income Tax – LTU V. Indian Railway Finance Corporation Limited’ – 2014 (6) TMI 224 - DELHI HIGH COURT the issue to be considered by High Court is whether the assessee is entitled to depreciation on the office premises at NBCC Place, Lodi Road, New Delhi.   The Revenue contended that the assessee is not the owner of the building or in possession in part performance under Section 53A of Transfer of Property Act.   In the agreement dated 21.11.2002 it is stated that NBCC had handed over the vacant possession to the assessee.   The Tribunal concluded that possession ‘in fact’ or actually was handed over to the assessee before the end of the Financial Year ending 31.03.2000.   The assessee is, therefore, entitled to the benefit under Section 53A of the Transfer of Property Act and allowed the depreciation.   The High Court confirmed the findings of the Tribunal.

Depreciation for generator set

In ‘Commissioner of Income Tax V. TTG Industries Limited’ – 2014 (2) TMI 792 - MADRAS HIGH COURT the High Court held that the generator set is the one such machinery, which would fall for considered in the block of assets, specified in Rule 5 (10A) (xviii) of Income Tax rules, 1962.   The assessee was engaged in turnkey projects for which it used drilling machines, boring machines for foundation work and lathe machine.  When machinery was not there used in the manufacture of wind mill or any specially designed device, which run wind mills, it would not fall for consideration on the block of assets which is defined in Section 2(11).   Therefore, the generator set alone would qualify for the rate as prescribed under ‘renewable energy services’ that is 100% depreciation.   The other machinery would qualify for depreciation at 25% and not 100% as claimed by the assessee.

False Ceiling

In ‘Commissioner of Income Tax V. Ayesha Hospital P. Limited’ – 2006 (10) TMI 117 - MADRAS High Court it was held that assessee was entitled to100% depreciation on the false ceiling and wooden partition inclusive of furniture, electrical wiring and interior decoration.

Depreciation for temporary partition

In ‘Commissioner of Income Tax V. Amrutanjan Finance Limited’ – 2011 (8) TMI 320 - MADRAS HIGH COURT  the High Court held that the temporary wooden structure and partition put up by the assessee for running computer centers were entitled to depreciation at 100%.

In ‘Comfort Living Hotels P Limited V. Commissioner of Income Tax’ – 2014 (3) TMI 585 - DELHI HIGH COURT the assessee claimed depreciation at 100% on roofing on the basis that the construction was temporary in nature.   The Assessing Officer disallowed this on the assumption that the construction included two sets of toilets and that it involved the use of marble and false ceiling.   This was confirmed by the Tribunal.  On appeal the High Court held that the Tribunal had not adequately dealt with the reasoning of the Commissioner (Appeals) who had, in fact, carried out site inspection after which held that the entire expenses had to be treated as revenue expenditure.   The Tribunal did not clearly point out how the expenses resulted in the creation of any new asset.   Rather it was only the seating capacity of the existing bar that was increased with the renovation was carried out.

Unabsorbed depreciation

In ‘Golden Silk Weaving Factory V. Commissioner of Income Tax’ – 1991 (3) TMI 1 - SUPREME Court it was held that unabsorbed depreciation in the case of a firm cannot be set off at the hands of the partners and it has to be reverted back to the firm.                      

Depreciation for Vibro bed dryer

In ‘Commissioner of Income Tax V. Mcleod Russel (India) Limited’ – 2014 (2) TMI 797 - CALCUTTA HIGH COURT the High Court held that vibro bed dryer is an item covered under Appendix I III (3) (iii) A of Income Tax rules,1962 and is entitled to 100% depreciation.                      

Depreciation for going concern

In ‘Mattel Toys (I) P Limited V. Deputy Commissioner of Income Tax’ – 2013 (10) TMI 555 - ITAT MUMBAI the assessee’s manufacturing activity had been closed down with effect from 1.1.2001 and the plant and machinery were for the purpose of manufacturing activities had not been put to use either during the relevant accounting year or in the subsequent assessment years.   Therefore depreciation could not be allowed on such machinery.  Further passive user of such machinery had also not been established by the assessee.   However the assessee was a going concern and depreciation could not be denied on plant and machinery used for purposes other than manufacture.

Depreciation for good will

In ‘Commissioner of Income Tax V. Worldwide Media P Limited’ – 2014 (4) TMI 527 - ITAT MUMBAI it was held that depreciation can be allowed on such intangible assets in the form of good will also.   Once depreciation was allowable on goodwill at the same rate at which the assessee had claimed depreciation on trade mark and copy right, it was immaterial to disallow the entire depreciation on intangible assets.   The aggregate value of all the intangible assets was ₹ 90 crores and depreciation was to be allowed at 25% on this cost.   It did not make any difference whether part of the depreciation was to be ascribed for goodwill or not, because resultantly, there would be no effect on the assessee’s quantum of claim of depreciation.   It made no difference in the present case to segregate the various intangible assets for the purpose of making any disallowances on account of deprecation.   Thus the invocation of provisions of Explanation 3 to Section 43(1) to ascribe value of goodwill was vitiated.

Depreciation with reference to cost

In ‘Deputy Commissioner of Income Tax V. Sumi Motherson Innovative Engineering Limited’ – 2014 (2) TMI 652 - ITAT DELHI it was held that depreciation is always considered with reference to the cost of asset and not the sales effected.  Vehicle pending for registration in the name of the assessee is eligible for depreciation.

Higher rate of depreciation

In ‘Assistant Commissioner of Income Tax V. Bharat Scans P Limited’ – 2014 (2) TMI 1150 - ITAT CHENNAI it was held that the medical diagnostic imaging equipment using positron emission tomography or computed tomography scan is used in the treatment of cancer.   It gives both anatomic and metabolic information to assess the present condition of cancer growth in a patient and also assessed the advanced stage of cancer and aids in treating heart diseases and neurological diseases, as it delivers the condition of vascular system of a patient.  Therefore the positron emission tomography or computed tomography scan is life saving medical equipment and entitled for higher rate of depreciation at 40%.