Rule 5

Depreciation

The statutory background

5.1 Section 32(1) of the Act allows a deduction towards depreciation in respect of buildings, machinery, plant or furniture, owned wholly or partly by the assessee and used for the purpose of the business or profession. This sub-section provides as follows :

u Under clause (i), depreciation is allowable in the case of assets of an undertaking engaged in generation or generation and distribution of power, at such percentage on the actual cost as may be prescribed.

(This provision was inserted by the Income-tax (Amendment) Act, 1998 with effect from 1-4-1998, and will hence apply from the assessment year 1998-99 onwards) [see also para 5.8].

u Under clause (ii), depreciation is allowable in the case of any ‘block of assets’, at such percentage on the written down value as may be prescribed.

(For this purpose, section 2(11) of the Act defines a ‘block of assets’ as a ‘group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed’. From the assessment year 1999-2000, the definition has been enlarged so as to include intangible assets, i.e. know-how, patents, copyrights, trade marks, licences, franchises, or any other business or commercial rights of a similar nature.)

u Under the first proviso, no depreciation is allowable on motor cars manufactured outside India and acquired by the assessee after 28-2-1975, unless it is used in a business of running it on hire for tourists, or it is used outside India in the assessee’s business or profession in another country.

Rule 5 prescribes the rate at which depreciation is to be calculated in the aforesaid situations.

The contents of rule 5

5.2 Sub-rule (1) prescribes the rates (Appendix I) applicable to ‘block of assets’ under clause (ii) of section 32(1), while sub-rule (1A), inserted with effect from 2-4-1997, prescribes the rates (Appendix IA) in respect of assets covered under clause (i) of section 32(1). Sub-rule (2) prescribes a higher rate of depreciation in certain situations, if the specified conditions are satisfied.

Legislative competence

5.3 The question whether Parliament was competent to prescribe higher rates of depreciation for certain items, but not for certain other items in the same genus, cropped up in the case of Titanium Equipments & Anodes Mfg. Co. Ltd. v. Union of India [1994] 207 ITR 566 (Mad.), and the Court held that Parliament had the freedom to select and classify goods for purposes of prescribing different rates of depreciation based on certain criteria. The Court observed :

“Fiscal adjustment of diverse elements dictated by economic wisdom and diverse economic criteria is a difficult and a complex problem and while so adjusting, it is open to Parliament to treat certain items of goods differently from others, for purposes of depreciation and in that process, a selection may also be made to include some items and omit  others. . . .

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In the complex and ever-expanding exigencies of the Government, when the power to tax and grant exemptions and benefits of depreciation exists, the extent of the benefit is a matter for the discretion of the law-makers and it is not the function of the court to enter upon the realm of legislative policy.”

Certain irrelevant factors

5.4 For the purpose of determining whether depreciation is allowable or not, the following factors are not relevant.

5.4-1 Genuineness of accounts - The depreciation has to be allowed to an assessee under the provisions of the statute, which lays down how profits and gains shall be computed after making the allowances mentioned thereunder, which includes depreciation allowance on specified assets. This therefore is not a matter depending on the genuineness of the books of account. - Allahabad Glass Works  v. CIT [1965] 42 ITR 439 (All.). The fact that the accounts are defective has nothing to do with the assessee’s claim for depreciation allowance—P. Appavu Pillai  v. CIT [1965] 58 ITR 622 (Mad.).

5.4-2 Commencement of production - Where the finding was that the assessee has set up his business in the relevant previous year, depreciation could not be disallowed on the ground that the assessee had not commenced commercial production - CIT v. Kanoria General Dealers (P.) Ltd. [1986]  159 ITR 524 (Cal.).

The ownership test

5.5 One of the conditions prescribed for claiming depreciation is that the asset must be owned by the assessee.

5.5-1 Fractional owner is also entitled - Prior to 1-4-1997, the wordings of section 32(1) of the Act did not permit allowance of depreciation to an assessee who was only a fractional owner of an asset. In that context, the Supreme Court held that depreciation was not admissible when the assessee owned only a fractional share in the asset - Seth Banarsi Dass Gupta v. CIT [1987] 166 ITR 783. Considering the fact that a large number of big projects were being undertaken in which assets subject to wear and tear were financed by a number of companies, each of which owned a fraction of the asset, section 32(1) of the Act was amended with effect from 1-4-1997, so as to provide that the asset may be owned by the assessee ‘either wholly or in part’. Thus, from the assessment year 1997-98, even a fractional owner is entitled to claim depreciation.

5.5-2 Whether legal title is necessary - In Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166/239 ITR 775 (SC) it was held that the terms ‘own’, ‘ownership’, ‘owned’ are generic and relative terms. They have a wide and also a narrow connotation. The meaning would depend on the context in which the terms are used. The term ‘owned’ as occurring in section 32(1) must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, 1882, Registration Act, etc. ‘Building owned by the assessee’, the expression as occurring in section 32(1), means the person who having acquired 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 laws such as Transfer of Property Act and Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others. Generally speaking depreciation is an allowance for the diminution in the value due to wear and tear of capital asset employed by an assessee in his business. The very concept of depreciation suggests that the tax benefit on account of depreciation legitimately 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. 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, 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 purpose of his business or profession. Assigning any different meaning would not subserve the legislative intent.

5.5-3 Owner by decree of Court  - Where assessee became owner of a hotel by a decree of the Court, decree did not require registration under the Registration Act and assessee having used hotel for business purposes was entitled to depreciation on it—Hotel Skylark & Restaurant (P.) Ltd. v. CIT [1996] 221 ITR 283 (Punj. & Har.).

5.5-4 Registration under Motor Vehicles Act - The provisions of the Motor Vehicles Act, 1939 do not prevent a person from becoming the owner of the motor vehicles without registration. Registration is not an essential prerequisite for the acquisition of ownership of the motor vehicle but is an obligation cast upon an owner of the vehicle for the purpose of running the vehicle in any public place. It is hence immaterial whether the buses were registered in the assessee’s name or the original owner’s name - CIT v. Salkia Transport Associates [1983] 143 ITR 39 (Cal.).

The transfer of ownership of a vehicle is not dependent upon the transfer of ownership being recorded under the Motor Vehicles Act. Section 31 of that Act simply obligates the transferor and the  transferee to report within the specified time from the date of transfer, the fact of transfer to the registering authority. This section, in fact, presupposes transfer of ownership of a motor vehicle. An assessee who has purchased a motor vehicle for valuable consideration and uses the same in his business cannot be denied the benefit of depreciation on the ground that the transfer was not recorded under the Motor Vehicles Act or that the vehicle stood in the name of the vendor in the records of the authorities under the Motor Vehicles Act - CIT v. Dilip Singh Sardarsingh Bagga [1993] 201 ITR 995 (Bom.) followed in CIT v. Mirza Ataullaha  Baig [1994] 76 Taxman 495 (Bom.).

5.5-5 Assets transferred by Government - Where certain buildings, plant and machinery were transferred to the assessee by Government, registration of conveyance deed is not required, and hence depreciation on such assets should be granted even in the absence of registration - CIT v. Tamil Nadu Small Industries Development Corporation Ltd.  [1995] 211 ITR 550 (Mad.); CIT v. Tamil Nadu Small Industries Corporation Ltd. [1995] 215  ITR 834 (Mad.); CIT v. Pallavan Transport Corpn. Ltd. [1997] 91 Taxman 132 (Mad.); CIT  v. Thanthai Periyar Transport Corpn. 1997 Tax LR 514 (Mad.).

In Express Newspapers (P.) Ltd. v. Union of India AIR 1986 SC 872, the Supreme Court, while considering sections 2 and 3 of the Government Grants Act, 1895, had observed that section 2 excludes the operation of the Transfer of Property Act, 1882, to Government grants. Hence, registration of the conveyance deed transferring certain buildings, plant and machinery by the Government to the assessee, is not necessary. Even without registration, assessee would be entitled to depreciation on such transferred assets - CIT v. Tamil Nadu Dairy Development Corporation Ltd. [1995] 216 ITR 535 (Mad.).

5.5-6 Assets contributed by partners - Under section 14 of the Indian Partnership Act, the property originally brought in the stock of the firm becomes the partnership property whatever be the nature of the property. A partnership deed may contain stipulations governing the rights of the parties when the dissolution takes place and if those conditions are not in any way contrary to law, they may be given effect to because section 48 of the Indian Partnership Act provides that the mode of settlement of accounts between the partners is subject to the agreement by the partners.

Thus, where a building was contributed as capital by four out of the five partners of the assessee-firm, and the partnership deed stipulated that the building would go back to those four partners only on the dissolution of the firm, it was held that during the subsistence of the partnership, the assessee-firm was entitled to depreciation on the building - CIT v. Amber Corporation [1974] 95 ITR 178 (Raj.). See also CIT v. Amber Corporation [1981] 127 ITR 29 (Raj.) and CIT v. Amber Corporation [1994] 74 Taxman 302 (Raj.).

Where assessee-HUF carried on its business of plying buses only for first three months of previous year and thereafter gave its buses towards its capital contribution to a partnership firm in which karta of the assessee-HUF became partner, depreciation allowance could not be denied to assessee either on ground that assessee was not owner of said buses for full previous year or on ground that section 34(2)(iii) would apply to the assessee’s case—A.M. Ponnuranga Mudaliar v. CIT [1996] 88 Taxman 482 (Mad.).

Depreciation would be allowable to a firm on trucks transferred to it by its partners as their capital contribution, even though registration of the vehicles under the Motor Vehicles Act continued in the names of the partners - CIT v. Navdurga Transport Co. [1998] 149 CTR (All.) 219.

The “user” test

5.6 Another condition prescribed in section 32(1) of the Act is that the asset must be used for the purpose of the business or profession. Certain aspects relating to this condition are explained in the succeeding paragraphs.

5.6-1 Whether ‘user’ must be ‘passive’ or ‘active’ - The question whether the use of the asset must be the active user, or whether it would suffice if the asset is ‘kept ready’ for use, has been the subject-matter of divergent views.

One view - ‘User’ of the asset need not be active use, and can even be passive use - The words ‘used for the purposes of the business’ are capable of larger and a narrower interpretation. If the expression ‘used’ is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, etc., is actively employed but also cases where there is, what may be described as a passive user of the same in the business. So allowance for normal depreciation allowance does not depend upon the actual working of the machinery. It is sufficient if the machinery in question is employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use in the profit-making apparatus the moment a need arises.

Thus, in a transport business buses kept ready for running on contract basis on temporary permits, but not actually run for more than 30 days on account of lack of demand, are entitled to depreciation - Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi)/Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker.).

The word ‘used’ in this section may be given a wider meaning and embrace passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season. It seems that the ultimate test is, whether without the particular user of the machinery relied upon, the profits sought to be taxed could have been made.

Thus, where the assessee was a member of ginning factories pool and his factory was under the said pool and under the pool agreement his factory did not work during the year, it was held that he was entitled to depreciation - Vishwanath Bhaskar Sathe v. CIT 10 ITC 386 (Bom.).  See  also CIT v. India Tea & Timber Trading Co. [1996] 221 ITR 857 (Gauhati).

See also para 5.6-7.

Contrary view - ‘User’ means actual use and not passive use - In rule 5 of the Income-tax Rules, 1962, the emphasis is on ‘user’ of the building in the business of the assessee. Mere preparation for the user cannot amount to user. There must be actual, effective and real user in the commercial sense. And the user must be so linked with the business that it can be said that there is an immediate nexus between the user and the business, i.e., the real business of the assessee.

Depreciation is inseparable from the actual user for business. And, depreciation allowance is permissible only on that account. It is not an allowance for natural wear and tear by reason of the aging process. In a way, every building must have started aging from the day it was constructed. But depreciation cannot be claimed in that behalf by way of compensation for such diminution in life span and value. It is claimable only on account of its user for business which can result in profits or gains. This can happen only when production commences. Thus, where an existing company installed a new plant and in the course of the erection of the plant a building meant for housing the machines were erected and some time later, the work of installing the machinery in the building commenced which was completed before 1-3-1965 and started functioning by 7-3-1965. The Court held that the building was used only from 7-3-1965 and thus it was not used for more than one month to enable the assessee to claim depreciation - CIT v. Suhrid Geigy Ltd. [1982] 133 ITR 884 (Guj.)/CIT v. Jiwaji Rao Sugar Co. Ltd. [1969] 71 ITR 319 (MP) (App.); CIT  v. J.K. Transport  [1998] 96 Taxman 152 (MP). In the case of CIT v. J.K. Transport [1998] 231 ITR 798/96 Taxman 152 (MP), the Court reiterated that their earlier view in the case of Jiwaji Rao Sugar Co. Ltd. (supra).

The words ‘used for the purposes of the business’ mean ‘actually used’ and in a case where the buildings, plant and machinery were not actually used during the year no allowance can be granted on account of depreciation. Thus, where the assessee was member of ginning factories pool and under the pool agreement his factory did not work during the year, it was held that no depreciation was admissible - Bhikaji Venkatesh v. CIT [1937] 5 ITR 626 (Nag.).

5.6-2 ‘Use’ must be during the relevant accounting year - The machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed.

Accordingly, depreciation allowance could not be allowed on the machineries not at all used in the account year merely because the stocks sold during the account year were the result of the use of the machinery in previous years - Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC).

The expression ‘used for the purposes of the business’ in section 32 means ‘used for the purposes of the business during the account year’ and not merely that the machinery must not have been used for other purposes. No doubt, machinery may depreciate from disuse as well as from use, but the allowance is granted not for depreciation as such, but for depreciation as a consequence of the  earning of income or while employed in the earning of income. Thus, where machinery was kept idle during the accounting year because of depressed trade, it was held that no depreciation was allowable - Central Provinces Manganese Ore Co. Ltd. v. CIT [1937] 5 ITR 734 (Nag.).

5.6-3 Asset need not be used throughout the year - There is no such provision in the Act as would justify the view that if the machinery is not the property of the assessee throughout the year then the period for which it was the property of the assessee should be calculated and depreciation should be allowed in proportion to such period. There is no provision in the Act for pro rata depreciation for the period of actual use. Full allowance is admissible even if machinery is used for part of the year - CIT v. S.K. Sahana & Sons [1946] 14 ITR 106 (Pat.)/CIT v. Motors & General Stores Ltd.  [1946] 14 ITR 130 (Mad.).

The words ‘not wholly used for the purposes of the business, profession’ etc., do not mean not used throughout the year or during the whole of the year in question. They mean that the building, machinery, etc., have not been used exclusively for the purpose of the profession or vocation, that is to say, they have been used for other purposes also. There is no such provision in the Act as would justify the view that if the machinery is not used throughout the year, then the period for which it has worked should be calculated and depreciation should be allowed in proportion to such period - CIT v. Dalmia Cement Ltd. [1945] 13 ITR 415 (Pat.).

However, second proviso to section 32(1)(ii), inserted with effect from 1-4-1992, provides that where any asset falling within a block of assets is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this clause in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed under this clause in the case of block of assets comprising such asset.

5.6-4 Owner need not necessarily be the user - To claim depreciation it is not necessary that the factory should be worked by the assessee himself, and it is enough if the factory is worked by a licensee or a hirer - CIT v.  Sarveshwar Nath Nigam [1963] 48 ITR 853 (Punj.).

5.6-5 Asset used by another for and on behalf of assessee - Where the office equipment and motor vehicles owned by the assessee-company were being used by another company which was acting as its sales manager and the assessee used to reimburse all the expenses of the sales manager, it was held that depreciation could not be denied to the assessee on the ground that assets were not used by it, because if the property of the assessee had been used by the sales manager it was still the property of the assessee and the assets were used by them for and on behalf of the assessee and thus depreciation was admissible - CIT v. Associated Cement Co. Ltd. [1968] 68 ITR 478 (Bom.).

In CIT v. Peacock Chemicals (P.) Ltd. [1999] 102 Taxman 527 (Delhi) it was held that where Tribunal had recorded findings of fact that assessee was owner of leased out assets and that there was such a leasing, the fact that assets were not actually used or were not capable of being put to use by assessee, might be relevant for purposes of finding out whether transaction was colourable or not, but would not be relevant so far as finding of assets having been used by assessee for purpose of business of leasing was concerned.

5.6-6 Commercial asset capable of being exploited by more than one - If nature of commercial asset is such that it is capable of being exploited by more than one, and if such an asset is temporarily put out of use or let out to another person for his use, such asset does not cease to be a commercial asset of the assessee’s business - CIT v. Hindusthan Aluminium Corpn. Ltd. [1989] 176 ITR 206 (Cal.).

5.6-7 Preparation of building for use, is also ‘use’ - After arranging for the building, any steps taken by the entrepreneur to set the building into gear for running the unit, would be nothing but putting it to ‘use’.

Where the assessee, after purchase of new building in the accounting year 1970-71 installed electrical fitting therein to run the unit but was able to shift its business to the said new building only in the next accounting year, it was held that during this shifting gap the building purchased by the assessee had been ‘used for the purpose of its business’ and, hence, the claim for depreciation would be admissible for the accounting year 1970-71 - CIT v. O.P. Khanna & Sons [1983] 140 ITR 558 (Punj. & Har.).

Admissibility in certain situations

5.7 The question whether depreciation is allowable in certain specified situations has been considered by Courts/CBDT in the following cases.

5.7-1 Assets acquired in earlier years - Where the assessee could not claim depreciation on an asset in earlier years because of the fact that no rate was prescribed in the rules, and had also not claimed the expenditure incurred as allowable revenue expenditure, there is no prohibition under the Act that depreciation cannot be claimed in a later year when the rules provided for a rate for that asset. On the contrary the definition of ‘written down value’ clearly indicates that even in the case of an asset acquired before the previous year, depreciation can be allowed provided it is otherwise admissible - CIT v. Shri Vallabh Glass Works Ltd. [1994] 207 ITR 963 (Guj.).

5.7-2 Asset not in existence - In view of the provisions contained in section 34(1)(iii), an assessee is not entitled to depreciation on an asset, which is not in existence.

Thus, where the boiler being used by the assessee exploded and was thus destroyed, the ITO was correct in withdrawing the depreciation  allowed on the old boiler in the original assessment—E.I.D. Parry Ltd. v. CIT 1996 Tax LR 648 (Mad.).

5.7-3 Asset partly used for private purposes - Where the car was used by the assessee for the purposes of business as well as private purposes, it was held that the depreciation allowance under section 10(2)(vi) of the 1922 Act should be confined to an amount proportionate to the business use only - CIT v. Sobharam Jokhiram [1960] 39 ITR 299 (Pat.).

5.7-4 Assets used in seasonal business - In CIT v. Sarveshwar Nath Nigam [1963] 48 ITR 853 (Punj.) the assessee let out Kolhus to agriculturists for the preparation of gur from sugarcane and the question was whether the assessee could claim depreciation in respect of kolhus for the entire twelve months of the year even though the kolhus were actually let out only for four months in the year. It was held that kolhus, which were used in connection with the manufacture of gur, must be deemed to be factory and since it was not necessary that the factory should be worked by the assessee himself, the assessee was entitled to depreciation for the full year under section 10(2)(vi) of the 1922 Act.

In CIT v. Banarsi Dass & Sons [1966] 61 ITR 414 (Punj.) the firm had a workshop for the manufacture of kolhus (cane crushers) and karhais (iron pans). These were let out on hire to the village cultivators who utilised them for the manufacture of gur. The business was seasonal and the kolhus were utilised by the villagers for a period of about six months. For the assessment years 1951-52 and 1952-53, the ITO declined to allow depreciation for the whole year. It was held that the assessee was entitled to depreciation on such machinery for the full year.

5.7-4a Assets used for earning agricultural income -  In Arooran Sugars Ltd. v. CIT [1999] 239 ITR 16 (Mad.) it was held that under the scheme of the Act the assessee is entitled to claim depreciation on the assets owned and used for the purpose of the assessee’s business and is not entitled to claim depreciation on assets used for earning agricultural income. The principle behind rule 7 of the Rules prohibiting the deduction of expenditure incurred as a cultivator or rent-in-kind is also the same and the rule does not permit the expenses relating to the agricultural segment of income as an allowable expenditure against non-agricultural portion of the income. Under the scheme the assessee is entitled to claim depreciation on the assets owned and used for the purpose of assessee’s business and is not entitled to claim depreciation on assets used for earning agriculture income. Thus, the assessee is not entitled to claim depreciation on farm assets used for earning agricultural income, against non-agricultural income.

5.7-5 Assets purchased under instalment scheme - Where the assessee purchased two trucks for which it paid partly from his own funds and balance from a loan which was repayable in monthly instalments, the property in the vehicles passed on to the assessee as soon as the sale was made. The fact that the full price was not paid at the time of purchase but only a part was paid and the balance was to be paid in instalments did not militate against the passing of property to the purchaser - CIT v. Mirza Ataullaha Baig [1994] 76 Taxman 495 (Bom.).

5.7-6 Assets taken on lease - In CIT v. Chandra Agro (P.) Ltd. [1979] 117 ITR 251 (All.) the assessee’s company’s main business was taking house property on lease, repairing and remodelling it and letting out to tenants for higher returns. The assessee  incurred expenditure for construction of partition walls, fitting tiles and converting floors, into mosaic floors and claimed depreciation thereon. It was held that the assessee was the owner of the improvements of permanent nature for the duration of the lease and it was a business investment in the shape of making improvements. Hence, the assessee was entitled to depreciation on the expenditure.

5.7-7 Assets given on lease - In Sadhucharan Roy Chowdhry, In re [1935] 3 ITR 114 (Cal.)/Mangalagiri Sri Umamaheswara Gin & Rice Factory Ltd. v. CIT 2 ITC 251 (Mad.) the assessee purchased a jute press and worked it until 1930. In 1931 he leased it out for a term of one year and the question was as to whether the assessee was entitled to claim depreciation on the said jute press in the year in which it was leased out by him.

It was held that the letting of a jute press on a rent was as much a business as the letting of a ship for freight, or the letting of a motor-car or any other kind of machines. Further, the lessees to whom the jute press was leased out were liable only for repairs and not for depreciation, and in no circumstances could they claim any allowance for depreciation  under section 10(2)(vi) of the 1922 Act because the buildings, machinery, etc., mentioned in that sub-section must be the property of the assessee. Accordingly the assessee was entitled to an allowance for depreciation in respect of jute press under section 10(2)(vi).

There is no difference in principle between the letting out of a rice mill and its machinery and the letting out of a building built and fitted for the purpose of a hotel business. Where the letting of the premises was part of the business of the  assessee carrying on hotel business, it was entitled to an allowance for depreciation in respect of the let out buildings and furniture  under section 10(2)(vi) of the 1922 Act - CIT v. Bosotto Bros. Ltd. [1940] 8 ITR 41 (Mad.).

Where the assessee, whose business was leasing out generators but not actually running the generators, had leased out a generating set in the course of its business but could not get back the set after expiry of lease period due to lock-out in the lessee’s factory, the assessee was entitled to claim depreciation in respect of that asset - Hindusthan Gas & Industries Ltd. v. CIT [1995] 79 Taxman 151 (Cal.).

5.7-8 Assets under repairs - Where some of the trucks owned by the assessee were under repairs during the relevant year, but they had been used in assessee’s business during earlier and later years, the vehicles continued to be in use for business of the assessee even though the same were under repair, and hence were eligible for depreciation - CIT v. G.N. Agrawal [1994] 75 Taxman 30 (Bom.).

Where assessee running business in Ahmedabad purchased a premises in Bombay in 1975 for expansion of business and premises were handed over to agent for repairs and furnishing and actual commencement of business from premises was in 1977, depreciation in respect of said premises was allowable in assessment year 1976-77 - Khimji Visram & Sons (Gujarat) (P.) Ltd. v. CIT [1994] 209 ITR 993 (Guj.).

5.7-8a When factory is under lock-out - One of the conditions specified in section 32(1) for grant of depreciation is the actual user of plant and machinery for the purpose of business. In certain cases like a pooling arrangement or where plant and/or machinery is kept as stand-by to provide against breakdown, even a passive user may entitle the  assessee to claim depreciation because, in both these cases, the machinery is kept ready for use in the factory. A lock-out is an act of the assessee in suspending the business operations. The allowance of depreciation may not depend on the actual working of the machinery but no depreciation is allowable if the assets are not used at all for the business of the assessee in the relevant previous year. Hence, where the assessee’s factory remained under lock-out during the entire previous year, the aforesaid condition in section 32(1) will not stand satisfied, and hence no depreciation will be admissible - CIT v. Oriental Coal Co. Ltd. [1994] 206 ITR 682 (Cal.).

5.7-9 Where income is estimated at a flat rate - Under Board’s Circular No. 29D(XIX) of 1965, dated 31-8-1965 [Annex 5.3] where income is proposed to be computed by applying a flat rate and the assessee has furnished the prescribed particular for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. No provision under the Act has been brought to notice which makes the claim of depreciation inadmissible where the income is computed by applying the flat rate - CIT v. Bishambhar Dayal & Co. [1994] 74 Taxman 123 (All.).

5.7-10 Tea business - Rule 8 requires the composite income to be determined in the first instance and, in that computation, the entire depreciation is allowable, say at Rs. 5. But 40 per cent of the composite income is taken as the taxable business income in view of rule 8. Consequently, it is 40 per cent of the depreciation, i.e., 40 per cent of Rs. 5 or Rs. 2 that is actually allowed towards depreciation. So, it can be said that Rs. 2 has been allowed as depreciation and Rs. 2 alone can be deducted from the cost of the depreciable asset in determining the written down value and not the whole of Rs. 5, notwithstanding the fact that, in the first stage of computation, the entire Rs. 5 was allowed as depreciation. Therefore, for computing the written down value of depreciable assets used in tea business, only 40 per cent of the depreciation has to be deducted while determining the written down value - CIT v. Suman Tea & Plywood Industries (P.) Ltd. [1993] 204 ITR 719 (Cal.).

5.7-11 Assets acquired under hire-purchase - The CBDT have clarified that assets acquired under hire-purchase agreements will be eligible for depreciation if certain conditions are satisfied - Refer Circular No. 9, dated 23-3-1943 read with Letter F. No. 27(20)-IT/59, dated 26-6-1959 [Annex 5.1]. In CIT v. Nagpur Golden Transport Co. [1998] 233 ITR 389 (Delhi), the Court held that depreciation shall be allowed to the user in the case of a hire-purchase agreement.

5.7-12 Foreign motor cars - As already stated in  para 5.1,  motor cars manufactured outside India and acquired by the assessee after 28-2-1975 are not entitled to depreciation, except in cases where they are used in a business of running it on hire for tourists. Where the cars are used in such a business, by tour operators or travel agents, the CBDT have clarified that depreciation can be allowed even in cases where transportation services are provided as part of package tour for tourists, and that they are eligible for higher rate of depreciation admissible to motor buses/motor lorries/motor taxis - Circular No. 609, dated 28-7-1991 [Annex 5.4].

5.7-13 Fittings in employees’ residences - The CBDT have clarified that fans/air-conditioners/refrigerators, etc., provided by an employer at the residence of his employees should be considered to have been used wholly for the purpose of the employer’s business and that depreciation was allowable on such assets - Letter F. No. 10/14/66-IT(A-I) dated 12-12-1966 [Annex 5.5].

Option to power generating units

5.8 Under clause (i) of section 32(1) of the Act, inserted by the Income-tax (Second Amendment) Act, 1998 with effect from 1-4-1998, read with rule 5(1A) inserted with effect from 2-4-1997 by the Income-tax (Twelfth Amendment) Rules, 1997, power generating units are entitled to depreciation in respect of assets acquired on or after 1-4-1997 on the straight line method, at the rates specified in Appendix IA. The said Rule however gives an option to the units to claim depreciation under the written down value method by applying the rates specified for block of assets in Appendix I, provided such option is exercised before the due date for furnishing the return of income under section 139(1), (a)  for the assessment year 1998-99, in the case of an undertaking which began to generate power prior to 1st day of April, 1997; and (b)  for the assessment year relevant to the previous year in which it begins to generate power, in case of any other undertaking.

The option once exercised shall be final and shall apply to all subsequent assessment years. In effect, while no option is necessary for claiming depreciation at the rates specified in Appendix IA (straight line method), an option is necessary only for claiming depreciation under the written down value method, and once such an option is exercised, the calculation under the written down value method will continue for the subsequent assessment years, and the units cannot switch back to the straight line method.

Higher rate of depreciation under rule 5(2)

5.9 Normal rate of depreciation in case of plant and machinery is 25%. However, if the following conditions are satisfied, then plant and machinery shall be treated as a part of block of assets qualifying for depreciation at the rate of 40 per cent (50 per cent for the  assessment years 1988-89 to 1991-92) by virtue of rule 5(2):

u New machinery or plant is installed during the previous year relevant to the assessment year 1988-89 (or any subsequent year), for the purposes of business of manufacture or production of any article or thing (not being any article specified in the Eleventh Schedule).

u Such article or thing is manufactured or produced by using any technology (including any process) or other know-how developed in, or is an article or thing invented in, a laboratory owned or financed by the Government or a laboratory owned by a public sector company or a University or an institution recognised in this behalf by the Secretary, Department of Scientific and Industrial Research, Government of India.

u The right to use such technology (including any process) or other know-how to manufacture or produce such article or thing has been acquired from the owner of such laboratory or any person deriving title from such owner.

u The return, furnished by the assessee for any previous year in which the said machinery or plant is acquired, shall be accompanied by a certificate from the Secretary, Department of Scientific and Industrial Research, Government of India, to the effect that such article or thing is manufactured or produced by using such technology (including any process) or other know-how developed in such laboratory or is an article or thing invented in such laboratory. The guidelines and other procedural aspects in regard to issue of the certificate referred to above are spelt out in a departmental Press Release - Refer Annex 5.6.

Law applicable

5.10 The Income-tax Act, 1961, as it stands amended on the 1st day of April of any financial year, applies to the assessment of that year. Any amendment in the Act or the Rules which comes into force after the 1st day of April of a financial year would not apply to the assessment of that year, even if the assessment is actually made after the amendment came into force.

Thus, where in rates of depreciation there was amendment raising rate with effect from 24-7-1980, the law as amended was not applicable to the assessment year 1980-81, nor could it be deemed to be retrospective - CIT v. Mirza Ataullaha Baig [1993] 202 ITR 291 (Bom.).

Amendment in the rate of depreciation in respect of buses, brought about by Notification dated 24-7-1980 could not be applied to the assessment year 1980-81 retrospectively—CIT v. S. Palaniswamy [1996] 219 ITR 380 (Mad.).

New rates of depreciation given effect to on 2-4-1983 will not apply for  assessment year 1983-84 - The Income-tax (Fourth Amendment) Rules, 1983, by which higher rate of depreciation was laid down, came into effect on 2-4-1983. The assessment year 1983-84 began on 1-4-1983. In other words, this new rule was not intended to be made applicable to the assessment year 1983-84. The rates of depreciation laid down in the rules are matters of substantive law. The new rates were intended to apply only from the assessment year 1984-85 since these were not in force on 1-4-1983 on which the assessment year 1983-84 began - S.P. Jaiswal Estates (P.) Ltd. v. CIT [1994] 75 Taxman 298 (Cal.).

In Sree Karpgambal Mills Ltd. v. CIT [1999] 238 ITR 842 (Mad.) it was held that depreciation as per the Income-tax (Fourth Amendment) Rules, 1983, is not to be allowed in all cases which were pending on 2-4-1983 (i.e., the date of amendment), irrespective of the assessment year involved and depreciation under the said Rules can, if at all, be allowed only in 1984-85 and subsequent years.

Whether assessee can forgo claim for depreciation

5.11 The questions whether depreciation is a mandatory deduction even if the assessee has not claimed it or has not furnished the requisite particulars, or alternatively, whether the assessee has the right to forgo depreciation, have cropped up in a number of cases. Prior to 1-4-1988, section 34(1) of the Act stipulated that the deduction can be allowed only if the ‘prescribed particulars’ are furnished by the  assessee. Even when this provision was in force, judicial opinion was divided as to whether the  Assessing Officer can suo motu allow depreciation even in the absence of the prescribed particulars or a claim by the assessee.

The matter is now set at rest by the decision of the Supreme Court in the case of CIT  v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 226. The Supreme Court held that if an assessee does not claim the benefit of depreciation in the return of income, or withdraws the claim through a revised return, the benefit cannot be forced upon him. Some relevant observations of the Supreme Court in this context are given below :

u Section 34 provides that deduction under section 32 shall be allowed only if prescribed particulars have been furnished. Rule 5AA of the Income-tax Rules, 1962 which though since deleted, provided for the particulars required for the purpose of deduction under section 32. Even in the absence of rule 5AA return of income in the form prescribed itself requires particulars to be furnished if the assessee claims depreciation. These particulars are required to be furnished in great detail.

u Board Circular No. 29D [XIX-14 of 1965, F. No. 45/239/65 ITJ], dated 31-8-1965, provides that depreciation could not be allowed where the required particulars have not been furnished by the assessee and no claim for the depreciation has been made in the return. The Assessing Officer in such a case is required to compute the income without allowing depreciation allowance.

u Provision for claim of depreciation is certainly for the benefit of the assessee. If he does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. The Assessing Officer should advise him not to claim depreciation if that course is beneficial to the assessee.

u The argument that since section 32 provides for depreciation it has to be allowed in computing the income of the assessee, cannot in all circumstances be accepted in view of the bar contained in section 34. If section 34 is not satisfied and particulars are not furnished by the assessee his claim for depreciation under section 32 cannot be allowed. Section 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code.

u Section 34 is not in the nature of merely an enabling provision. In the absence of particulars of depreciation as required by section 34, there is no mandate on the Assessing Officer under section 29 to compute the income by allowing depreciation under section 32.

u The assessee can withdraw the claim of depreciation made in the return by filing revised return. If the revised return is a valid return and the assessee has withdrawn the claim of depreciation it cannot be granted relying on the original return when the assessment is based on the revised return.

u Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions ‘actually allowed’ to the assessee for the past years. ‘Actually allowed’ does not mean ‘notionally allowed’. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is ‘allowed’ when it is claimed. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation.

u Therefore, the Assessing Officer could not grant depreciation allowance to the assessee when the same was not claimed by the assessee.

Classification of certain assets

5.12 In the matter of classification of certain assets for purposes of determining the rate of depreciation, the following points are worth notice.

5.12-1 Trucks, buses etc. - The Rules provide for a higher rate of depreciation on trucks, buses, taxis which are used in the business of plying vehicles for hire. It has been held that this higher rate can be availed by a person only if his only business is that of transportation of goods on hire - ABC India Ltd. v. CIT [1997] 226 ITR 914 (Gauhati). An occasional use of vehicles, when they are not required for the assessee’s own business, will not suffice to claim the higher rate - CIT v. Sardar Stones [1995] 215 ITR 350 (Raj.). The higher rate is held as admissible to assessee engaged in transporting passengers from one place to another in their fleet of buses - CIT v. Sharma Motor Service [1998] 148 CTR (MP) 75.

5.12-2 Ambulance van - An ambulance van used by a private hospital for the benefit of patients on payment of hire was held to be entitled to higher rate of depreciation - CIT v. Dr. K.R. Jayachandran [1995] 212 ITR 637 (Ker.).

5.12-3 Hotel building and cinema building - In the case of CIT v. Anand Theatres [2000] 244 ITR 192, the Supreme Court has set at rest the controversy as to whether a hotel building or a cinema building is to be classified as ‘building’ or as ‘plant’. The Supreme Court held that such a building could not be treated as a ‘plant’. Some relevant observations made by the Supreme Court are given below :

u For a building used as a hotel there is a specific provision for granting depreciation allowance at specified rates depending upon fulfilment of the conditions mentioned therein. Hence, there is no question of referring to dictionary meaning of the word ‘plant’ which may or may not include building, for arriving at a conclusion that building which is specifically designed and constructed as a hotel building would be a ‘plant’.

u Further, in the context of the legislative scheme under section 32, which provides depreciation at different rates for building, machinery and plant, furniture and fixtures, ships, building used for hospital, aeroplanes, cinematograph films, machinery used in the production and exhibition of cinematograph films, recording equipment, developing machines, printing machines, synchronisers and studio lights except bulbs, projecting equipment of film exhibiting concerns, even though the word ‘plant’ may include building or structure in certain set of circumstances as per the dictionary meaning, but to say that building used for running the business of hotel or a cinema would be ‘plant’ under the Act appears, on the face of it, to be inconsistent with the aforesaid provisions. Such meaning would be clearly against the legislative intent.

u Section 43 itself provides that ‘unless the context otherwise requires’ the word ‘plant’ is to be given wider meaning as stated therein. This wider meaning does not include building. But in any case even for the time being presuming that the judge-made meaning of the word ‘plant’ includes building in certain set of circumstances, in the context of section 32 such wider meaning cannot be given and plant would not include building in which hotel business is run or a theatre building in which cinema business is carried on.

u The business of a hotelier is carried on in a building or a premises and the building is not an apparatus for running such business. It is a shelter or a home for conduct of such business.

u Courts have specifically held that creation of atmosphere in a hotel by beautiful buildings and gardens would not make such buildings as plants. The suitability of such building is simply the reason why the business is carried on there which may flourish, but the premises remain premises where business is carried  on and are not something with which business is carried on.

u Section 32 itself contemplates a hotel business being carried on in residential accommodation including accommodation which is in the nature of a guest house. On occasions hotel buildings may be constructed with a special design and features so as to attract and accommodate a certain class of tourists. Similarly with regard to cinema business, it can be carried on in a specially designed and constructed building and also in other buildings. Still, however, it would be difficult to draw a distinction and differentiate by holding that a building which is specially designed and constructed for running a hotel or cinema would be covered by ‘plant’ and other buildings used for the same purpose would not get depreciation as ‘plant’, even though such business is carried on in such premises.

u It would be difficult to draw a line between a building which is specifically constructed for the aforesaid purposes and buildings which are used for the aforesaid purposes by converting a residential accommodation or industrial premises for such purposes. Secondly, depreciation as a general principle represents the diminution in value of a capital asset when applied to the purpose of making profit or gain. The object is to get a true picture of the real income of the business. Hence, it can be inferred that the Legislature never intended to give such benefit of depreciation to a ‘building’ which is usually more durable than ‘machinery’ or ‘plant’.

u Further for running almost all industries or for carrying on any trade or business building is required. On occasions a building may be designed and constructed to suit the requirement of a particular industry, trade or business. But that would not make such building plant. It only shelters running of such business. For each and every business, trade or industry, a building is required to carry on such activity. That means the building plays some role and in other words, its function is to shelter the business, but it has no other function except in some rare cases such as dry dock where it plays an essential part in the operations which take place in getting a ship into the dock, holding it securely and then returning it to the river. Building is more durable. If the contention of the assessee is accepted, virtually all such buildings would be considered to be a plant and the distinction which the Legislature has made between the ‘building’ and ‘machinery’ or ‘plant’ would be obliterated.

5.12-4 Nursing Home - Where the Tribunal found that the assessee’s nursing home was equipped for carrying out sterilisation of surgical instruments and bandages, and was also equipped with an operation theatre, the Supreme Court agreed with the conclusions of the Tribunal and the High Court that the building was classifiable as ‘plant’—CIT v. Dr. B. Venkata Rao [2000] 243 ITR 81 (SC).

5.12-5 Canteen building - Canteen building is part of factory building - CIT v. Motor Industries Co. Ltd. (No. 2) [1998] 229 ITR 137/97 Taxman 7 (Kar.)/Widia (India) Ltd. v. Chief CIT [1998] 100 Taxman 526/233 ITR 1 (Kar.).

5.12-6 Approach roads - Approach roads within the factory are to be treated as ‘building’ and not as ‘plant’ - CIT v. Karnataka Power Corporation Ltd. [1994] 205 ITR 511 (Kar.)/CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad.).

5.12-7 Roads/culverts/compound wall - Roads laid within factory are integral part of factory building. So far as culverts are concerned, they are part of the roads and are required to be held as part of building. Accordingly, it must be held that the roads and culverts are part of the building. For the same reasoning, compound wall of the factory premises must also be held to be integral part of the factory premises and is building - CIT v. Gujarat State Fertilizer Co. Ltd. [1996] 219 ITR 550 (Guj.)

5.12-8 Books - Pre-commencement expenditure on books and periodicals which was capitalised would qualify to depreciation, since books and periodicals are to be treated as ‘plant’ - CIT v. Southern Petrochemical Industries Corpn. Ltd. (No.1) [1998] 233 ITR 391 (Mad.).

5.12-9 Bottles/Crates  - Returnable bottles and crates used by manufacturer of soft drinks are to be treated as ‘plant’-CIT  v. Saurashtra Bottling (P.) Ltd. [1998] 233 ITR 270 (Guj.).

Rates of depreciation

5.13 The following rates introduced during the past two years may be noted :

(i)

Computers

- 60%

 

(ii)

Know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

- 25%

Under Income-tax (12th Amendment) Rules, 1998, w.e.f. 1-4-1999

(iii)

Commercial vehicle acquired on or after 1-10-1998 but before 1-4-1999, and put to use before 1-4-1999 for the purposes of business or profession [See third proviso to section 32(1)(ii)]

- 40%

 

 

(iv)

New commercial vehicle acquired on or after 1-10-1998 but before 1-4-1999 in replacement of condemned vehicle of over 15 years of age, and put to use before 1-4-1999 for the purposes of business or profession [See third proviso to section 32(1)(ii)]

 

- 60%

 

Under Income-tax (First Amendment) Rules, 1999, w.e.f. 1-4-1999

(v)

New commercial vehicle acquired on or after 1-4-1999 but before 1-4-2000, in replacement of condemned vehicle of over 15 years of age and put to use before 1-4-2000 for the purposes of business or profession [See third proviso to section 32(1)(ii)]

 

 

- 60%

Under Income-tax (First Amendment) Rules, 1999, w.e.f. 1-4-1999

 

(vi)

New buildings with dwelling units each with plinth area not exceeding 80 square metres, acquired on or after 1-4-1999 but before 1-4-2002

 

Under Income-tax (Ninth Amendment) Rules, 1999 w.e.f. 1-4-2000

 

40%

 

Annexure to rule 5

Annex 5.1

Circular No. 9 [R. Dis. No. 27(4)-IT/43], dated 23-3-1943

Depreciation on assets acquired under the hire-purchase agreement - Conditions subject to which it is to be allowed

Clarification 1

The following instructions are issued for dealing with cases in which an asset is being acquired under on what is known as hire-purchase agreement :

1. In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.

2. Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (e.g., where the lessor obtains a right to sue for arrear instalments but no right to recovery of the asset), the transaction should be regarded as one of purchase by instalments and no deduction in respect of “hire” should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

3. Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire-purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of:

     (a)  consideration for hire, to be allowed as a deduction in the assessment, and

     (b)  payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement).

The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value (as described above), the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreement was terminated either by the outright purchase of equipment or of its return to the owner, the deduction should cease as from the date of the termination.

An  assessee claiming this deduction should be asked to furnish a certificate, from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming, the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum; in doubtful cases the facts should be reported to the Board.

Clarification 2

Letter F. No. 27(20)-IT/59, dated 26-6-1959 of the CBR

Attention is drawn to the Board’s Circular No. 9 of 1943 (P/DI F. No. 27(4)/II/43), dated March 23, 1943 clarifying that depreciation on plant and machinery purchased on hire-purchase system would be admissible at the usual rates if the conditions stated therein were fulfilled. The Board, vide its letter F. No. 27(20)-IT/59, dated June 26, 1959 further clarified that the same basis should be followed for development rebate also.

2. It has now been brought to the notice of the Board that in view of objections raised by Revenue Audit in certain cases some Income-tax Officers are not allowing depreciation and development rebate on machinery purchased on hire-purchase system even though the conditions laid down in the aforesaid circular and letter are fulfilled.

3. I am directed to say that the Instructions contained in the circular and letter referred to above have not been withdrawn by the Board and are still in force and as such, should continue to be followed. This may please be brought to the notice of the officers working in your charge.

Annex 5.2

Circular No. 14(XL-35) of 1955, dated 11-4-1955

[Extracted from Chokshi Metal Refinery v. CIT [1977]
107 ITR 63 (Guj.)]

Claim for depreciation - Department not to take benefit of assessee’s ignorance

Officers of the department must not take advantage of ignorance of an  assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming and reliefs rests with the assessees on whom it is imposed by law, officers should—

 

(a)

draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

 

(b)

freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

Annex 5.3

Circular No. 29-D(XIX-14) [F. No. 45-239-65-ITJ], dated 31-8-1965

Claim for depreciation - Where income is estimated at flat rates/where required particulars have not been furnished

1. Numerous instances have come to the notice of the Board where assessee’s claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimate profits by invoking the proviso to section 13 of the 1922 Act. The course generally followed in such cases was to estimate the net income. The decision of the appellate authorities in such cases that the mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly “allowed” as provided under the Act. On the contrary, they held, that since no depreciation was actually allowed in the past years, the profit or loss under section 10(2)(vii) would be computed without making any deduction for depreciation for arriving at the written down value of the asset.

2. The Board considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including the depreciation allowance should be separately deducted from the gross profit. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom.

3. Even where best judgment is made, the above procedure should be adopted provided the required particulars have been furnished by the assessee. In cases where required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance. In such cases, the estimate of net profit would be naturally higher than otherwise and the fact that the estimate has been made without considering depreciation allowance may be clearly brought out in the assessment order. In such cases, the written down value of depreciable assets would continue to be the same as at the end of the preceding year as no depreciation would actually be allowed in the assessment year.

Note : In Beco Engg. Co. Ltd. v. CIT [1984] 148 ITR 478 (Punj. & Har.), the above circular was explained with the following observations:

“...The Central Board of Revenue, in its Circular No. 29-D(XIX-14) of 1965, F. No. 45/239/65-ITJ, dated August 31, 1965, has provided that where the required particulars have not been furnished by the  assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance. From the circular, it is evident that in case the assessee has not claimed depreciation allowance, he cannot be granted the same by the ITO. It has been settled by the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, that the circulars issued by the Department would be binding on it. From the language of the section, read with the circular, it is clear that in case an assessee has not claimed depreciation, the ITO cannot give the allowance of depreciation to him.” (pp. 481-482)

Annex 5.4

Circular No. 609, dated 29-7-1991

Allowance of depreciation on motor vehicles owned and used by tour operators and travel agents in the business of running these vehicles on hire for tourists

Clarification 1

1. The second proviso to section 32(1)(ii) of the  Income-tax Act, 1961, which disallows depreciation on foreign motor cars, is reproduced below:—

“Provided further that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975, and is used otherwise than in a business of running it on hire for tourists.”

2.1 The intention behind this provision is to discourage use of foreign cars for the purposes of business or profession. However, in order to promote tourism industry, an exception has been made in the case of foreign motor cars used in a business of running them on hire for tourists, on which full depreciation is allowable.

2.2 Where tour  operators or travel agents use certain foreign motor cars, owned by them, for providing transportation services to tourists, depreciation should be allowed on these cars. The position will not change even where such transportation services are provided as a part of package tour for tourists, which may include a number of other services like boarding and lodging, service of guides, etc. A tourist, who opts for a package tour, agrees to pay for a number of services including use of car provided to him by the tour operator or travel agent. Thus, it can be said that the car has been taken by him on hire from such tour operator or travel agent. Therefore, depreciation on foreign motor cars, owned by him and used for providing transportation services to tourists, whether in a package tour or otherwise, should be allowed.

3. Further, under sub-item (2)(ii) of item III of Appendix I to the Income-tax Rules, 1962, a higher rate of depreciation, namely, 50 per cent,  is allowed on motor buses, motor lorries and motor taxis used in a business of running them on hire. Therefore, where a tour operator or travel agent uses such vehicles, owned by him, in providing transportation services to the tourists, higher rate of depreciation should be allowed on such vehicles. It is clarified that “motor vans” are akin to “motor lorries” or “motor buses” and, therefore, higher rate of depreciation will be allowed on motor vans also, if they are used for providing transport services to tourists.

Clarification 2

Circular No. 622, dated 6-1-1992

1. Circular No. 609 clarified, inter alia, that the higher rate of depreciation under sub-item (2)(ii) of Item III of Appendix I to the Income-tax Rules will be allowed on motor vans also if they are used for providing transport services to tourists (para 3 of the Circular).

2. Vide Notification No. SO 467(E), dated 24th July, 1991, the rate of depreciation in sub-item (2)(ii) of Item III of Appendix I to the Income-tax Rules, 1962 has been changed to 40% from the earlier figure of 50%.

3. In view of the above, the figure of 50% occurring in the 3rd line of para 3 of Circular No. 609, dated 29-7-1991 may be read as 40%.

Clarification 3

Circular No. 652, dated 14-6-1993

1. Under sub-item (2)(ii) of Item No. III of Appendix I to the Income-tax Rules, 1962, higher rate of depreciation is admissible on motor buses, motor lorries and motor taxis used in a business of running them on hire. A question has been raised as to whether, for deriving the benefit of higher depreciation, motor lorries must be hired out to some other person or whether the user of the same in the assessee’s business of transportation of goods on hire would suffice.

2. In Board’s Circular No. 609, dated 29th July, 1991, it was clarified that where a tour operator or travel agent uses motor buses or motor taxis owned by him in providing transportation service to tourists, higher rate of depreciation would be allowed on such vehicles. It is further clarified that higher depreciation will also be admissible on motor lorries used in the assessee’s business of transportation of goods on hire. The higher rate of depreciation, however, will not apply if the motor buses, motor lorries, etc., are used in some other non-hiring business of the assessee.

Annex 5.5

Letter F. No. 10/14/66-IT(A-I), dated 12-12-1966

Fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of employees - Whether should be considered to have been used wholly for the purpose of employer’s business and full depreciation be allowed

1. Attention is invited to the Board’s letter F. No. 10/97/63-IT(A-I), dated 29-2-1964, addressed to the Commissioner of Income-tax, in which instructions were issued, inter alia, that development rebate should not be allowed on air-conditioners and fans given by an employer for the personal use of the employees or directors at their residence, on the ground that the said plant and machinery were not wholly used for the purpose of the  assessee’s business.

2. The question has been re-examined by the Board recently in the light of the Board’s letter F. No. 9/26/IT/60, dated 21-3-1960 in which it was clarified that quarters built by the employers for the accommodation of their employees must be regarded as buildings used for the purpose of the business and depreciation allowed thereon, where the occupation by the employees of the property owned by the employer is subservient to and necessary for the purpose of their duties. It is considered that what applies to buildings applies also to the fans, air-conditioners and refrigerators fitted to those buildings, as those are amenities which virtually form part of such buildings.

3. On reconsideration, therefore, the Board have decided, in supersession of the instructions issued in their letter dated 29-2-1964 that fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of the employees, should be considered to have been used wholly for the purpose of the employer’s business and full depreciation as may be admissible in accordance with the rules, should be allowed in the assessment of the employer. Where such assets have been installed on or before March 31, 1965, development rebate may also be allowed in respect of these assets, if the rebate is otherwise admissible.

Annex 5.6

PIB Press release

Guidelines for issue of certificate for depreciation allowance under rule 5(2) of the Income-tax Rules as substituted by the Third Amendment Rules, 1987, w.e.f. 1-4-1987

PREAMBLE - Government is providing various incentives and support for the development and promotion of indigenous technology towards technological self-reliance and reducing dependence on foreign technology inputs. There are several incentives to encourage the use of indigenous technology and to commercialise it. The Government has now, inter alia, notified still an additional incentive and relief to the users of know-how developed in the country, in the shape of depreciation allowance at the higher rate of 50 per cent. The depreciation is available in respect of machinery and plant installed in the accounting years relevant to the assessment year 1988-89 and subsequent assessment years for manufacture/production of goods based on indigenous technology.

COMMENCEMENT DATE - The scheme of depreciation allowance at the rate of 50 per cent came into force with effect from 2-4-1987.

CONDITIONS TO BE SATISFIED - The conditions which are to be satisfied for availing of this allowance are :—

 

(a)

The article should be manufactured by using technology or the know-how developed in :—

 

(i)

a laboratory owned or financed by Government

 

(ii)

a laboratory owned by a public sector company or

 

(iii)

a University

 

(iv)

any institution recognised in this behalf by the prescribed authority.

 

(b)

The right to use the technology (including any process) or other know-how to manufacture or produce such products has been acquired by the taxpayer from the owner of such laboratory or any person deriving title from such owner.

 

(c)

The taxpayer furnishes a certificate from the Secretary, Department of Scientific and Industrial Research along with return of income that such article or thing is manufactured or produced by using technology (including any process) or the know-how has been developed in any of the institutions referred to at (b) above.

 

(d)

The machinery or plant is not used for the manufacture or production of specified article listed in Appendix 1.

DEFINITION - (a) “Laboratory financed by the Government” means a laboratory owned by anybody [including a society registered under the Societies Registration Act, 1860 (21 of 1860)], and financed wholly or mainly by the Government;

(b) “public sector company” means any corporation established by or under any Central, State or Provincial Act or a Government Company as defined in section 617 of the Companies Act, 1956 (1 of 1956);

(c) “university” means a University established or incorporated or under a Central, State or Provincial Act and includes an institution declared under section 3 of University Grants Commission Act, 1956 (3 of 1956), to be a University for the purpose of that Act; and

(d) “institution” means an institution, having adequate infrastructural facilities to undertake research, design and development and approved in this behalf by the prescribed authority.

CONDITIONS FOR ISSUE OF CERTIFICATE - (i) This certificate is intended only for the purposes of depreciation @50 per cent on plant and machinery installed after 1-4-1987 and is subject to the provisions of section 32.

(ii) The plant and machinery certified will be treated as a block of assets qualifying for depreciation at the rate of 50 per cent of written down value.

(iii) This is subject to the assessee complying with the conditions laid down in section 32 of the Income-tax Act, and rule 5(2) of the Income-tax Rules as modified, vide Ministry of Finance Notification No. 133/342/86-TPL, dated 1-4-1987 [the Income-tax (Third Amendment) Rules, 1987].

(iv) In respect of the plant and machinery, the assessee would, as desired furnish to the income-tax authorities the particulars required for admissibility of the exact amount of the claim.

(v) In case the particulars furnished by the assessee regarding the technology/know-how, plant and machinery, the date of installation, value, etc., are found to be incorrect, the certificate will be cancelled and penal action as provided under the Income-tax Act will be taken against the assessee.

(vi) This certificate is also subject to the conditions that—

 

(a)

the right to use the technology/know-how (including any process) has been acquired by the laboratory owned/financed by Government or owned by public sector company or recognised institution or any person deriving title from such owner;

 

(b)

the plant and machinery is not used for the purposes of business of manufacture or production of any article or thing specified in the list in the Eleventh Schedule to the Income-tax Act.

(vii) This certificate is valid for a period of three years from the date of issue.

(viii) In all future correspondence, the number indicated on the certificate should be quoted.

PROCEDURAL AND OTHER MATTERS - Applications for depreciation allowance may be made to the prescribed authority in the Department of Scientific and Industrial Research, Ministry of Science and Technology, New Mehrauli Road, New Delhi - 110016. The applications are to be made in 4 sets.

 

FORM

Depreciation allowance - Application for grant of certificate under
rule 5(2) of the Income-tax Rules

Part I

      1.   (a)  Name of applicant

            (b)  Addresses of :

                (i)  Registered office

               (ii)  R & D laboratory

              (iii)  Factory

      2.   (a)  In case of existing industrial undertakings, whether there is any foreign, financial or technical collaboration.

            (b)  If so, give details such as, the product/services, covered, name and country of the foreign collaborator, date and period of collaboration (a copy of the agreement may be enclosed).

            (c)  Whether you come within the purview of the Foreign Exchange Regulation Act, 1973.

      3.   (a)  Item of manufacture for which depreciation on plant and machinery is applied.

            (b)  Date from which item at 3(a) is commercially produced.

      4. Other products manufactured by the company.

      5. Is the item in 3(a) above for import substitution? Please give details of imports into the country during the last two years.

      6. Date of installation of new plant or machinery for which depreciation allowance is being claimed.

      7. Have you obtained an industrial licence for the manufacture of item at 3(a). Please indicate No. and date with a copy (not applicable for small scale units under delicensed sector) ?

      8.  (a)  Specify the details (such as, specifications, quantity produced) of article in “3(a)” above

            (b)  Selling cost per unit/unit quantity

            (c)  Names of major customers

            (d)  Is it for your captive use.

      9. Names of manufacturers producing similar items.

     10. Whether the machinery/plant is used for the manufacture or production of articles mentioned in the Eleventh Schedule and referred to in rule 5(2) of the Income-tax Rules (list enclosed).

     11. Enclose a copy of the annual report of the company wherein investment on plant/machinery for production of item at 3(a) were mentioned.

Technical information

Part II

      1.  Name and address of laboratory, university/institution, whose technology has been adopted. Give details (like the period during which research work was carried out in the laboratory, fees paid for development, details of your association during the proposed development)

      2.  Give a detailed chronological note on the development of technology

      3.  Whether the laboratory/institution is :

           (i)  Owned or financed by Government, or

          (ii)  Owned by public sector company, or

         (iii)  Is it laboratory of the University, or

         (iv)  Is approved by Government. Give details of approval.

      4.  Whether the right to use technology/process/know-how is acquired by the applicant from :

     (a)  Owner of the laboratory referred to in the above column

     (b)  Any other agency deriving title from the owner

     (c)  Was the technology patented and, if so, whether commercialised under the patent

     (d)  A copy of the agreement with R & D laboratory/institution for transfer of technology and material in support of its actual implementation, may be enclosed

     (e)  Did you utilise services of any consultancy organisation, if so, give details.

      5.  Do you have your own R & D Laboratory ?

           (i)  If yes, are you recognised by the Ministry of Science and Technology (Department of Scientific and Industrial Research)

          (ii)  If no, whether you propose to establish your R & D Laboratory.

      6.  Nature of technology

          (a)  Indicate whether it is :

                (i)  new product, or

               (ii)  improved product, or

              (iii)  new process, or

               (iv)  improved process

          (b)  Is it basic to the manufacture or production.

      7.  Give details of engineering assistance/services rendered by the laboratory to utilise the know-how commercially.

      8.  Are you aware of this technology development in any other country

           If yes, give details including techno-economic comparison in a separate note.

      9.  What is the superiority in technology/product as compared to existing products, if any.

     10.  Total investment - Indicate accounting and assessment year regarding investment made

          (a)  Plant

          (b)  Total value of capital equipment used

                (i)  Imported

               (ii)  Indigenous

          (c)  Break-up of the above itemwise viz., component/equipment purchased/imported

Item

Name of

Date of

Date of

Cost (c.i.f.

Description

supplier

placing order

installation

value in case

 

 

(date of

 

of imported

 

 

supply)

 

equipment)

(1)

(2)

(3)

(4)

(5)

 

 

 

 

 

 

 

 

 

 

 

 

     (d)  Details of installation—

Agency which completed the installation job

Period of work

Cost

 

from

to

(1)

(2)

(3)

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     11.  Percentage of imported components and raw materials for the manufacture of item 3(a) - Part I.

     12.  Have you enclosed colour photographs of the plant and machinery installed ?

     13.  Any other information you consider relevant for admissibility of depreciation allowance.

Place........................                                            Signature..............................

Date...........................                                                     Designation..........................

N.B. : Four copies of the application are to be submitted on A-4 size paper, addressed to the Secretary, Ministry of Science and Technology, Department of Scientific and Industrial Research, Technology Bhavan, New Mehrauli Road, New Delhi - 110 016.

LIST OF ITEMS ON WHICH DEPRECIATION @ 50 PER CENT
NOT ADMISSIBLE

The Eleventh Schedule referred to in rule 5(2) of the Income-tax Rules :

      1. Beer, wine and other alcoholic spirits

      2. Tobacco and tobacco preparations, such as cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff

      3. Cosmetics and toilet preparations

      4. Tooth paste, dental cream, tooth powder and soap

      5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used

           Explanation : “Blended flavouring concentrates” shall include, and shall be deemed always to have included, synthetic essences in any form.

      6. Confectionery and chocolates

      7. Gramophones including record-players and gramophone records

      8. Projectors

      9. Photographic apparatus and goods

     10. Office machines and apparatus, such as typewriters, calculating machines, cash registering machines, cheque writing machines, intercom machines and teleprinters

           Explanation : The expression “Office machines and apparatus” includes all machines and apparatus used in offices, shops, factories, workshops, educational institutions, railway stations, hotels and restaurants for doing office work and  for data processing (not being the computers within the meaning of section 32AB).

     11. Steel furniture, whether made partly or wholly of steel

     12. Safes, strong boxes, cash and deed boxes and strong room doors

     13. Latex foam sponge and polyurethane foam

     14. Crown corks or other fittings of cork, rubber, polyethylene or any other material

     15. Pilfer-proof caps for packaging or other fittings of cork, rubber, polyethylene or any other material.