Section 32

Depreciation – Allowance/rate of

General

Depreciation allowance is a concession - ‘Depreciation’ allowance is a concession granted by the State in the computation of income based on very many factors relevant to a wholesome fiscal administration - Parthas Trust v. CIT [1988] 169 ITR 334 (Ker.)(FB).

Depreciation, whether a notional loss towards diminution in value of assets - Depreciation represents the diminution in the value of an asset when applied to the purpose of making profit or gain. Depreciation is thus related to an asset and is a notional loss as against actual loss in sense of outgoings of a business - CIT v. R.J. Trivedi & Sons [1990] 53 Taxman 485/183 ITR 420 (MP).

Depreciation allowance under section 32 is a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear; allowance can be claimed if the asset in question is shown to be capable of diminution in value on account of any factor known to the prevailing accounting or commercial practice - CIT v. Refrigeration & Allied Industries Ltd. [2000] 113 Taxman 103 (Delhi)

Deduction is allowable even according to accounting principles - Depreciation is allowable as a deduction both according to accountancy principles and according to the Income-tax Act, because otherwise, one would not have a true picture of the real income of the business - CIT v. Alps Theatre [1967] 65 ITR 377 (SC).

Genuineness of books of account is not relevant - In respect of buildings, machinery, plant or furniture, being the property of the assessee, a depreciation allowance has to be made in computing the profits. This, therefore, is not a matter depending on the genuineness of the books of account - Allahabad Glass Works v. CIT [1961] 42 ITR 439 (All.).

Charitable trust is entitled to deduction - A charitable trust is entitled to depreciation in respect of assets held by it - CIT v. Raipur Pallottine Society [1989] 80 CTR (MP) 127.

Calculation must be in Indian currency - A company may keep its accounts in foreign currency but depreciation will have to be calculated in Indian currency at the point of time of acquisition of the asset - CESC Ltd. v. CIT [1998] 233 ITR 50 (SC).

Explanation 5 to section 32(1) takes effect only on and from 1-4-2002 - Explanation 5 which was inserted in section 32(1) by the Finance Act, 2001 with effect from 1-4-2002, takes effect only on and from 1-4-2002, and will not be applicable to prior years. Thus, for the assessment year 1988-89, no depreciation was required to be allowed if the same had not been claimed. If a claim made in the original return had been given up in the revised return, there was no obligation to consider the claim for depreciation - CIT v. Sree Senhavalli Textiles (P.) Ltd. [2003] 259 ITR 77 (Mad.)/CIT v. Kerala Electric Lamp Works Ltd. [2003] 129 Taxman 549/261 ITR 721 (Ker.).

Law applicable

Law as on 1st April of financial year applies - 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 come 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.).

Power of CBDT

Power to make rules for Board, with retrospective effect, does not include within its parameters to provide for increased rate of depreciation with retrospective effect, while enacting Amendment Rules - Mercantile Credit Corpn. Ltd. v. CIT [2000] 108 Taxman 210 (Mad.).

Building - Meaning of

‘Building’ must be construed in its ordinary sense - The word ‘building’ has not been defined in the Income-tax Act and must, therefore, be construed in its ordinary sense having regard to the purposes for which depreciation is allowed - CIT v. Indo Burmah Petroleum Co. Ltd. [1978] 112 ITR 755 (Cal.).

‘Building’ does not include site - For purposes of depreciation also, the expression ‘buildings’ does not include the site because there cannot be any question of the destruction of the site - CIT v. Alps Theatre [1967] 65 ITR 377 (SC)/D.S. Bist & Sons v. CIT [1972] 85 ITR 254 (Delhi)/Distt. Co-operative Federation Ltd. v. CIT [1973] 87 ITR 639 (All.).

Roads inside factory are ‘buildings’ - The roads laid within the factory premises as links or which provide approach to the buildings are necessary adjuncts to the factory buildings to carry on the business activities of the assessee and would be ‘building’ within the meaning of section 32 - CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 62 Taxman 471/196 ITR 149 (SC).

Roads not adjunct to building cannot be treated as ‘building’ - Where the assessee constructed roads to approach about 500 trenches meant for dumping waste and night soil, the roads cannot be treated as ‘building’ for purposes of allowing depreciation, since the roads were not adjunct to any building and there was no other construction except the roads - Indore Municipal Corporation v. CIT [2001] 247 ITR 803 (SC).

Factory buildings

Administrative blocks are ‘factory buildings’ - Where the administrative block housed the chief engineer and related staff, the canteen, the new stores, and co-operative stores buildings, which were essential adjuncts to the factory premises, it was held that they were rightly treated as factory buildings - CIT v. Standard Motor Products of India Ltd. [1983] 142 ITR 877 (Mad.).

Mere taking of licence will not suffice - Taking a licence under the Factories Act does not make the unit a ‘factory’ - CIT v. Mangolia Dairy Products (India) [1979] 119 ITR 26 (Cal.).

Canteen is ‘factory building’ - A canteen building is, in the proper sense of the term, a factory building for the purpose of depreciation allowance - CIT v. Motor Industries Co. Ltd. [1986] 158 ITR 734 (Kar.)/CIT v. Engine Valves Ltd. [1980] 126 ITR 347 (Mad.).

Cinema studio is ‘factory building’ - A cinema studio building is entitled to depreciation allowance equal to that allowed to a factory building - CIT v. A.V. Meyyappa Chettiar [1963] 50 ITR 751 (Mad.).

Cold storage building is ‘factory building’ - A cold storage building is entitled for depreciation at rates as applicable to a factory building - CIT v. Yamuna Cold Storage [1981] 129 ITR 728 (Punj. & Har.).

Church

‘Church’ is a ‘building’ - The activities of the church can be properly considered as a vocation. Accordingly, the assessee-trust, owner of the church building, would be entitled to depreciation in respect of the church building while computing the taxable income - All Saints Church v. CIT [1984] 145 ITR 786 (Kar.).

Machinery

‘Machinery’ shall have same meaning as for other purposes like repairs, insurance etc. - The word ‘machinery’ when used in ordinary language prima facie means some mechanical contrivance which, by themselves or in combination with one or more mechanical contrivances, by the combined movement and inter-dependent operation of their respective parts, generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result. If a machinery is machinery for purposes of giving an allowance in respect of insurance or for repairs or in respect of normal depreciation, it must be machinery for other purposes also - CIT v. Mir Mohammad Ali [1964] 53 ITR 165 (SC).

Dumper is ‘machinery’ - A ‘dumper’ comes within expression ‘earthmoving machinery’ for purposes of depreciation. It cannot be treated as a road transport vehicle - CIT v. Sibson Construction & Co. [1996] 221 ITR 468 (Gauhati).

Furniture/fittings

Partition works are ‘fittings’ and not ‘building’ - Partition works and false ceiling come under expression ‘fittings’ and not ‘building’ for purpose of depreciation - CIT v. Indian Metal & Metallurgical Corpn. [1983] 141 ITR 40 (Mad.).

False ceilings in cinema theatre are ‘fittings’ - False ceilings and other accessories fitted in cinema theatres are part of ‘fittings’ - CIT v. N.L. Mehta Cinema Enterprises (P.) Ltd. [1993] 71 Taxman 443 (Bom.).

Bus

Cost of route permit must be excluded - Where a bus was purchased along with the route permit, depreciation is allowable only on the amount representing the value of the vehicle, and not on the amount representing the value of the route permit - G. Vijayaranga Mudaliar v. CIT [1963] 47 ITR 855 (Mad.)/CIT v. S. Sudhakar [2001] 247 ITR 747 (Mad.).

Ownership of asset

Claimant must have more than some thread of rights - The deduction under section 32(1) cannot be claimed by someone having no real connection with the asset and the claimant must be one with much more than some threads of rights. Depreciation is claimable by the owner who uses the assets in question - Kalpaka Tourist Home (P.) Ltd. v. CIT [1988] 172 ITR 364 (Ker.).

Vesting of full title is not necessary - The expression ‘property owned by the assessee’, in section 32 has not been used in the sense that the property’s complete title vests in the assessee. The assessee will be considered to be an owner of the building if he is in a position to exercise the rights of the owner not on behalf of the person in whom the title vests but in his own right - Addl. CIT v. U.P. State Agro Industrial Corpn. Ltd. [1981] 127 ITR 97 (All.).

Right to dispose of property need not exist - To be treated as ‘owner’, the assessee need not have the right to dispose of the property, so long as he is in a position to enjoy the property in his own right - Gowersons Publishers (P.) Ltd. v. CIT [1999] 240 ITR 191 (Delhi) (FB).

Dominion and control over property as a matter of right will suffice - For purposes of claiming benefit under section 32, the requirement of ownership by the assessee will be deemed to be fulfilled if the assessee has the dominion and control over the property in his own right and not in the right of others - CIT v. Orient Longman (P.) Ltd. [1997] 227 ITR 68 (AP).

Registered ownership is not necessary - ‘Building owned by the assessee’ means the person who having acquired possession over the building in his own right, uses the same for the purposes of his business or profession though a legal title has not been conveyed to him as per the requirements of laws such as the Transfer of Property Act and the Registration Act, but nevertheless is entitled to hold the property to the exclusion of all others - Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC).

Where facts of case did not indicate that assessee had acquired dominion over mills, assessee could not be allowed depreciation in respect of mills - Tamil Nadu Civil Supplies Corpn. Ltd. v. CIT [2001] 116 Taxman 369/249 ITR 214 (SC).

When vehicle is registered in partner’s name - Where partner of firm transferred vehicle registered in his name to the firm as his capital contribution to the firm, depreciation is allowable to the firm even though the vehicle continued to remain in the name of the partner in the transport department records - CIT v. Navdurga Transport Co. [1998] 149 CTR (All.) 219.

Vehicles taken under hire-purchase agreement - Depreciation is to be allowed to the user in the case of a hire-purchase agreement - CIT v. Nagpur Golden Transport Co. [1998] 233 ITR 389 (Delhi).

Trucks bought on instalment basis are eligible - A transporter is entitled to depreciation on trucks bought on instalment basis even though they are not registered in his name - CIT v. Mirza Ataullaha Baig [1994] 76 Taxman 495/[1993] 202 ITR 291 (Bom.).

Transfer of assets by Government does not require registration - CIT v. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535 (Mad.)/CIT v. Thanthi Periyar Transport Corporation 1997 Tax LR 514 (Mad.).

Ownership through court decree does not require registration - Hotel Skylark & Restaurant (P.) Ltd. v. CIT [1996] 221 ITR 283 (Punj. & Har.).

Firm is eligible qua assets contributed by partners - The firm would be entitled to depreciation in respect of property contributed by its partner even if the transfer is not registered - CIT v. Amber Corpn. [1981] 127 ITR 29/[1994] 207 ITR 435 (Raj.).

Dissolution of firm - Registration of transfer of property received by partner on dissolution of firm is not a condition precedent for claiming depreciation thereon - Universal Radiators Ltd. v. CIT [2006] 281 ITR 261 (Mad.).

Ownership for the entire year is not necessary - The term ‘owned’ by the assessee’, used in section 32(1) does not mean that the assessee should have remained owner of the asset for the entire previous year - A.M. Ponnuranga Mudaliar v. CIT [1996] 88 Taxman 482 (Mad.)./CIT v. Geo Tech Construction Corpn. [2000] 244 ITR 452/115 Taxman 373 (Ker.).

Device adopted for avoiding tax - Where the assessee purchased a truck for Rs. 2 lakhs, and later, the money was ‘routed back’ to the assessee as an interest-free deposit, and the truck was also ultimately transferred to the brother of the seller, the benefit of depreciation was rightly denied to the assessee since the entire sequence of transactions disclosed only a device to save tax, and since there was no genuine transaction between the parties apart from pure paper transactions - Mittal Belting and Machinery Stores v. CIT [2002] 253 ITR 341/119 Taxman 260 (Punj. & Har.).

House taken under hire-purchase agreement - Where the assessee acquired certain houses under a hire-purchase agreement, the terms of which provided inter alia, (i) that the hirer should hold the said property as a tenant during the hire-purchase period, (ii) that the hirer shall not sell, transfer, assign or otherwise part with the possession of the whole or any portion of the said property without previous consent in writing of the owner which can be refused at the absolute discretion of the owner, and (iii) that the owner had agreed to transfer the property only after the expiry of the hire-purchase period, the assessee could not be said to be the ‘owner’ of the property, and hence was not entitled to depreciation - Atlas Cycle Industries Ltd. v. CIT [2004] 270 ITR 108/[2005] 142 Taxman 102 (Punj. & Har.).

Where a third party has interest in the asset - Where a person has acquired interest in a property with notice of the right of a third party, the person continues to be the owner of the property against the whole world until such right is enforced by the third party. The lessee cannot dispute the title of the lessor and the alleged third party interest would not affect the ownership of the lessor nor can it be doubted or disputed - SBI Home Finance Ltd. v. CIT [2005] 148 Taxman 585 (Cal.).

The ‘user’ test

‘Use’ means ‘kept ready for use’ and not ‘actual use’ - 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 - Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi)/Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker.).

A machine kept ready for use is to be deemed to have been used within meaning of section 32 - CIT v. Premier Industries (India) Ltd. [2008] 170 Taxman 407 (MP).

Expression ‘put to use for 180 days’ cannot be interpreted to mean as ‘exploited for 180 days’ but it would comprehend those cases also where machinery has been kept ready by owner for its use in business and failure to use it actively in business has not been, on account of its incapacity for being used for that purpose or its non-availability - Siv Industries Ltd. v. Dy. CIT [2009] 187 Taxman 442 (Mad.).

Even passive use will suffice - The expression ‘used’ for the purposes of section 32 should have a wider meaning so as to include not only actual user but also passive user - CIT v. India Tea & Timber Trading Co. [1996] 221 ITR 857 (Gauhati).

Where machinery was kept ready for use but could not be put to use, assessee would be entitled to depreciation on machinery - CIT v. Nahar Exports Ltd. [2007] 163 Taxman 518 (Punj. & Har.)

Steps taken to set building into gear are ‘putting it to 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’ - CIT v. O.P. Khanna & Sons [1983] 140 ITR 558 (Punj. & Har.).

Vehicles under repairs are eligible - An assessee is entitled to depreciation on written down value of trucks which were under repairs throughout relevant accounting years but were used for the purpose of business in earlier and later years - CIT v. G.N. Agrawal [1994] 75 Taxman 30 (Bom.).

Stand by machines - Stand-by assets which are kept ready for use during relevant assessment year, are entitled to depreciation - CIT  v. Southern Petrochemical Industries Corpn. Ltd. [2008] 301 ITR 255 (Mad.).

Where assessee had certain dumpers and tippers, etc., which it gave on hire to contractors on daily basis and it claimed depre­ciation on certain vehicles kept ready as stand-by for use in event of major breakdown of vehicles given on hire by assessee, depreciation was admissible on vehicles provided as stand-by - CIT v. Raj Kumar Singh & Co. (No. 2) [2007] 295 ITR 81 (All.).

Spare engines kept by transport operator - Where the appellate authorities allowed the claim of the assessee, a transport corpo­ration owning a fleet of buses, for depreciation on spare engines kept in the store for emergency use, it could not be said that the opinion of the appellate authorities was perverse or untenable. The engines were meant to be used in case of need. It could not therefore be said that the spare engines kept in store were not meant for use. Everything ages with the passage of time including engines which gather dust in the store room. There is a normal depreciation of value even when a machine or equipment is merely kept in a store. Further, keeping in view the nature of the assessee’s business, it had to necessarily keep certain spare engines in store to meet an emergent situation. There was nothing on record to indicate that an engine which was purchased a year or two earlier would fetch the same price in open market. In this situation, the appellate authorities had taken a possible view - CIT v. Pepsu Road Transport Corporation [2002] 121 Taxman 232/253 ITR 303 (Punj. & Har.).

(Per Contra)

‘Used’ denotes actually used and not merely ready for use - The word ‘used’ denotes actually used and not merely ready for use. The expression ‘used’ means actually used for the purposes of the business - Dineshkumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768/ 141 Taxman 62 (Bom.).

‘Kept ready’ theory is not available - Section 32 would show that deduction for depreciation is permissible in the event of machin­ery, plant or furniture owned by the assessee are used for the purposes of the business or profession. From various judgmens it is clear that for the purpose of depreciation, machinery has to be actually used in terms of the statute. A ‘kept ready’ theory is not available, to the assessee, for the purpose of claiming depreciation, when the Legislature has chosen to use the word ‘used’. One has to give a full meaning to it and avoid reading something not intended by the legislation. After all, these benefits are provided for certain purposes. That purpose is ‘used’ in terms of the statute. If the machinery is not used, section 32 is not applicable - Dy. CIT v. Yellamma Dasappa Hospital [2007] 159 Taxman 58/290 ITR 353 (Kar.).

Mere preparations for use will not suffice - Mere preparation for use 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 - CIT v. Suhrid Geigy Ltd. [1982] 133 ITR 884 (Guj.)/CIT v. Jiwaji Rao Sugar Co. Ltd. [1969] 71 ITR 319 (MP)(App.).

Where assets were not at all used due to lock-out, depreciation cannot be allowed - Where the factory of the assessee remained under lock-out throughout the previous year and during the lock-out period, the plant and machinery had not been actually used for the purposes of the business for a single day, depreciation on machinery was not allowable for the relevant previous year - CIT v. Oriental Coal Co. Ltd. [1994] 206 ITR 682/76 Taxman 240 (Cal.).

‘Use’ must be during relevant accounting year - The expression ‘used for the purposes of the business’ means used for the purposes of the business during the accounting year. The machinery and plant must be such as were used, in whatever sense that word was taken, at least for a part of the accounting year. If the machinery and plant had not at all been used at any time during the accounting year, no allowance could be claimed - Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC).

User during full year - In section 32(1) there is no requirement that assets should be used for whole of the previous year in question - CIT v. Refrigeration & Allied Industries Ltd. [2000] 113 Taxman 103 (Delhi).

Factory need not be worked by owner himself - 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 on by the assessee as a licensee or a hirer - CIT v. Sarveshwar Nath Nigam [1963] 48 ITR 853 (Punj.).

Trial production amounts to ‘use’ of the asset - The trial run of a machinery is obviously for the purpose of business and not for any other purposes. What is required to be seen is that the machinery must be ‘used’ for the purpose of business, and keeping in mind the wider meaning ascribed judicially for the term ‘use’, even trial production of a machinery would fall within the ambit of ‘used for the purpose of business’. Further, as the statute does not prescribe a minimum time-limit for ‘use’ of the machinery, the assessee cannot be denied the benefit of depreciation on the ground that the machinery was used for a very short duration for trial run - Asstt. CIT v. Ashima Syntex Ltd. [2002] 122 Taxman 230/251 ITR 133 (Guj.).

Machinery used in trial production of sugar would be enti­tled to depreciation - CIT v. Piccadily Agro Industries Ltd. [2007] 164 Taxman 567 (Punj. & Har.)

Whether commercial production has commenced is not relevant - Commencement of commercial production by the assessee during the relevant previous year is not a condition for allowing deduction as investment allowance or depreciation. What is needed is that the machines must be used for the assessee’s business. Whether the assessee is able to successfully commence commercial production or commercial production is delayed on account of defect in trial production does not affect the allowability of deduction on account of depreciation and investment allowance if from the material on record, it can reasonably be inferred that machines were used for the assessee’s business during the relevant previous year. The user of machines for trial production, before giving full throttle is as much use of machines for the purpose of business - CIT v. Nakoda Metals [2006] 204 CTR (Raj.) 514.

Magnitude of production is not determinative of ‘use’ - Law does not require that there must be optimum production for granting the benefit of depreciation. Law only require ‘that there must be use of plant and machinery for the purpose of business. Use of such words that plant and machinery was run more extensively or was required to be used for larger production’ is not to be found in the Act or Rules. Whether the plant and machinery is used to the extent of its efficiency is irrelevant for the purpose of allowing depreciation. The test is that the building, plant and machinery are used for the purpose of business - Asstt. CIT v. Ashima Syntex Ltd. (supra).

Continuous use for same purpose is not necessary - It is not the requirement of section 32 that depreciation claim in respect of any asset has to be allowed only if it continues to be used for all purposes for which it was being used earlier - CIT v. Udaipur Distillery Co. Ltd. [2004] 135 Taxman 487 (Raj.).

Application of section 32 is not confined only in respect of plant required for manufacturing purpose - The expression used in both sections 32(1) and 32A(1) is ‘in relation to the business’, viz., for the purpose of the business. It does not make out anything to the extent that such business has to be related to manufacturing purpose. The section does not make any such provision circumscribing the application only in respect of the plant required for manufacturing purpose. If it is related to the business of the assessee, namely, used for the purpose of the business, the provisions of sections 32 and 32A would be attracted - CIT v. Birla Jute & Industries Ltd. [2003] 260 ITR 55/133 Taxman 337 (Cal.).

Where the asset was bought on the last day of the accounting year - Where the cars were bought on the last day of the accounting year and had not been registered for being brought on roads, and there was no evidence of the assessee having used those cars before the end of the accounting year in the business of the assessee, the Tribunal was clearly in error in holding that the assessee was entitled to depreciation in respect of these vehicles - CIT v. Maps Tours & Travels [2003] 260 ITR 655/[2004] 141 Taxman 38 (Mad.).

Contract carriage becomes “ready for use” only after receipt of permit - Only after getting a vehicle registered as contract carriage and obtaining contract carriage permit, it can be concluded that vehicle is kept ready for use for carrying passengers for hire - CIT v. Air Travel Enterprises India Ltd. [2004] 136 Taxman 194 (Ker.).

Other factors for allowance

Assets whose full cost is allowed as business expenditure are not eligible - Depreciation is allowable only on capital assets and not on the assets of which the costs have been allowed as a business expenditure - Burrakur Coal Co. Ltd. v. CIT [1982] 135 ITR 804 (Cal.)/CIT v. Lucas TVS Ltd. [1984] 149 ITR 771 (Mad.)/CIT v. Sundaram Fasteners Ltd. [1984] 149 ITR 773 (Mad.).

Expenditure on shifting factory is not eligible for allowance - No depreciation was admissible on capital expenditure incurred on shifting factory from one site to another because no tangible asset was acquired by the expenditure and no improvement was made to any capital asset in the sense that there was an increase in the value thereof - Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC).

Asset must physically exist - 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.).

Technical know-how is eligible for allowance - Depreciation is allowable in respect of technical know-how - Anup Engg. Ltd. v. CIT [1991] 192 ITR 633 (Guj.).

Increased cost due to exchange fluctuations is eligible for allowance - Depreciation has to be allowed on increased value of assets due to fluctuation in exchange rate - Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220 (Kar.).

Foundation laying expenses are to be included - Expenditure incurred on ceremony of foundation laying is to be added to the cost of the factory building for the grant of depreciation allowance - CIT v. Nirlon Synthetic Fibres & Chemicals Ltd. [1982] 137 ITR 1 (Bom.).

Expenditure on digging wells is eligible - Depreciation would be allowed on the cost of digging and construction of a well in the factory premises of the assessee - CIT v. Warner Hindustan Ltd. [1986] 160 ITR 217 (AP).

Gratuity liability taken over is not entitled to depreciation - Where assessee had by an agreement with the vendor purchased an undertaking as a going concern for a price of Rs. 2 crores and also had taken over the accrued and future gratuity liability of the vendor which amounted to Rs. 3.5 crores, the entire amount of consideration was indeed capital expenditure because it was an expenditure incurred for acquiring an asset of an enduring nature. But even if it was held that the expenditure on taking over the gratuity liability was a capital expenditure, yet no depreciation was allowable on the same be­cause such liability taken over by the assessee did not fall under any of the eligible assets specified in section 32 - CIT v. Hoogly Mills Co. Ltd. [2006] 157 Taxman 347 (SC).

Scientific research assets

Where deduction is allowed under section 35, depreciation is not allowable - The assessee is not entitled to depreciation under section 32(1) on scientific research assets relating to the business carried on by it the cost of which has been allowed as deduction in full under section 35 in an earlier year - Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224 (AP); CIT v. Alkali & Chemical Corpn. of India Ltd. [1987] 165 ITR 698 (Cal.)/CIT v. Mahindra Sintered Products Ltd. [1986] 161 ITR 692 (Bom.)/Union Carbide India Ltd. v. CIT [1995] 80 Taxman 197 (Cal.).

Rate of depreciation

Hotels/Cinema Theatres - See under section 43(3) - Plant.

The provisions for accommodating the officers and staff of the hotel are deemed to be part and parcel of the functional charac­ter of the hotel for the simple reason that when the facilities of the hotel could be utilized by the casual visitors to the hotel as hospitality from the hotel, why could not such facility be extended to the officers, staff and employees of the hotel. Similarly, letting out shopes for antiques, emporium, arts and crafts, florists and travels, which are all intended as a part of service of the hospitality to the travellers, paying guests and other travelling public on commercial basis, shall have the same  effect as that of providing facilities and services like restau­rant, bar room, health clinic, gynmasium centre, swimming pool, music, floor dance, etc. These services are not only intended to attract the customers but are a part and parcel of the hospitality of the hotel. Therefore, for purposes of determining the rate of depreciation, the entire building has to be treated as composite building and could not be segregated in any manner to hold that a part of the building is used for hotel purpose and other part is used for accommodating the officers and staff of the hotel and housing the bank and shopping complex etc. - CIT v. Sangu Chakra Hotels (P.) Ltd. [2007] 161 Taxman 257/292 ITR 591 (Mad.).

Jeeps must be treated as motor cars - Jeeps are motor cars for purposes of depreciation - Crompton Engg. Co. (Madras) Ltd. v. CIT [1992] 193 ITR 483 (Mad.)/CAIT v. Good Hope Enterprises [1992] 197 ITR 236 (Ker.).

Dumpers are road transport vehicles - Dumpers are road transport vehicles - Shiv Construction Co. v. CIT [1987] 165 ITR 160 (Guj.).

Ambulance van is eligible for enhanced rate - Where the Tribunal had found that the plying of the ambulance van on hire itself constituted the business of the assessee though it may be incidental to the running of the hospital and that, the hire charges were also assessed under the head ‘Business’, the assessee was entitled to higher rate of depreciation - CIT v. Dr. K.R. Jayachandran [1995] 212 ITR 637 (Ker.).

Trucks - Under sub-item 2(ii) of Item III, higher rate of depre­ciation is admissible on motor trucks used in a business of running them on hire; therefore, user of same in business of transportation is the test - CIT v. Gupta Global Exim (P.) Ltd. [2008] 171 Taxman 474/305 ITR 132 (SC).

Trucks primarily self-used but occasionally hired out are not eligible for higher rate - If a truck is not used for hiring but for the purpose of one’s own business, then it would be entitled for depreciation at the normal rate and not at higher rate. The business of running the vehicle on hire is different from giving the vehicle on hire casually. The vehicle may be given on hire occasionally which may or may not constitute an activity of carrying on business of running them on hire. It is the main activity and the intention behind thereof which has to be considered for deciding as to whether the assessee was carrying on the business of running vehicle on hire or not - CIT v. Sardar Stones [1995] 215 ITR 350 (Raj.).

Vehicles used for transporting passengers/goods as a regular business are entitled to higher rate - CIT v. Sharma Motor Service [1998] 148 CTR (MP) 75.

Whether higher rate is admissible on vehicles leased out on rent - Where the assessee leased out vehicles on rent to various industries, depreciation is not admissible at the higher rate on the vehicles, since the vehicles could not be said to have been run by the assessee on hire. Only general rate of depreciation is admissible - Soma Finance & Leasing Co. Ltd. v. CIT [2000] 244 ITR 440 (Cal.).

Where the assessee is a leasing and financing company having income from lease, rent, bills discounting and service charges, and it has let out motor buses, motor trucks and motor vans to its customers, it cannot be stated that the assessee is using the said vehicles in the business of running them on hire. Higher depreciation is hence not allowable - Kotak Mahindra Finance Ltd. v. Dy. CIT [2003] 130 Taxman 422/[2004] 265 ITR 114 (Bom.).

(Contra)

The word ‘hire’ used in the entry relating to motor lorries etc., is only meant to denote that the use of the vehicle is not by the owner himself for his own purposes but it is given to another for use for a limited period of that other for a consideration. For the purpose of this entry, there is no qualitative difference between lease of the vehicle for a specified period for consideration and letting the vehicle on hire for short duration on payment of hire charges. Thus, an assessee leasing out motor lorries owned by him and receiving lease rentals would be entitled to higher rate of depreciation by treating the vehicles as being used in the business of running them on hire - CIT v. Madan & Co. [2002] 254 ITR 445 (Mad.).

For availing higher rate of depreciation, it is not mandatory that vehicles are not only used in business of running on hire but assessee should also use these vehicles himself for same purpose - CIT v. Bansal Credits Ltd. [2003] 126 Taxman 149 (Delhi).

Mobile crane mounted on truck is eligible for depreciation as ‘motor truck’ - A mobile crane mounted on a truck constitutes a single unit known as a ‘truck crane’ which is adapted for use upon roads for special services. It will fall under the category of ‘motor truck’ (also Motor Lorry), for purposes of allowing depreciation - Gujco Carriers v. CIT [2002] 122 Taxman 206/256 ITR 50 (Guj.).

Fluid drier - Fluid drier, which does not find place in restrictive definition of ‘energy saving devices’ in Depreciation Table appended to Income-tax Rules, 1962, is not entitled to 100 per cent depreciation - CIT, Coimbatore v. Adar Tea Products Co. [ 2009] 178 Taxman 126 (Mad.).