LIVE GST Certification Course by CA Arun Chhajer begins 27th April. Register Now!!

Depreciation when assets

Satish Makam (Asst. Manager - Accounts) (294 Points)

06 September 2010

there is a company. and it has some assets. during the year assets were not at all used in the production as there is no business. Now my doubt is- can the company claim depreciation under either of the Acts ( companies and IT act)

Reply
Follow
Share

18 Replies

Vivek Angrish (Manager Finance & Accounts) (232 Points)
Replied 06 September 2010

No, the depreciation cannot be claimed under I.Tax Act, for companies act i m not sure.

CA Navin Jain (MANAGER (FINANCE & ACCOUNTS)) (11768 Points)
Replied 06 September 2010

the company can not claim the depreciation imn the line of both companies act and income tax act

Ashish Bhatt ( B.COm C.A FINAL (New)) (493 Points)
Replied 06 September 2010

depreciation can be claimed only from the date of putt to use.

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 06 September 2010

Hi All,

Under both the acts, depreciation should be provided only when the asset is put to use.

and it is specifically mentioned under the acts.

Thi is done in order to ensure the matching concept.

Regards,

manoj

Nitesh (service) (136 Points)
Replied 06 September 2010

Business — Whether discontinued or temporarily suspended :

3.1 The first issue that arises in the present case is whether the business has been discontinued or has been temporarily suspended. In the querist’s case, the attendant circumstances suggest that the business is not being discontinued but the querist has merely decided to temporarily suspend manufacturing activity at its factory. Suspension does not necessarily amount to discontinuance or closure of business. Where an assessee is maintaining his establishment and is waiting for improved market conditions and there is nothing to show that he has completely abandoned or closed his business forever, the business must be said to be continuing. It is not necessary that for a business to be in existence, it should have worked all the time. There may be long intervals of inactivity and a concern may still be a going concern, though it may be quiet and dormant for some time. [Lakshmi Narayan Board Mills Pvt. Ltd. v. CIT, (1994) 205 ITR 88 (Cal)]. The querist has only suspended manufacturing activity at its factory and its business is continued by way of trading in the same line of products. In L. VE. Vairavan Chettiar v. CIT, (1969) 72 ITR 114, the Madras High Court held that maintaining the establishment and waiting for improved market conditions in a business which the assessee had temporarily stopped, the business must be deemed to have continued as there was nothing to show that he had completely abandoned or closed that business. The facts of the querist’s case suggest that business has not been closed down but manufacturing at its factory has been suspended and trading is being carried out. The querist therefore has a good case to contend that its business has not been discontinued but manufacturing has been temporarily suspended and trading activity is carried out in the interim.

‘Used’ — Whether includes passive user :

4.1 ‘Depreciation’, according to Webster’s New World Dictionary, means ‘a decrease in value of property through wear, deterioration or obsolescence; the allowance made for this in book-keeping, accounting, etc.’. Depreciation is the measure of the effective life of an asset owing to use or obsolescence during given period. The principal factors responsible for depreciation are (i) ordinary wear and tear, (ii) unusual damage, (iii) inadequacy, and (iv) obsolescence. These factors include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time.

4.2 S. 32 of the Income-tax Act, 1961 provides for depreciation allowance. As per S. 32(1), two requisites for depreciation allowance are (i) that the depreciable asset is owned, wholly or partly, by the assessee; and (ii) that it is used for the purposes of business or profession. Therefore an assessee on satisfaction of these two primary conditions can claim allowance for depreciation.

4.3 The expression ‘used for the purposes of business’ and more particularly the word ‘used’ have been subject to different interpretations by various Courts. The Supreme Court in Liquidators of Pursa Ltd., (1954) 25 ITR 265 (SC) held that the words ‘used for the purposes of the business or profession’ obviously mean ‘used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession.’ In other words, the machinery or plant must be used, in whatever sense that word is taken, for the purpose of that business which is actually carried on and the profits of which are assessable, at least for a part of the accounting year concerned. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed under this Section in respect of them. The Supreme Court further observed, though it did not express any opinion on it, that the word ‘used’ has been read in some of the pool cases in a wide sense so as to include a passive as well as an active user.

4.4 There have been conflicting judgements of various Courts as to whether, the term ‘used’ also includes a passive user. The Bombay High Court in CIT v. Vishwanath Bhaskar Sathe, (1937) 5 ITR 621 (Bom.) held that the word ‘used’ should be understood in a wider sense so as to give a wider meaning and embrace passive as well as active user. The said decision was followed by the Patna High Court in CIT v. Dalmia Cement Ltd., (1945) 13 ITR 415 (Pat.) wherein it was held that depre-ciation should be allowed even though machinery was not in use or was kept idle. Further in the case of Whittle Anderson Ltd. v. CIT, (1971) 79 ITR 613 (Bom.), the Bombay High Court held that when the machinery is kept ready for use it will be said to be used for the purpose of business. However a contrary view is taken in CIT v. Jiwaji Rao Sugar Co. Ltd., (1969) 71 ITR 319 (MP) and in CIT v. J. K. Transport, (1998) 231 ITR 798 (MP).

4.5 In CIT v. Oriental Coal Co. Ltd., (1994) 206 ITR 682 (Cal.), the Calcutta High Court held that no depreciation can be allowed on plant and machinery where the factory of the assessee remained under lock-out throughout the relevant previous year and the plant and machinery had not been actually used for the purpose of business even for a single day during that year. However, in the case of CIT v. G. N. Agarwal, (1996) 217 ITR 250 (Bom.), the assessee was held entitled to deduction for depreciation on the written down value of the trucks which were under repair throughout the relevant accounting year but were used for the purpose of the business earlier and later. Further inCapital Bus Service (P) Ltd. v CIT, (1980) 123 ITR 404 (Del.), the Delhi High Court held that the allowance for depreciation does not depend on the actual working of the machinery, it is sufficient if the machinery in question is employed by the assessee for the purpose of the business and for no other business and it is kept ready by him for actual use. Similar view is taken in CIT v. Geo Tech Construction Corpn., (2000) 244 ITR 452 (Ker.) and in CIT v. Refrigeration & Allied Industries Ltd., (2000) 113 Taxman 103 (Delhi).

4.6 On the basis of various judicial pronounce-ments as discussed above, it can be stated that word ‘used’ in S. 32(1) has been interpreted by the Courts to have a wider meaning so as to include not only the actual user but also the passive user. Further, the allowance for depreciation does not depend upon actual working of the machinery, it is sufficient if the assessee for the purpose of business employs the machinery in question and it is kept ready for actual use. In the querist’s case, in spite of the fact that there was no manufacturing activity carried on during the year, the querist had continued the business on a smaller scale by buying and selling of same line of products and had also retained and maintained its plant, in anticipation of restarting manufactur-ing activities as and when market conditions improve. Further the said plant and machinery were used for the purpose of the business in the earlier years. Applying the ratio of the judgements as discus-sed, to the facts of the case of the querist, the querist has a good case to contend that it satisfies the primary conditions of S. 32(1) and is therefore entitled to depreciation.

2 Like

Ashish Sharma (Service) (1028 Points)
Replied 06 September 2010

hi nitesh,

Nice interpretation.

Santosh (Student ( Final Year - New )) (348 Points)
Replied 07 September 2010

Tthe company can not claim the depreciation imn the line of both companies act and income tax act

And also agree with Nitesh

Saurabh Toshniwal (ca final) (2358 Points)
Replied 07 September 2010

no the company cannot claim depriciation

CA Manoj Kumar Rai (Practitioner) (46 Points)
Replied 07 September 2010

Dear sir,

As per AS -6, Depreciation is a measure of the wearing out, consumption or
other loss of value of a depreciable asset arising from use, effluxion of
time or obsolescence through technology and market changes.

In other hand,Depreciable assets are assets which
(i) are expected to be used during more than one accounting
period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of
goods and services, for rental to others, or for administrative
purposes and not for the purpose of sale in the ordinary course
of business.

If we read definition of Depreciation and Depreciable Assets a new concept found ready to put to use.

In my opinion depreciation should be charge according to AS-6 if it is ready for put to use in the business.

Thanks;

CA Manoj kumar rai

vpr99 (Manager-Accounts&Finance) (68 Points)
Replied 07 September 2010

as per my opinion it should be shown under CWP-Plant & Machinery if ther is intention to cont.business in same line. depreciation cannot be claimed as per it & co's act

vijay singla (learner) (340 Points)
Replied 07 September 2010

i agree with ca manoj

(Guest)

HI Guys very good article,i am just say that different states have different laws and accounting is the major and most important subject to all over the world.depreciation only starts when company utalize its current assets.very nice interpretation.

Persuasive Essay

Sunshine (Helping All) (10575 Points)
Replied 07 September 2010

depreciation can be claimed if the asset was put to use in the business...it doesnt matter if it wasnt used for even a single day.....so depreciation can be claimed u/s 32 of IT act....