Depreciation u/s 32

SECTION 32 of the Income Tax Act provides for deduction on account of depreciation from the total income of assessee, and the two basic requirements to be fulfilled for claiming depreciation are ownership of asset and 'use of asset for the purpose of business'. What amounts to 'use' of an asset for the purpose of business has been a moot point in numerous cases as was in the instant case which had to be eventually decided by the Third Member of the Tribunal as even amongst the judicial and accountant members of the Tribunal, there was a difference of opinion. Basic issues to be decided was whether asset to be kept in ready to use condition was enough or its actual use and payments of hire charges were essential for entitlement of claim of depreciation. It was clearly held that the word 'use' for purpose of claiming depreciation u/s 32 embraces both active and passive user, thus it is not essential that an asset is actually used for purpose of business for claiming depreciation. Brief facts of the case are as under. Brief Facts : Assessee in the instant case was engaged in the business of giving cranes and other equipment on hire. It pertained to AYs 1991-92 and 1993-94. In the previous year for AY-1991-91 assessee purchased two cranes i.e. Model No. Cole 620M and Cole 825(1) from M/s TIL Ltd., Calcutta and with respect to AY-1993-94, assessee had imported two new Kato cranes. On all four cranes depreciation was claimed by assessee in the relevant AYs which were however disallowed by A.O. It was noticed by A.O. that in all cases purchase or imports as the case may be were made at the fag end of the relevant financial year thus he asked assessee to satisfy the conditions of Sec.32 for the purpose of depreciation. For model no. Cole 620M, assessee put forth that the order of purchase and advance was made in August 1990, sale letter by the seller was issued on 16.3.91 and a temporary registration was also obtained. It was further shown that assessee's sister concern M/s Sanghvi Non-ferrous Metal Industries Pvt.Ltd. had obtained a letter of intent from ONGC for deployment of the said crane at Kariakal in Tamil Nadu but since it could not fulfill the committment, a combined request to ONGC was made by the assessee co. and its sister concern for transfer of intent in the name of assessee. M/s TIL Ltd. even tested performance specifications of the said crane as per requirements of ONGC and also assessee had made arrangements for transport of the crane to T.N. on 27.3.91. Thus on the basis of above facts it was claimed by assessee that conditions of Sec.32 for claim of depreciation stand satisfied as the crane was put to use for the purpose of business in terms of the section. However A.O. noted that the contract for hire of crane was not between assessee and ONGC but with its sister concern who not being able to fulfill the contract wrote to ONGC about its inability to go ahead with contract and only thereafter letter of intent was transferred in assessee's name and the crane was used at Kariakal only from 17.4.91. Assessee also failed to provide any material to prove an arrangement with ONGC prior to April 1991. Moreover A.O. was of the opinion that since crane was only temporarily regd. in the previous year and got permanent registration only in April, it couldn't have been used for commercial purposes thus relying on the above observation A.O. disallowed depreciation claimed. As for crane of model no. Cole 825(1) which was also purchased at the fag end from calcutta, it was submitted that the crane was kept as a standby from 22.3.1991 at the premises of one M/s Light Motive, Calcutta in case Crane no.830 which had already been suplied to the said hirer broke down thus a standby crane in ready condition was to be suplied in the interest of business. But the A.O. did not accept this contention on the ground that assessee was under no obligation to provide a stand by crane and since crane was not actually used but only kept as a standby and lying idle it cannot be said it was used for business purpose. Moreover as in the earlier case this crane also didn't have permanent registration, thus couldn't have been used for commercial use thus disallowed depreciation. In the previous year to AY 1993-94 assessee had imported two Kato cranes for a contract with ONGC on 11.1.93 which landed on Chennai port on 26.2.93 and cleared by custom authorities on 12.3.93. Thus A.O. reached a conclusion that in the relevant accounting year the crane was not used for purpose of business rejecting assesse's contention that since it was in the business of hiring of cranes, it is to be treated as used if it was kept ready for use for business. Assesee took the matter in appeal to CIT(A) who uphed the order of A.O. disallowing the claim of depreciation for both the AYs on similar reasoning that the cranes were bought at the fag end thus they were not put to use for purpose of business and on account of this even passive use wasn't made out. Aggrieved by the order, assessee appealled to the Tribunal. However the two members of Tribunal gave different orders on the matter. The Judicial member noted all the facts as noted above with regard to purchase and delivery of cranes and contract with ONGC and the rival submissions. It was of the opinion that basic requirment to be satisfied u/s 32 to claim depreciation was ownership of asset and delivery of the same which stood satisfied in the instant case as there was no doubt whatsoever with regard to ownership of asset by assessee and its delivery to him which stood established by the above facts. As regards revenue's objection that letter of intent in the name of assessee by ONGC for crane Model No. 620M was made only in subsequent year, it was of the opinion that on the basis of ownership of asset, its delivery, its transfer to the site etc., it can be safely concluded that it was put to use for the purpose of business of hiring and thus to be allowed depreciation and just because of technical consideration that letter of intent was issued in the name of assessee in subsequent year, the assessee cannot be denied depreciation as it had satisfied all the conditions for fulfilling of obligation of its sister concern with regard to hire of crane to ONGC. The Accountant Member however took a divergent stand on the issue and disallowed depreciation for both the years under consideration. His primary reasoning was that the word 'used' for the purpose of claiming depreciation u/s 32 means actual use and not ready to use thus unless asset is put to actual use, no depreciation can be allowed. He was of the view that for claiming depreciation, it is to be shown that contract of hiring was in existence and hiring charges were received which did not happen in the instant case as privity of contract between assessee and ONGC took place on 17.4.91 when ONGC paid hiring charges and not in previous year thus assessee couldn't claim depreciation in the AYs under consideration. On account of this differing stand taken by the two members, matter was referred to the third member who heard the rival submissions. The AR forcefully reasserted submissions made throughout and supported the Judicial Member's order. He asserted that the word 'used' is to be interpreted as ready to be used and not actual use for claimng depreciation and that the cranes were purchased and duly delivered thus ready to be used and it was only on account of technical reasons that the cranes were not actually used. In support of this contention assessee showed its objection filed with ONGC for not opening of tender for use of cranes in March which was accepted by the Co. and the cranes actually used in April. On the other hand DR supported the view of Accountant Member and submitted that even if its taken that giving a machine on hire amounted to 'use', that was also not proved in view of failure of assessee to show any document supporting any agreement between it and ONGC thus failing to prove actual user of asset. Having heard the rival contentions, the Third Member laid down that ++ for claiming of depreciation u/s 32, two conditions were to be satisfied i.e. ownership of asset which according to him stood fully established in favour of assessee. It was with respect to second condition i.e. use of asset for purpose of business which was in dispute; ++ the said expression was capable of both narrow and broad interpretation and while in its narrow sense it would mean actual use of asset but if construed in broad sense it would include not only actual use of asset but also its passive user for the purpose of business and the same can be said to be in use when it is kept ready for use; ++ The depreciation was an allowance given for dimunition in value of asset due to wear and tear and claim of depreciation legitimately belongs to one who invests in capital asset. It was a benefit conferred on the assessee and thus has to be construed liberally and in a manner which is beneficial to the assessee. The expression 'used' would embrace not only actual use of asset but also passive use of asset for purpose of business. As for registration of vehicle, registration of vehicle was not a sine qua non for taking benefit of depreciation and it could be claimed even where vehicle is temporarily registered as long as its used for the purpose of business as plying of vehicle without registration may be an offence under Motor Vehicle Act but has no relevance for claiming depreciation and only thing relevant is use of asset for business. Aplying the above principles to the facts of the case, he held that in case of crane model no.620 though assessee claimed to have an agreement with ONGC for its use in Kariakal, no cogent material, direct or circumstantial was produced by assessee to show that there existed an arrangement between the two for use of cranes before the period ending 31.3.91. The crane was transported to Kariakal where it reached in second week of April and thereafter contract of hire was entered into and thus even if a wide meaninng of the term 'used' for purpose of business is taken, taking of delivery at Kariakal cannot be taken as used for the purpose of business before 31.3.91 nor it can be said to be kept ready for use and thus Ld. Member held that revenue authorities were fully justified in not allowing depreciation. As for other cranes it held that assessee was totally justified in claiming depreciation and went with the view of Judicial Member. As for crane Model no. Cole 825 he held that assessee claimed that it was used as a back up crane for its hirer in case of break down of crane 830 already with him which is also substantiated by the statement of Dir. of assessee co. who was summoned by the A.O. He clearly held that it was a case where the vehicle was in use when it was kept ready for use for business purposes as the crane was used as a back up by the hirer and it did not matter if it actually used it or not. Similarly he upheld the allowance of depreciation by Judicial Member for Kato cranes imported in previous year to AY 1993- 94. Accordingly the matter was decided and while depreciation in case of one crane was disallowed, it was allowed for other cranes for reasons as discussed above. Thus bottom line of the judgement was that for claiming of depreciation u/s 32, it is not essential that the asset is actually used but even passive use of asset for business purpose will entitle the owner of asset to claim depreciation and an asset kept ready for use for business purpose will be taken as 'used' in terms of the said section even if it remains idle. This is because underlying principle of depreciation is an allowance given to owner of asset for dimunition in value of asset due to wear and tear and it does not matter if asset is not actually used as the value of asset will still go down even without its actual use. Thus so long as asset is kept ready for use for business, depreciation on it is to be allowed.