Vildirect: IncomeTax-caselaws-2009-VIL-331-ITAT-

2009-VIL-331-ITAT-

Equivalent Citation: [2009] 126 TTJ 865

Income Tax Appellate Tribunal MADRAS

ITA No. 1967/Mad/2006 ITA No. 1643/Mad/2007

Date: 23.10.2009

ASSISTANT COMMISSIONER OF INCOME-TAX.

CHENNAI PETROLEUM CORPORATION LIMITED.

BENCH

Member(s) : R. V. EASWAR., U. B. S. BEDI.

JUDGMENT

May, 2008

These appeals by the Revenue as well as by the assessee are directed against different orders of the CIT(A) for the above assessment years.

ITA Nos. 1976/Mad/2006 & 1643/Mad/2007:

2. These appeals are filed by the Revenue against the assessee who is a Government of India undertaking. The Revenue was required to obtain the approval of COD for prosecuting the matter before the Tribunal as per the directions of the Hon'ble Supreme Court in the case of Oil & Natural Gas Commission vs. CCE (1992) 104 CTR (SC) 31 : 1992 (Suppl./II) SCC 432. It was held in this case by the apex Court that no litigation between the Government and Government undertaking can proceed with before any Court or Tribunal without the approval of High Power Committee known as COD. Nothing was placed before us to demonstrate that what action the Revenue took for obtaining the approval of COD.

3. However, we may mention that in case the Revenue desires to prosecute the appeals, it shall be free to move this Tribunal by appropriate petition for recalling the case after obtaining the permission of the COD.

4. The Revenue's appeals are dismissed.

ITA No. 1822/Mad/2006:

5. In this appeal, the assessee has taken various grounds but at the time of hearing, the learned counsel for the assessee submitted that the only two disputes involved viz., (i) reopening of assessment; and (ii) confirmation of disallowance of depreciation.

6. At the outset the learned counsel for the assessee submitted that he would like to argue the case on merits before reopening the issue. He referred to para 3 of the appellate order and submitted that the assessee had claimed depreciation amounting to Rs. 2,76,68,250 on gas sweetening plant. The plant was built during the previous year relevant to the asst. yr. 1997-98 but was never used thereafter due to non-availability of raw material viz., sour gas. He submitted that this plant was commissioned after running the test run during the asst. yr. 1997-98. Considering the trial run as equivalent to putting the said plant into use, depreciation was allowed by the Department. In this year, the claim for depreciation has been denied mainly because the plant has not been put to use. He argued that the plant was ready for use and in fact trial run has also been completed. However, due to non-availability of sour gas the plant could not be put to use in this year. Since the plant is ready for use, it should be construed that the plant has been used. In this regard, he referred to the decision of Hon'ble Madras High Court in the case of CIT vs. Heera Financial Services Ltd. (2007) 212 CTR (Mad) 532. In that case, certain films could not be used which were ready for use because there was a strike in the film industry. The High Court confirmed the order of the Tribunal holding that depreciation was allowable. He then referred to the decision of the Delhi "A" Bench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. (2008) 21 SOT 122 (Del) (copy of the decision filed on record). It was held in that case that though the ownership and user criteria is fundamental to the grant of depreciation, once the asset forms part of the block of assets then user criteria would lose its value because depreciation has to be allowed on the block of assets. He submitted that this can be explained by way of an example, in the sense that even if an asset is purchased and used for very little time but when it enters into the block of assets, depreciation would be allowed on the basis of block and such depreciation would be allowed even if such asset is sold or discarded because depreciation as per the block of assets, formula has to be calculated on the basis of WDV of the block of assets. He submitted that the Hon'ble Allahabad High Court in the case of CIT vs. Swamp Vegetable Products India Ltd. (2005) 198 CTR (All) 595 : (2005) 277 ITR 60 (All) has taken the same view and held that once the asset was ready for use, but not actually used during the relevant accounting year even then the same was entitled for depreciation. Similarly, the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Nahar Exports Ltd. (2007) 213 CTR (P&H) 20 : (2008) 296 ITR 419 (P&H) has held that when an asset was used for two years but during the year the asset could not be used on account of non-receipt of orders even then the assessee was entitled to depreciation. He also relied on the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Southern Petrochemical Industries Corporation Ltd. (2007) 211 CTR (Mad) 116 : (2007) 292 ITR 362 (Mad).

7. The learned Departmental Representative, on the other hand, submitted that s. 32 has been amended since long and now, the word "used" has been substituted by the word "use". He then referred to the decision of the Hon'ble Bombay High Court in the case of Dineshkumar Gulabchand Agrawal vs. CIT (2004) 267 ITR 768 (Bom) where it has been clearly observed that the word 'used' in s. 32 of the IT Act denotes that the asset has been actually used and not that it is merely ready for use. It was further observed that the expression 'used' means actual use for the purpose of business. Since in this case, the plant has not been used in this year and in fact never used after the asst. yr. 1997-98 till date, depreciation could not be granted. He then referred to the decision of Hon'ble Karnataka High Court in the case of Dy. CIT vs. Yellamma Dasappa Hospital (2007) 207 CTR (Kar) 523 : (2007) 290 ITR 353 (Kar) where again it was clearly held that unless and until the plant and machinery was used the assessee was not entitled to depreciation.

8. The learned Departmental Representative further referred to the decision of the Hon'ble Madras High Court in the case of CIT vs. Heera Financial Services Ltd. relied on by the learned counsel for the assessee and pointed out that in that case that assessee had leased out the films and the same could not be used by the lessee. Therefore, as far as the lessor is concerned, it can be said that the same has been used. Therefore, this decision is quite distinguishable. He also submitted that the decision of Delhi Bench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. also stands distinguished in view of the decision of the Karnataka High Court in the case of Yellamma Dasappa Hospital because the High Court was concerned with the asst. yr. 1989-90, by which time the concept of law (sic-block) of assets was already on the statute which means that it should be assumed that the High Court has considered all the issues and, therefore, the decision of the Delhi Bench of the Tribunal cannot be applied to the present case. He pointed out that in fact, the High Power Committee has not given permission to the assessee company in the next year and other future years to appeal for the claim of depreciation. This shows that even the High Power Committee was of the view that the assessee would never use these assets and, therefore, the claim of depreciation was not appropriate.

9. In the rejoinder, the learned counsel for the assessee submitted that after all depreciation is given on the basic presumption that certain assets suffer wear and tear and, therefore, they need to be replaced and that is why the claim of depreciation is allowed. He referred to the decision in the case of Heera Financial Services Ltd. and submitted that no doubt in that case films were leased out but depreciation was not held to be allowed merely because the assessee had leased out the films, but depreciation was held to be allowed on the basis of earlier decision of High Court in the case of CIT vs. Vayithri Plantations Ltd. (1980) 18 CTR (Mad) 9 : (1981) 128 ITR 675 (Mad) wherein it was held that assets ready for use were eligible for depreciation. He also submitted that the Hon'ble Karnataka High Court in the case of Yellamma Dasappa Hospital has never dealt with the issue regarding block of assets. He contended that non-grant of permission by the High Power Committee for the future years is of no relevance because such Committee is merely a High Power Administrative Committee and is not technically competent to give its opinion on technical issues. The High Power Committee sometimes decide the issue on the basis of certain administrative conveniences. For example, not to encourage litigation. Since permission has been granted in this year, the issue has to be adjudicated on its own merits for this year.

10. We have considered the rival submissions carefully in the light of the material on record. We have also perused the case law cited by both the parties. We find force in the submission of the learned counsel for the assessee. In this case, admittedly gas sweetening plant was installed in the asst. yr. 1997-98 and a test run was also done and accordingly on the basis of this test run, depreciation was allowed by the Department in the asst. yr. 1997-98. Since the plant could not be used due to non-availability of raw material in this year, depreciation has been denied mainly on the basis that the plant and machinery were not put to use in this relevant year.

11. First of all, we would like to observe that after all depreciation is an allowance towards wear and tear of the plant and machinery because after such wear and tear, the plant and machinery have to be replaced after a lapse of particular period. Every plant and machinery or for that matter every asset will have a distinct usable life and depreciation rates have been designed in such a fashion that for every usable life of the asset, the cost is recouped so as to enable the owner of the machinery to replace such asset. This is further clear from the fact that where the life of an asset is very short, say for example, in the case of a computer because of technology changes, very high rate of depreciation at 60 per cent is provided under the rules. Similarly, where the life of asset will be longer, say in the ease of buildings, lower rate of depreciation at 5 per cent has been-provided. Again no depreciation is available on land because the same will not suffer any wear and tear. Therefore, while deciding the issue before us, we have to keep the concept of wear and tear in mind.

12. As mentioned above, admittedly gas sweetening plant was installed in the asst. yr. 1997-98 but the same could not be put to use in this year because raw material was not available. But once the plant was installed, it will keep on suffering some wear and tear and in our opinion, it should be entitled to the depreciation. No doubt, now s. 32 has been amended and now the word "used" is used in the section and the Hon'ble Bombay High Court in the case of Dineshkumar Gulabchand Agrawal has held that because of the expression 'used', depreciation cannot be granted unless and until the plant is really put to use. However, according to the assessee, this decision cannot be applied in all the situations. The Hon'ble Madras High Court in the case of Heera Financial Services Ltd. has clearly held, following its earlier decision in the case of Vayithri Plantations Ltd. that once the plant was ready, the same is entitled for depreciation.

13. We are unable to agree with the submission of the learned Departmental Representative that in this case depreciation was allowed because the assessee had leased out the films and whether the lessee would use the same or not was none of the business of the lessor. Moreover, a perusal of the judgment would show that there is no discussion by the High Court whether the films were leased out and because of that it was none of the concern of the lessor whether the lessee can use the same or not. Throughout the judgment, the High Court has discussed the concept of usage and referred to the decision of the Division Bench of Bombay High Court in the cases of CIT vs. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom), Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom) and the Hon'ble Supreme Court decision in the case of Liquidators of Pursa Ltd. vs. CIT (1954) 25 ITR 265 (SC). Ultimately it was held that since the assessee was keeping the machinery ready for usage, depreciation has to be allowed. Similarly, in the case of CIT vs. Swamp Vegetable Products India Ltd., the Hon'ble Allahabad High Court has held that once an asset is kept ready for use, but not actually used, then the same was entitled for depreciation. The Hon'ble Punjab & Haryana High Court has also taken similar view in the case of CIT vs. Nahar Exports Ltd. Therefore, we are of the view that sitting at Chennai Benches of the Tribunal, it may not be appropriate to ignore the direct judgment of the Hon'ble jurisdictional High Court in the case of Heera Financial Services Ltd., because every subordinate Tribunal is bound by the decision of the Hon'ble jurisdictional High Court.

14. Elaborate arguments were made on the concept of "block of assets" also. Therefore, we are of the view that the issue has to be examined even from that angle. Relevant portion of s. 32(1)(i) and (ii) of the IT Act reads as follows:

32(1). Depreciation-In respect of depreciation of:

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st April, 1998, owned wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

(i) ..............

(ii) in the case of any block of assets, such percentage on the WDV thereof as may be prescribed;

The above provision clearly shows that depreciation in the case of block of assets has to be allowed on WDV at the prescribed rates. "Block of assets" is defined in s. 2(11) of the Act as under:

"(11) 'block of assets' means a group of assets falling within a class of assets comprising-

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature,

in respect of which the same percentage of depreciation is prescribed."

The above provision clearly shows that basically block of assets means assets of similar nature for which same Tate of depreciation is allowed.

15. Now, we have to see another term which is "WDV". The same is defined in s. 43(6)(c) of the Act as under:

"Written down value" means-

(e) in the case of any block of assets,-

(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the WDVs of all the assets falling within that block of assets at the beginning of the previous year and adjusted,-

(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;

(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the WDV as so increased; and

(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian IT Act. 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st April, 1988; and

(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st April, 1988 as if the asset was the only asset in the relevant block of assets,

so, however, that the amount of such decrease does not exceed the WDV;

(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the WDV of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in Item (i)."

The above definition clearly shows that if an asset is purchased or acquired, the value of that asset has to be added to the block of assets and if the same is sold or discarded, then such portion of the sale value has to be reduced from the block of assets. This can be explained by way of example as under:

Say, the opening WDV of block of asset is Rs. 100 and during the year another asset of the same block is purchased at Rs. 50 and one more item from the same block is sold at Rs. 20; then for the purpose of depreciation under s. 32, the WDV would be computed as under:

Opening WDV Rs. 100

Add: Cost of new asset purchased Rs. 50

-------

Rs. 150

Less: Sale value of the asset of

the block of assets Rs. 20

-------

Net WDV Rs. 130

-------

Now, in terms of s. 32(1)(ii), depreciation has to be allowed on the above WDV, i.e., Rs. 130. When depreciation is being allowed at Rs. 130 it cannot be said which asset has been used and which asset has not been used and; therefore, in our view after the interpretation (sic-introduction) of the concept of block of assets, depreciation has to be granted on the WDV of the block. This is particularly so, say, the gas sweetening plant has been totally discarded and very nominal value was realised. In that case, such nominal value would have been reduced from the WDV of the block of assets and depreciation would have been allowed on the balance figure, which means that the depreciation has to be allowed on the block.

16. Similar view was taken by the Delhi Bench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. wherein it was held that:

"Under s. 32(1) depreciation on certain assets owned and used for the purpose of business is allowable and the same is allowable at the prescribed percentage on the WDV of block of assets, which comprises of various assets entitled to same rate of depreciation. Thus, the ownership and user both are tile criteria for claim of depreciation. However, the user criteria is to be fulfilled at the time when the asset is to form part of block of assets. Once the assets are part of block of assets, it looses its individual cost or WDV. In a way it looses its identity. Thereafter, the depreciation is allowable on the entire block of assets. In the instant case, the assets of international division was not a separate block of assets. The entire assets of all the divisions formed block of assets. Even these were ready for use though not used actually. In the decision of Delhi High Court in Capital Bus Service (P) Ltd. vs. CIT (1980) 17 CTR (Del) 155 : (1980) 123 ITR 404 (Del), it was held that even if the assets were not actually used, if the assets were kept ready for use by the owner in his business, will entitle the assessee to claim depreciation. Accordingly, applying the ratio laid by the Delhi High Court in the case of Capital Bus Service (P) Ltd. the claim of the assessee was allowable."

Insofar as the submissions of the learned Departmental Representative are concerned, that this decision stands overruled by the judgment of the Karnataka High Court in the case of Yellamma Dasappa Hospital, does not seem to be correct. A careful perusal of this decision clearly shows that depreciation was denied on the basis of the fact that the asset was not used and there is no discussion in the judgment in support of the block of assets. Therefore, that judgment is per incuriam as far as the concept of block of assets is concerned.

17. Before reaching final conclusion, one more aspect which was argued at length needs to be looked at, i.e., the High Power Committee's refusal to grant permission to the assessee company to contest the issue of depreciation in the future years. After considering the rival submissions we agree with the submissions of the learned counsel for the assessee that the High Power Committee is an administrative committee and may give permission or decline permission to contest a particular issue considering not only the merits of the case but other administrative reasons. For example, they may like a particular company to declare higher profits so as to receive higher dividends from such Government company. In any case, the High Power Committee is not a judicial body. Otherwise, they themselves would have decided the issue. Therefore, in our view, the fact that no permission was granted in the future years will have no bearing on deciding the issue before us.

18. In view of the above detailed discussion and considering the fact of wear and tear since gas sweetening plant was kept ready for use and must have suffered some wear and tear, the decision of the Hon'ble jurisdictional High Court in the case of Heera Financial Services Ltd. as well as the concept of block of assets, we are of the view that the assessee is entitled to depreciation on the gas sweetening plant. In these circumstances, we set aside the order of the CIT(A) and direct the AO to allow depreciation on the gas sweetening plant.

19. As far as the issue regarding reopening of the assessment is concerned, detailed arguments were made by both the parties. In fact, doubt was also expressed by the learned Departmental Representative whether permission has been given to contest this issue because he read item No. 16 of the minutes of COD meeting held on 23rd Nov., 2006 and while referring to various columns he pointed out that no permission was given for contesting the reopening issue. Since we have decided the issue on merits without going into the controversy whether permission was granted to contest the issue of reopening, we arc of the view that the same has been rendered of academic nature.

20. In the result, this appeal is allowed.

ITA No. 1823/Mad/2006:

21. In this appeal, ground Nos. 2, 3 and 4 in the grounds of appeal filed by the assessee relate to the issue of grant of depreciation against which no permission has been granted by the COD. Since permission has not been granted by COD therefore, we reject these grounds.

22. Ground Nos. 5 to 8 in this appeal relate to the issue regarding denial of deduction under s. 80HHC of the Act by exclusion of certain receipts from business profits.

23. Before we go on to adjudicate individual items, it is relevant that the relevant observations of the Hon'ble Supreme Court in the case of CIT vs. K. Ravindranathan Nair (2007) 213 CTR (SC) 227 : (2007) 295 ITR 228 (SC). In that case, while discussing s. 80HHC, the Hon'ble Supreme Court had observed at p. 241 of the report as under:

"In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent, of the sums referred to in cl. (baa) to the said Explanation. In the computation of deduction under s. 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of s. 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting cl. (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of ss. 28 to 44D of the IT Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under cl. (baa). A bare reading of cl. (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, cl. (baa) stood inserted to say that although incentive profits and 'independent incomes' constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the IT Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula [CIT vs. Lakshmi Machine Works (2007) 210 CTR (SC) 1 : (2007) 6 Scale 168]."

Thus, on the basis of the above decision it was held that, receipts which have nothing to do with the exports cannot be included in the business profits under cl. (baa) for calculating deduction under s. 80HHC of the Act.

24. Now, we shall examine individual items in the light of the above decision:

1. Sale of power: Though it was argued that the assessee company had installed a power plant to meet the captive requirements and only excess power was sold but since the same has got nothing to with export activities of the assessee, the receipts from such sale of power cannot be included in the business profits.

2. Sale of scrap: Since the sale of scrap has got nothing to do with the export activities of the assessee the receipts from such sale of scrap cannot be included in the business profits.

3. Unclaimed/unspent liabilities: As far as this item is concerned, after hearing the rival parties, we find that this relates to items like unclaimed salary, liability to suppliers, forfeiture of security deposit etc. This means some of the items were debited to P&L a/c in the earlier period and profits stood reduced on account of such debits. Now, if the assessee is booking these items separately then it cannot be said that profits have been generated. Strictly speaking, this is only an adjustment entry and only booking of expenditure is nullified now. However, this concept will apply only in the case of revenue items like salary and it cannot be applied to capital items like forfeiture of EMD which would not have been shown as profit. Therefore, we set aside the order of the CIT(A) on this issue and restore this matter to the file of the AO to re-examine this issue and include the revenue items only as business profits and ignore the other capital items.

4. Crane hire charges: This expenditure (sic) has got nothing to do with the export activities of the assessee and hence rejected.

5. Recoveries from employees furniture: Here again, this needs further examination because if the assessee has claimed the expenditure incurred on account of furniture provided to the employees and if some recovery has been made then that only reduced the expenditure on furniture and, therefore, we set aside the order of the CIT(A) on this issue and remit the matter to the file of the AO with a direction to re-examine the issue in accordance with law.

6. Recoveries from house rent: This item cannot be excluded from business profits because for providing accommodation to the employees, rent must have been debited in expenditure account and if in some cases recoveries have been made from some of the employees, then that expenditure stands reduced. Therefore, needs to be set off against the expenditure on rent.

7. Liquidated damages and other recoveries: Since details are not before us, this item also needs to be re-examined at the level of AO in the light of our observation in respect of unclaimed/unspent liability vis-a-vis revenue items only can be allowed and capital items are to be ignored.

8. Participation fees for training programme: Before us it was claimed that this is only reimbursement of expenditure incurred on training programme of employees and, therefore, this should be set off against training expenditure. However, on a perusal of the records, we do not find any details. Therefore, we set aside this issue also and remit the matter to the file of the AO for re-examination. If it is found on verification that this expenditure was rightly incurred on reimbursement of training expenses, then it should be set off against the training expenditure.

9. Reimbursement from PII and others for deputation of employees: Here again, no details are available before us for reimbursement from PH and others. Hence, we set aside this issue to the file of the AO for re-examination on the basis of our observation on unclaimed/unspent liabilities.

25. These grounds are partly allowed as indicated above.

26. Ground Nos. 9 to 11 relate to assessment of interest income as income from other sources. It was mainly argued before us that source of interest was interest received from customers and also interest received on special bonds. It was contended that that bonds have been given to the company by various corporations in discharge of trade payments. But the chart filed before us shows that interest has been received on Government of India special bonds which may relate to subsidy provided by Central Government. Since all the details are not available and admittedly assessment of this interest income under the head "Income from other sources", would only affect to the extent where the decision in the case of CIT vs. V. Chinnapandi (2006) 201 CTR (Mad) 13 : (2006) 282 ITR 389 (Mad) or the decision in the case of Dollar Apparels vs. ITO (2007) 294 ITR 484 (Mad) rendered by the Hon'ble jurisdictional High Court has to be applied because if such income is assessed as business income then only 90 per cent of such interest can be excluded from business profits but if this is income from other sources, then 100 per cent of the interest income has to be excluded in view of the decision of the Hon'ble jurisdictional High Court cited above. It was argued that, for example, interest from customers has to be assessed only as business income in view of the decision of the Madras High Court in the case of CIT vs. The Madras Motors Ltd. (2002) 174 CTR (Mad) 221 : (2002) 257 ITR 60 (Mad). As we have pointed out that various details are not available, we set aside the order of the CIT(A) and remit the matter to the file of the AO to re-examine this issue and decide the same keeping in mind the following four judgments:

(1) CIT vs. V. Chinnapandi;

(2) Dollar Apparels vs. ITO;

(3) CIT vs. Indo Matsushita Carbon Co. Ltd. (2006) 205 CTR (Mad) 493 : (2006) 286 ITR 201 (Mad);

(4) CIT vs. The Madras Motors Ltd.

27. In the result, the appeal is partly allowed.

V.B.S. BEDI, J.M.: 4th Dec., 2008

28. Despite best persuasion of myself, I have not been able to agree either with the findings or conclusion drawn by the learned AM in the appeals of the assessee in ITA No. 1822/Mad/2006 with respect to both the issues involved and so far as ITA No. 1967/Mad/2006, ITA No. 1823/Mad/2006 and ITA No. 1643/Mad/2007 are concerned, I fully agree with the findings and conclusion as drawn by the learned AM.

29. As such, I write my own order on the point of confirmation of disallowance of depreciation as well as reopening of the assessment in ITA No. l822/Mad/2006 as under:

29.1 Facts indicate that with regard to issue relating to reopening of assessment, admittedly, COD has not granted permission for the same as contended by the learned Departmental Representative and referring to various columns of minutes of COD meeting held on 23rd Nov., 2006, as per item No. 16, no permission is stated to have been granted for contesting the reopening issue and on verification, the same is found to be correct, so in my considered view, assessee being public sector undertaking could not prosecute the matter without such permission as per the directions of the Hon'ble Supreme Court in the case of Oil & Natural Gas Commission vs. CCE and such decision is being followed in number of cases including ITA Nos. 1967/Mad/2006 and 1643/Mad/2007 as contained in earlier part of the order agreed by both the Members. So, in the absence of permission of COD to prosecute the appeal on reopening of assessment issue, I dismiss the ground of appeal of the assessee on this issue.

30. As regards confirmation of disallowance of depreciation is concerned, the assessee is found to have claimed depreciation of Rs. 2,76,68,250 on gas sweetening plant. The plant was stated to have been built during the asst. yr. 1997-98 when trial run was done and thereafter, it was not used for stated non-availability of raw material, but claim of the above amount of depreciation was made during the assessment year under consideration. The AO disallowed such claim, because the plant was not put to use and assessee took up the matter in appeal, but without any success. In further appeal, it was strongly pleaded since plant was ready for use so it should be construed that it has been put to use. Reliance was placed on (2007) 212 CTR (Mad) 532, (2008) 21 SOT 122 (Del), (2005) 198 CTR (All) 595 : (2005) 277 ITR 60 (All), (2007) 213 CTR (P&H) 20 : (2008) 296 ITR 419 (P&H) and (2007) 211 CTR (Mad) 116 : (2007) 292 ITR 362 (Mad). Whereas, the learned Departmental Representative, on the other hand submitted that s. 32 of IT Act has since been amended and the word "used" has been substituted for the word "use" and Hon'ble Bombay High Court decision reported in (2004) 267 ITR 768 (Bom) has clearly held, while referring earlier decisions on which case law cited by the assessee's counsel are based, that the word "used" in s. 32 connotes that asset has been actually used and not that it is merely ready for "use". Further reference was made to the decision reported in (2007) 207 CTR (Kar) 523 : (2007) 290 ITR 353 (Kar). The learned Departmental Representative further referred to the decision reported in (2007) 212 CTR (Mad) 532 relied on by the learned counsel for the assessee and pointed out that in that case the assessee had leased out the films and the same could not be used by the lessee. Therefore, as far as the lessor is concerned, it can be said that the same has been used. Therefore, this decision is quite distinguishable. He also submitted that the decision reported in (2008) 21 SOT 122 (Del) also stands distinguished in view of the decision reported in (2007) 207 CTR (Kar) 523 : (2007) 290 ITR 353 (Kar) because the High Court was concerned with the asst. yr. 1989-90, by which time the concept of law (sic-block) of assets was already on the statute which means that it should be assumed that the High Court has considered all the issues and, therefore, the decision of the Delhi Bench of the Tribunal cannot be applied to the present case. He pointed out that in fact, the High Powered Committee has not given permission to the assessee-company in the next year and other future years to appeal for the claim of depreciation as is clear from the record and the order for subsequent years. This shows that even the High Powered Committee was of the view that the assessee would never use these assets and, therefore, the claim of depreciation was not appropriate.

30.1 In his rejoinder to the argument of the learned Departmental Representative, the learned counsel of the assessee submitted that no doubt in that case films are leased out, but depreciation was held to be allowable on the basis of earlier decision of the Hon'ble Madras High Court in the case of CIT vs. Vayithri Plantations Ltd., wherein it was held that assets ready for use were eligible for depreciation. The Hon'ble Karnataka High Court decision is stated to be distinguishable as it never dealt with the issue regarding block of assets. So far as non-grant of permission by High Powered Committee for future years is concerned it has no bearing on the issue being agitated in the present year because permission stands duly accorded for the year under consideration.

30.2 Arguments of both the sides have been considered carefully in the light of materials on record as well as precedents relied upon by the rival sides. It is undisputed fact that gas sweetening plant has not been put to use at all and merely stated trial run was undertaken in the earlier year and it is the main contention of the assessee that since plant was ready to use, therefore, assessee is entitled for depreciation as claimed. Whereas, the Department's stand is that since plant has not started normal functioning and especially it was not used during the year under reference, therefore, claim of the assessee has rightly been rejected by the AO, whose action has correctly been upheld by the first appellate authority.

30.3 Coming to the relevant provisions of law I find that amendment to s. 32(1) was made by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1st April, 1988 and by virtue of said amendment, assets should be such as has been used for the purpose of the business, profession, or vocation for at least a part of the year. In view of the existing provision, it is also necessary that the business using the assets to which allowance relates should be carried on for at least some part of the accounting year. Otherwise, s. 28 of the Act itself would have no application, if the business has been discontinued earlier, the allowance cannot be claimed.

30.4 This issue has been dealt by various Courts including Hon'ble jurisdictional High Court and Hon'ble Supreme Court in the following cases as under:

(i) Jurisdictional High Court's decision in the case reported in (1980) 18 CTR (Mad) 9 : (1981) 128 ITR 675 (Mad) has relied upon various decisions including Whittle Anderson Ltd. vs. CIT. The Hon'ble Bombay High Court in the case of Dineshkumar Gulabchand Agrawal vs. CIT had categorically held that:

"Learned counsel appearing on behalf of the appellant has raised a question as framed in the appeal memo and tried to contend that even if the vehicle was not actually used but since it was ready for use, the assessee was entitled to claim the benefit of depreciation on such assets. He sought to place reliance on the judgment of this Court in the case of Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom). In the above judgment, this Court was concerned with the interpretation of the expression 'use' or 'used', whereas we are concerned with the interpretation of the word 'used'. It appears that after the above judgment, there was an amendment to s. 32 of the IT Act. The word 'used' denotes actually used and not merely ready for use. The expression 'used' means actually used for the purposes of the business. The view is taken by the Tribunal. In this view of the matter, no substantial question of law is involved. The appeal is dismissed in limine with no order as to costs."

The Hon'ble Supreme Court has also dismissed the SLP filed by the assessee against this decision as reported in (2004) 266 ITR (St) 106.

(ii) The Hon'ble jurisdictional High Court in the case of CIT vs. Maps Tours & Travels (2004) 191 CTR (Mad) 177 : (2003) 260 ITR 655 (Mad) while referring to a decision of Hon'ble Supreme Court has discussed the facts at pp. 655 and 656 to decide the issue in favour of the Revenue as per last but one para of its order and last but two paras of the said orders are reproduced below:

"The assessee's claim for depreciation of these vehicles was negativated by the AO. That order was affirmed by the appellate authority. The Tribunal, on further appeal, however has held that depreciation is to be allowed by observing that the assessee as a businessman would have definitely used the cars though the same were purchased on the last day of the accounting year. No evidence of any such use has been placed before the authorities or the Tribunal by the assessee.

The Supreme Court in the case of Liquidators of Pursa Ltd. vs. CIT (1954) 25 ITR 265 (SC), has held, inter alia, that the words 'used for the purpose of the business' obviously mean 'used for the purpose of enabling the owner to carry on the business and earn profits in the business'. Sec. 32 of the IT Act provides for depreciation being allowed in respect of any building, machinery, plant, etc., 'owned wholly or partly by the assessee and used for the purpose of the business or profession'. In this case, as the cars were bought on the last day of the accounting year, had not been registered for being brought on roads, and there was no evidence of 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.

The question referred to us is answered in favour of the Revenue and against the assessee."

(iii) The facts of this case too do not indicate that the asset on which depreciation has been claimed were ever used during the year under consideration because plant was built during the previous year relevant to the asst. yr. 1997-98 and admittedly was never used thereafter because due to stated non-availability of raw material, whereas, for the asst. yr. 1997-98 also there was a trial run only and it did not function on commercial basis and assessee is claiming depreciation on the basis of ready to use, on the basis of case law, which is found to have been duly considered by Hon'ble Bombay High Court in the case of B. Malani & Co. vs. CIT (1995) 214 ITR 192 (Bom) and relevant observation and distinction having been pointed out on earlier decision of Bombay High Court and Madras High Court at pp. 194 and 195 is as under:

"Having regard to the object of depreciation allowance, the expression 'owned by the assessee and used for the purposes of the business' and the language used in cl. (vi), it seems to us that unless the machinery is actually put to use for the purposes of business of the assessee, the depreciation allowance is not to be granted. This view is fortified by a decision of the Gujarat High Court in the case of CIT vs. Suhrid Geigy Ltd. (1981) 25 CTR (Guj) 280 : (1982) 133 ITR 884 (Guj). Inviting our attention to the following words of cl. (vi):

'in respect of the previous year in which the ship or aircraft is acquired or the machinery or plant is installed, of it the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year,'

Shri Thakar, learned counsel for the assessee, submitted that it was the choice of the assessee to claim depreciation either in respect of the year of installation or in respect of the year of first putting it to use for the business, and, hence the assessee was entitled to claim depreciation allowance even in respect of the year of first putting it to use for the business, and, hence the assessee was entitled to claim depreciation allowance even in respect of the year of installation of machinery. It is difficult to accept this line of approach. The scheme seems to be that the assessee is entitled to claim deduction in respect of the assessment year relevant to the previous year in which the machinery or plant was installed and was used in such year for the purposes of business carried on by the assessee. If, however, the machinery is not used in an year in which it has been installed but not the less it has been put to use in the year just following the year of installation, the assessee is entitled to claim deduction in respect of that year. Thus, if there is a gap of more than one clear previous year between the installation of the machinery and its user no depreciation can be claimed.

In this context our attention was invited to some decisions. CIT vs. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom). This is a Bombay High Court decision taking a view that the word 'use' in s. 10(2)(vi) of the Indian IT Act, 1922, should be understood in a wide sense so as to embrace passive as well as active user. In a subsequent decision, the Bombay High Court in Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom), following the above decision, has given the same meaning to the word 'user' as found in the second proviso to s. 10(2)(vii) of the Indian IT Act, 1922. A bare perusal of those provisions will indicate that the object, the words and the context of s. 10(2) are not similar to the object, words and context of s. 32 of the IT Act. The case of CIT vs. Vayithri Plantations Ltd. (1980) 18 CTR (Mad) 9 : (1981) 128 ITR 675 (Mad) pertains to development rebate under s. 33 of the 1961 Act. The object of this provision and that of s. 32 are not similar and hence the ratio of that decision also does not apply to this case."

(iv) The Hon'ble Karnataka High Court in the case of Dy. CIT vs. Yellamma Dasappa Hospital has held as under:

"Under s. 32 of the IT Act, 1961, depreciation is permissible in the case of machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. When the legislature has used the word 'used' full meaning must be given to it. The machinery has to be actually used in terms of the statute.

The assessee filed its return for the asst. yr. 1989-90. The AO concluded that the items of machinery on which depreciation was claimed were not put to use by the hospital and consequently he disallowed the depreciation. The Tribunal upheld the claim of the assessee holding that since the machinery was kept ready for use the assessee was entitled to depreciation. On appeal to the High Court:

Held, that the assessee was not entitled to depreciation."

(v) In a latest decision of the Hon'ble Supreme Court in the case of Dy. CIT vs. N.K. Industries Ltd. (2008) 216 CTR (SC) 114 : (2008) 6 DTR (SC) 131 : (2008) 305 ITR 274 (SC) upheld the action of the Tribunal as under:

"We are concerned with the block period 1st April, 1988 to 24th Feb., 1999. The main contention advanced on behalf of the Department is that for allowance of deduction for depreciation, the asset must not only be owned by the assessee but it must also be used for the purposes of business or profession of the assessee. It is the case of the Department that the word 'used' in s. 32 of the IT Act, 1961, refers to actual use of the asset. It is the case of the Department that having regard to the scheme of the IT Act, 1961, and particularly, after the introduction of the concept of 'block of assets', actual use is the only requirement apart from ownership for allowance of depreciation under s. 32. It is the case of the Department that an important question of law arose for determination before the High Court. That the High Court has failed to examine the said question and that it had erred in dismissing the tax appeals only on the ground that no substantial question of law had arisen.

In the present case, the Tribunal has examined the statements of certain witnesses and after analyzing the material on record, it has come to the conclusion on facts that there is nothing to show that the machinery, namely, expellers remained idle for the entire block period 1st April, 1988 to 24th Feb., 1999. Having examined the record ourselves, we agree with the view expressed by the Tribunal on the facts of the present case. Hence, it is not necessary for us to go into the larger question of law regarding the connotation of the word 'used' appearing in s. 32 of the IT Act, 1961."

30.5 Since, Hon'ble Bombay High Court in the case of Dineshkumar Gulabchand Agrawal vs. CIT, while discussing earlier decisions has given a clear finding that under s. 32, as amended, the word "used" has been substituted by the word "use", 'which connotes that asset has been actually used and not merely ready for use and it means actual use for the purpose of business. Hon'ble Supreme Court in the case of Dy. CIT vs. N.K. Industries Ltd. has also upheld the action of the Tribunal, which has examined the statement of certain witnesses and after analyzing the material on record, it has come to the conclusion on the facts that there is nothing to show that the machinery remained idle for the entire block period, where depreciation on block of assets was under consideration and the Hon'ble Supreme Court after having examined the record themselves, agreed with the view of the Tribunal, though not considering necessary to go into larger question of law, which implies that depreciation has to be allowed on the basis of use of the assets for business purpose. Similarly, Hon'ble Bombay High Court in the case of B. Malani & Co. vs. CIT not only differentiated the earlier Bombay High Court decision and Madras High Court decision, but agreed with the view expressed by the Gujarat High Court decision in the case of CIT vs. Suhrid Geigy Ltd. (1981) 25 CTR (Guj) 280 : (1982) 133 ITR 884 (Guj) to explain the language used in cl. (vi) and to hold that unless the machinery is actually put clause for the purpose of the business of the assessee, the depreciation allowance is not to be granted. The Karnataka High Court as relied upon by the learned Departmental Representative also supports the above view.

30.6 Keeping in view the facts of the case, the language used in s. 32, legal position as explained in the decisions of various Courts including jurisdictional High Court in the case of CIT vs. Maps Tours & Travels as discussed above, it is held that since the asset on which depreciation was claimed, has admittedly not been used for business purpose during the year under consideration, therefore, the assessee is not entitled to depreciation as claimed. This view gets further fortified by the Chennai 'B' Bench decision in the case of Asstt. CIT vs. Kurien E. Kalathil in ITA No. 1854/Mad/2006 for the asst. yr. 2002-03 order dt. 31st July, 2008. As such, while upholding the concurrent finding of both the authorities below in this regard, the appeal of the assessee is dismissed.

REFERENCE UNDERS. 255(4) OF THE IT ACT, 1961

11th Dec., 2008

As there is difference of opinion between the Members constituting the Bench, the following questions are formulated and referred for nominating Third Member:

"(i) Whether in view of the facts and circumstances of the case, the depreciation on gas sweetening plant, could be allowed or not?

(ii) Whether in the absence of approval from COD for prosecuting the issue regarding reopening of assessment, ground in this regard could be dismissed or held to be academic?"

R.V. EASWAR, VICE PRESIDENT(AS THIRD MEMBER):

26th Aug., 2009

The following points of difference have been referred to me under s. 255(4) by the Hon'ble President of the Tribunal:

"(i) Whether in view of the facts and circumstances of the case, the depreciation on gas sweetening plant could be allowed or not?

(ii) Whether in the absence of approval from COD for prosecuting the issue regarding reopening of assessment, ground in this regard could be dismissed or held to be academic?"

2. It may be clarified that the above points of difference arose only in ITA No. 1822/Mad/2006 which pertains to the asst. yr. 1998-99, though a combined order has been passed by the dissenting Members in respect of certain other appeals also in which there is no difference of opinion.

3. The facts have been stated by both the learned Members elaborately in their dissenting orders. In a nutshell, the assessee appears to have purchased and installed a gas sweetening plant in the previous year relevant to the asst. yr. 1997-98. In that order, the AO allowed depreciation at the prescribed rate, accepting the trial run as equivalent to user of the plant for the purpose of the assessee's business. For the year now under consideration before me i.e., asst. yr. 1998-99, the AO denied the claim of depreciation on the said plant on the ground that it has not been used at any time during the year for the purpose of the business as required by s. 32(1) of the IT Act, 1961. When the matter reached the Tribunal, the learned AM held that the assessee was entitled to the depreciation because the plant was kept ready for use, though not actually used. He referred to the judgment of the Hon'ble Madras High Court in the case of CIT vs. Heera Financial Services Ltd. (2007) 212 CTR (Mad) 532 : (2008) 298 ITR 245 (Mad) in support of his decision. He distinguished the judgments cited on behalf of the Department on the ground that in those decisions this question did not directly arise. The learned AM also referred to the concept of block of assets and held that after the introduction of this concept, it is not relevant to consider the question as to whether the individual assets forming the block were actually used in the relevant previous year for the purpose of the business and that depreciation would be allowed on the WDV of the block of the assets as computed in accordance with the s. 43(6)(c) of the Act. In support of this conclusion, he relied on the order of the Delhi Bench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. (2008) 21 SOT 122 (Del) in which the Tribunal applied the judgment of the Delhi High Court in Capital Bus Service (P) Ltd. vs. CIT (1980) 17 CTR (Del) 155 : (1980) 123 ITR 404 (Del) where it was ruled that depreciation was allowable if the assets were kept ready for use though not actually used. In this view of the matter, the assessee's claim was upheld by the learned AM.

4. The learned JM in his dissenting opinion has referred to the judgment of the Hon'ble Madras High Court in CIT vs. Maps Tours & Travels (2004) 191 CTR (Mad) 177 : (2003) 260 ITR 655 (Mad) to hold that if the asset is not actually put to use in the relevant previous year, no depreciation can be allowed. In addition he has also referred to the order of the Chennai Bench in the case of Asstt. CIT vs. Kurien E. Kalathil in ITA No. 1854/Mad/2006, dt. 31st July, 2008, for the asst. yr. 2002-03. Apart from these two decisions which have been referred to by the learned JM, he has also relied on the judgment of the Bombay High Court in Dineshkumar Gulabchand Agrawal vs. CIT (2004) 267 ITR 768 (Bom) where it was held that the word "used" appearing in s. 32 denotes that the asset has been actually used and not merely ready for use. The SLP filed by the assessee against this judgment was dismissed by the Supreme Court as reported in (2004) 266 ITR (St) 106 as has been noted by the learned JM. Two other judgments which have been noticed by the learned JM as supporting the case of the Department are that of the Karnataka High Court in Dy. CIT vs. Yellamma Dasappa Hospital (2007) 207 CTR (Kar) 523 : (2007) 290 ITR 353 (Kar) and that of the Supreme Court in Dy. CIT vs. N.K. Industries Ltd. (2008) 216 CTR (SC) 114 : (2008) 6 DTR (SC) 131 : (2008) 305 ITR 274 (SC). According to the learned JM these two judgments are applicable to the block of assets also and even after the introduction of the concept of block assets, it is necessary that the assets should be actually used and not merely kept ready for use in the business in order to be eligible for depreciation. Since in the present case, the assessee had not actually used the plant during the relevant previous year due to lack of raw material, the condition of s. 32 has not been satisfied. In this view of the matter, the learned JM rejected the assessee's claim, dissenting from the view expressed by the learned AM.

5. Before I proceed to answer the first point of difference, I need to answer the second point of difference which is whether the assessee had obtained the approval of the COD for prosecuting the issue regarding the validity of the reopening of the assessment. It was the contention of the Department before the Bench that the assessee being a public sector undertaking, has not obtained the approval of the COD in respect of the above point. The learned AM in para 19 of his order stated that since the issue of depreciation was decided on merits, the question raised by the Department would be rendered academic. On the other hand, the learned JM in para 29.1 held that the assessee has not obtained the permission of the COD questioning the validity of the reopening of the assessment and therefore this ground of appeal should be dismissed. So far as the second point of difference is concerned, I was taken through the relevant papers and I find that in item No. 16 of the minutes of the COD meeting it has been recorded that the Committee has decided not to accord permission to the assessee for pursuing this point before the Tribunal. There seems to be some confusion in the matter due to the language used. However, it seems sufficiently clear to me that the assessee was not permitted to challenge the validity of the reopening of the assessment for the asst. yr. 1998-99. I therefore hold that the learned JM was right in holding that the assessee's appeal challenging the validity of the reopening of the assessment has to be dismissed. The learned AM, in my humble opinion and with due respect, ought to have dismissed the assessee's appeal on this point instead of holding that since the matter was being decided on merits this point became academic. I thus, answer to second point of difference by saying that this ground of the assessee should be dismissed.

6. Coming to the first point of difference it seems to me that even after the introduction of block of assets concept, there is no change in the legal position to the effect that the assessee would be entitled to depreciation even though the assets in question were not actually put to use in the relevant previous year, but were kept ready for being put to use for the purpose of the business. The judgment of the Hon'ble Madras High Court on this question is in CIT vs. Vayithri Plantations Ltd. (1980) 18 CTR (Mad) 9 : (1981) 128 ITR 675 (Mad). In this case, the Hon'ble High Court was concerned with the asst. yr. 1971-72 and with the claim or development rebate made by the assessee. Sec. 33 of the Act dealt with development rebate. An assessee can claim development rebate in the year in which the asset was installed or in the immediately succeeding previous year in which year the asset was "first put to use". The claim of the assessee for the year ended 31st March, 1971 was that the machinery had been installed in the new tea factory but it could not start regular manufacture with the aid of the machinery because of frequent labour unrest. The AO did not allow the claim, saying that the machinery was not used in the relevant previous year and that he would allow deprecation (sic) in the next year, when according to him, the regular production of tea with the aid of the machinery had commenced. It is in the light of this controversy and in the context of s. 33 that the matter reached the Hon'ble High Court and the argument of the Department was that since the machinery had not been used in the relevant previous year, the main condition of s. 33 was not satisfied. The contention of the assessee was that the condition was satisfied because the machinery was kept ready for use but could not be used only because of frequent labour unrest. The Hon'ble Madras High Court, in order to resolve the controversy, referred to the relevant provisions relating to depreciation in the 1922 Act and compared the same with s. 32 of the 1961 Act. After observing that s. 32 of the 1961 Act has practically re-enacted s. 10(2)(vi) of the old Act, it was further observed that both under the old Act and under the new Act, it was provided that the assessee must be the owner of the machinery and must have used the same for the purposes of the business. After referring to the judgment of the Bombay High Court in CIT vs. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom) where it was held that the word "used" appearing in s. 10(2)(vi) of the old Act embraced passive as well as active user and after referring to the later judgment of the Bombay High Court in Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom), it was noticed by the Hon'ble Madras High Court that the view taken by the Bombay High Court is the more appropriate view to take on the construction of the provision, as against a contrary view expressed by the Madhya Pradesh High Court in CIT vs. Jiwaji Rao Sugar Co. Ltd. (1969) 71 ITR 319 (MP). Thus, the decision of the Hon'ble Madras High Court in CIT vs. Vayithri Plantations Ltd. is a binding precedent so far as the Tribunal is concerned in favour of the view that in order to claim depreciation under s. 32 of the Act it is not necessary that the machinery in question should have been actually used in the relevant previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year, though not actually used due to circumstances beyond the assessee's control.

7. Sec. 32 of the Act has received several amendments but our attention was not drawn to any amendment which has clarified that depreciation would be allowed only if the asset in question was actually used during the relevant previous year and merely keeping ready for being used in the business was not sufficient. It seems to me that when the interpretation of s. 32, especially of the word "used" appearing in that section was the subject-matter of a judgment of the Bombay High Court as long back in 1937 in the old IT Act, the same word which is used in s. 32 of the 1961 Act must receive the same construction. In this connection it is not out of place to mention that the same view was expressed by the Patna High Court in CIT vs. Dalmia Cement Ltd. (1945) 13 ITR 415 (Pat). A contrary view was however expressed in Bhikaji Venkatesh vs. CIT (1937) 5 ITR 626 (Nag) and in Central Provinces Manganese Ore Co. Ltd. vs. CIT (1937) 5 ITR 734 (Nag). Thus, despite contrary views having been expressed by different High Courts there was no amendment in s. 32 to clarify the position and the same word was used.

8. Be that as it may, so far as this case is concerned, the view taken by the Hon'ble Madras High Court in CIT vs. Vayithri Plantations Ltd. has to be given effect to as it is the judgment of the jurisdictional High Court. In this case, the High Court has referred to the cleavage of opinion on the interpretation of the word "used" but still preferred, to follow the judgment of the Bombay High Court in CIT vs. Viswanath Bhaskar Sathe as "the more appropriate view" to take on the construction of the provision.

9. I will now refer to the judgment of the Hon'ble Madras High Court in CIT vs. Heera Financial Services Ltd. This case arose under s. 32 of the 1961 Act in relation to the asst. yr. 1997-98. One of the two questions that was sought to be raised before the Hon'ble Madras High Court at the instance of the Revenue was whether the Tribunal was right in allowing depreciation on an asset which was neither used nor kept ready for use, applying the theory of passive user. It was found as a fact that the film rolls leased out by the assessee could not be used by the lessee, even though kept ready for use, on account of strike in the film industry. The Hon'ble Madras High Court held that the film rolls kept under forced idleness, were in use during the entire period of the year and consequently the assessee, even though a passive user, was deemed to be an active user within the meaning of the word "used" and therefore, the Tribunal was right in allowing depreciation. It is noteworthy that the Hon'ble Madras High Court did not decide the question on the ground that it is the business of the assessee to lease out film rolls and therefore, once the film rolls were leased out they must be taken to have been used for the purpose of the business, applying the ruling of the Supreme Court in the case of CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC). The Tribunal had allowed the assessee's claim only on the ground that the film rolls were kept ready for use by the lessee though they could not be actually used due to strike. Accordingly, it was held by the Tribunal that the assessee has to be given depreciation allowance on the ground of a passive user. The High Court affirmed the decision of the Tribunal by a reasoned judgment and dismissed the appeal, finding that no substantial question of law arose for consideration. I am unable to accept the argument put forward by the Department before me that this judgment cannot be taken as an affirmation of the Tribunal's order on merits. The last para of the judgment clearly shows that the appeal of the Department was dismissed. Further the dismissal is by an elaborate judgment considering several authorities and the legal position. The earlier judgment in Vayithri Plantations Ltd. was followed and applied to the case which arose under s. 32 of the Act and in respect of a year in which the concept of block of assets was applicable. In the light of two binding judgments of the Hon'ble Madras High Court and respectfully following them, I hold that the assessee before me is entitled to the claim of depreciation on the gas sweetening plant which was kept ready for use during the entire previous year, though not actually used due to lack of raw material.

10. In the view I have taken as above, it is not necessary for me to examine the other contentions raised by both the sides before me, especially the contention of the assessee that after the introduction of the block of assets concept, it is only in the first year that the assessee has to prove actual user and that in the following years depreciation has to be allowed on the WDV of the block, after reducing the opening WDV by the sale price of the assets and after increasing the same by the cost of assets purchased in that year. My decision for the present year is that though the gas sweetening plant was not actually used, since it was kept ready for use it was eligible for depreciation.

11. It is now necessary for me to discuss some of the authorities cited before me on behalf of the Department. The first is the judgment of the Bombay High Court in Dineshkumar Gulabchand Agrawal. Suffice to say that this judgment has expressed a view contrary to the view expressed by the Hon'ble Madras High Court in Vayithri Plantations Ltd. and Heera Financial Services Ltd. The judgment of the Karnataka High Court in Dy. CIT vs. Yellamma Dasappa Hospital has also expressed a view contrary to the above judgments of the Hon'ble Madras High Court. For the same reason the order of the Mumbai Bench of the Tribunal in Asstt. CIT vs. Rishiroop Polymers (P) Ltd. (2006) 105 TTJ (Mumbai) 132 : (2006) 102 ITD 128 (Mumbai) also cannot be given effect to by me with respect, because it runs counter to the above cited judgments of the Hon'ble Madras High Court which are binding on the Madras Benches of the Tribunal. Reference was also made to another order of the Mumbai Bench of the Tribunal in Nathani Steels Ltd. vs. Dy. CIT (1996) 56 TTJ (Bom) 240 : (1996) 57 ITD 584 (Bom) at pp. 593-594. In this order in para 8 it has been opined that the proviso to cl. (b) of s. 32(1) contains the words "put to use" which shows that even after the introduction of the concept of block of assets, the requirement of user of the asset still continues and this user must be actual user. Now the connotation of the words "put to use" has been considered by the Hon'ble Madras High Court in Vayithri Plantations Ltd. because s. 33 which provided for development rebate required that the depreciation (sic) should be claimed in the year in which the plant was installed or in the next year in which it was "first put to use". The Hon'ble Madras High Court equated the quoted words appearing in s. 33 with the words "used for the purposes of the business" appearing in s. 32(1) and proceeded to lay down the law that passive user would be sufficient to entitle an assessee to claim depreciation. In the light of this judgment of the Hon'ble Madras High Court I am unable to give effect to the order of the Mumbai Bench of the Tribunal in Nathani Steels Ltd. which takes the view that the words "put to use" connote actual user and not passive user.

12. I will now refer to the two judgments of the Supreme Court which were cited before me on behalf of the Department. The first is the judgment in Dy. CIT vs. N.K. Industries Ltd. This case related to s. 32 as it was applicable after the introduction of the concept of block of assets. It was the case of the Department before the Supreme Court that the word "used" appearing in s. 32 refers to actual use of the asset, particularly so after the introduction of the block of assets concept. The Supreme Court noted that the Tribunal has examined the material on record and has come to the conclusion that there is nothing to show that the machinery namely, expellers remained idle for the entire block period from 1st April, 1998 to 24th Feb., 1999. The Supreme Court also examined the record and agreed with the Tribunal's view. It was therefore held that it was not necessary for the Court to go into the larger question of law regarding the connotation of the word "used" in s. 32 of the Act. This decision has left the question open and it has been so stated clearly by the Court itself in the following words "question of law is kept open". Therefore this judgment cannot support the Department in its contention that under s. 32 it is only the actual user and not the passive user, of the asset that would entitle the assessee to claim depreciation. The other decision referred before me was that of the Supreme Court in CIT vs. McDowell & Co. Ltd. (2009) 224 CTR (SC) 22 : (2009) 23 DTR (SC) 128 : (2009) 314 ITR 174 (SC). A perusal of the judgment shows that ultimately the matter was remitted to the AO for finding out the relevant facts. In that case the basic issue was whether the depreciation claimed by the assessee related to both the units or only to the fast food unit which was admittedly closed. This issue was not examined by the lower authorities. The assessee's stand was that the machinery was used in respect of both the fast food unit and the liquor unit. The Supreme Court did not decide the issue but remitted the same for finding the relevant facts. The contention of the Department before me is that this decision establishes that the claim of depreciation should be examined each year and not merely in the year in which the machinery was first installed, as contended on behalf of the assessee. I agree that the question of depreciation has to be examined in each year. However, what constitutes user of the asset has not been decided in this judgment cited by the Department. Therefore this judgment cannot advance the Department's case further.

13. The judgment of the Hon'ble Madras High Court in CIT vs. Maps Tours & Travels cited by the Department turned on its peculiar facts. There the assessee purchased 10 motorcars on the last day of the accounting year relevant to the asst. yr. 1989-90 and no proof was adduced for having used them in the business before the end of the previous year. The Tribunal surmised that the assessee as a businessman would have definitely used the cars though they were purchased on the last day. The High Court held that the cars were not registered for being brought on roads and there was no evidence that they were used before the end of the accounting year. As the facts show, they were peculiar and there was no claim by the assessee that the cars were kept ready for use in the business but could not be used due to circumstances beyond its control. In other words, the question whether the cars can be said to have been passively used could not have, and did not, arise for decision. Therefore, this judgment does not help the Revenue in its contention.

13.1 For the above reasons, I am inclined to agree with the view taken by the learned AM and hold that since the gas sweetening plant was kept ready for use, but could not be actually used due to lack of raw material, was eligible for depreciation as claimed by the assessee. Accordingly, I answer the first point of difference in the affirmative.

14. The appeal will now go before the regular Bench for passing the order in conformity with my decision.

U.B.S. BEDI, J.M.: 23rd Oct., 2009

In ITA No. 1822/Mad/2006, on difference of opinion between Members constituting the Bench, the following questions were formulated and referred to Third Member under s. 255(4):

"(i) Whether in view of the facts and circumstances of the case, the depreciation on gas sweetening plant could be allowed or not?

(ii) Whether in the absence of approval from COD for prosecuting the issue regarding reopening of assessment, ground in this regard could be dismissed or held to be academic?"

2. And the learned Third Member has given his opinion vide order dt. 26th Aug., 2009.

3. Consequently, in view of majority opinion, the first issue in relation to reopening of assessment is decided against the assessee and the same is dismissed, whereas, the second issue with regard to confirmation of disallowance of depreciation, in view of majority opinion, the issue is decided in favour of the assessee and appeal of the assessee on this point is allowed.

4. In the result appeal in ITA No. 1822/Mad/2006 of the assessee is partly allowed.

5. As regards appeals in ITA Nos. 1967/Mad/2006, 1643/Mad/2007 and 1823/Mad/2006, there was no difference of opinion and therefore, the appeals of the Revenue in ITA Nos. 1967/Mad/2006 and 1643/Mad/2007 are dismissed, whereas, the appeal of the assessee in ITA No. 1823/Mad/2006 is partly allowed.

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