30 Depreciation – Condition precedent – User of plant and machinery – Machinery utilised for trial runs – Depreciation allowable

For the A. Y. 1997-98, the
assessee claimed depreciation in respect of machinery installed and put to use
in the production of cement. A trial run was conducted for one day and the
quantity produced was small. The assessee was unable to establish that after
the trial run, commercial production of clinker was initiated within a
reasonable time. According to the Assessing Officer, trial runs continued till
October, 1997 before a reasonable quantity of cement was produced. According to
the Assessing Officer, use of machinery for trial production was not for the
purpose of business and, therefore, depreciation could not be allowed. The
Assessing Officer therefore disallowed the claim for depreciation on the ground
that the plant was only used for trial runs.

The Commissioner (Appeals)
confirmed the disallowance finding that there was a long gap between the first
trial run, subsequent trial runs and commercial production and that the user of
the assets during the year should be actual, effective and real user in the
commercial sense. The Tribunal held that once the plant commenced operations
and a reasonable quantity of product was produced, the business was set up even
if the product was substandard and not marketable. It directed the Assessing
Officer to verify the period of use and restrict depreciation to 50% if the
Assessing Officer found that the machinery was used for less than 180 days
during the year under consideration.

In appeal by the Revenue,
the Calcutta High Court upheld the decision of the Tribunal and held as under:

“i) Once a plant commences
operation, even if the product is substandard and not marketable, the business
can be said to have been set up. Mere breakdown of machinery or technical snags
that may have developed after the trial run which had interrupted the
continuation of further production for a period of time cannot be held to be a
ground to deprive the assessee of the benefit of depreciation.

ii) The assessee was
entitled to depreciation.

iii) The appeal is not
entertained. The appeal is accordingly dismissed.”