8. Depreciation – trial production – even if final production is not started – as the expenses incurred thereafter will have to be treated as incurred in the course of business and on the same basis the depreciation is admissible.: Section 32

The Pr.CIT-4
vs. Larsen and Toubro Ltd. [Income tax Appeal no 421 of 2015 dt : 06/11/2017
(Bombay High Court)].

[Larsen and
Toubro Ltd. vs. The Pr.CIT-4. [ITA No. 4771 & 4459/Mum/2005; Bench : J ;
dated 27/08/2014 ; AY 1997-98 Mum. ITAT ]

The assessee
had claimed depreciation in respect of the machineries which were stated to
have been installed and put to use in the production of clinker which is
intermediates stage for production of cement. The AO observed that even if the
assessee had produced 100 MT of clinker it was only a trial run for one day and
this quantity was minuscule compared to the intended production capacity and
that the assessee was not able to prove that after the trial run, commercial
production of clinker was initiated within reasonable time. The AO pointed out
that the trial runs continued till October 1997 before the reasonable quantity
of clinker was produced. The AO held that use of machinery for trial production
cannot be deemed to be user for the purpose of business and therefore
depreciation on plant and machinery used in production of clinker cannot be
allowed. The AO disallowed the claim of depreciation of Rs. 34,79,40,576/-.

The CIT(A) confirmed the disallowance by
observing that as per section 32 the depreciation can be allowed, only if the
assets have been used for the purpose of business carried on during the year.
The expression ‘used for the purpose of business or profession means that the
assets were capable of being put to use and were used for the purpose of
enabling the owner to carry on the business or profession. The user of assets
during the year should be actual, effective and real user in the commercial
sense. In the case of the appellant as has been pointed out by the AO, even if
it is accepted that plant and machinery used for production of intermediate
stages are eligible for depreciation, is accepted, the trial production took
place only for one day. It appears that some technical snag developed in the
plant and, therefore, immediately the trial run was stopped. The AO has stated
that the trial run continued at least till October, 1997.

The appellant has not produced any evidence
to show as to when exactly the commercial production started. In the present
case, the trial production by the assessee cannot be considered as the date of
user by the assessee. One cannot ignore the facts that there was substantial
gap between the first trial run and subsequent trial runs and commercial
production. From the long gap between the first trial run and subsequent trial
runs it can be said that the installation of plant and machinery even for
production of clinkers was not satisfactorily completed and was still in installation
stage. The CIT(A) confirmed the action of the AO.

The assessee
filed appeal before ITAT. The Tribunal observed that there is no merit in the
action of the lower authorities for denial of claim of depreciation in respect
of plant and machinery which has been put to use even for trial production,
which is also for the purpose of assessee’s business of manufacture of clinker.
The Hon’ble Gujarat High Court in the case of ACIT vs. Ashima Syntex, 251
ITR 133 (Guj) held that even trial production of a machinery would fall
within the ambit of “used for the purpose of business” .Further, it
was held that as the statute does not prescribe a minimum time limit for
“use” of the machinery, the assessee cannot be denied the benefit of
depreciation on the ground that the machinery was used for a very short
duration for trial run. Furthermore, the Hon’ble Bombay High Court in the case
of CIT vs. Industrial Solvents & Chemicals Pvt. Ltd., (Mumbai) (119
ITR 615) held that once the plant commences operation and reasonable
quantity of product is produced, the business is set up. This is so even if the
product is sub-standard and not marketable.

Industrial
Solvents & Chemicals Pvt. Ltd. was entirely a new company. The Court held
that once the business is set up, the expenses incurred thereafter will have to
be treated as incurred in the course of business and on the same basis, the
depreciation and development rebate admissible to the assessee company would
have to be determined. Even use of machine for one day will entitled the
assessee for claim of depreciation. Since it is not clear from the record as to
the period for which machinery was actually used by assessee, we direct the AO
to verify the period of used and restrict the claim of depreciation to 50%, if
he finds that machinery was used for less than 180 days during the year under
consideration.