“Used for the purposes of business or profession” for depreciation u/s 32

The general scheme of the Act is, that income is to be charged regardless of the exhaustion or diminution in the value of capital. To this principle of taxation, an exception is afforded by section 32, wherein an allowance is provided in respect of depreciation on the value of certain capital assets in computing the profits and gains of business or profession u/s. 28 of the Income-tax Act, 1961 (‘the Act’).

The relevant part of section 32 of the Act is reproduced below for ease in understanding and ready reference in context of controversy to be discussed:

“32(1) In respect of depreciation of –

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

(ii) Know-how, patents, copyrights…. or any other business or commercial rights of similar nature, being intangible assets, acquired on or after the 1st day of April, 1988, owned, wholly or partly, by the assessee and used for the purpose of the business or profession, the following deductions shall be allowed……”

Section 32 while conferring the benefit on the assessee, lays down two conditions to be satisfied by an assessee .These two conditions are, firstly, that the asset must be owned by the assessee and, secondly, the asset must be used for the purpose of business or profession of the assessee.

Pradip Kapasi Gautam Nayak Ankit Virendra Sudha Shah Chartered Accountants Controversies Therefore, ownership and usage of the asset by the assessee for the purpose of the business and profession are the pre-requisites for grant of depreciation u/s. 32 of the Act.

The controversy revolves around the determination of the event in point of time when the asset under consideration can be said to be ‘used’ for the purpose of business or profession. Conflicting decisions of the Courts are available on the subject wherein Delhi, Rajasthan, Punjab and Haryana, Madras, Calcutta and Gauhati High Courts have supported the view that an asset which is owned and is kept ready for use should be eligible for grant of depreciation even where the same is actually not used during the year [hereinafter referred to as “passive user of asset”] while the Bombay, Karnataka and Gujarat High Courts have held that not only the asset should be owned by the assessee, but the same should be actually used during the year [hereinafter referred to as “actual user of asset”].

Oswal Agro Mills case

Recently, the Delhi High Court in the case of CIT v. Oswal Agro Mills Ltd. and Anr (supra) (‘the company’) had an occasion to deal with the aforesaid issue under consideration, wherein a question arose for grant of depreciation in respect of assets in the unit of the assessee company at Bhopal, which remained closed throughout the year. The AO denied the claim for depreciation in respect of assets of Bhopal unit of the assessee company on the ground that it was closed throughout the year, which was upheld by the CIT(A) on appeal by the assessee. The Delhi Tribunal, however, reversed the findings of the lower authorities, after considering the submissions of the assessee and held as under:

• The Bhopal unit remained dormant and could not function due to various reasons and the Revenue could not bring on record that this unit was finally closed or sold out in succeeding years;
•  That revenue could not controvert that this unit did not form part of the block of assets;
• If any of the part of the block of assets was not used during the year, but remaining part of the block of assets was in continuous use, then assessee was entitled for the depreciation on the entire block of assets; and
• If the assessee’s unit was temporarily closed for a year or so and its commercial activities were in lull for that period, then assessee could not be deprived from its claim of depreciation unless and until, it was proved that the assessee had closed its business forever and had no intention of reviving the same.

On further appeal by the Revenue before the Delhi High Court, the Court after referring to the conflicting judgements of other High Courts as referred to above, opined in principle that the passive user of the asset was also recognised as user for the purpose of expression ‘asset used for the purpose of business or profession.’ After relying on its own decisions on the subject, the Court held that even when an asset was not used for certain reason in the concerned assessment year but was kept ready for use, in such a case, assessee should not be denied the claim for depreciation.

For the sake of completeness, as to the facts, in the aforesaid case on facts, the assessee failed to prove that the assets were ready for use, since the assets under consideration were not used for number of years. Even then, the assessee was allowed depreciation on the impugned assets by applying the ‘block of assets’ concept which was brought by the Legislature in section 2(11) of the Act w.e.f. 1st April 1988 vide Taxation Laws (Amendment) Act, 1986 where the grant of depreciation, additions and deletion of assets are considered qua the block of assets and not qua the individual assets. In other words, the High Court held that since the impugned assets had lost their individual identities under the block of asset concept, and therefore, it was not possible to disallow depreciation qua the individual assets of Bhopal unit, once such assets entered the block of assets. Further, the Court also observed that the Revenue would not be put to any loss by adopting such method and allowing depreciation, since whenever the assets at Bhopal unit were sold, it would result in short term capital gain, which would be exigible to tax.

Dineshkumar Gulabchand Agrawal’s case

 In a short judgement by the Bombay High Court in the case of Dineshkumar Gulabchand Agrawal (‘the assessee’) v. CIT and Anr (supra) with limited facts on record, the Court held that the word ‘used’ in s. 32 denoted actually used and not merely ready to use. The assessee submitted before the Court that, since the vehicle was ready to use for the purpose of business even though not actually used, should be allowed claim of depreciation placing reliance on the earlier Bombay High Court decision in the case of Whittle Anderson Ltd. vs CIT (79 ITR 613). The Bombay High Court distinguished the decision of Whittle Anderson Ltd (supra) on the ground that in the said case, the Court was concerned with the interpretation of the terms ‘use’ or ‘used’ and further referred to an amendment in section 32 of the Act, post the decision of Whittle Anderson Ltd. Inserted for clarifying that the expression ‘used’ meant actually used for the purpose of the business and accordingly upheld the decision of the Mumbai Tribunal in disallowing the claim of depreciation on vehicles kept ready for use.

In a further development, the assessee’s Special Leave Petition (‘SLP’) before the Apex Court reported in 266 ITR (St.) 106 was also dismissed by the Supreme court with the following observations:

•     Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law;

•     The jurisdiction conferred by Article 136 of the Constitution of India is divisible into two stages. First stage is upto the disposal of prayer for special leave to file an appeal. The second stage commences if and when the leave is granted and SLP is converted into an appeal;

•    Doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or af-firming the order put in issue before it;

•     Under Article 136 of the Constitution of India, the Supreme Court may reverse, modify or af-firm the judgement, decree or order appealed against, while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of petition for special leave to appeal. The doctrine for merger can, therefore, be applied to former and not to the latter;

•    An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case, it does not attract doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means that the Court was not inclined to exercise its discretion so as to allow the appeal being filed;

•     If the order refusing leave to appeal is a speaking order ie gives reasons for refusing the grant of leave, then the order has two implications:

–    Firstly, the statement of law contained in the order is a declaration of law by Supreme Court within the meaning of Article 141 of Constitution of India; and

–    Secondly, other than the declaration of law, whatever is stated in the order is a declaration of law by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings sub-sequent thereto by way of judicial discipline, the Supreme Court being the apex court of the country;

–    But this does not amount to saying that the order of Court, Tribunal or authority below has stood merged in the order of Supreme Court rejecting SLP or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.

In light of above relevant findings of the Supreme Court, it may be concluded that even though SLP to Dineshkumar Gulabchand Agrawal case was dismissed, irrespective whether being speaking or non-speaking order, it would not be binding as res judicata and/or binding on other parties or serve as doctrine of merger to subsequent proceedings between the parties thereto.

Observations
Upon perusing the provisions of section 32 of the Act and the legislative history thereof, one finds that the word “used” was in the statute from its inception and there has been no change brought in the said section except by the second proviso to section 32 inserted vide Finance (No. 2) Act, 1991 and further substituted by the Income-tax (Amendment) Act, 1998 to its present form, which reads as under:

“Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than one hundred-eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset under clause ……………”

In Dineshkumar Gulabchand Agrawal’s case (supra), the Bombay High Court found that subsequent to the earlier law as laid down in Whittle Anderson Ltd v. CIT(supra), there has been an amendment to section 32 of the Act in context of the word “used” and so earlier decision as relied upon by the assessee had no application. The Bombay High Court as well as the Supreme Court, while ruling, did not provide any reference to the amendment carried out in the expression “used”. It is also not possible for a reader to fathom the above referred amendment out from a plain reading of the said decision.

It may not be incorrect to hold, in the circumstances, that an erroneous presumption was made by the court which error formed the basis of the decision. It may also be correct to presume that neither this error was pointed out to the court by the assessee nor was it pointed out to the apex court. In the alternative, though not expressly referred to by the court, one may gather that the Bombay High Court was probably referring to the expression “put to use” that is referred to in the second proviso to section 32 of the Act. According to the second proviso to section 32 of the Act, if the assets acquired during the previous year are put to use for less than 180 days, then depreciation is restricted to 50% of the depreciation as otherwise available for the whole year.

Surely, the stipulation in the proviso could not have the effect of curtailing the scope of the main provision, unless specifically provided for. Again, had that been the intention, the main provision could have been amended simultaneously, more so where the controversy was fairly known to all concerned. It may be inappropriate to restrict the scope of the term ‘used’ found in the main provision by gathering the meaning thereof from the proviso, which again has been introduced for the limited purpose of restricting the quantum of depreciation and not for the disallowance thereof. Accordingly, even in the context of the proviso, it is not possible to hold that the eligibility of depreciation under the main provision of section 32 is based on actual user of the asset. The courts have consistently upheld the claim of the assessee on being satisfied with readiness of the asset for its use. This view has been unanimously upheld by all the courts including the Bombay high court for the period prior to the amendment and does not require any change on account of the proviso.

The said proviso otherwise is found to be relevant only for the first year of claim of depreciation and has been found to be inapplicable once the identity of the asset is merged with that of the block of assets. Once in the block, it is not possible to seggregate an asset for disallowance, nor it is possible to determine the written down value of an individual asset that is believed to have not been used for the year.

The Act has used several terms surrounding the user. For example; used, wholly used, put to use and partly used. It has also used the term ‘actually’ wherever required, for example in section 43B where actual payment is desired. All these clearly show that the Act would have provided for in clear terms, that the asset should have been actually used, if the intention was to restrict the depreciation to such user only. In the absence of the condition to ‘actually’ use the asset, it is apt that a wider meaning is given to the term ‘used’ as was given by the Bombay high court in the case of CIT v. Vishwanath Bhaskar Sathe, 5 ITR 621.

The expression “put to use” in a general sense may otherwise also mean and include an asset that is ready for use. In many cases, an asset is not actually used during the year, but is kept ready for use. For example, standby plant and machinery, step-ins, spare parts, etc. Further, in many cases like strike, lock out, flood, fire,etc., the assets cannot be actually used, even if desired. In these cases, though the assets are not actually used during the previous year, even then depreciation is not denied considering the intention to use such assets. It is, therefore ,appropriate to hold that the user of asset should signify all such cases where an asset is kept ready for use for the purpose of business or profession.

This view also finds support from the the Circular No. 621 of 1991 (supra), which attempts to match the claim of the depreciation with the income offered for taxation. Once the assessee has derived income from business to which the said asset belongs, the claim for depreciation should not unreasonably be withheld.

The intention of the legislature cannot be gathered from the proviso introduced at a much later date with the limited effect of reducing the quantum of the claim of depreciation and not for denying the same altogether.

An asset is depreciated for several factors and user is just one of them. Therefore, to deny the claim for depreciation simply for non user is otherwise not very appealing. The position at the most can be held to be debatable and where it is debatable, the view beneficial to the assessee should be adopted especially in interpreting the incentive provisions, like, depreciation.

The Supreme Court in the case of Kunhayammed & Ors. Vs State of Kerala & Anr. (245 ITR 360) while considering the jurisdiction of High Court in cases where a SLP on the same issue is dismissed by the Supreme court, observed as under:

•     Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law;

•     The jurisdiction conferred by Article 136 of the Constitution of India is divisible into two stages. First stage is upto the disposal of prayer for special leave to file an appeal. The second stage commences if and when the leave is granted and SLP is converted into an appeal;

•     Doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid, shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it;   

•     Under Article 136 of the Constitution of India, the Supreme Court may reverse, modify or af-firm the judgement, decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of petition for special leave to appeal. The doctrine for merger can, therefore, be applied to former and not to the latter;

•     An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case, it does not attract doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is, that the Court was not inclined to exercise its discretion so as to allow the appeal being filed;

•     If the order refusing leave to appeal is a speaking order ie gives reasons for refusing the grant of leave, then the order has two implications:

–    Firstly, the statement of law contained in the order is a declaration of law by Supreme Court within the meaning of Article 141 of Constitution of India; and
–    Secondly, other than the declaration of law, whatever is stated in the order is a declaration of law by the Supreme
Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex court of the country;
–    But this does not amount to saying that the order of Court, Tribunal or authority below has stood merged in the order of Supreme Court rejecting SLP or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.

Once an asset entered in to the block of assets, in view of the findings of the Delhi High Court in Oswal Agro Mills Ltd’s case (supra), the “user” shall be relevant only in the year of entry of asset into the block, because once it enters the block, it is neither possible nor necessary to consider whether each asset in the block has been used during the subsequent years.