The Judgment of the Court was delivered by

Arijit Pasayat, C.J:— At the instance of revenue, following questions have been referred under S. 256(1) of the Income-tax Act, 1961 (in short ‘the Act’) for opinion of this Court by Income-tax Appellate Tribunal, Cochin Bench (in short ‘Tribunal’):

“1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on the tippers?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the fact that they were kept ready for use would be enough to the grant of depreciation on the principles of passive user of asset?”

2. Factual position, as highlighted in the statement of case, is as follows: Assessee purchased two tippers on 29.3.1986 and claimed depreciation for assessment year 1986–87 on the same. Assessing officer did not allow depreciation on the ground that assessee had not produced any evidence to show that they were put to use before 31.3.1986 He observed that even though tippers were taken delivery on 29.3.1986 at Pondicherry, there was no evidence to show that they were delivered at the work site before 31.3.1986 On appeal, Commissioner of Income-tax (Appeals), Cochin (in short ‘CIT (A)’) held that it would take at least a day for the tippers to reach work site and there was no evidence to show that they were put to use before 31.3.1986 Accordingly, he upheld disallowance. Assessee preferred an appeal before Tribunal.

3. It produced copy of the voucher dated 29.3.1986 from T.V Sundaram Iyengar & Sons Ltd, Pondicherry for having purchased tippers for a sum of Rs. 5,70,174.30. It was brought to the notice of Tribunal that CIT (A) himself had observed that tippers were purchased with their fully built body and were ready for use. Only point on which doubt was entertained by revenue authorities is that there was no evidence to show that tippers had reached work site at Cochin and were put to use. Assessee's contention was that there can be no evidence for movement of a vehicle on road and that distance between Podicherry and Cochin could be covered in about ten hours. Tippers are used for the smooth and complete flow of materials during unloading operations and for this purpose, assessee produced pamphlets containing descriptions etc. of tippers purchased by it. For smooth flow of materials at construction site, there can be as such no evidence on record. Tribunal held that margin of time was enough for tippers to move from Pondicherry to the work site and even if it is accepted, as contended by revenue, there was no actual user, the fact that they were kept ready for use would be enough for grant of depreciation on the principle of passive user of the asset. Accordingly, claim of depreciation was allowed.

4. A reference was sought for by revenue and as aforementioned, said prayer was accepted by Tribunal.

5. Learned counsel for revenue submitted that even though it is accepted that depreciation can be granted when an asset is ready for use by application of the principle of passive user of the asset, yet there must be some material to show that the asset was ready for use at the work site. Purchase was made on 29.3.1996 and considering the time gap necessary for bringing the asset to the work site, the principle of passive user cannot be pressed into service. Only if the assets were actually at work site, for which there is no material, depreciation could have been granted. Mr. P. Balachandran, learned counsel for assessee, on the other hand, submitted that authorities themselves had accepted that maximum time that would be necessary for bringing tippers to work site is one day. Undisputedly, tippers were purchased on 29.3.1986 It is inconceivable that assessee, after spending so much of money, would keep tippers at Pondicherry without bringing them to work site. Even if time period indicated by revenue authorities to be necessary for the purpose of bringing tippers to work site is accepted, yet latest by 30.3.1986, it was possible for the tippers to reach work site, and, in fact, had reached work site. Since Tribunal has come to a conclusion on facts about assets being put to use and in the alternative applying principle of passive user, conclusions are irreversible, and no question of law arises.

6. S. 32 of the Act deals with depreciation. There is no requirement that the assets should be used for the whole of the assessment year in question. The term used in S. 32(1) is “owned by assesseee”, but that does not bring in a requirement that assessee should have remained owner of the asset in question for the entire previous year in question. Object of the legislature, in granting depreciation allowance under S. 32 of the Act, is to give due allowance to assessee for wear and tear suffered by the assets used by him in his business so that net income (total income) is duly arrived at. There is no factual dispute that assets in question were owned by assessee. In Machinery Manufacturers Corporation Ltd. v. C.I.T ((1957) 31 ITR 203), it was observed that the expression “used” in S-10(2)(vi) of the Income-tax Act, 1922 (hereinafter referred to as ‘Old Act’) corresponding to S. 32 of the Act has to be given a wider meaning. The expression includes passive as well as active user. In C.I.T v. Dalmia Cement Ltd. ((1945) 13 ITR 415 and C.I.T v. Viswanath Bhaskar Sathe ((1937) 5 ITR 621), it was observed that depreciation might be allowed in certain cases even though machinery was not in use or was kept idle. Question whether the word ‘used’ would include both passive as well as active user was left open by Apex Court in Liquidators of Pursa Ltd. v. C.I.T ((1954) 25 ITR 265). The words ‘used for the purposes of the business’ are. capable of a larger and a narrower interpretation. If expression ‘used’ is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, plant etc. are actively employed but also cases where there is, what may be described as, a passive user of the same in the business. An asset can be said to be in use when it is kept already for use.

7. Like every other animate and inanimate object, business premises, machinery, plant or furniture employed by an assessee in the course of his business, profession, etc. has a limited effective life. The vigour, strength, capacity, etc. of every such object gradually exhausts by the factors of use and time. These have undoubtedly aided assessee to earn ‘income’ from such business or profession which is subjected to the levy of tax. Unless provision was made for proper recompense of such diminution in the vigour, strength, capacity, etc., the apparent profits from the business, profession, etc. would not give a correct picture. Allowance for depreciation is born out of necessity for such recompense. “Depreciation”, according to Webster's New World Dictionary, means ‘a decrease in value of property through wear, deterioration or obsolescence: the allowance made for this in book-keeping, accounting, etc.’. Depreciation is the inherent decline in the value of an asset from any cause whatsoever (as observed by William Pickles, in “Accountancy”, page 74). Depreciation is the diminution which takes place in the value of a wasting asset despite the amount expended on it in repairs (as stated in the Business Encyclopaedia, Vol. II, page 365). Depreciation is the measure of the effective life of an asset owning to use or obsolescence during given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective life-time and the amount written off during an accounting period is intended to represent the proportion of such expenditure which has expired during the period (as stated by Spicer and Pegier in “Book-keeping and Accounts”, 14th edition, page 47. For the purposes of determining the true profits in the commercial sense or under the proper principles of accountancy, the wear and tear of the assets utilised by the assessee for the purpose of earning his profit will have to be considered and allowance will have to be made for wear and tear. This is “what is notionally understood as depreciation (see: C.I.T v. Bombay State Transport Corporation, (1979) 118 ITR 399, 405 (Bom)). Allowable depreciation amount is a capital loss to the depreciable asset which must be replaced First to give a true or correct picture as otherwise there is bound to be a distorted picture in the profit and loss account. Depreciation amount is to be treated as a charge on the profits (see: G.R Govindarajulu Naidu v. C.I.T, (1973) 90 ITR 13 (Mad)). The principal factors responsible for reduction in value of a capital asset and, therefore, responsible for depreciation are: (i) ordinary wear and tear, (ii) unusual damage, (iii) inadequacy, and (iv) obsolescence. These factors include not only those relating to physical deterioration, but also those referring to the suitability of the asset as an economically productive unit after a period of time. The depreciation allowance under S. 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice (see: C.I.T v. Elecon Engg. Co. Ltd., (1974) 96 ITR 672 (Guj)). The two ingredients for depreciation allowance are (i) that the depreciable asset is owned by assessee and (ii) that it is used for the purpose of assessee's business or profession subject, however, to the provision of S. 34. As noted above, only dispute that was raised by revenue is there was no positive material to show even existence of the asset at the work site. Tribunal, on a consideration of factual aspects and more particularly with reference to observation of CIT (A) about normal time required for bringing asset from Pondicherry to Cochin, has recorded a finding about passive user. Said conclusion essentially is factual and it cannot be termed to be one without any basis or illogical. Above being the position, we accept the view of Tribunal.

8. Question referred to are answered in favour of assessee and against revenue.