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Commissioner Of Income Tax v. Geo Tech Construction Corporation
Summary of the Opinion delivered by Arijit Pasayat, C.J.
Factual and Procedural Background
The assessee purchased two tippers on 29.3.1986 and claimed depreciation for the assessment year 1986–87. The Assessing Officer disallowed depreciation because there was no evidence that the tippers had been put to use before 31.3.1986; although delivery at Pondicherry on 29.3.1986 was accepted, no proof was produced showing delivery at the work site in Cochin or actual use before 31.3.1986. On first appeal, the Commissioner of Income-tax (Appeals), Cochin, upheld the disallowance, noting that it would take at least a day for the tippers to reach the work site and that no evidence showed they were used before 31.3.1986. The assessee appealed to the Income-tax Appellate Tribunal (Cochin Bench). The Tribunal produced the purchase voucher dated 29.3.1986, observed that the vehicles were fully built and ready for use, considered the time margin sufficient for movement from Pondicherry to Cochin, and, applying the principle of passive user, held that being kept ready for use entitled the assessee to depreciation. At the instance of the revenue, the Tribunal referred two questions under Section 256(1) of the Income-tax Act, 1961 to this Court for opinion. This judgment answers those referred questions.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on the tippers?
- 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?
Arguments of the Parties
Revenue's Arguments
- While accepting that depreciation may be granted when an asset is ready for use by application of the principle of passive user, there must be some material to show that the asset was ready for use at the work site.
- The purchase was, as stated in the opinion, made on 29.3.1996 (as recorded in the transcript of submissions), and considering the time needed to bring the asset to the work site, the principle of passive user cannot be invoked for the assessment year in question.
- Only if the assets were actually at the work site (for which there is no material) could depreciation have been properly granted.
Assessee's Arguments
- Authorities themselves (including the CIT(A)) had accepted that the maximum time necessary to bring the tippers from Pondicherry to the work site would be one day.
- Undisputedly, the tippers were purchased on 29.3.1986; it is inconceivable that the assessee, after expending significant sums, would keep them at Pondicherry without bringing them to the work site.
- Even if the time period indicated by the revenue is accepted, the tippers could, at the latest by 30.3.1986, have reached the work site and in fact had reached; the Tribunal's conclusion on facts about assets being put to use (and alternately applying passive user) are factual findings that are irreversible and do not give rise to a question of law.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Machinery Manufacturers Corporation Ltd. v. C.I.T ((1957) 31 ITR 203) | The expression "used" (in the predecessor provision) must be given a wider meaning to include passive as well as active user. | The Court relied on this authority to support the proposition that "used" in S.32 can include passive user; this aids acceptance of the Tribunal's passive-user finding. |
| C.I.T v. Dalmia Cement Ltd. ((1945) 13 ITR 415) | Depreciation may be allowed in certain cases even though machinery was not in active use or was kept idle. | Used to show that inactivity or idleness of machinery does not automatically preclude depreciation; supports a wider meaning of "used". |
| C.I.T v. Viswanath Bhaskar Sathe ((1937) 5 ITR 621) | Depreciation might be allowable even when machinery was not in active use. | Cited for the same proposition as Dalmia Cement to justify allowance of depreciation despite lack of active use. |
| Liquidators of Pursa Ltd. v. C.I.T ((1954) 25 ITR 265) | The question whether "used" includes both passive and active user had been left open; the words are capable of a larger or narrower interpretation. | The Court drew on the discussion in this case to explain that "used for the purposes of the business" can mean either active employment or passive user (an asset kept ready for use). |
| C.I.T v. Bombay State Transport Corporation ((1979) 118 ITR 399) | Illustration of the notionally understood meaning of "depreciation" in commercial/accounting terms. | Quoted to explain the commercial/accounting concept of depreciation and why allowance is justified to reflect diminution of asset value in computing true profits. |
| G.R Govindarajulu Naidu v. C.I.T ((1973) 90 ITR 13 (Mad)) | Depreciation amount is to be treated as a charge on the profits. | Used to support the accounting treatment and fiscal rationale for allowing depreciation as a deduction/charge against profits. |
| C.I.T v. Elecon Engg. Co. Ltd. ((1974) 96 ITR 672 (Guj)) | Depreciation allowance is a statutory allowance not confined strictly to diminution by wear and tear; allowance can be claimed if asset is capable of diminishing in value by factors recognised by accounting or commercial practice. | Relied on to show that statutory depreciation under S.32 is broader than mere physical wear and tear and may be allowed where commercial/accounting practice recognises potential diminution. |
Court's Reasoning and Analysis
The Court commenced with a textual and purposive reading of Section 32 of the Income-tax Act. It noted that Section 32 does not require that an asset be used for the whole of the assessment year, nor that the assessee must own the asset for the entire previous year; the statute uses the term "owned by the assessee" but does not import a requirement of ownership for the whole year.
The Court articulated the legislative object: depreciation allowance is intended as recompense for diminution in the vigour, strength or capacity of business assets so that net income is correctly determined. The opinion set out commercial/accounting understandings of depreciation (citing dictionary and authoritative texts as recorded in the judgment) to explain why depreciation is permitted as a charge in computing true profits.
The Court then identified the two statutory ingredients for allowance under S.32 as recorded in the opinion: (i) the asset is owned by the assessee, and (ii) it is used for the purpose of the assessee's business or profession (subject to S.34). There was no dispute about ownership in this case.
Turning to the meaning of "used", the Court relied on the line of authorities cited in the opinion to confirm that "used" can be given a wider meaning to include passive as well as active use — i.e., an asset may be "in use" when it is kept ready for use. The Court observed prior decisions that permitted depreciation even when machinery lay idle and noted that the question of active versus passive user had been discussed in earlier cases and is capable of a wider interpretation.
Applying these principles to the facts, the Court recorded that the Tribunal, having considered factual aspects (including the CIT(A)'s observation concerning the normal time required to bring the tippers from Pondicherry to Cochin), had recorded a finding of passive user. The Court characterised that conclusion as essentially factual, supported by the record, and not illogical or without basis. Accordingly, the Court accepted the Tribunal's view that being kept ready for use qualified as being "used" for purposes of S.32.
Holding and Implications
Holding: The questions referred under Section 256(1) are answered in favour of the assessee and against the revenue.
Implications:
- Direct effect on the parties: The assessee is entitled to depreciation on the two tippers for the assessment year in question, as the Tribunal's factual finding of passive user is accepted.
- No broader or novel precedent was proclaimed beyond applying established principles: the Court applied settled authority that "used" may include passive user and accepted the Tribunal's factual conclusion; the opinion does not purport to lay down a new rule beyond these applications.
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.
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