By TIOL News Service

KOLKATA, NOV 12, 2016: THE ISSUE IS - Whether assessee is entitled to claim depreciation on machinery used for even trial purposes. YES IS THE VERDICT.

Facts of the case:

The assessee, engaged in providing diagnostic services, had filed its return. Consequent to the same, the case was selected for scrutiny under CASS module and accordingly notices u/s 143(2) & 142(1) were issued upon assessee. The assessment was framed u/s. 143(3) at a total income of 34,15,988/- after making certain additions. The assessee, during the year, had purchased fixed assets (machines) along with its accessories for Rs.1,67,00,895 and claimed depreciation thereon for 32,38,637. The AO observed that the installation process for the machine was completed on 14.03.2005, but it functionally started on 03.05.2005. The observation of the AO was based on the handing/ taking over report given by the machine supplier. The AO further observed that warranty period of the said machine started with effect from 03.05.2005. The AO opined that the assessee is not entitled to claim the depreciation allowance in the year under consideration and accordingly disallowed the aforesaid allowance and added back to the total income of assessee. On appeal, the CIT(A) deleted the addition made by AO.

On appeal , the ITAT held that,

++ It is seen that AO has disallowed the depreciation claimed by assessee on the ground that machine has not been put to use in the year under consideration. It is found that machine was ready to use in the year under consideration as evident from the testing report. In similar facts and circumstances, several courts have decided this issue in favour of assessee. The High Court of Calcutta in the case of CIT Vs. Union Carbide (I) had held that, once it is shown that the assessee has put the machinery to use for the purpose of its business, further enquiry about the degree or type of use is not permitted by the language of s. 32.

++ Once the assessee can establish bona fide use of machinery for the purpose of its business, the assessee establishes its right to claim depreciation. As regards investment allowance, s. 32A inter alia, requires that the machinery or plant in question "is wholly used for the purposes of the business". It was with the purpose of its business that the assessee used the machinery for trial production. Thus, trial production was quite sufficient to claim both depreciation and investment allowance". Therefore, respectfully following the various judicial precedents, Tribunal found no infirmity in the order passed by the CIT(A) in this regard and accordingly, the inter-connected issues raised by Revenue is dismissed.

(See 2016-TIOL-1921-ITAT-KOL)