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* IN THE HIGH COURT OF DELHI AT NEW DELHI
R-93
+ ITA 346/2002
STITCHWELL QUALITEX (RF) ..... Appellant
Through: Mr. S. Krishnan, Advocate.
versus
INCOME TAX OFFICER & ANR ..... Respondents
Through: None.
CORAM:
HON'BLE DR. JUSTICE S.MURALIDHAR
HON'BLE MR. JUSTICE VIBHU BAKHRU
ORDER
% 16.09.2015
1. This appeal by the Assessee, Stitchwell Qualitex (RF), under Section 260-
A of the Income Tax Act, 1961 (,,Act) is directed against the impugned
order dated 26th April 2002 passed by the Income Tax Appellate Tribunal
(,,ITAT) in ITA No. 6209/Del/96 for the Assessment Year (,,AY) 1990-91.
2. The following question of law has been framed by the Court by its order
dated 3rd April 2003:
"Whether the Tribunal was correct in law in holding that the
Assessee-firm was not entitled to depreciation claimed by it in
respect of Unit-II?"
ITA 346/2002 Page 1 of 6
3. The facts to this appeal are that the Assessee is a registered firm carrying
on business of manufacturing bag stitching machines in a factory situated at
Noida since 1981. In the year 1987 the Assessee applied for and was allotted
plot No. A-11, Sector-57, Noida. It constructed a factory building thereon in
the accounting year ending 31st March 1989 (AY 1989-90) and the cost of
the factory building was Rs. 9,77,775.58. Machinery worth Rs. 1,10,825 was
installed in the said factory (styled Unit II) in the previous year 1989-90.
The Assessing Officer while framing assessment under Section 143 (3) of
the Act noted that the Assessee had claimed depreciation of Rs. 1,97,458 in
the AY 1990-91 as per the following details:
Building : Rs. 1,51,432.00
Plant & Machinery : Rs. 36,572.00
Furniture & fixtures: Rs. 2,920.00
Office equipment
Rs. 6,534.00
in respect of Unit-II:
---------------------
Rs. 1,97,458.00
---------------------
4. The AO disallowed the above claim of depreciation on the ground that (i)
no sales have been made from Unit-II; (ii) purchases made for Unit-II are
only Rs. 361.70; (iii) no expenses under any head have been claimed; (iv) all
the wages payments and official documents showed that no manufacturing
ITA 346/2002 Page 2 of 6
activity took place; (v) no separate staff was engaged and (vi) no power bill
has been received. The AO held that the Assessee failed to prove that it had
undertaken any manufacturing activity during the AY in question.
5. The Commissioner of Income Tax (Appeals) [,,CIT (A)] however
accepted the plea of the Assessee that the plant and machinery was installed
in the previous year 1989-90 (AY 1989-90). However, the CIT (A) also
observed that there was no employment of staff, payment of wages,
purchase of raw material or sale from Unit-II. The CIT further observed that
"in other words, the plant was not actually used for any manufacturing
activity." The CIT (A) allowed the depreciation and came to the conclusion
that the assets were kept ready for actual use and were profit making
apparatus.
6. Aggrieved with the above order of the CIT (A), the Revenue went in
appeal before the ITAT. The ITAT referred to the decision of the Supreme
Court in Federation of Andhra Pradesh Chambers of Commerce and
Industry v. State of Andhra Pradesh [2001] 247 ITR 36 (SC) and
concluded that "in order to claim depreciation, it is important, inter alia, that
the asset must be actually used for the purpose of business." Accordingly, it
ITA 346/2002 Page 3 of 6
was held that "the CIT (A) was not justified in granting depreciation."
7. This Court has heard the submissions of Mr. S. Krishnan, learned counsel
for the Appellant. None appears for the Revenue.
8. As noted by this Court in a recent decision in National Thermal Power
Corporation Limited v. Commissioner of Income Tax (2013) 357 ITR 253
(Del), two conditions are necessary to be fulfilled before an allowance by
way of depreciation under Section 32 of the Act can be granted to the
Assessee. The first is ownership of the asset and the second, the user of the
assets for the purposes of the business. The Court on the facts of the said
case rejected the stand of the Revenue that the machinery and equipment
had to be put to actual use and that it would not be enough if they were "kept
ready for use". The Court referred to a large number of decisions of the High
Courts which held that the expression "used for the purpose of business" in
Section 32 of the Act was interpreted to include a case where the asset is
kept ready for use but is not actually put to use. These included Whittle
Anderson Ltd. v. CIT (1971) 79 ITR 613 (Bom); CIT v. Yamaha Motor
India Pvt. Ltd. (2010) 328 ITR 297 (Del); CIT v. Vayithri Plantations Ltd.
(1981)128 ITR 675 (Mad) and CIT v. Refrigeration and Allied Industries
ITA 346/2002 Page 4 of 6
Ltd. (2001) 247 ITR 12 (Del).
9. The Supreme Court in Federation of Andhra Pradesh Chambers of
Commerce v. State of Andhra Pradesh (supra), was interpreting the word
"used" occurring in Section 3 of the Andhra Pradesh Non-Agricultural
Lands Assessment Act, 1963. The question in that case was whether the
agricultural lands of the Assessee had been used for industrial purposes so as
to subject it to levy of 'assessment' . It was held in that context that that "it is
only land which is actually in use for an agricultural purpose as defined in
the said Act that can be assessed to non-agricultural assessment at the rate
specified for land used for industrial purpose." In other words, given the
background in which the question arose, the interpretation placed on the
word 'used' was in favour of the Assessee.
10. In the present case the context is the claim for depreciation under
Section 32 of the Act. On facts, it is not in dispute that the building was
constructed in the previous year 1988-89. Further, the plant and machinery
was installed in the factory in the previous year ending 31st March 1990. The
Court in of the view that the installation of the plant and machinery in the
building would amount to use of the building so as to justify the claim for
ITA 346/2002 Page 5 of 6
depreciation on the building. Further, the plant and machinery installed in
the building during AY 1989-90 was ready for use for the purpose of
business of the Assessee. The electricity connection was given on 6th
February 1990. Another important fact was that the Assessee was already
conducting its business and this was Unit II which was by way of expansion
of an existing business. It is not the Revenue's case that the building and
plant and machinery were not for the purpose of business of the Assessee.
Therefore, it is concluded that the building and machinery in Unit II were
used for the purpose of the business of the Assessee during the AY in
question.
11. The question of law is accordingly answered in the negative, i.e. in
favour of the Assessee and against the Revenue. The impugned order of the
ITAT on the issue is set aside and the appeal is allowed with no order as to
costs.
S.MURALIDHAR, J
VIBHU BAKHRU, J
SEPTEMBER 16, 2015
Rk
ITA 346/2002 Page 6 of 6
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