Conditions

- In order to claim depreciation, an assessee has to fulfil the following conditions :

The asset should be owned by the assessee. Where, however, an assessee carries on business or profession in a building not owned by him but taken on lease, he is entitled to depreciation in respect of the capital expenditure incurred by him after March 31, 1970 on the construction of any structure or any work in relation to the building by way of improvement, renovation or extension.

The asset, in respect of which depreciation is claimed, must have been used for the purpose of business. Where, however, the asset is partly used for business or profession and partly used for private and personal purposes, a reasonable proportion of the depreciation attributable to the business user of the asset is allowed

Under the Income-tax Act, one can claim depreciation in respect of the following assets-

The following points should be noted-

1. Depreciation is available even in respect of a fractional ownership of an asset.

2. It has come to the notice of the Board that the New Accounting Standard on 'Leases' issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act.-Circular No. 2 of 2001, dated February 9, 2001.

3. From the assessment year 2002-03, depreciation under section 32(1) will be available whether (or not) the assessee has claimed, the deduction for depreciation while computing his total income.

4. "Building" means the superstructure only and does not include site-CIT v. Alps Theatre [1967] 65 ITR 377 (SC). "Plant" includes ships, vehicles, books (including technical know-how report), scientific apparatus and surgical equipments used for the purpose of business or profession but does not include tea bushes or livestock or (from the assessment year 2004-05) building, furniture and fittings.

DISALLOWANCE OF DEPRECIATION - For the assessment years 1971-72 to 1997-98, no depreciation is allowed under section 37(4)(ii) in respect of a building used as a guest house. Any asset used therein also does not qualify for depreciation allowance. Where a car is used otherwise than in a business of running it on hire for tourists :

a. depreciation is not allowed on the excess of the actual cost over Rs. 25,000 if the car is acquired, after March 31, 1967 but before March 1, 1975; and

b. depreciation (including terminal depreciation) is wholly disallowed if the car is a foreign car and has been acquired after February 28, 1975 but before April 1, 2001 (depreciation is available if a foreign made car is acquired after March 31, 2001).

Where a foreign motor car is used outside India in a business or profession carried on by the assessee in another country, depreciation will be allowed on the same even if the foreign made car is acquired after February 28, 1975 but before April 1, 2001.

BLOCK OF ASSETS [SEC. 2(11)] - The term "block of assets" has been defined by section 2(11) to mean a group of assets falling within a class of assets, comprising-

a. tangible assets, being buildings, machinery, plant or furniture;

b. intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights or similar nature, in respect of which the same percentage of depreciation is prescribed.

A taxpayer may have 18 different blocks of assets as given below-

While blocks 1 to 11 are in respect of tangible assets, blocks 12 to 18 are in respect of intangible assets.

WRITTEN DOWN VALUE [SEC. 43(6)]

Written down value for the assessment year 2003-04 will be determined as under :

Step 1 - Find out depreciated value of the block of assets on April 1, 2002.

Step 2 - To this value add "actual cost" of the asset [falling in the block] acquired during the previous year ending March 31, 2003 relevant for the assessment year 2002-03.

Step 3 - From the resultant figure, deduct moneys received, receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold, discarded, demolished or destroyed during the previous year ending March 31, 2003 relevant for the assessment year 2003-04. However, the amount of deduction cannot exceed the value of block of assets computed up to Step 2 supra.

The resulting amount is the written down value of the block of assets on March 31, 2003 relevant for the assessment year 2003-04.

One may determine the written down value for other assessment years on the similar basis.

Slump sale - In the case of a slump sale, the following shall be reduced from the value determined after Step 2 - Actual cost of assets falling in the block transferred by "slump sale"

Less :

a. depreciation actually allowed in respect of that asset in respect of any previous year relevant to the assessment year commencing before 1988-89; and

b. depreciation that would have been allowable from the assessment year 1988-89 onwards as if that asset was the only asset in the relevant block of assets.

It may be noted that the amount of reduction under Step 3 cannot exceed the value of assets computed up to Step 2.

MEANING OF "ACTUAL COST" [SEC. 43(1)] - It means the actual cost to the assessee as reduced by that proportion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority. Interest paid before the commencement of business on capital borrowed for the acquisition and installation of plant and machinery is treated as a part of actual cost and consequently the assessee is entitled to claim depreciation on such interest also. However, amount payable as interest in connection with acquisition of asset and relatable to a period after the asset is first put to use does not form part of actual cost (applicable from April 1, 1974). Likewise, the commission paid to the banker for giving guarantee to the supplier of the asset is deemed as part of actual cost.

Section 43(1) enumerates the cases where actual cost of an asset is taken at a notional figure. This is determined as follows :

Where an asset is used in the business after it ceases to be used for scientific research, the actual cost of the asset to the assessee will be the actual cost to the assessee as reduced by the amount of any deduction allowed [Expln. 1 to section 43(1)].

Where an asset is acquired by the assessee by way of a gift or inheritance, the actual cost of the asset to the assessee will be the actual cost to the previous owner as reduced by the following (from the assessment year 1988-89) :

a. depreciation actually allowed in respect of that asset in respect of any previous year relevant to the assessment year commencing before April 1, 1988; and

b. depreciation that would have been allowable from the assessment year 1988-89 onwards as if that asset was the only asset in the relevant block of assets [Expln. 2 to sec. 43(1)].

CONDITIONS - To claim additional depreciation, the following conditions should be satisfied-

1. Manufacture/production of any article - The assessee should be engaged in the manufacture or production of any article or thing (maybe priority sector item or even non-priority sector item given in the Eleventh Schedule).

2. New plant and machinery installed and acquired after March 31, 2002 - Additional depreciation is available only in respect of new plant and machinery acquired and installed after March 31, 2002. The following points should be noted-

Additional depreciation is not available in respect of building or furniture even if the other conditions are satisfied.
Additional depreciation is not available in respect of old plant and machinery.
Additional depreciation is available only if plant and machinery is acquired and installed after March 31, 2002. If a plant or machinery is acquired before April 1, 2002 but installed after March 31, 2002, then additional depreciation is not available.

3. Eligible plant and machinery - Any plant and machinery which has been acquired and installed after March 31, 2002 by an assessee is qualified for additional depreciation. However, the following assets are not eligible for additional depreciation-

a. ships and aircrafts; or
b. any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
c. any machinery or plant which is installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or
d. any office appliances or road transport vehicles; or
e. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year.

4. Certificate from a chartered accountant - Additional depreciation will not be available unless the assessee furnishes the details of machinery or plant and increase in the installed capacity of production in Form No. 3AA along with the return of income and the report of a chartered accountant, certifying that the deduction has been correctly claimed in accordance with the provisions.

RATE OF ADDITIONAL DEPRECIATION - Additional depreciation shall be available @ 15 per cent of the actual cost. If, however, the asset is put to use for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 7.5 per cent.

YEAR IN WHICH ADDITIONAL DEPRECIATION IS AVAILABLE - It is available as follows-

1. In the case of a new industrial undertaking, additional depreciation is available during any previous year in which such undertaking begins to manufacture or produce any article or thing on or after April 1, 2002.

2. In the case of any industrial undertaking existing before April 1, 2002, it is available during any previous year in which it achieves the substantial expansion by way of increase in installed capacity by not less than 25 per cent.

"New industrial undertaking" means an undertaking which is not formed- a. by the splitting up or the reconstruction, of a business already in existence; or b. by the transfer to a new business of machinery or plant previously used for any purpose. "Installed capacity" means the capacity of production as existing on March 31, 2002. The following points should be noted-

Formation" of new undertaking - If a new industrial undertaking is "formed" by transfer of new as well as old machinery or plant, then additional depreciation is not available even in respect of new plant and machinery. Conversely, if the old plant and machinery is such that new industrial undertaking cannot be regarded as having been "formed" by their acquisition, then additional depreciation is available in respect of new plant and machinery-see Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC).

On the basis of aforesaid ruling, it can be said that acquisition of old plant or machinery (may or may not be of significant value) which does not result in "formation" of a new industrial undertaking, does not disentitle the assessee from availing the benefit of additional depreciation in respect of new machinery.

New undertaking formed after March 31, 2002 - In the case of a new industrial undertaking formed on or after April 1, 2002, additional depreciation is available in the year in which undertaking begins to manufacture or produce any article or thing. In the case of expansion of such undertaking in a subsequent year, additional depreciation is not available. For instance, X Ltd. forms a new industrial undertaking to manufacture paper on June 30, 2002. New plant and machinery acquired and put to use during the previous year 2002-03 is qualified for additional depreciation. If X Ltd. acquires a plant to increase the installed capacity of the said undertaking by 25 per cent on June 10, 2005, then in respect of the new plant, additional depreciation is not available. Acquisition of new plant and machinery to increase the installed capacity of an existing industrial undertaking is qualified for additional depreciation only in the case of an undertaking which existed before April 1, 2002.

Undertaking formed before April 1, 2002 - If a new plant and machinery is purchased to expand an existing unit, then additional depreciation is available only if the following conditions are satisfied.

Condition one - There is an industrial undertaking which comes into existence before April 1, 2002. If an industrial undertaking comes into existence on or after April 1, 2002, then plant and machinery acquired in a subsequent year for expansion purposes is not eligible for additional depreciation.

Condition two - The industrial undertaking has achieved substantial expansion in the capacity of production in the year in which new plant and machinery is acquired and put to use. The procedure to find out whether (or not) there is a substantial expansion is as follows-

Step 1 - Find out the capacity of production of the industrial undertaking as on March 31, 2002.

Step 2 - Find out the expansion in such capacity during the previous year in which new plant and machinery is acquired and put to use. If capacity under Step 2 is 25 per cent or more of the capacity under Step 1, then it is substantial expansion and new plant and machinery will be eligible for additional depreciation.

General

Depreciation allowance is a concession - ‘Depreciation’ allowance is a concession granted by the State in the computation of income based on very many factors relevant to a wholesome fiscal administration. - Parthas Trust v. CIT [1988] 169 ITR 334 (Ker.)(FB).

Depreciation, whether a notional loss towards diminution in value of assets - Depreciation represents the diminution in the value of an asset when applied to the purpose of making profit or gain. Depreciation is thus related to an asset and is a notional loss as against actual loss in sense of outgoings of a business - CIT v. R.J. Trivedi & Sons [1990] 53 Taxman 485/183 ITR 420 (MP).

Depreciation allowance under section 32 is a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear; 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 - CIT v. Refrigeration & Allied Industries Ltd. [2000] 113 Taxman 103 (Delhi).

Deduction is allowable even according to accounting principles - Depreciation is allowable as a deduction both according to accountancy principles and according to the Indian Income-tax Act, because otherwise, one would not have a true picture of the real income of the business - CIT v. Alps Theatre [1967] 65 ITR 377 (SC).

Genuineness of books of account is not relevant - In respect of buildings, machinery, plant or furniture, being the property of the assessee, a depreciation allowance has to be made in computing the profits. This, therefore, is not a matter depending on the genuineness of the books of account - Allahabad Glass Works v. CIT [1961] 42 ITR 439 (All.).

Charitable trust is entitled to deduction - A charitable trust is entitled to depreciation in respect of assets held by it - CIT v. Raipur Pallottine Society [1989] 80 CTR (MP) 127.

Calculation must be in Indian currency - A company may keep its accounts in foreign currency but depreciation will have to be calculated in Indian currency at the point of time of acquisition of the asset - CESC Ltd. v. CIT [1998] 233 ITR 50 (SC).

Law applicable

Law as on 1st April of financial year applies - The Income-tax Act, 1961, as it stands amended on the 1st day of April of any financial year, applies to the assessment of that year. Any amendment in the Act or the Rules which comes into force after the 1st day of April of a financial year would not apply to the assessment of that year, even if the assessment is actually made after the amendment come into force. Thus, where in rates of depreciation there was amendment raising rate with effect from 24-7-1980, the law as amended was not applicable to the assessment year 1980-81, nor could it be deemed to be retrospective - CIT v. Mirza Ataullaha Baig [1993] 202 ITR 291 (Bom.).

Building - Meaning of

Building’ must be construed in its ordinary sense - The word ‘building’ has not been defined in the Income-tax Act and must, therefore, be construed in its ordinary sense having regard to the purposes for which depreciation is allowed - CIT v. Indo Burmah Petroleum Co. Ltd. [1978] 112 ITR 755 (Cal.).

Building’ does not include site - For purposes of depreciation also, the expression ‘buildings’ does not include the site because there cannot be any question of the destruction of the site - CIT v. Alps Theatre [1967] 65 ITR 377 (SC)/D.S. Bist & Sons v. CIT [1972] 85 ITR 254 (Delhi)/Distt. Co-operative Federation Ltd. v. CIT [1973] 87 ITR 639 (All.).

Roads inside factory are ‘buildings’ - The roads laid within the factory premises as links or which provide approach to the buildings are necessary adjuncts to the factory buildings to carry on the business activities of the assessee and would be ‘building’ within the meaning of section 32 - CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 62 Taxman 471/196 ITR 149 (SC).

Roads not adjunct to building cannot be treated as ‘building’ - Where the assessee constructed roads to approach about 500 trenches meant for dumping waste and night soil, the roads cannot be treated as ‘building’ for purposes of allowing depreciation, since the roads were not adjunct to any building and there was no other construction except the roads - Indore Municipal Corporation v. CIT [2001] 247 ITR 803 (SC).

Factory buildings

Administrative blocks are ‘factory buildings’ - Where, the administrative block housed the chief engineer and related staff, the canteen, the new stores, and co-operative stores buildings, which were essential adjuncts to the factory premises, it was held that they were rightly treated as factory buildings - CIT v. Standard Motor Products of India Ltd. [1983] 142 ITR 877 (Mad.). Mere taking of licence will not suffice - Taking a licence under the Factories Act does not make the unit a ‘factory’ - CIT v. Mangolia Dairy Products (India) [1979] 119 ITR 26 (Cal.).

Machinery

‘Machinery’ shall have same meaning as for other purposes like repairs, insurance etc. - The word ‘machinery’ when used in ordinary language prima facie means some mechanical contrivances which, by themselves or in combination with one or more mechanical contrivances, by the combined movement and inter-dependent operation of their respective parts, generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result. If a machinery is machinery for purposes of giving an allowance in respect of insurance or for repairs or in respect of normal depreciation, it must be machinery for other purposes also - CIT v. Mir Mohammad Ali [1964] 53 ITR 165 (SC). Dumper is ‘machinery’ - A ‘dumper’ comes within expression ‘earthmoving machinery’ for purposes of depreciation. It cannot be treated as a road transport vehicle - CIT v. Sibson Construction & Co. [1996] 221 ITR 468 (Gauhati).

Furniture/fittings

Partition works are ‘fittings’ and not ‘building’ - Partition works and false ceiling come under expression ‘fittings’ and not ‘building’ for purpose of depreciation - CIT v. Indian Metal & Metallurgical Corpn. [1983] 141 ITR 40 (Mad.). False ceilings in cinema theatre are ‘fittings’ - False ceilings and other accessories fitted in cinema theatres are part of ‘fittings’ - CIT v. N.L. Mehta Cinema Enterprises (P.) Ltd. [1993] 71 Taxman 443 (Bom.).

Bus

Cost of route permit must be excluded - Where a bus was purchased along with the route permit, depreciation is allowable only on the amount representing the value of the vehicle, and not on the amount representing the value of the route permit - G. Vijayaranga Mudaliar v. CIT [1963] 47 ITR 855 (Mad.)/CIT v. S. Sudhakar [2001] 247 ITR 747 (Mad.).

Depreciation on assets acquired under the hire-purchase agreement - Conditions subject to which it is to be allowed

The following instructions are issued for dealing with cases in which an asset is being acquired under on what is known as hire-purchase agreement :

1. In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.

2. Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (e.g., where the lessor obtains a right to sue for arrear instalments but no right to recovery of the asset), the transaction should be regarded as one of purchase by instalments and no deduction in respect of “hire” should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

3. Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of :

a. Consideration for hire, to be allowed as a deduction in the assessment, and
b. payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement).

The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value (as described above), the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreement was terminated either by the outright purchase of equipment or of its return to the owner, the deduction should cease as from the date of the termination.

An assessee claiming this deduction should be asked to furnish a certificate, from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming, the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum; in doubtful cases the facts should be reported to the Board.
Circular : No. 9 [R. Dis. No. 27(4)-IT/43], dated 23-3-1943.

Judicial Analysis

EXPLAINED IN : Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 (Hyd. - Trib.) (SB) with the observation that the Circular No. 9 dated 23-3-1943 mainly clarifies that depreciation on plant and machinery purchased on hire purchase system would be admissible to the hirer (lessee) and that the periodical payments made by the hirer should for tax purposes be regarded as made up of (i) consideration of hire (interest), and (ii) payment on account of purchase (principal component). It further mentions that allowance for interest/hire should be evenly spread over the term of the agreement for being allowed as deduction in the case of the hirer. The said circular does not give any guidelines relating to accrual of income in the hands of the financier. The said circular does not be interpreted to mean that an income which come within the ambit of charging section should not be charged to tax in the year of accrual of income because deduction by way of hire and depreciation in the hands of the hirer is to be allowed in a particular manner as clarified in the said circu­lar. Moreover, the circular say that that interest should be evenly spread over the terms of the agreement. The interest income according to the SOD method had been spread over the term of the contract in such a manner that it evenly gave a uniform, constant and uniform rate of interest on the reducing balances of principal amount for the entire period of contract. In any case, the said circular cannot override the charging provisions of the Act.

Depreciation and Development rebate on plant and machinery purchased on hire-purchase system

Attention is drawn to the Board’s Circular No. 9 of 1943 (P/DI F. No. 27(4)/II/43), dated March 23,1943 (Sl. No. 229) clarifying that depreciation on plant and machinery purchased on hire purchase system would be admissible at the usual rates if the conditions stated therein were fulfilled. The Board, vide its letter F. No. 27(20)-IT/59, dated June 26, 1959 (See Annex) further clarified that the same basis should be followed for development rebate also.

It has now been brought to the notice of the Board that in view of objections raised by Revenue Audit in certain cases some Income-tax Officers are not allowing depreciation and development rebate on machinery purchased on hire purchase system even though the conditions laid down in the aforesaid circular and letter are fulfilled.

I am directed to say that the Instructions contained in the circular and letter referred to above have not been withdrawn by the Board and are still in force and as such, should continue to be followed. This may please be brought to the notice of the officers working in your charge.

Annex

COPY OF LETTER F. NO. 27(20)-IT/59, DATED 26-6-1959 OF THE C.B.R.

Subject : Allowances in assessing income—Development rebate on the installation of machinery acquired on hire-purchase basis—Whether the assessee is entitled to.

In Circular No. 9 of 1943 the Board issued instructions regarding the grant of depreciation allowance for machinery acquired under hire-purchase agreement to the effect that depreciation should be allowed in the first year itself on the estimated full initial value of the asset (the balanced being taken as hire charges). The same basis may be followed for development rebate also, i.e., development rebate may be granted in the first year itself on the full initial value. No difficulty is likely to arise as a result of forfeiture of the asset to the “hirer” because the existing provisions enable Government to recover development rebate where the machinery is sold or otherwise transferred by the assessee.

Instruction : No. 1097, dated 19-9-1977. [Source : 193rd Report of Public Accounts Committee (1983-84) (Seventh Lok Sabha), pp. 50-54.]

Judicial analysis

Explained in - The above circular and letter were explained and applied in Addl. CIT v. General Industries Corporation [1985] 155 ITR 430 (Delhi), with the following observations :

“. . . The circulars of the Central Board of Direct Taxes only serve to overcome a greater difficulty in computing how the various allowances have to be given to the assessee. If the payments towards the hire-purchase are not treated as being capital pay­ments, they will have to be allowed as revenue payments, because the payments are certainly for business purposes and yet, if they are not treated as capital payments, they will necessarily be amounts expended towards the carrying out of the business. On the other hand, if the property passes at the time of the last in­stalment, then the entire revenue payment will be transformed into a capital payment at that stage. To meet this obvious diffi­culty, the Central Board of Direct Taxes has issued circulars at various times directing that assets purchased on hire-purchase basis should be treated as belonging to the assessee. The various documents filed along with the statement of case show that this posi­tion has been continuing for a very long time. Circular No. 9, dated March 23, 1943, issued by the Central Board of Revenue directed that the periodical payments should be treated as (a) the consideration for hire to be allowed as a revenue deduction, and (b) a payment on account of purchase to be treated as a capital layout. It is also mentioned in that circular that depre­ciation should be allowed on the initial value, i.e., the amount for which the hired object could be purchased in cash on the date of the agreement. The same view was reiterated by the Central Board of Revenue in its circular dated June 26, 1959. The Central Board of Revenue again reiterated its instructions in November, 1962, and again on July 15, 1963. In the technical instructions of November, 1962, it is pointed out that if depreciation is not allowed to the user, the same cannot also be granted to the owner because he is not using the object for the business, i.e., the result would be that neither the owner nor the hirer would get the allowance. This document points out that it is the person who runs the business who should get the allowance and not the formal owner.

Claim for depreciation - Department not to take benefit of assessee’s ignorance

Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed by law, officers should—
(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

Circular : No. 14(XL-35) of 1955, dated 11-4-1955 [Extracted from Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.)].

Judicial analysis

Explained in - This circular was explained in CIT v. Ahmedabad Kaiser-e-Hind Mills Co. Ltd. [1981] 128 ITR 486 (Guj.), with the following observations :

“This is Circular No. 14(XI-35) of 1955 and is dated April 11, 1955. In view of this circular it is clear that for the purpose of the circular, what should be the guiding factor is whether the proceedings or other particulars before the ITO at the stage of original assessment disclosed any grounds for relief under sec­tion 2(5)(a)(iii) of the Finance Act of 1964 or of the Finance Act of 1965, even though no claim was made for that relief by the assessee at the stage of those proceedings before him. It is possible to argue that, to the extent to which the circular of 1955 speaks of proceedings or other particulars before the ITO as distinguished from the return and the assessment order which were spoken of by the Supreme Court in Rai Bahadur Hardutroy’s case [1967] 66 ITR 443, there is a deviation from the correct legal position. But it is now well-settled after the decision of the Supreme Court in Ellerman’s case [1971] 82 ITR 913, that even if there is a deviation on a point of law, so far as the circular of the Board is concerned, that circular will be binding on all officers concerned with the execution of the Act and they must carry out their duties in the light of the circular.

In view of this clear position regarding the effect of the circu­lar, it is obvious that in the instant case it was incumbent on the ITO to advise the assessee before us to claim relief under section 2(5)(a)(iii) if the proceeding or any other particulars before him at the stage of the original assessment indicated that the assessee was entitled to such relief under the provisions of the relevant Finance Act, 1965, so far as the order under refer­ence is concerned. This question in the light of this circular of 1955 has not been examined by the Tribunal. What applies to the obligation of the ITO would also apply to all officers of the department concerned with the execution of the Act. Therefore, so far as the controversy before us regarding the powers of the AAC is concerned, in the light of the facts before us and in the light of this circular, we decline to answer the question referred to us because the question before us becomes academic in view of this circular of 1955.”

Claim for depreciation - Where required particulars have not been furnished

1. Numerous instances have come to the notice of the Board where assessee’s claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimate profits by invoking the proviso to section 13 of the 1922 Act. The course generally followed in such cases was to estimate the net income. The decision of the appellate authorities in such cases that the mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly “allowed” as provided under the Act. On the contrary, they held, that since no depreciation was actually allowed in the past years, the profit or loss under section 10(2)(vii) would be computed without making any deduction for depreciation for arriving at the written down value of the asset.

2. The Board considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including the depreciation allowance should be separately deducted from the gross profit. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom.

3. Even where best judgment is made, the above procedure should be adopted provided the required particulars have been furnished by the assessee. In cases where required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance. In such cases, the estimate of net profit would be naturally higher than otherwise and the fact that the estimate has been made without considering depreciation allowance may be clearly brought out in the assessment order. In such cases, the written down value of depreciable assets would continue to be the same as at the end of the preceding year as no depreciation would actually be allowed in the assessment year.

Circular : No. 29-D(XIX-14) [F. No. 45/239/65-ITJ], dated 31-8-1965.

Judicial Analysis

Explained in - In Beco Engg. Co. Ltd. v. CIT [1984] 148 ITR 478 (Punj. & Har.), the above circular was explained with the following observations :

“. . . The Central Board of Revenue, in its Circular No. 29-D(XIX-14) of 1965, F. No. 45/239/65-ITJ, dated August 31, 1965, has provided that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance. From the circular, it is evident that in case the assessee has not claimed depreciation allowance, he cannot be granted the same by the ITO. It has been settled by the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, that the circulars issued by the Department would be binding on it. From the language of the section, read with the circular, it is clear that in case an assessee has not claimed depreciation, the ITO cannot give the allowance of depreciation to him.”

Explained in - In CIT v. Friends Corporation [1989] 180 ITR 334 (Punj. & Har.), it was observed as under :

“There is no gainsaying that allowance for depreciation is a benefit available to the assessee to claim, but not one that can be thrust upon him against his wishes. At any rate, in order to claim depreciation, the assessee must furnish the requisite particulars as prescribed by the Income-tax Act and the Rules made thereunder. In the absence of such particulars, the assessee cannot avail of, nor indeed can he be held entitled to, depreciation. It would be pertinent in this behalf to advert to the judgment of this court. In Beco Engineering Co. Ltd. v. CIT [1984] 148 ITR 478, where a reference was made to Circular No. 29-D(XIX-14) of 1965, dated August 31, 1965, issued by the Central Board of Direct Taxes which provides that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance. Further, it was held that from the language of sections 32(1)(ii) and 34(1) read with the circular, it was clear that in case an assessee had not claimed depreciation, the Income-tax Officer could not give him depreciation allowance.”

Explained in - In CIT v. Arun Textile [1991] 192 ITR 700 (Guj.), it was observed as under :

“. . . In this context, we may also refer to the Circular of the Central Board of Revenue, 29-D(XIX-14) of 1965 (F. No. 45/239/65-ITJ, dated August 31, 1965), which directed that, ‘where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance.’ Thus, as the assessee had not claimed depreciation allowance and had made clear its intention not to claim the same, no necessary particulars were furnished and it is obvious that the Income-tax Officer has no occasion to allow any deductions. It was not open to the Income-tax Officer to advert to the original returns for the purpose of allowing deductions which claim was expressly withdrawn by filing the revised returns.”

Explained in - In CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. [1989] 177 ITR 443 (Bom.), the above circular was explained with the following observations :

“Our attention was invited by counsel for the assessees to the judgment of the Gujarat High Court in Chokshi Metal Refinery v. CIT [1977] 107 ITR 63, 70, 71. Reference was there made to a circular of the Central Board of Revenue [Circular No. 14(XL-35) of 1955, dated April 11, 1955]. The circular required officers of the Department ‘to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs. . . . Although, therefore, the responsibility, for claiming refunds and relief rests with the assessees on whom it is imposed by law, officers should (a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other....’ Counsel for the assessees rightly relied upon this judgment as saying that a claim had to be made by the assessee for a relief to which he was entitled and that the Income-tax Officer’s duty was only to advise him of it.

In the instant cases, therefore, the Income-tax Officer could certainly have advised the assessees of their right to claim depreciation but he could not have given them the allowance on his own.

In our view, to sum up on the first issue, the assessee has a choice to claim or not to claim a deduction on account of depreciation. If he chooses not to claim it, the Income-tax Officer is not entitled to allow a deduction on account of depreciation.”

Approved in - The above circular was referred to and impliedly approved in CIT v. Bishambar Dayal & Co. [1994] 210 ITR 118 (All.), with the following observations :

“. . . The Income-tax Appellate Tribunal relied upon a circular of the Central Board of Direct Taxes No. 29D(xix) of 1965, F. No. 45/239/65-ITC, dated March 31, 1965. Under this circular, the Board had issued instructions that where income is proposed to be computed by applying a net rate and the assessee has furnished the prescribed particulars for the claim in respect of deprecia­tion, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Income-tax Appellate Tribunal is in conformity with the circular issued by the Central Board of Direct Taxes. No provision of the Income-tax Act was brought to our notice which makes the claim to depreciation inadmissible where the income is computed by applying the flat rate. In our opinion, the order of the Income-tax Appellate Tribunal does not give rise to any statable question of law....”

Explained in - The above circular was explained in Chopra Bros. (India) (P.) Ltd. v. ITO [1993] 202 ITR 40 (Chd. - Trib.), in the following words :

“. . . In the order of the learned Accountant Member, the entire circular of the Board was reproduced. I do not wish to reproduce the circular again, but the need to issue such circular arose because determination of income by estimating the net profit without mentioning anything about the allowance of depreciation led to several legal difficulties in assessing the profits aris­ing on the sale of assets by applying the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922. The Board, there­fore, considered that, where it was proposed to estimate the profit and where the prescribed particulars were furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including depreciation allowance should be separately deducted from the profit so that the net profit can be arrived at. If it is considered that the net profit should be estimated, it should be estimated subject to allowance of depreciation and the depreciation allowance should be deducted therefrom. This was what was contained in paragraph 2 of the circular. The circular is, there­fore, very categorical and unambiguous and directs the Assessing Officers to work out the depreciation separately even in cases where the net profit is to be estimated. I do not, therefore, see how the learned Commissioner (Appeals) could bring himself to say that the circular is inapplicable. The reasoning given by him is rather strange. In paragraph 3 of the circular, the Board has gone a step further and said that even when a best judgment assessment was made, the procedure mentioned above should be scrupulously followed. This is another reason why I am astonished at the way in which the circular of the Central Board of Direct Taxes was, if I may use the expression, deliberately and with a conscious design sidetracked. Beneficial circulars and benevolent circulars should receive the highest respect and consideration at the hands of the Assessing Officers, particularly, at the level of the Commissioner (Appeals) because that was the policy of the Central Board of Direct Taxes, which means the Government. They are not supposed to go against the intention of the Government in implementing laws. They must advance the course of justice by extending the benefits. There is no room for personal predilec­tions in implementing the fiscal laws. The spirit more than the letter should receive the highest consideration. I am, there­fore, of the opinion that both the Income-tax Officer and the Commissioner (Appeals) have erred in appreciating the circular and in not applying it....”

Explained in - CIT v. Jain Construction Co. [2000] 110 Taxman 156 (Raj.) in following words :

“It appears that the Board felt it necessary to issue the aforesaid circular for determination of income by estimating the net profit without mentioning anything about the allowance of depreciation, which led to several legal difficulties arising on the sale of assets by applying the provisions of section 10(2)(vii). The Board, therefore, considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances in­cluding the depreciation allowance should be separately deducted from the gross profit so that the net profit can be arrived at. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance of depreciation and the depreciation allowance should be deducted therefrom.”

Fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of employees - Whether should be considered to have been used wholly for the purpose of employer’s business and full depreciation be allowed

1. Attention is invited to the Board’s letter No. F. 10/97/63-IT(A-I), dated 29-2-1964, addressed to the Commissioner of Income-tax, in which instructions were issued, inter alia, that development rebate should not be allowed on air-conditioners and fans given by an employer for the personal use of the employees or directors at their residence, on the ground that the said plant and machinery were not wholly used for the purpose of the assessee’s business.

2. The question has been re-examined by the Board recently in the light of the Board’s letter F. No. 9/26/IT/60, dated 21-3-1960 in which it was clarified that quarters built by the employers for the accommodation of their employees must be regarded as buildings used for the purpose of the business and depreciation allowed thereon, where the occupation by the employees of the property owned by the employer is subservient to and necessary for the purpose of their duties. It is considered that what applies to buildings applies also to the fans, air-conditioners and refrigerators fitted to those buildings, as those are amenities which virtually form part of such buildings.

3. On reconsideration, therefore, the Board have decided, in supersession of the instructions issued in their letter dated 29-2-1964 that fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of the employees, should be considered to have been used wholly for the purpose of the employer’s business and full depreciation as may be admissible in accordance with the rules, should be allowed in the assessment of the employer. Where such assets have been installed on or before March 31, 1965, development rebate may also be allowed in respect of these assets, if the rebate is otherwise admissible.

Depreciation - Extra shift allowance - Implications of the word ‘concern’ used in the rules

It was pointed out that the extra-shift allowance for deprecia­tion was being denied on the ground that the word ‘concern’ appearing in the Rules means the whole concern in contradiction to any one shop or shops of the industrial concern. The Committee was informed that instructions had already been issued to the Commissioner of Income-tax that the double or triple shift allowance should be granted only in respect of that machinery which had actually worked double or triple shift in a concern, and not in respect of all the machinery in the concern. As a corollary, for the purposes of extra shift allowance it is not necessary that all the machinery in the concern should work extra shift, but where some of the machinery or plant works extra shift, the depreciation in that regard will be admissible in respect of that machinery or plant.

Whether, for deriving benefit of higher depreciation, motor lorries must be hired out to some other person or whether user of same in assessee’s business of transportation of goods on hire would suffice

1. Under sub-item 2(ii) of Item III of Appendix I to the Income-tax Rules, 1962, higher rate of depreciation is admissible on motor buses, motor lorries and motor taxis used in a business of running them on hire. A question has been raised as to whether, for deriving the benefit of higher depreciation, motor lorries must be hired out to some other person or whether the user of the same in the assessee’s business of transportation of goods on hire would suffice.

2. In Board’s Circular No. 609, dated 29-7-1991 (Sl. No. 244) it was clarified that where a tour operator or travel agent uses motor buses or motor taxis owned by him in providing transportation services to tourists, higher rate of depreciation would be allowed on such vehicles. It is further clarified that higher depreciation will also be admissible on motor lorries used in the assessee’s business of transportation of goods on hire. The higher rate of depreciation, however, will not apply if the motor buses, motor lorries, etc., are used in some other non-hiring business of the assessee.

Circular : No. 652, dated 14-6-1993.

Rate of depreciation

Hotels/Cinema Theatres - See under section 43(3) - Plant.

Jeeps must be treated as motor cars - Jeeps are motor cars for purposes of depreciation - Crompton Engg. Co. (Madras) Ltd. v. CIT [1992] 193 ITR 483 (Mad.)/CAIT v. Good Hope Enterprises [1992] 197 ITR 236 (Ker.).

Dumpers are road transport vehicles - Dumpers are road transport vehicles - Shiv Construction Co. v. CIT [1987] 165 ITR 160 (Guj.).

Ambulance van is eligible for enhanced rate - Where the Tribunal had found that the plying of the ambulance van on hire itself constituted the business of the assessee though it may be incidental to the running of the hospital and that, the hire charges were also assessed under the head ‘Business’, the assessee was entitled to depreciation at the rate of 40 per cent - CIT v. Dr. K.R. Jayachandran [1995] 212 ITR 637 (Ker.).

Trucks primarily self-used but occasionally hired out are not eligible for higher rate - If a truck is not used for hiring but for the purpose of one’s own business, then it would be entitled for depreciation at the rate of 30 per cent and not 40 per cent. The business of running the vehicle on hire is different from giving the vehicle on hire casually. The vehicle may be given on hire occasionally which may or may not constitute an activity of carrying on business of running them on hire. It is the main activity and the intention behind thereof which has to be considered for deciding as to whether the assessee was carrying on the business of running vehicle on hire or not - CIT v. Sardar Stones [1995] 215 ITR 350 (Raj.).

Vehicles used for transporting passengers/goods as a regular business are entitled to higher rate - An owner who holds a transport fleet of buses on permits for hiring them can be said to be doing a transport business and will be entitled to depreciation. Likewise, if the owner uses motor lorries for goods carriage as a regular business, then also he is entitled to depreciation. Similarly, if the owner is doing the business of giving his motor cars on hire as taxis, then also he will be entitled to depreciation. In all these cases, depreciation would be admissible at the higher rate of 50 per cent - CIT v. Sharma Motor Service [1998] 148 CTR (MP) 75.

Whether Higher rate is admissible on vehicles leased out on rent - Where the assessee leased out vehicles on rent to various industries, depreciation is not admissible at the higher rate on the vehicles, since the vehicles could not be said to have been run by the assessee on hire. Only general rate of depreciation is admissible - Soma Finance & Leasing Co. Ltd. v. CIT [2000] 244 ITR 440 (Cal.).

(Contra)
The word ‘hire’ used in the entry relating to motor lorries etc., is only meant to denote that the use of the vehicle is not by the owner himself for his own purposes but it is given to another for use for a limited period of that other for a consideration. For the purpose of this entry, there is no qualitative difference between lease of the vehicle for a specified period for consideration and letting the vehicle on hire for short duration on payment of hire charges. Thus, an assessee leasing out motor lorries owned by him and receiving lease rentals would be entitled to higher rate of depreciation by treating the vehicles as being used in the business of running them on hire - CIT v. Madan & Co. [2002] 254 ITR 445 (Mad.).

For availing higher rate of depreciation, it is not mandatory that vehicles are not only used in business of running on hire but assessee should also use these vehicles himself for same purpose - CIT v. Bansal Credits Ltd. [2003] 126 Taxman 149 (Delhi).

Mobile crane mounted on truck is eligible for depreciation as ‘motor truck’ - A mobile crane mounted on a truck constitutes a single unit known as a ‘truck crane’ which is adapted for use upon roads for special services. It will fall under the category of ‘motor truck’ (also Motor Lorry), for purposes of allowing depreciation - Gujco Carriers v. CIT [2002]122 Taxman 206/256 ITR 50 (Guj.).