Four of my vehicles were kept in running condition all year but were actually plied for barely a month. The Assessing Officer says they were not used, so no depreciation. Is he right?
No. The Delhi High Court held that 'used for the purposes of the business' bears the wider meaning and includes passive user, so that machinery kept ready for actual use in the business is used for the purposes of the business even if it is not actually worked. Depreciation was allowed on four buses kept ready for use throughout the year although not plied for more than thirty days.
Decided by the High Court (S. Ranganathan J (the report as read names only one judge although the judgment speaks in the plural)) on 1980-02-14, reported as [1980] 123 ITR 404 (Delhi); assessment year 1961-62. It bears on section 10(2)(vi) of the Indian Income-tax Act, 1922, section 32, section 32(1) of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
Passive user is the answer to the commonest depreciation disallowance in a year of low activity: a standby generator, a spare engine, plant idle for want of orders, a vehicle off the road for part of the year. What the doctrine requires is readiness, not intention — the asset must be in the business and kept in a condition in which it can be put to use the moment the need arises, which means keeping evidence of maintenance, insurance and fitness. Two limits should be understood. First, an asset that has never been put to use at all is a harder case than one temporarily idle. Second, since the introduction of the block of assets in 1988 the argument is often unnecessary, because depreciation is computed on the block and the Revenue cannot pull one asset out of the block on the ground that it was not put to use; the passive user argument matters most where the whole block or the whole business is idle, or where the asset is claimed in the year it first enters the block.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee ran a transport business with twenty buses. Four of them, earmarked for contract work, were kept in working condition and ready for operation throughout the previous year but were actually plied for fewer than thirty days, the reason being an absence of customers rather than any mechanical defect. Depreciation on those four buses was disallowed on the footing that they had not been used. The Appellate Assistant Commissioner took the view that there was a passive user of the buses which entitled the assessee to depreciation, and the question referred to the High Court was whether the assessee was entitled to depreciation in respect of four buses kept ready for use throughout the previous year although not actually used for more than thirty days.
The question was answered in the affirmative and in favour of the assessee, with no order as to costs. The assessee was entitled to depreciation on the four buses kept ready for use throughout the previous year although they were not actually used for more than thirty days (paras 20 to 22).
The Court held that the words 'used for the purposes of the business' are capable of a larger and a narrower interpretation: read strictly they would require the active employment or actual working of the machinery, plant or building, but the wider meaning includes cases of what may be described as a passive user of the asset in the business (para 16). It adopted the wider meaning, following the line of authority in which it was held that the assessee's contribution to the business was the obligation to keep his machinery ready for actual use at any moment, and that machinery kept idle may well depreciate. On the facts, the buses were kept ready for operation and were in the business and for use in the business, and it was sufficient that they were employed for the purposes of the business and kept ready for actual use the moment a need arose.
On the other hand, the wider meaning will include not only cases where the machinery, etc., is actively employed but also cases where there is, what may be described as, a passive user of the same in the business.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that 'used for the purposes of the business' bears the wider meaning and includes passive user, so that machinery kept ready for actual use in the business is used for the purposes of the business even if it is not actually worked. Depreciation was allowed on four buses kept ready for use throughout the year although not plied for more than thirty days. This was decided by the High Court (S. Ranganathan J (the report as read names only one judge although the judgment speaks in the plural)) and bears on section 10(2)(vi) of the Indian Income-tax Act, 1922, section 32, section 32(1) of the Income Tax Act 1961. It is reported as [1980] 123 ITR 404 (Delhi); assessment year 1961-62. Passive user is the answer to the commonest depreciation disallowance in a year of low activity: a standby generator, a spare engine, plant idle for want of orders, a vehicle off the road for part of the year. What the doctrine requires is readiness, not intention — the asset must be in the business and kept in a condition in which it can be put to use the moment the need arises, which means keeping evidence of maintenance, insurance and fitness. Two limits should be understood. First, an asset that has never been put to use at all is a harder case than one temporarily idle. Second, since the introduction of the block of assets in 1988 the argument is often unnecessary, because depreciation is computed on the block and the Revenue cannot pull one asset out of the block on the ground that it was not put to use; the passive user argument matters most where the whole block or the whole business is idle, or where the asset is claimed in the year it first enters the block. If it applies to you, the first step is this: Show readiness, not merely ownership: log books, fitness and insurance certificates, maintenance records, evidence that the plant was manned or maintained.
The assessee ran a transport business with twenty buses. Four of them, earmarked for contract work, were kept in working condition and ready for operation throughout the previous year but were actually plied for fewer than thirty days, the reason being an absence of customers rather than any mechanical defect. Depreciation on those four buses was disallowed on the footing that they had not been used. The Appellate Assistant Commissioner took the view that there was a passive user of the buses which entitled the assessee to depreciation, and the question referred to the High Court was whether the assessee was entitled to depreciation in respect of four buses kept ready for use throughout the previous year although not actually used for more than thirty days. The matter was decided on 1980-02-14 by the High Court (S. Ranganathan J (the report as read names only one judge although the judgment speaks in the plural)). On those facts the High Court held as follows. The question was answered in the affirmative and in favour of the assessee, with no order as to costs. The assessee was entitled to depreciation on the four buses kept ready for use throughout the previous year although they were not actually used for more than thirty days (paras 20 to 22).
The Court held that the words 'used for the purposes of the business' are capable of a larger and a narrower interpretation: read strictly they would require the active employment or actual working of the machinery, plant or building, but the wider meaning includes cases of what may be described as a passive user of the asset in the business (para 16). It adopted the wider meaning, following the line of authority in which it was held that the assessee's contribution to the business was the obligation to keep his machinery ready for actual use at any moment, and that machinery kept idle may well depreciate. On the facts, the buses were kept ready for operation and were in the business and for use in the business, and it was sufficient that they were employed for the purposes of the business and kept ready for actual use the moment a need arose. In the words reproduced by the source cited on this page: "On the other hand, the wider meaning will include not only cases where the machinery, etc., is actively employed but also cases where there is, what may be described as, a passive user of the same in the business."
It was decided by the High Court on 1980-02-14 and is reported as [1980] 123 ITR 404 (Delhi); assessment year 1961-62. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 10(2)(vi) of the Indian Income-tax Act, 1922, section 32, section 32(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the affirmative and in favour of the assessee, with no order as to costs. The assessee was entitled to depreciation on the four buses kept ready for use throughout the previous year although they were not actually used for more than thirty days (paras 20 to 22). It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 10(2)(vi) of the Indian Income-tax Act, 1922, section 32, section 32(1) of the Income Tax Act 1961, and was decided by S. Ranganathan J (the report as read names only one judge although the judgment speaks in the plural). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Explain the reason for the idleness — absence of orders or of customers is a business reason and was accepted here; disrepair and abandonment are not. Where the asset is in an existing block, take the block point as well (see the Oswal Agro Mills entry) and do not rest on passive user alone. For an asset acquired in the year, remember the 180-day proviso: readiness has to be established from the date the asset was put to use for the purpose of the half-rate rule. Do not stretch the doctrine to an asset that was never installed or was still under erection at the year end — that is a different argument, on capitalisation, not on user.
Validity check could not be completed. Later treatment was not checked. The decision is on the 1922 Act; it is relied on for the meaning of 'used for the purposes of the business', which is the same expression as in s.32 of the 1961 Act. For years from AY 1988-89 the block of assets scheme changes how the point usually arises, and the argument in this entry is not a substitute for the block argument. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The assessment year is 1961-62 and the provision construed is s.10(2)(vi) of the Indian Income-tax Act, 1922, confirmed from a raw fragment; the words 'used for the purposes of the business' are common to s.32 of the 1961 Act and the reasoning is applied to s.32 to this day. indiankanoon's transcription of this old report prints 'assessed' where the report says 'assessee' — the quote used avoids that word. The page header names only S. Ranganathan J although the judgment speaks in the plural; a second judge could not be identified from anything read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the affirmative and in favour of the assessee, with no order as to costs. The assessee was entitled to depreciation on the four buses kept ready for use throughout the previous year although they were not actually used for more than thirty days (paras 20 to 22).
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