I bought second-hand machinery and claimed depreciation on what I paid. The Assessing Officer has substituted the previous owner's written down value as my actual cost. Can he do that?
Not without satisfying the conditions of Explanation 3 to s.43(1). The Chennai Bench held that the Explanation can be invoked only where the Assessing Officer records a satisfaction that the main purpose of the transfer of the assets was the reduction of a liability to income-tax by claiming depreciation on an enhanced cost, and only where he determines the actual cost with the previous approval of the Joint Commissioner; both conditions are mandatory, and neither having been met, the substitution had no jurisdictional basis and the disallowance was deleted.
Decided by the ITAT (Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member) on 2026-02-18, reported as ITA No. 2317/Chny/2025 (ITAT Chennai 'A' Bench); assessment year 2017-18. It bears on section 43(1), section 32, section 32(1) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
There is no bar in s.32 on claiming depreciation on second-hand machinery, and the actual cost is what the assessee paid unless the Act displaces it. Explanation 3 is the provision that displaces it, and it is a deeming provision with two procedural conditions built into it — a recorded satisfaction as to purpose, and the Joint Commissioner's prior approval — which Assessing Officers routinely omit. The failure is jurisdictional, so the point can be taken even where the valuation looks vulnerable on the merits, and it is worth taking before arguing about value. Note what the Explanation does not require: it does not require the transfer to be between related parties, only that the assets were used by any other person before acquisition and that the main purpose of the transfer was the reduction of tax. And note the neighbouring provisions the officer may switch to — Explanation 7 to s.43(1) and Explanation 2 to s.43(6) in an amalgamation, the sixth proviso to s.32, and Explanation 10 on subsidies — each of which has its own conditions.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, engaged in the production of fish meal, purchased second-hand machinery for Rs. 2,14,80,600 and claimed depreciation of Rs. 31,41,044 on that cost. The Assessing Officer took the view that depreciation on used machinery could be allowed only on the residual written down value in the hands of the previous owner, and substituted that value for the price paid, invoking Explanation 3 to s.43(1). He recorded no satisfaction that the main purpose of the transfer was the reduction of a liability to income-tax, and obtained no approval of the Joint Commissioner before determining the actual cost. The CIT(A) confirmed the disallowance. The assessee also challenged the validity of the scrutiny notice for not specifying the category of scrutiny.
The appeal was partly allowed and the disallowance of Rs. 31,41,044 was deleted. Explanation 3 to s.43(1) can be invoked only where the Assessing Officer records the satisfaction the Explanation requires and determines the actual cost with the previous approval of the Joint Commissioner; both conditions being unmet, he had no jurisdiction to substitute the actual cost declared by the assessee. The challenge to the notice was rejected, the non-mention of the category of scrutiny not rendering a notice invalid where the case was selected under CASS.
The Tribunal started from s.32(1), which allows depreciation where the asset is owned wholly or partly by the assessee and is used for the purposes of the business, and noted that there is no prohibition in s.32 on claiming depreciation on second-hand machinery, so that the proposition that depreciation is allowable only on the residual value in the previous owner's hands finds no support in the Act. Explanation 3 to s.43(1) is a deeming provision and must be strictly construed, and the burden lies on the Revenue to establish the conditions prescribed in it. Those conditions are the recorded satisfaction as to the main purpose of the transfer and the previous approval of the Joint Commissioner before the exercise of determining the actual cost is embarked upon. Neither appearing on the record, the invocation of the Explanation was unsustainable and the actual cost declared by the assessee stood.
Explanation 3 is a deeming provision and must be strictly construed. The burden lies on the Revenue to establish the conditions prescribed therein. In the absence of statutory compliance, the AO had no jurisdiction to substitute the actual cost declared by the assessee.
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Handle my notice → Ask a CA on WhatsAppNot without satisfying the conditions of Explanation 3 to s.43(1). The Chennai Bench held that the Explanation can be invoked only where the Assessing Officer records a satisfaction that the main purpose of the transfer of the assets was the reduction of a liability to income-tax by claiming depreciation on an enhanced cost, and only where he determines the actual cost with the previous approval of the Joint Commissioner; both conditions are mandatory, and neither having been met, the substitution had no jurisdictional basis and the disallowance was deleted. This was decided by the ITAT (Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member) and bears on section 43(1), section 32, section 32(1) of the Income Tax Act 1961. It is reported as ITA No. 2317/Chny/2025 (ITAT Chennai 'A' Bench); assessment year 2017-18. There is no bar in s.32 on claiming depreciation on second-hand machinery, and the actual cost is what the assessee paid unless the Act displaces it. Explanation 3 is the provision that displaces it, and it is a deeming provision with two procedural conditions built into it — a recorded satisfaction as to purpose, and the Joint Commissioner's prior approval — which Assessing Officers routinely omit. The failure is jurisdictional, so the point can be taken even where the valuation looks vulnerable on the merits, and it is worth taking before arguing about value. Note what the Explanation does not require: it does not require the transfer to be between related parties, only that the assets were used by any other person before acquisition and that the main purpose of the transfer was the reduction of tax. And note the neighbouring provisions the officer may switch to — Explanation 7 to s.43(1) and Explanation 2 to s.43(6) in an amalgamation, the sixth proviso to s.32, and Explanation 10 on subsidies — each of which has its own conditions. If it applies to you, the first step is this: Ask for the assessment record: is there a recorded satisfaction that the main purpose of the transfer was the reduction of a liability to income-tax, and is there the Joint Commissioner's approval on file?
The assessee, engaged in the production of fish meal, purchased second-hand machinery for Rs. 2,14,80,600 and claimed depreciation of Rs. 31,41,044 on that cost. The Assessing Officer took the view that depreciation on used machinery could be allowed only on the residual written down value in the hands of the previous owner, and substituted that value for the price paid, invoking Explanation 3 to s.43(1). He recorded no satisfaction that the main purpose of the transfer was the reduction of a liability to income-tax, and obtained no approval of the Joint Commissioner before determining the actual cost. The CIT(A) confirmed the disallowance. The assessee also challenged the validity of the scrutiny notice for not specifying the category of scrutiny. The matter was decided on 2026-02-18 by the ITAT (Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member). On those facts the ITAT held as follows. The appeal was partly allowed and the disallowance of Rs. 31,41,044 was deleted. Explanation 3 to s.43(1) can be invoked only where the Assessing Officer records the satisfaction the Explanation requires and determines the actual cost with the previous approval of the Joint Commissioner; both conditions being unmet, he had no jurisdiction to substitute the actual cost declared by the assessee. The challenge to the notice was rejected, the non-mention of the category of scrutiny not rendering a notice invalid where the case was selected under CASS.
The Tribunal started from s.32(1), which allows depreciation where the asset is owned wholly or partly by the assessee and is used for the purposes of the business, and noted that there is no prohibition in s.32 on claiming depreciation on second-hand machinery, so that the proposition that depreciation is allowable only on the residual value in the previous owner's hands finds no support in the Act. Explanation 3 to s.43(1) is a deeming provision and must be strictly construed, and the burden lies on the Revenue to establish the conditions prescribed in it. Those conditions are the recorded satisfaction as to the main purpose of the transfer and the previous approval of the Joint Commissioner before the exercise of determining the actual cost is embarked upon. Neither appearing on the record, the invocation of the Explanation was unsustainable and the actual cost declared by the assessee stood. In the words reproduced by the source cited on this page: "Explanation 3 is a deeming provision and must be strictly construed. The burden lies on the Revenue to establish the conditions prescribed therein. In the absence of statutory compliance, the AO had no jurisdiction to substitute the actual cost declared by the assessee."
It was decided by the ITAT on 2026-02-18 and is reported as ITA No. 2317/Chny/2025 (ITAT Chennai 'A' Bench); assessment year 2017-18. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 43(1), 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 appeal was partly allowed and the disallowance of Rs. 31,41,044 was deleted. Explanation 3 to s.43(1) can be invoked only where the Assessing Officer records the satisfaction the Explanation requires and determines the actual cost with the previous approval of the Joint Commissioner; both conditions being unmet, he had no jurisdiction to substitute the actual cost declared by the assessee. The challenge to the notice was rejected, the non-mention of the category of scrutiny not rendering a notice invalid where the case was selected under CASS. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 43(1), section 32, section 32(1) of the Income Tax Act 1961, and was decided by Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member. 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. Take the absence of either as a jurisdictional ground in the grounds of appeal, expressly and separately from the valuation ground. Support the actual cost with the purchase bills and the machinery-wise details; the claim still has to be proved even where the Explanation is not validly invoked. If the seller is a related party, expect the satisfaction to be recorded next time — prepare the commercial justification for the price now, ideally with a registered valuer's report. Do not accept the argument that depreciation on second-hand machinery is confined to the previous owner's residual value; there is no such provision in s.32.
Validity check could not be completed. A very recent order; later treatment could not be checked and the paragraph numbering of the findings could not be established. The same two conditions were treated as essential by the Gujarat High Court in Ashwin Vanaspati Industries v. CIT [2002] 255 ITR 26 (Guj), decided 25 January 2002, which was read on this pass and is consistent with the reasoning here. 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.
This order could not be read cleanly. The plain /doc/ rendering returned what is plainly a paraphrase — bullet points and mixed quotation marks — and is not relied on for any wording. Two raw passages were recovered through /docfragment/: one is expressly counsel's submission ('He submitted that no such satisfaction was recorded by the AO...') and is NOT used, and the other, which is quoted here, reads as the Tribunal's own findings but its paragraph number could not be established, so no locator is given. A later pass should re-read the order and fix the paragraph numbers of the findings before the quote is relied on in print. The dates in the header (ITA No. 2317/Chny/2025 for AY 2017-18, pronounced 18 February 2026) are as printed. 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 appeal was partly allowed and the disallowance of Rs. 31,41,044 was deleted. Explanation 3 to s.43(1) can be invoked only where the Assessing Officer records the satisfaction the Explanation requires and determines the actual cost with the previous approval of the Joint Commissioner; both conditions being unmet, he had no jurisdiction to substitute the actual cost declared by the assessee. The challenge to the notice was rejected, the non-mention of the category of scrutiny not rendering a notice invalid where the case was selected under CASS.
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