The Assessing Officer says my boiler was also used by my sister concerns and has cut my depreciation by two-thirds. Can he do that?
Yes, if the asset was genuinely not used exclusively for your business. Section 38(2) requires depreciation under s.32 to be restricted to a fair proportionate part, which the Assessing Officer determines having regard to the user of the building, machinery, plant or furniture for the purposes of the business, and the Punjab and Haryana High Court upheld exactly such a restriction where the boiler was used by two sister concerns and the expenses were shared.
Decided by the High Court (Satish Kumar Mittal J and Rakesh Kumar Garg J) on 2008-07-10, reported as I.T.A. No. 596 of 2007 (Punjab and Haryana High Court); assessment year 2000-01. It bears on section 38(2), section 32, section 32(1)(ii) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
Section 38(2) is the provision an Assessing Officer reaches for whenever an asset has a non-business or a shared user — a car, a residence, a shared generator or boiler — and it is easy to miss because the disallowance is made in the depreciation schedule rather than under s.37. Two limits are worth pressing. First, the restriction bites only where the asset is not used exclusively for the business; incidental benefit to a third party is not the same thing as shared user, which is how this Court distinguished Punjab National Bank and Indian Express. Second, the section requires the officer to determine a fair proportionate part having regard to the user, so an arbitrary fraction with no basis in measured user is open to challenge on the quantum even where the principle is conceded. Note also that once the officer restricts depreciation under s.38(2) the block of assets argument does not answer it: s.38(2) operates on the deduction, not on the composition of the block.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee manufactured glue from bone material and claimed depreciation on a boiler. The Assessing Officer found that the boiler was also used by two sister concerns, Protinkem and P.B.M. Gelatine, for their own production, and that the operational expenses of running it were shared between them. Treating the boiler as not exclusively used for the assessee's business, he restricted the depreciation to a proportionate part, the extent of the outside user being put at about 68 per cent. The CIT(A) and the Tribunal upheld the restriction, and the assessee appealed to the High Court, relying on decisions in which an incidental benefit to a third party had not been allowed to reduce the assessee's deduction.
The appeal was dismissed, no substantial question of law arising from the Tribunal's order. Where the plant is not exclusively used for the purposes of the assessee's business, the deduction claimed under s.32 has to be restricted to a fair proportionate part which the Assessing Officer may determine having regard to the user of the machinery or plant for the purposes of the business.
The Court set out s.38(2) in full and read it as a mandatory restriction on the depreciation deduction wherever the asset is not exclusively used for the business. On the facts found by the Tribunal, the boiler was not merely producing an incidental benefit for someone else: the sister concerns were themselves permitted to use it for their own production and the expenses of running it were shared. That took the case outside the authorities the assessee relied on, Punjab National Bank v. CIT and CIT v. Indian Express, where the third party's benefit was incidental to the assessee's own user, and brought it within the plain words of s.38(2). The apportionment made by the Assessing Officer and confirmed by the Tribunal was a finding on user, and no question of law arose from it.
the deduction claimed by the assessee under section 32 (1) (ii) of the Act has to be restricted to a fair proportionate part thereof, which the Assessing Officer may determine having regard to the user of such building, machinery, plant or furniture for the purposes of the business.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes, if the asset was genuinely not used exclusively for your business. Section 38(2) requires depreciation under s.32 to be restricted to a fair proportionate part, which the Assessing Officer determines having regard to the user of the building, machinery, plant or furniture for the purposes of the business, and the Punjab and Haryana High Court upheld exactly such a restriction where the boiler was used by two sister concerns and the expenses were shared. This was decided by the High Court (Satish Kumar Mittal J and Rakesh Kumar Garg J) and bears on section 38(2), section 32, section 32(1)(ii) of the Income Tax Act 1961. It is reported as I.T.A. No. 596 of 2007 (Punjab and Haryana High Court); assessment year 2000-01. Section 38(2) is the provision an Assessing Officer reaches for whenever an asset has a non-business or a shared user — a car, a residence, a shared generator or boiler — and it is easy to miss because the disallowance is made in the depreciation schedule rather than under s.37. Two limits are worth pressing. First, the restriction bites only where the asset is not used exclusively for the business; incidental benefit to a third party is not the same thing as shared user, which is how this Court distinguished Punjab National Bank and Indian Express. Second, the section requires the officer to determine a fair proportionate part having regard to the user, so an arbitrary fraction with no basis in measured user is open to challenge on the quantum even where the principle is conceded. Note also that once the officer restricts depreciation under s.38(2) the block of assets argument does not answer it: s.38(2) operates on the deduction, not on the composition of the block. If it applies to you, the first step is this: Ask first whether the asset was used exclusively for your business. If a sister concern, a partner or a director used it, s.38(2) is in play and a blanket denial of the facts will not survive.
The assessee manufactured glue from bone material and claimed depreciation on a boiler. The Assessing Officer found that the boiler was also used by two sister concerns, Protinkem and P.B.M. Gelatine, for their own production, and that the operational expenses of running it were shared between them. Treating the boiler as not exclusively used for the assessee's business, he restricted the depreciation to a proportionate part, the extent of the outside user being put at about 68 per cent. The CIT(A) and the Tribunal upheld the restriction, and the assessee appealed to the High Court, relying on decisions in which an incidental benefit to a third party had not been allowed to reduce the assessee's deduction. The matter was decided on 2008-07-10 by the High Court (Satish Kumar Mittal J and Rakesh Kumar Garg J). On those facts the High Court held as follows. The appeal was dismissed, no substantial question of law arising from the Tribunal's order. Where the plant is not exclusively used for the purposes of the assessee's business, the deduction claimed under s.32 has to be restricted to a fair proportionate part which the Assessing Officer may determine having regard to the user of the machinery or plant for the purposes of the business.
The Court set out s.38(2) in full and read it as a mandatory restriction on the depreciation deduction wherever the asset is not exclusively used for the business. On the facts found by the Tribunal, the boiler was not merely producing an incidental benefit for someone else: the sister concerns were themselves permitted to use it for their own production and the expenses of running it were shared. That took the case outside the authorities the assessee relied on, Punjab National Bank v. CIT and CIT v. Indian Express, where the third party's benefit was incidental to the assessee's own user, and brought it within the plain words of s.38(2). The apportionment made by the Assessing Officer and confirmed by the Tribunal was a finding on user, and no question of law arose from it. In the words reproduced by the source cited on this page: "the deduction claimed by the assessee under section 32 (1) (ii) of the Act has to be restricted to a fair proportionate part thereof, which the Assessing Officer may determine having regard to the user of such building, machinery, plant or furniture for the purposes of the business." The decision followed or applied Punjab National Bank v. CIT — distinguished; CIT v. Indian Express — distinguished.
It was decided by the High Court on 2008-07-10 and is reported as I.T.A. No. 596 of 2007 (Punjab and Haryana High Court); assessment year 2000-01. 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 38(2), section 32, section 32(1)(ii), 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed, no substantial question of law arising from the Tribunal's order. Where the plant is not exclusively used for the purposes of the assessee's business, the deduction claimed under s.32 has to be restricted to a fair proportionate part which the Assessing Officer may determine having regard to the user of the machinery or plant for the purposes of the business. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 38(2), section 32, section 32(1)(ii) of the Income Tax Act 1961, and was decided by Satish Kumar Mittal J and Rakesh Kumar Garg J. 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. If the user is genuinely exclusive, say so on affidavit and produce the log, the production records or the meter readings; the section turns on user, and user is a question of fact you must prove. Where a share of the cost was recovered from the other user, put that on record — a cost-sharing arrangement is what turned this case against the assessee, so if you did not share expenses say so. Attack the fraction if you cannot attack the principle: the officer must determine a fair proportionate part having regard to user, and a figure picked without material is challengeable. Distinguish the incidental-benefit cases (Punjab National Bank, Indian Express) if what happened is that someone else derived a benefit from an asset you used for your own business, rather than that they used the asset themselves.
Searched for later treatment; none was found. That is not the same as a source affirming it. Two probes were run and neither produced an application. The citedby search returns 3 documents, all Mumbai Tribunal, and in each the judgment is the Revenue's authority and is distinguished, not followed. In Defiance Clothing Company v ITO (26 June 2013) the Bench recorded at para 5 that 'the learned Departmental Representative relied on the judgment dated 10.07.2008 of the Hon'ble Punjab & Haryana High Court in Punjab Bone Mills vs. CIT (ITA No.596 of 2007)... Their Lordships upheld the Tribunal order holding that deduction u/s 32 be restricted to a fair proportionate part thereof having regard to the user of the asset by the assessee for its business purpose', and then declined the proportionate approach, adopting instead a binary test turning on whether the asset was acquired for the assessee's business at all. In National Stock Exchange of India Ltd v DCIT (24 June 2011) the Bench distinguished it at para 26 on the footing that here 'the equipments installed with the members have been exclusively used for the purpose of assessee's business', and decided against the Revenue. A case-name probe added nothing citing the judgment on the s.38(2) point. So nothing applies it, and nothing overrules or doubts it either; no Supreme Court challenge is traceable. The practical reading is that proportionate disallowance under s.38(2) needs evidence of actual shared user and shared expenses, which is what the High Court found on its facts; where the asset is used only for the assessee's own business the Tribunal has consistently refused to apportion. 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 judgment is not divided into numbered paragraphs, so the quotation used here is attributed without a locator; that is a feature of the report and not a gap in the reading. The disallowance figure is Rs. 1,76,257. One rendering of the text shows Rs. 1,76,254, and the figure given here is the one carried by the passage recording the Assessing Officer's reasoning, the same passage recording that he put the sister concerns' use of the boiler at 68 per cent. The wording of s.38(2) stated here follows the text reproduced in the judgment for AY 2000-01; the current text has not been read for this entry. What s.38(2) does is worth stating plainly, because it is often argued as though it were a disallowance provision. It is not. Where a building, machinery, plant or furniture is not exclusively used for the purposes of the business, the allowances under s.32 and its neighbours are to be restricted to a fair proportionate part having regard to the user for business purposes. The officer is required to apportion rather than to disallow, and the sub-section presupposes that the asset is used for the business to some extent. Two consequences follow in a case of this kind. The burden of establishing the proportion is practical rather than formal: where an assessee lets a sister concern use his plant, the officer will work from whatever measure of use is available to him, and an assessee who produces no measure of his own is left with the officer's. A usage log, a recovery of charges, or an agreement fixing the basis is worth more at the assessment stage than an argument at the appellate stage. And the sub-section operates on the allowance and not on the ownership. Depreciation under s.32(1)(ii) is available to the owner who uses the asset for his business, and s.38(2) then reduces the allowance to the proportionate part. It does not convert the arrangement into a letting, and it does not decide under which head a recovery from the sister concern is to be brought to tax; those are separate questions on which this judgment says nothing. Nor does the judgment decide how the proportion is to be arrived at where the asset is used partly for a business and partly for a purpose that is not a business at all, which is the other half of the sub-section and a harder case than the one before the Court. 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 dismissed, no substantial question of law arising from the Tribunal's order. Where the plant is not exclusively used for the purposes of the assessee's business, the deduction claimed under s.32 has to be restricted to a fair proportionate part which the Assessing Officer may determine having regard to the user of the machinery or plant for the purposes of the business.
TaxSphere, “Punjab Bone Mills v CIT — s.38(2) proportionate disallowance where plant is shared with sister concerns”, https://taxnotice.vittsphere.com/caselaw/case/punjab-bone-mills-38-2-plant-shared-with-sister-concerns/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The Assessing Officer has disallowed one-sixth of my company's car expenses and depreciation because the directors used the cars personally. Can he?
I am a tenant of part of a building and I paid to replace the whole roof. The Assessing Officer has allowed me only the proportion of the area I occupy. Is that right?
I wrote off the whole cost of a laboratory building and its equipment under the scientific research provision. Can I also take depreciation on the same assets in later years, and can the department deny it for years before 1980 using an amendment made in 1980?
I bought a Bombay Stock Exchange membership card — can I claim depreciation on it as an intangible asset under section 32(1)(ii)?
