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.
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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.
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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.
Validity check could not be completed. Later treatment was not checked. Section 38(2) has not been amended in any way that touches this reasoning so far as could be established, but no live departmental page for s.38 could be opened to confirm the current text — the wording relied on is that reproduced in this judgment for AY 2000-01 and on the department's archived Year-2009 page. 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 — established on a full read, so the quote is attributed without a locator by necessity and not by failure of retrieval. ?type=print returned a prose summary with no judgment text and is not relied on anywhere. The disallowance figure was confirmed on the verification pass from the raw /docfragment/ passage as Rs. 1,76,257, the same passage recording that the Assessing Officer put the sister concerns' use of the boiler at 68 per cent; an earlier rendering had shown Rs. 1,76,254. The text of s.38(2) reproduced in the judgment for AY 2000-01 matches the text on the department's archived section 38 page (Year stamp 2009), which is the basis on which the statutory wording is stated here — no live departmental page for s.38 could be reached. 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.
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