Section 32(1)

Section 32(1) — the law in short

What the courts have decided on section 32(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Smifs Securities Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  Can I claim depreciation on the goodwill that arose when I took over another company on amalgamation?
  Not any longer. This case held that goodwill falls within 'any other business or commercial rights of similar nature' in Explanation 3(b) to s.32(1) and is eligible for depreciation, and that the excess of consideration over the value of net assets taken over is itself the goodwill, so payment had been made for it. The Finance Act 2021 has since removed goodwill from depreciation altogether with effect from assessment year 2021-22.
• CIT v Anand Theatres Supreme CourtHelps department
  I built a cinema hall (or a hotel) specially for the business. Can I claim depreciation on the building at plant rates?
  No. The Supreme Court held that a building used for running a hotel or carrying on a cinema business is a building, not a plant, and cannot be given depreciation as plant. Section 32 grants depreciation separately for buildings and for machinery or plant, and the inclusive definition of plant in section 43(3) nowhere takes in buildings. That a building is specially designed to suit the trade does not convert it into an apparatus with which the trade is carried on. The Court answered the reference in favour of the Revenue and against the assessee.
• Mysore Minerals Ltd v CIT Supreme CourtHelps taxpayer
  I paid part of the price, took possession and am using the building in my business, but the conveyance has not been executed. Can I claim depreciation?
  Yes. The Supreme Court held that owned in section 32(1) carries a wider meaning than legal title. Anyone in possession of property in his own title, exercising dominion so as to exclude others, entitled to use and occupy it and to enjoy its usufruct in his own right, is the owner for section 32, even though no deed has been executed and registered. The Court followed Podar Cement, decided on section 22, and refused to accept a reading that would give the depreciation to nobody: the allottee cannot claim it for want of title, and the Housing Board cannot, not using the building for its business.
• CIT v Taj Mahal Hotel Supreme CourtHelps taxpayer
  The officer says my fittings are part of the building, not plant. Is there a test, or is it just his impression?
  There is a test, and it is functional. The definition of plant is inclusive, not exhaustive, so the question is what the article does in the business rather than what it looks like. Sanitary fittings and pipeline fittings in a hotel were held to be plant, because providing them is part of what a hotelier sells.
• Brakes India Ltd v DCIT — balance additional depreciation in the next year, before the Finance Act 2015 proviso High CourtHelps taxpayer
  My machine went into use after 30 September, so I got only half the additional depreciation. The assessment year is before AY 2016-17. Can I claim the balance half in the following year?
  Yes. On the unamended section the Madras High Court held there is nothing that confines additional depreciation under s.32(1)(iia) to the year of acquisition, so the balance fifty per cent of the additional depreciation is allowable in the immediately succeeding year; and it treated the Finance Act 2015 amendment as clarificatory of that position rather than as changing it. From AY 2016-17 the point is no longer arguable: the third proviso to s.32(1) inserted by s.10 of the Finance Act 2015, with effect from 1 April 2016, expressly allows the balance in the immediately succeeding previous year.
• Areva T & D India Ltd v DCIT High CourtHelps taxpayer
  We bought a business under a slump sale agreement and booked the excess of price over net tangible assets as 'goodwill'. The Assessing Officer says goodwill is not depreciable. Can we still get depreciation on it?
  For the years before AY 2021-22, yes, if the excess in truth represents identified business and commercial rights and not goodwill in the abstract. The Delhi High Court held that know-how, business claims, business information, business records, contracts and skilled employees acquired under a slump sale agreement are 'business or commercial rights of similar nature' under s.32(1)(ii) and are depreciable, whatever the label in the books. Read the amendment note before relying on this today.
• CIT v BSES Yamuna Powers Ltd — printers, scanners and servers are part of the computer system for the depreciation rate High CourtHelps taxpayer
  The Assessing Officer has taken my printers, scanners and servers out of the computer block and put them in plant and machinery at the general rate. Can I keep them in the computer block?
  Yes. The Delhi High Court agreed with the Tribunal that computer accessories and peripherals such as printers, scanners and servers form an integral part of the computer system and cannot be used without the computer, and so are entitled to depreciation at the rate applicable to computers, which for that year was sixty per cent. The Revenue's appeal was dismissed.
• CIT v Yamaha Motor India P Ltd High CourtHelps taxpayerNo later treatment found
  I discarded machinery this year and did not use it. Can I still claim depreciation on it?
  Yes. Once assets enter a block, the identity of the individual item is lost and depreciation is computed on the block, not machine by machine. Actual use in the year of the claim is not required if the asset was used for the business in earlier years, and the residual value after scrap stays in the block.
• Premier Automobiles Ltd v ITO High CourtHelps taxpayer
  The Assessing Officer has broken our lump sum into building, plant and paint shop and charged short-term capital gains, relying on the values the buyer later put in its own books. Can he apportion a slump price like that?
  No. The Bombay High Court held that the basic test for a slump sale is continuity of business — whether there was a transfer of a business as a whole — and that on the facts the lump sum of Rs.210 crores was not apportionable to different assets and the individual values were not ascertainable. The buyer's later accounting entries could not be used, and the matter went back for a fresh computation on the footing of a slump sale.
• Capital Bus Service (P.) Ltd. v CIT — passive user: assets kept ready for use are used for the purposes of the business High CourtHelps taxpayer
  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.
• Hameed Marine Pvt Ltd v ACIT — Explanation 3 to s.43(1) needs a recorded satisfaction and the Joint Commissioner's prior approval ITATHelps taxpayerNo later treatment found
  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.
• Gati Kintetsu Express Pvt Ltd v DCIT ITATHelps taxpayerSuperseded by amendment
  We took over a business under a business transfer agreement and assumed liabilities far in excess of the assets, paying no cash. The Assessing Officer says we paid nothing, so there is no cost and no depreciation on the intangibles. Is that right?
  No, on these facts. The Mumbai Tribunal held that where the buyer took over liabilities exceeding the assets by about Rs.125 crores and discharged those liabilities in later years, that discharge is consideration for acquiring the intangibles — business and commercial rights and goodwill — and depreciation follows. It also held that the fifth proviso to s.32(1) does not apply to a succession by way of slump sale.
• DCIT v Archroma India P Ltd ITATCuts both waysSuperseded by amendment
  I bought a business on slump sale. Can I depreciate the assets at the price I paid?
  No. A slump sale of an undertaking as a going concern is a succession to business otherwise than on death within s.170, so the proviso to s.32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value, not on the buyer's allocation of the purchase price.
• Statutory position — the second proviso to s.32(1): where an asset is acquired during the previous year AND put to use for less than 180 days in that year, depreciation is restricted to fifty per cent — the exact words, what the 180 days is counted on, and the further proviso giving the balance of the additional allowance in the succeeding year CBDT Circulars & InstructionsCuts both ways
  We bought plant in February and used it from March. The Assessing Officer has halved the depreciation. Is the 180 days counted from acquisition or from the date the asset was put to use, and what happens to the other half of the additional depreciation under s.32(1)(iia)?
  The proviso is worded on BOTH events, and that is the whole fight. As printed on the most recent departmental edition, it reads: "Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :". So the restriction applies only where TWO things are true of the same previous year — the asset was acquired by the assessee during that previous year, and it was put to use for the purposes of business or profession for a period of less than 180 days in that previous year. The 180-day count is on the period of USE ("is put to use ... for a period of less than one hundred and eighty days"); acquisition during the previous year is a separate, cumulative condition, not the thing counted. An asset acquired in an earlier previous year is outside the proviso even if it is used for less than 180 days in the year in question. The further proviso, printed immediately after, gives back the missing half of the ADDITIONAL depreciation only: where an asset referred to in clause (iia) or the first proviso to clause (iia) is acquired during the previous year and put to use for less than 180 days in that year and the deduction is accordingly restricted to fifty per cent, "then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset". The footnote evidence I could read attaches that further proviso to an insertion effective 1 April 2016; the Act number as the departmental page prints it is set out in the editor note and I could not reconcile it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.