Section 32

Section 32 — the law in short

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

• Sharp Business System v CIT-III Supreme CourtHelps taxpayerValidity unconfirmed
  Is a lump sum non-compete fee paid to keep a former partner out of the market capital expenditure, or is it deductible as revenue expenditure under s.37(1)?
  On these facts it was revenue expenditure and deductible under s.37(1). Because the payment was held to be on revenue account, the alternative claim for depreciation on a non-compete right as an intangible asset did not arise and was left undecided.
• Pride Foramer S.A. v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  A non-resident had no contract in India for several years but kept trying for one. Had its business ceased, so that expenditure and unabsorbed depreciation fall away?
  No. A business going through a lean period which could be revived if circumstances permitted is a lull in business, not a cessation. The test is the assessee's conduct judged as a prudent businessman would judge it, not whether a contract was actually obtained. Expenditure of the lull years remained deductible and could be set off, and unabsorbed depreciation carried forward.
• CIT v Rajasthan and Gujarati Charitable Foundation Supreme CourtHelps taxpayerSuperseded by amendment
  We treated a building's full cost as application of income. Can we also claim depreciation on it?
  Yes on the law as it stood, but read the editor's note before using this for a current year. The Court held that treating the whole acquisition cost as application under s.11(1)(a) does not bar a s.32 depreciation claim on the same asset, rejected the double benefit objection, and allowed the depreciation to be carried forward.
• 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.
• Techno Shares & Stocks Ltd v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  I bought a Bombay Stock Exchange membership card — can I claim depreciation on it as an intangible asset under section 32(1)(ii)?
  Yes, on these facts. The Supreme Court held on 9 September 2010 that the right of membership of the Bombay Stock Exchange, which includes the right of nomination, is a business or commercial right that gives a non-defaulting continuing member access to the Exchange and the ability to trade on its floor. Under Rule 5 membership is a personal permission from the Exchange, which is a licence, and Explanation 3 to section 32(1)(ii) declares a commercial right similar to a licence or franchise to be an intangible asset. The right vests in the Exchange only on default or demise. The Bombay High Court's contrary judgment was set aside.
• CIT v Sri Mangayarkarasi Mills (P) Ltd Supreme CourtHelps departmentValidity unconfirmed
  I replaced worn out machines in my spinning mill. Is that current repairs or at least revenue expenditure, since the mill is one integrated plant?
  Neither. The Supreme Court held that each machine in a textile mill is an independent and separate asset with its own function, notwithstanding that all of them form part of one integrated manufacturing process. Replacing an old machine with a new one therefore brings a new asset into existence rather than preserving or maintaining an existing one, so it is not current repairs under section 31. It also gives the assessee an enduring benefit of better and more efficient production, so it is capital and not deductible under section 37. The claim of Rs 61,28,150 for assessment year 1995-96 was disallowed and the Assessing Officer's order restored.
• CIT, Dibrugarh v Doom Dooma India Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  I grow and manufacture tea, so only part of my income is taxed under the Income-tax Act. When I carry the written down value forward, does the Assessing Officer deduct the whole year's depreciation or only the taxable proportion?
  Only the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed.
• 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.
• CIT v Mahendra Mills Supreme CourtHelps taxpayer
  I did not claim depreciation in my return because it suits me not to. Can the assessing officer force it on me anyway?
  No, on the law as it then stood. The Supreme Court held that where the assessee neither claims depreciation nor furnishes the prescribed particulars, the Income-tax Officer cannot thrust the allowance on him. Section 32 allows depreciation subject to section 34, and section 34 permits the deduction only if the prescribed particulars are furnished. Section 29 is not a complete code and must be read with section 34. Depreciation is a benefit for the assessee; a privilege cannot be turned into a disadvantage and an option cannot become an obligation. The Revenue's appeal was dismissed.
• 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 P.J. Chemicals Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  I received a central or state capital subsidy worked out as a percentage of my plant cost. Must I reduce the actual cost by it before claiming depreciation?
  No, not a subsidy of that kind. The Supreme Court held that a government subsidy given as an incentive to set up industry in a backward area does not become a payment towards the cost of assets merely because it is quantified as a percentage of the fixed capital cost. The percentage is only a measure for working out the aid. Such a subsidy is therefore not met directly or indirectly towards the actual cost within section 43(1), and depreciation is allowed on the full cost. The Court preferred the view of the majority of the High Courts to that of Punjab and Haryana.
• Scientific Engineering House (P) Ltd v CIT Supreme CourtHelps taxpayer
  I paid a foreign collaborator a lump sum for drawings and designs that let me start manufacturing. Is that capital spending on which I can at least claim depreciation?
  Yes. The Supreme Court held that the payment was capital expenditure by which the assessee acquired technical know-how, and that the know-how, in the shape of drawings, designs, charts, plans, processing data and other literature, is plant within section 43(3) and so a depreciable asset. The test is functional: does the article fulfil the function of a plant in the assessee's trading activity, and is it a tool of his trade? These documents were the basic tools with which the manufacture was begun, and collectively they are a book. That they perform no mechanical operation does not matter. The appeals were allowed.
• Challapalli Sugars Ltd v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  I borrowed to buy and install my plant and paid interest before production started — can I add that interest to the cost of the plant and claim depreciation on it?
  Yes. The Supreme Court held that interest paid on money borrowed to acquire and install plant and machinery, for the period before production commences, forms part of the actual cost of the asset. 'Actual cost' is not defined in the Act, so it must be read in the sense no commercial man would misunderstand — that is, by the accepted accountancy rule, which brings in all expenditure necessary to bring the asset into existence and put it in working condition. Depreciation and development rebate are therefore admissible on the capitalised interest.
• CIT v Dewas Cine Corporation Supreme CourtHelps taxpayer
  Our firm dissolved and each partner took back the building he had brought in. The officer says the firm sold it to him and wants to tax the depreciation back. Is that a sale?
  No. The Supreme Court held that the return of the two cinema theatres to the partners who had brought them in was not a sale, so the balancing charge under the second proviso to section 10(2)(vii) of the 1922 Act did not apply. Property brought into a firm becomes the firm's property, and on dissolution a partner is entitled to have it applied in paying the firm's debts and to share in the surplus. The distribution of that surplus adjusts the rights of the partners; it is not a transfer. Sale in its ordinary sense is a transfer of property for a price, and this was neither.
• CIT v Alps Theatre Supreme CourtHelps department
  I built a cinema and capitalised the land with the building. Can I claim depreciation on the whole cost, or must the land be taken out?
  The land must be taken out. The Supreme Court held that building in the depreciation provision means the structure and does not include the site. Depreciation is a decrease in value through wear, deterioration or obsolescence, and in that sense land cannot depreciate. The same word is used in the neighbouring clauses on insurance against destruction and on current repairs, neither of which can sensibly cover the site, and the prescribed rates turn on the class of construction, which makes no sense if applied to land. Allowing depreciation on land would give a wrong picture of the real income of the business. Rs 12,000 of land cost was rightly excluded from the Rs 85,091 written off.
• PCIT v Asian Mills P Ltd High CourtHelps taxpayerValidity unconfirmed
  I paid freight without TDS after taking the transporters' PANs. Can the AO still disallow the freight?
  No. The exclusion from the duty to deduct in s.194C(6) is complete the moment its substantive conditions are met, and from that point the payer has no authority to deduct at all; the obligation under s.194C(7) to furnish particulars arises at a much later point and its breach cannot revive a deduction obligation that never existed. Since s.40(a)(ia) operates only where tax was deductible and was not deducted, it had nothing to work on. On the facts the Tribunal had found that no prescribed authority stood nominated to receive the particulars, so filing them with Form 26Q was sufficient compliance. Two other issues went the same way: discounts to customers who took delivery into their own godowns were not rent under s.194-I, and depreciation on cars registered in directors' names but paid for and used by the company was allowed on beneficial ownership.
• Sundaram Finance Ltd v ACIT High CourtHelps departmentValidity unconfirmed
  The notice did not specify the default, but you clearly understood it. Does the defect still help you?
  In Madras, no. The assessee had understood the purport and import of the notice, and claiming depreciation on machinery that did not exist was inaccurate particulars. The penalty was upheld.
• Brakes India Ltd v DCIT — balance additional depreciation in the next year, before the Finance Act 2015 proviso High CourtHelps taxpayerValidity unconfirmed
  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.
• CIT v Y. Ramachandra Reddy High CourtHelps taxpayer
  The officer made a best judgment assessment and fixed my profit at a percentage of receipts. Does that wipe out my claim to depreciation and to interest?
  No. The High Court held that depreciation and interest, which are otherwise deductible in the ordinary course of assessment, keep the same legal character even where the profit is determined on a percentage basis. There was no reason to withhold from the assessee, merely because his profit had been estimated, a facility he would have had on a regular computation. The Revenue's appeal was dismissed. Note the boundary of this: the assessee's receipts were far above the s.44AD threshold, so s.44AD did not apply to him at all. Where income is actually returned under s.44AD, s.44AD(2) provides that deductions under ss.30 to 38 are deemed to have been given full effect, and depreciation under s.32 falls inside that range.
• Areva T&D India Ltd v ACIT High CourtHelps taxpayerValidity unconfirmed
  On a slump sale I paid more than the value of the tangible assets and my books show the excess as goodwill. Can I claim depreciation on it under section 32(1)(ii)?
  Yes, where the excess is in truth the price of identifiable business or commercial rights. The Delhi High Court held that "business or commercial rights of similar nature" in section 32(1)(ii) is not confined to things resembling know-how, patents, trademarks, copyrights, licences or franchises individually - those six are themselves quite different from one another. What they share is that they are intangible assets forming part of the tools of trade. Business claims, business information, business records, contracts, skilled employees and know-how acquired on a slump sale fall in the same genus and are depreciable. The entries in the books are not conclusive; the true nature of the transaction governs.
• CIT v Oswal Agro Mills Ltd — depreciation on a block of assets cannot be split asset by asset for non-user High CourtHelps taxpayerValidity unconfirmed
  One of my units has been shut for years. The Assessing Officer has pulled the assets of that unit out of the block and disallowed the depreciation on them. Can he?
  No. The Delhi High Court held that after the 1988 amendment depreciation is allowed on the written down value of the block of assets, individual assets have lost their identity, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use. The Revenue's appeals were dismissed even though the unit concerned had been closed for years.
• CIT v BSES Yamuna Powers Ltd — printers, scanners and servers are part of the computer system for the depreciation rate High CourtHelps taxpayerValidity unconfirmed
  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 Bharat Aluminium High CourtHelps taxpayerValidity unconfirmed
  One machine in my block of assets was not used this year. Can the AO deny depreciation on it?
  No. Once assets are clubbed into a block they lose their individual identity and become an inseparable part of the block, so 'used for the purpose of business' means use of the block and not of any specific item. User of an individual asset is required only in the first year in which that asset is acquired.
• CIT v Yamaha Motor India P Ltd High CourtHelps taxpayerValidity unconfirmed
  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.
• Punjab Bone Mills v CIT — s.38(2) proportionate disallowance where plant is shared with sister concerns High CourtHelps departmentValidity unconfirmed
  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.
• CIT v Texspin Engg & Mfg Works High CourtHelps taxpayer
  My partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains tax on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting on a Part IX conversion is not distribution: vesting takes the properties across as they stand, while distribution presupposes division, realisation and appropriation. Section 45(1) also failed, both because a firm treated as a company is a case of transmission with no counterparty and no incoming consideration, and because even if there were a transfer, full value of consideration in section 48 means what the transferor gets, not the market value of what he parts with.
• CIT v Texspin Engineering & Manufacturing Works High CourtHelps taxpayerValidity unconfirmed
  Our partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that neither section 45(4) nor section 45(1) was attracted. Section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting under Part IX is not distribution, which presupposes division, realisation and appropriation of the proceeds. Section 45(1) fails because there is no party and counterparty and no consideration coming to the firm: the same entity simply exchanges one cloak for another. And even if vesting were a transfer, section 48 allows only the consideration actually received or accrued, not market value, which is deemed only by section 45(4). Depreciation was also allowed.
• Sayaji Iron and Engg. Co. v CIT — a company has no personal use, so no fraction of car expenses or depreciation can be disallowed High CourtHelps taxpayerValidity unconfirmed
  The Assessing Officer has disallowed one-sixth of my company's car expenses and depreciation because the directors used the cars personally. Can he?
  Not where the company is the assessee. The Gujarat High Court held that where the directors were entitled under their terms of appointment to use the company's vehicles for personal purposes, the expenditure is remuneration within the Explanation to s.198 of the Companies Act 1956 and is the company's business expenditure, so no part of the vehicle expenses or depreciation could be disallowed for personal use.
• Capital Bus Service (P.) Ltd. v CIT — passive user: assets kept ready for use are used for the purposes of the business High CourtHelps taxpayerValidity unconfirmed
  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 taxpayerValidity unconfirmed
  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.
• Nirma Ltd v DCIT — depreciation on goodwill from amalgamation, and the date the Finance Act 2021 closed it ITATHelps taxpayerSuperseded by amendment
  The Assessing Officer has disallowed depreciation on goodwill that arose when a company amalgamated into mine. Which years can I still claim it for?
  Only assessment years up to AY 2020-21. The Finance Act 2021 removed goodwill of a business or profession from the definition of block of assets in s.2(11) and from s.32, excluded it from Explanation 3(b) to s.32(1), and amended s.43(6)(c)(ii) to require the written down value of goodwill to be reduced from the opening WDV where goodwill already formed part of a block; those amendments apply prospectively from AY 2021-22. For earlier years the Tribunal here allowed the claim on Smifs Securities, and the amendment gives the Assessing Officer no ground to disturb it.
• Samsung R&D Institute India Bangalore P Ltd v JCIT ITATHelps taxpayer
  My foreign group companies ship me handsets, network equipment and other test gear free of cost so that I can test the software I write for them, and I send it back or scrap it when the testing is done. The AO has added the value under s.28(iv) as a benefit arising from my business. Can he?
  No, on these facts. The Bangalore Bench deleted an addition of Rs 7,37,33,056 under s.28(iv) on equipment supplied free of cost by the assessee's associated enterprises for testing software the assessee had developed for them. Two things carried it: the equipment was either returned or destroyed after testing, so nothing irretrievable or of enduring nature was made available to the assessee, and the price for the software development services had already been settled under a Mutual Agreement Procedure resolution between the competent authorities of India and Korea, in which the cost of indirect benefits should have been embedded - so if there were a nexus at all it belongs in a transfer pricing adjustment and not in a second addition under s.28(iv). The same order also deleted a s.40(a)(i) disallowance of depreciation on capitalised software, following the coordinate bench in the assessee's own case. Note what the order does not do: it decides nothing under s.194R.
• Pagro Frozen Foods Pvt Ltd v ITO — a government grant-in-aid towards plant reduces the actual cost under Explanation 10 to s.43(1) ITATHelps departmentValidity unconfirmed
  I received a government grant towards building a cold chain facility. Must I reduce it from the cost of the assets before claiming depreciation?
  Yes, where the grant was given towards the cost of specified assets. The Chandigarh Bench held that actual cost under s.43(1) is the cost to the assessee reduced by so much of it as has been met directly or indirectly by any other person or authority, and upheld the reduction of a Rs. 2.5 crore grant-in-aid from the Ministry of Food Processing Industries from the cost of the assets on which depreciation was claimed. The appeal was dismissed.
• Prashant Vijay Kale v CPC, Bengaluru ITATHelps taxpayerValidity unconfirmed
  I filed my return on time and then revised it. CPC has ignored the original, treated the revised return as my first return, and charged s.234F fee and s.234A interest. Can that be undone?
  Yes. The Mumbai Bench found that the original return had been filed within the s.139(1) due date and that CPC and the CIT(A) had simply ignored it, and deleted both the Rs 5,000 fee under s.234F and the interest under s.234A charged on the footing that the revised return's date was the date of filing. Revising a return does not make a timely return late.
• M/s. The Plantation Corporation of Kerala Ltd and M/s. The Velimalai Rubber Co. Ltd v ACIT, Kottayam ITATHelps departmentValidity unconfirmed
  I am a rubber planter. I cleared an old unproductive block and replanted it, and claimed the cost under rule 7A(2). The Assessing Officer has disallowed it. Is there anything I can do?
  Not in Kerala. The Cochin Tribunal dismissed both appeals, holding itself bound by the Kerala High Court in Rehabilitation Plantations Ltd v CIT, which construed rule 7A(2) as covering only infilling — the replacement of dead or useless trees within an existing yielding area — and not the replanting of an area after cutting and removing an old plantation, and held that expenditure on planting and developing a plantation up to maturity must be capitalised. Rule 7A itself makes 35 per cent of the income from the specified rubber products taxable as business income and leaves 65 per cent as agricultural income for the State.
• C. Eswara Reddy & Co v ACIT ITATCuts both waysSuperseded by amendment
  The officer rejected my firm's books and estimated the profit at a percentage of receipts. Can the firm still deduct salary and interest paid to its partners from that estimated figure?
  For the years this order governs, yes. The Tribunal held that s.44AD(2) deems only the deductions under ss.30 to 38 to have been given full effect; s.40 is not deemed to have been allowed, and the proviso to s.44AD(2) as it then stood said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1), subject to the ceiling in s.40(b). Taking a clue from that scheme, the Tribunal directed the officer to allow partner salary and interest from the estimated income. On depreciation it went the other way: because depreciation is allowable under s.32, which falls inside ss.30 to 38, no separate deduction for depreciation was permitted from the estimate. The order concerns assessment years 2003-04 and 2004-05 and rests squarely on a proviso Parliament has since deleted.
• Pro-Quip Corporation v CIT Advance RulingHelps taxpayer
  We bought engineering drawings and designs outright from a US company for our plant. The buyer withheld tax treating it as royalty. Was that right?
  No. The Authority ruled that the amount Pro-Quip Corporation received from Linde Process Technologies India Ltd for the sale of engineering drawings and designs was not taxable in India. The purchase order transferred ownership in the drawings outright, with no reservation of rights, no contingency and no continuing service obligation. That is a sale of property, not consideration for the use of or the right to use property, so article 12 of the India-US convention on royalties and fees for included services was not attracted. Any services attached to the sale fell within the exclusion in article 12(5). The applicant could claim a refund of the tax deducted, with interest. The ruling binds only Pro-Quip.

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.