The officer has knocked out my depreciation because the assets were not put to use in the year - which of those heads can I actually save, and what does the block of assets do for me?
The client is a private limited company processing cotton yarn, assessed at a circle in Surat. Its AY 2023-24 return was filed late, on 12 January 2024, claiming depreciation of Rs 1,38,00,000, with Rs 2,14,00,000 of unabsorbed depreciation brought forward. The order under s.143(3) dated 12 March 2026 disallows Rs 87,40,000 across four heads. An imported sizing machine costing Rs 4,80,00,000 reached the factory on 21 March 2023 but was erected and trial run only on 16 May 2023; the officer disallowed the whole Rs 36,00,000 claimed and capitalised Rs 21,00,000 of interest on the term loan that funded it. A carding machine costing Rs 2,40,00,000 went into use on 14 November 2022; against Rs 36,00,000 of normal and Rs 48,00,000 of additional depreciation claimed, the officer allowed Rs 18,00,000 and refused the additional depreciation on the footing that processing is not manufacture. A second-hand diesel generator bought from a group company for Rs 60,00,000 sat on standby all year, was run only on test, and also feeds an adjoining unit of the same group; the officer disallowed it for want of use, and in the alternative substituted the previous owner's written down value of Rs 18,00,000 as its actual cost and cut the allowance under s.38(2) for shared use. A godown costing Rs 1,90,00,000, of which Rs 70,00,000 is land, was paid for and possession taken on 6 January 2023, but the deed was registered only on 2 August 2024; depreciation was refused for want of ownership.
Put the four assets on one sheet with the dates that actually decide them - invoice, delivery, erection completion, trial run, commercial production, possession, registration - and against each the document that proves the date. Three of these four heads turn on a date and not on a proposition, and one of them, the sizing machine, is lost on its dates whatever is argued. Knowing that before the grounds are drafted is what lets you concede one head cleanly and spend the appeal on the other three, instead of losing all four together.
A High Court has 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; it allowed depreciation on four vehicles kept in running condition all year but plied for barely a month. That is the generator's case exactly - kept fuelled, maintained and on standby for a running mill. The Supreme Court has separately held that a business going through a lean period which could be revived is in a lull and not a cessation, the test being the assessee's conduct judged as a prudent businessman would judge it, so an asset held against demand that did not come is not thereby out of use.
The library's own block-of-assets authority contains the sentence that decides this head against the client: user of an individual asset is required only in the first year in which that asset is acquired. The sizing machine is in its first year, it was never erected before 31 March 2023, and no block reasoning reaches it. What is worth having instead is the cost. The interest of Rs 21,00,000 relates to capital borrowed for an asset not put to use, so it is excluded from the revenue claim by the proviso to s.36(1)(iii) and goes into the actual cost - the Supreme Court has held that interest paid on money borrowed to acquire and install plant, for the period before production commences, forms part of actual cost. The whole Rs 5,01,00,000 then carries full depreciation from AY 2024-25, the machine having run from 16 May 2023.
The second proviso to s.32(1) restricts the deduction to fifty per cent where an asset is acquired by the assessee during the previous year and is put to use for less than 180 days in that year. The carding machine went into use on 14 November 2022, which leaves 138 days to 31 March 2023, so the officer's reduction of the normal allowance from Rs 36,00,000 to Rs 18,00,000 is right and should be conceded in the first paragraph of that ground rather than defended. This step is written from the words of the proviso: no entry in this collection decides a 180-day dispute, and the only entry touching the half rule at all is about the balance of the additional allowance, not the normal one.
Section 32(1)(iia) requires new machinery or plant, other than ships and aircraft, acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing, or in the generation, transmission or distribution of power, and its provisos exclude second-hand machinery, machinery installed in office premises or residential accommodation including a guest house, office appliances, road transport vehicles, and machinery the whole of whose actual cost is allowed as a deduction. The officer's ground is that processing yarn is not manufacture. That is a factual contest on the process - what goes in, what comes out, whether a commercially distinct article emerges - and it has to be met with the flow chart, the plant layout and the classification the company uses elsewhere, because there is no decision in this collection on whether a given process is manufacture.
The Supreme Court has held that owned in s.32(1) carries a wider meaning than legal title: anyone in possession of property in his own title, exercising dominion over it so as to exclude others, entitled to use and occupy it and to enjoy its usufruct in his own right, is the owner for the purposes of the section even though a formal deed of title has not been executed. Full consideration was paid and possession taken on 6 January 2023, and the godown has been in use since - that is the decision's fact pattern. Against that, the Supreme Court has equally held that building in the depreciation provision means the structure and does not include the site, because depreciation is a decrease in value through wear, deterioration or obsolescence and land does not depreciate. So Rs 70,00,000 comes out whichever way ownership goes.
For any asset that entered a block in an earlier year the officer cannot go asset by asset. A High Court has held that once assets are clubbed into a block they lose their individual identity and become an inseparable part of it, so that used for the purpose of business means use of the block and not of any specific item, and that individual user is required only in the first year. Another has held that the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use, and refused to let the assets of a unit shut for years be pulled out. A third has held that actual use in the year of claim is not required where the asset was used for the business in earlier years, and that a discarded item's residual value stays in the block.
On sharing, a High Court has held that s.38(2) requires the allowance to be restricted to a fair proportionate part where the asset is not used exclusively for the assessee's business, determined having regard to the user, and upheld a cut where a boiler was also used by sister concerns. That is against the client here and the honest answer is a measured one: meter the supply to the adjoining unit, raise a charge for it from the current year, and offer a proportion supported by readings rather than argue about thirds. On the substituted cost, a Tribunal Bench has held that Explanation 3 to s.43(1) can be invoked only where the 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 the Explanation itself requires the previous approval of the Joint Commissioner. Ask for both on the record.
The return was filed late, which matters for a business loss and not for depreciation. A High Court has held that the bar on carrying forward a loss returned late applies to business losses and not to unabsorbed depreciation, which is governed exclusively by s.32(2), so there is no obligation to file within the prescribed time in order to carry depreciation forward; the library's concept page puts it the same way, that unabsorbed depreciation is added to the following year's allowance and deemed to be part of it. Another High Court has held that unabsorbed depreciation available on 1 April 2002 is governed by the substituted sub-section, which carries no eight-year cap. Order the set-off correctly too: the Supreme Court has held that current depreciation comes off before brought-forward business loss, and that as between brought-forward loss and brought-forward unabsorbed depreciation the loss goes first.
The godown head is usually won, because possession with full consideration paid is squarely within a Supreme Court decision and the land component is a small concession. The generator is usually won on passive user where the maintenance and test records exist and usually lost where they do not, and even when won it comes back cut under the proportionate-use provision. The sizing machine is lost for the year and recovered in full the next year, so the real cost is a year of deferral and the interest on the demand. Additional depreciation turns entirely on whether the process is held to be manufacture and is close to an even contest; the balance half in the following year is not in dispute at all. The substituted-cost head usually survives long enough to be remitted for the valuation to be looked at.
