Arijit Pasayat, C.J. At the instance of revenue , following question has been referred to this court for opinion under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'), by the Tribunal, Delhi Bench 'B':
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the Appellate Assistant Commissioner that even though the business was closed there was a passsive user of the machinery and as such the assessee was entitled to claim depreciation on the machinery during the assessment year 1971-72 ?"
2. The factual position is almost undisputed assessee owns a could storage at Karnal. During the assessment proceedings for the assessment year 1971-72, Income Tax Officer noticed that the machinery, installed was not put to use during the whole of the previous year. The non-user was on account of the facts that there was very weak crop of potatoes available in the season and potatoes did not come from the hirers in the cold storage. Therefore, there was no business from cold storage. Accordingly claim for depreciation on cold storage machinery was disallowed. In appeal, Appellate Assistant Commissioner observed that the plant was kept in operational condition so that the facility can be availed of by any one as and when necessity arises. It was observed that the word "user" embraces passive as well as active user and depreciation was allowable even though machinery had not actually worked during the accounting period. It was noted that the case was not one where it was the first year of operation of company's business and it was a case where the business was only inactive or dorment because of circumstances prevailing in the year in question on account of fact situation indicated above. It is to be noted that all other expenses were, however, allowed by the assessing officer and it was only in respect of depreciation that the disallowance was made Appellate Assistant Commissioner also considered the fact that assessee was under an obligation to keep the machinery in good working condition in order to see that the machinery was ready for use at any moment. Therefore, it was held that the machinery had been used though not actually worked during the year. Appellate Assistant Commissioner relied on several decisions and commentaries of learned authors Kanga and Palkhiwala on Income-tax at p. 350 of the 6th Edition (Vol. I) and Sampath Iyanger at p. 805 of the 6th Edition Vol. I. Matter was carried in appeal by the revenue before the Tribunal. On consideration of the materials on record Tribunal came to hold that Appellate Assistant Commissioner's conclusions were in order. It noted specifically that the assessing officer himself had allowed expenses claimed on account of business of cold storage and, therefore, there was no justification to disallow the claim of depreciation. At the instance of revenue , reference as aforestated has been made.
2. The factual position is almost undisputed assessee owns a could storage at Karnal. During the assessment proceedings for the assessment year 1971-72, Income Tax Officer noticed that the machinery, installed was not put to use during the whole of the previous year. The non-user was on account of the facts that there was very weak crop of potatoes available in the season and potatoes did not come from the hirers in the cold storage. Therefore, there was no business from cold storage. Accordingly claim for depreciation on cold storage machinery was disallowed. In appeal, Appellate Assistant Commissioner observed that the plant was kept in operational condition so that the facility can be availed of by any one as and when necessity arises. It was observed that the word "user" embraces passive as well as active user and depreciation was allowable even though machinery had not actually worked during the accounting period. It was noted that the case was not one where it was the first year of operation of company's business and it was a case where the business was only inactive or dorment because of circumstances prevailing in the year in question on account of fact situation indicated above. It is to be noted that all other expenses were, however, allowed by the assessing officer and it was only in respect of depreciation that the disallowance was made Appellate Assistant Commissioner also considered the fact that assessee was under an obligation to keep the machinery in good working condition in order to see that the machinery was ready for use at any moment. Therefore, it was held that the machinery had been used though not actually worked during the year. Appellate Assistant Commissioner relied on several decisions and commentaries of learned authors Kanga and Palkhiwala on Income-tax at p. 350 of the 6th Edition (Vol. I) and Sampath Iyanger at p. 805 of the 6th Edition Vol. I. Matter was carried in appeal by the revenue before the Tribunal. On consideration of the materials on record Tribunal came to hold that Appellate Assistant Commissioner's conclusions were in order. It noted specifically that the assessing officer himself had allowed expenses claimed on account of business of cold storage and, therefore, there was no justification to disallow the claim of depreciation. At the instance of revenue , reference as aforestated has been made.
3. Learned counsel for revenue submitted that since there was no working of the machinery, depreciation cannot be allowed, and Appellate Assistant Commissioner and Tribunal were not justified in directing allowance of depreciation.
3. Learned counsel for revenue submitted that since there was no working of the machinery, depreciation cannot be allowed, and Appellate Assistant Commissioner and Tribunal were not justified in directing allowance of depreciation.
There is no appearance on behalf of the assessee in spite of notice.
4. Section 32 of the Act deals with depreciation. There is no requirement that the assets should be used for the whole of the assessment year in question. The term used in section 32(1) is "owned by assessee", but that does not bring in a requirement that the assessee should have remained the owner of the asset in question for the entire previous year in question. The object of the legislature, in granting depreciation allowance under section 32 of the Act, is to give due allowance to the assessee for wear and tear suffered by the asset used by him in his business so that the net income (total income) is duly arrived at. There is no factual dispute that the assets in question were owned by the assessee. In Machinery Manufacturers Corporation Ltd. v. CIT (1957) 31 ITR 203 (Bom), it was observed that the expression "used" in section 102(vi) of the Indian Income Tax Act, 1922 (hereinafter referred to as "the old Act") corresponding to section 32 of the Act has to be given a wider meaning. The expression includes passive as well as active user. In CIT v. Dalmia Cement Ltd. (1945) 13 ITR 415 (Pat) and CIT v. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom), it was observed that depreciation might be allowed in certain cases even though the machinery was not in use or was kept idle. The question whether the word "used" would include both "passive as well as active user was left open by the Apex Court in Liquidators of Purse Ltd. v. CIT (1954) 25 ITR 265 (SC). The words "used for the purposes of the business" are capable of a larger and a narrower interpretation. If the expression "used" is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, plant, etc., are actively employed but also cases where there is what may be described as a passive user of the same in the business. An asset can be said to be in use when it is kept ready for use.
4. Section 32 of the Act deals with depreciation. There is no requirement that the assets should be used for the whole of the assessment year in question. The term used in section 32(1) is "owned by assessee", but that does not bring in a requirement that the assessee should have remained the owner of the asset in question for the entire previous year in question. The object of the legislature, in granting depreciation allowance under section 32 of the Act, is to give due allowance to the assessee for wear and tear suffered by the asset used by him in his business so that the net income (total income) is duly arrived at. There is no factual dispute that the assets in question were owned by the assessee. In Machinery Manufacturers Corporation Ltd. v. CIT (1957) 31 ITR 203 (Bom), it was observed that the expression "used" in section 102(vi) of the Indian Income Tax Act, 1922 (hereinafter referred to as "the old Act") corresponding to section 32 of the Act has to be given a wider meaning. The expression includes passive as well as active user. In CIT v. Dalmia Cement Ltd. (1945) 13 ITR 415 (Pat) and CIT v. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom), it was observed that depreciation might be allowed in certain cases even though the machinery was not in use or was kept idle. The question whether the word "used" would include both "passive as well as active user was left open by the Apex Court in Liquidators of Purse Ltd. v. CIT (1954) 25 ITR 265 (SC). The words "used for the purposes of the business" are capable of a larger and a narrower interpretation. If the expression "used" is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, plant, etc., are actively employed but also cases where there is what may be described as a passive user of the same in the business. An asset can be said to be in use when it is kept ready for use.
5. Like every other animate and inanimate object, business premises, machinery, plant or furniture employed by an assessee in the course of his business, profession, etc., have a limited effective life. The vigour, strength, capability, etc., of every such object gradually exhausts by the factors of use and time. These have undoubtedly aided the assessee to earn "income" from such business or profession which is subjected to the levy of tax. Unless provision was made for proper recompense of such diminution in the vigour strength, capability, etc., the apparent profits from the business, profession, etc., would not give a correct picture. Allowance for depreciation is borne out of necessity for such recompense. "Depreciation". according to Webster's New World Dictionary, means " a decrease in value of property through wear, deterioration or obsolescence : the allowance made for this in book-keeping, accounting, etc. Depreciation is the inherent decline in the value of an asset from any cause whatsoever (as observed by Wilam Pickles in Accountancy, p. 74). Depreciation is the diminution which takes place in the value of a wasting asset despite the amount expended on it in repairs (as stated in The Business Encyclopaedia, Vol. E, p. 365). Depreciation is the measure of the effective life of an asset owning to use or obsolescence during a given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective lifetime, and the amount written off during an accounting period is intended to represent the proportion of such expenditure which has expired during the period (as stated by Spicer and Pegler in Book-keeping and Accounts, 14th Edri., p. 47). For the purposes of determining the true profits in the commercial sense or under the proper principles of accountancy the wear and tear of the assets utilised by the assessee for the purpose of earning his profit will have to be considered and allowance will have to he made for wear and tear. This is what is notionally understood as depreciation (See CIT v. Bombay State Transport Corporation (1979) 118 ITR 399 (Bom)). The allowable depreciation amount is a capital loss to the depreciable asset which must be reflected first to give a true or correct picture as otherwise there is bound to be a distorted picture in the profit and loss account. The depreciation amount is to be treated as a charge on the profits (See G.R. Govindarajulu v. CIT (1973) 90 ITR 13 (Mad)). The principle factors responsible for reduction in value of a capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear : (ii) unusual damage : (iii) inadequacy; and (iv) obsolescence. These factors include not only those relating to physical deterioration, but also those referring to the suitability of the asset as an economically productive unit after a period of time. The depreciation allowance under section 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed, if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice (See CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj)). The two ingredients for depreciation allowance are : (i) that the depreciable asset is owned by the assessee, and (ii) that it is used for the purpose of the assessee's business or profession subject, however, to the provisions of section 34. These aspects have been elaborately dealt with by one of us (Arijit Pasayat, C.J.) in CIT v. Geo Tech Construction Corpn (2000) 244 ITR 452 (Ker).
5. Like every other animate and inanimate object, business premises, machinery, plant or furniture employed by an assessee in the course of his business, profession, etc., have a limited effective life. The vigour, strength, capability, etc., of every such object gradually exhausts by the factors of use and time. These have undoubtedly aided the assessee to earn "income" from such business or profession which is subjected to the levy of tax. Unless provision was made for proper recompense of such diminution in the vigour strength, capability, etc., the apparent profits from the business, profession, etc., would not give a correct picture. Allowance for depreciation is borne out of necessity for such recompense. "Depreciation". according to Webster's New World Dictionary, means " a decrease in value of property through wear, deterioration or obsolescence : the allowance made for this in book-keeping, accounting, etc. Depreciation is the inherent decline in the value of an asset from any cause whatsoever (as observed by Wilam Pickles in Accountancy, p. 74). Depreciation is the diminution which takes place in the value of a wasting asset despite the amount expended on it in repairs (as stated in The Business Encyclopaedia, Vol. E, p. 365). Depreciation is the measure of the effective life of an asset owning to use or obsolescence during a given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective lifetime, and the amount written off during an accounting period is intended to represent the proportion of such expenditure which has expired during the period (as stated by Spicer and Pegler in Book-keeping and Accounts, 14th Edri., p. 47). For the purposes of determining the true profits in the commercial sense or under the proper principles of accountancy the wear and tear of the assets utilised by the assessee for the purpose of earning his profit will have to be considered and allowance will have to he made for wear and tear. This is what is notionally understood as depreciation (See CIT v. Bombay State Transport Corporation (1979) 118 ITR 399 (Bom)). The allowable depreciation amount is a capital loss to the depreciable asset which must be reflected first to give a true or correct picture as otherwise there is bound to be a distorted picture in the profit and loss account. The depreciation amount is to be treated as a charge on the profits (See G.R. Govindarajulu v. CIT (1973) 90 ITR 13 (Mad)). The principle factors responsible for reduction in value of a capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear : (ii) unusual damage : (iii) inadequacy; and (iv) obsolescence. These factors include not only those relating to physical deterioration, but also those referring to the suitability of the asset as an economically productive unit after a period of time. The depreciation allowance under section 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed, if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice (See CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj)). The two ingredients for depreciation allowance are : (i) that the depreciable asset is owned by the assessee, and (ii) that it is used for the purpose of the assessee's business or profession subject, however, to the provisions of section 34. These aspects have been elaborately dealt with by one of us (Arijit Pasayat, C.J.) in CIT v. Geo Tech Construction Corpn (2000) 244 ITR 452 (Ker).
6. In view of the conclusions arrived at by Appellate Assistant Commissioner and Tribunal about the obligation to keep the machinery in good working condition so that it can be used at any moment and the additional fact as noted by them that all expenses relating to the cold storage business were allowed, we find that the view of the Tribunal is irreversible. Accordingly we answer the question referred in the affirmative, in favour of the assessee and against the revenue .
6. In view of the conclusions arrived at by Appellate Assistant Commissioner and Tribunal about the obligation to keep the machinery in good working condition so that it can be used at any moment and the additional fact as noted by them that all expenses relating to the cold storage business were allowed, we find that the view of the Tribunal is irreversible. Accordingly we answer the question referred in the affirmative, in favour of the assessee and against the revenue .
The reference application stands disposed of.