MARCHON TEXTILES INDUSTRIES P. LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 1401/MUM/2010

• Counselvise Citation: 140119914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 11-04-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 19-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VANDANA SAGAR
• Keywords: Depreciation; Notional interest
• Section: 32; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI S.V. MEHROTRA S.V. MEHROTRA S.V. MEHROTRA S.V. MEHROTRA (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM ) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO. 1401 & 1402/MUM/2010 ASSESSMENT YEAR- 2005-06 & 2006-07 M/S. MARCHON TEXTILES INDUSTRIES PVT. LTD., F.P. 145, RAM MANDIR ROAD, GURUKUL CHS, VILE PARLE (E), MUMBAI-400 057 PAN-AABCM 9475F VS. THE DCIT, CIR 2(2), AAYAKAR BHAVAN, MUMBAI-400 020 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI VIJAY MEHTA RESPONDENT BY: SHRI VANDANA SAGAR O R D E R O R D E R O R D E R O R D E R PER ASHA PER ASHA PER ASHA PER ASHA VIJAYARAGHAVAN (JM) VIJAYARAGHAVAN (JM) VIJAYARAGHAVAN (JM) VIJAYARAGHAVAN (JM) THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS DATED 14.12.2009 PASSED BY THE LD. CIT(A)-5 FOR THE ASSESSMENT YEARS 2005-06 & 2006-07. 2. THE FIRST GROUND RAISED BY THE ASSESSEE REGARDING CON FIRMING ADDITION OF `. 17,19,655/- BEING 12% OF NOTIONAL IN TEREST ON SECURITY DEPOSIT OF `. 1,43,30,461/- TO DETERMINE ANNUAL VALU E U/S. 23(1)A) FOR THE PURPOSE OF COMPUTING INCOME UNDER THE HEAD INCO ME FROM HOUSE PROPERTY. THE RENT CHARGED BY THE ASSESSEE BEING REASO NABLE, ADDITION OF `. 17,19,655/- NEEDS TO BE DELETED. ITA NOS. 1401 & 02/M/10 2 3. FOR THE ASSESSMENT YEAR 2005-06 THE FACTS OF THE CASE ARE AS UNDER: DURING THE YEAR THE APPELLANT HAD LET OUT ITS PREM ISES TO M/S. I-FLEX SOLUTIONS LTD. FOR A COMPENSATION OF LICEN SE FEE AGGREGATING TO `. 1,86,750/- P.M. CALCULATED @ `. 2 2.50/- PER SQ. FT PER MONTH FOR 8300 SQ.FT. THE APPELLANT LET OUT ANOTHER PROPERTY TO M/S. JET AIRWAYS LTD. FOR A MONTHLY LICE NSE FEE OF `. 7,14,093/-. IT HAD ALSO TAKEN A DEPOSIT OF `. 75,00, 000/- FROM M/S. I-FLEX SOLUTIONS LTD. AND `. 68,30,461/- FROM JET AI RWAYS LTD. BY WAY OF INTEREST FREE SECURITY DEPOSIT. 4. FOR THE ASSESSMENT YEAR 2006-07 THE FACTS OF THE CASE ARE AS UNDER: THE FAIR RENTAL/ANNUAL VALUE OF THE PROPERTY WAS WO RKED OUT INCLUDING RENT RECEIVED OF `. 1,28,17,794/- TO WHICH NOTIONAL INTEREST OF `. 17,19,655/- WAS ADDED AND THE ANNUAL V ALUE WAS DETERMINED AT `. 1,45,37,449/-. 5. THE ASSESSING OFFICER OBSERVED THAT THE PROPERTY WAS L OCATED IN A VERY POSH INDUSTRIAL AREA. THEREFORE, THE RENT CHA RGED APPEARED TO BE VERY LOW. THE REDUCED RATE WAS DUE TO EXTRANEOUS CONSIDERATION OF INTEREST FREE DEPOSIT. THE PROPERTY WAS NOT COVERED U NDER THE PROVISIONS OF RENT CONTROL ACT. THEREFORE, THE ASSESSIN G OFFICER CONTENDED THAT IT WAS NECESSARY TO ESTIMATE THE ANNUAL VALUE/FAIR RENT AND FOR THAT PURPOSE, IT IS NECESSARY TO INCLUDE THE B ENEFIT IN THE FORM OF NOTIONAL INTEREST DERIVED FROM DEPOSIT IN ORDER TO ARRIVE AT THE CORRECT ANNUAL VALUE OF THE PROPERTY. HE NOTICED T HAT THE ASSESSEE HAD CHARGED INTEREST @12% ON THE LOANS ADVANCED TO HIRAN ANDANI AAKRUTI AND ROYAL CONSTRUCTION CO. CONSIDERING THE RATIO OF I NTEREST, THE INTEREST IN THE FORM OF BENEFIT WORKS OUT OF `. 17,19 ,655/- (12% OF 1,43,30,461/-) FOR THE A.Y. 2005-06. THE ASSESSEE WAS C ONFRONTED WITH PROPOSED ANNUAL VALUE AND AFTER CONSIDERING ITS REPLY THE ASSESSING OFFICER CONCLUDED THAT THE RENT CHARGED BY THE ASSESSE E WAS LESS THAN THE MARKET RATE. WHILE COMPUTING THE INCOME FROM H OUSE PROPERTY, ITA NOS. 1401 & 02/M/10 3 THE ASSESSING OFFICER OPINED THAT THE INTEREST RATE IS THE IMPORTANT FACTOR FOR DETERMINING THE ANNUAL VALUE. SINCE THE RENT CHARGED WAS LESS AND MARKET RATE WAS HIGHER, THEREFORE, THE FAIR R ENTAL/ANNUAL VALUE OF THE PROPERTY WAS WORKED OUT INCLUDING RENT RECEIV ED OF `. 1,09,38,055 TO WHICH NOTIONAL INTEREST OF `. 17,19,6 55/- WAS ADDED AND THE ANNUAL VALUE WAS DETERMINED AT `. 1,26,57,710/-. 6. AGGRIEVED, ASSESSEE WAS IN APPEAL BEFORE THE LD. CIT( A). THE LD. CIT(A) AFTER CONSIDERING VARIOUS DECISIONS HELD THAT A SSESSING OFFICER WAS JUSTIFIED IN ADOPTING ANNUAL LETTING VALUE BY TAK ING INTO CONSIDERATION THE NOTIONAL INTEREST ON DEPOSIT. THE L D. CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER. 7. AGGRIEVED ASSESSEE IS IN APPEAL BEFORE US. 8. WE FIND THAT THIS ISSUE HAS NOW BEEN DECIDED BY THE MUMBAI TRIBUNAL IN THE CASE OF M/S. ADVACADO PROPERTIES & TR DG. (I) PVT. LTD., IN ITA NOS. 2347 & 2348/M/2010 VIDE ORDER DT. 25 TH FEBRUARY, 2011 WHEREIN THE TRIBUNAL HAS FOLLOWED THE ORDER IN THE CASE OF M/S. EVEREST KANTO INVESTMENT & FINANCE LTD. WHICH IS REPRODUCED A S UNDER: AS ALREADY MENTIONED, THE A.O. AS WELL AS THE LD. CIT (A) HAS RELIED ON THE PROVISIONS OF SECTION 23(1)(A) TO TAK E THE ANNUAL VALUE OF THE ASSESSEES PROPERTY AT A HIGHER AMOU NT THAN THE RENT ACTUALLY RECEIVED BY THE ASSESSEE HOLDING THAT THE SAME REPRESENTED THE SUM FOR WHICH THE PROPERTY O F THE ASSESSEE MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR T O YEAR. IT IS PERTINENT TO NOTE HERE THAT AS PER THE R ELEVANT PROVISIONS OF SECTION 23(1) AS APPLICABLE UP TO A.Y. 19 75-76, THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR ALONE REPRESENTED ACTUAL VALUE OF THE PROPERTY FOR THE PURPOSE OF COMPUTING I NCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THEREAF TER, AMENDMENT WAS MADE AND AS PER THE AMENDED PROVISIONS O F SECTION 23(1)(B) MADE APPLICABLE FROM A.Y. 1976-77, THE ITA NOS. 1401 & 02/M/10 4 ACTUAL RENT RECEIVED WAS TREATED TO REPRESENT THE ANN UAL VALUE PROVIDED IT EXCEEDS THE SUM FOR WHICH THE PROPE RTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEA R. THE LEGISLATIVE INTENTION OF THE SAID AMENDMENT WAS EXPLAI NED BY CBDT IN CIRCULAR NO. 204 DTD. 24.7.76 AND AFTER TAKING NOTE OF THE SAID CIRCULAR AND AFTER REPRODUCING THE RELEVANT PORTION THEREOF IN ITS ORDER PASSED IN THE CASE OF REC LAMATION REALTY INDIA P. LTD. (SUPRA), THE TRIBUNAL HELD THAT THE POSITION OF LAW PRIOR TO INTRODUCTION OF SECTION 23(1 )(B) AS CLARIFIED BY THE BOARD ITSELF WAS THAT THE ANNUAL VAL UE WAS EQUAL TO THE MUNICIPAL VALUATION OF THE PROPERTY. THE TRIBUNAL HELD THAT THIS IS HOW THE BOARD SOUGHT TO INT ERPRET THE EXPRESSION THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR USED IN SECTION 23(1)(A). 12. THE TRIBUNAL ALSO TOOK NOTE OF THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF DIWAN DAULAT KAPOOR VS. NEW DELHI MUNICIPAL COMMITTEE 122 ITR 700 (SC) WHEREIN THE QUESTION THAT HAD ARISEN FOR CONSIDERATION WAS AS TO WH AT SHOULD BE THE BASIS OF DETERMINING THE ANNUAL VALUE FO R THE PURPOSE OF LEVY OF PROPERTY TAX. THE EXPRESSION ANNUA L VALUE AS DEFINED IN THE DELHI MUNICIPAL CORPORATIO N ACT 1957 AND PUNJAB MUNICIPAL ACT 1911 WAS GROSS ANNUAL R ENT AT WHICH SUCH HOUSE OF BUILDING MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. THE HONBLE SU PREME COURT HELD THAT THE ANNUAL VALUE IS ALWAYS RENT REALI ZABLE BY LANDLORD AND THAT ACTUAL RENT IS ONLY AN INDICATOR W HAT THE LANDLORD MIGHT REASONABLY EXPECT TO GET FROM A HYPO THETICAL TENANT. THE HONBLE SUPREME COURT FURTHER HELD THAT WHERE TENANCY IS SUBJECT TO RENT CONTROL LEGISLATION, STANDA RD RENT WOULD BE A PROPER MEASURE AND IN ANY EVENT, ANNUAL V ALUE CANNOT EXCEED SUCH STANDARD RENT. 13. THE TRIBUNAL IN ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. ALSO TOOK NOTE OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MRS. SHEILA KAUSHISH VS. CIT 131 ITR 435 (SC), WHEREIN THE QUESTION AROSE IN THE CONTEXT OF PROVISIONS OF SECTION 2 3 OF THE INCOME TAX ACT AND IT WAS HELD BY THE HONBLE SU PREME COURT THAT THE RATIO OF ITS DECISION IN THE CASE OF D EWAN DAULAT RAI KAPOOR (SUPRA) WOULD BE EQUALLY APPLICABL E IN INTERPRETING THE DEFINITION OF ANNUAL VALUE GIVEN IN SECTION 23(1) OF THE INCOME TAX ACT. IT WAS HELD THAT THESE DEFINITIONS ARE GIVEN IN IDENTICAL TERMS AND IT WAS IM POSSIBLE TO DISTINGUISH THE DEFINITION OF ANNUAL VALUE GIVEN IN SECTION ITA NOS. 1401 & 02/M/10 5 23(1) OF THE INCOME TAX ACT FROM THE DEFINITION OF THAT TERM GIVEN IN THE DELHI MUNICIPAL CORPORATION ACT 1957 A ND THE PUNJAB MUNICIPAL ACT, 1911. IT WAS THEREFORE HELD A DOPTING IDENTICAL LINE OF REASONING THAT EVEN IF THE STANDARD RENT OF A BUILDING HAS NOT BEEN FIXED BY THE CONTROLLER, THE A NNUAL VALUE OF THE BUILDING AS PER SECTION 23(1) OF THE INC OME TAX ACT MUST BE HELD TO BE A STANDARD RENT DETERMINABLE U NDER THE PROVISIONS OF THE RENT CONTROL ACT AND NOT THE AC TUAL RENT RECEIVED BY THE LANDLORD FROM THE TENANT. THE HONB LE APEX COURT ALSO OBSERVED THAT THIS INTERPRETATION WHICH WA S BEING PLACED ON THE LANGUAGE OF SECTION 23(1) OF THE INCOM E TAX ACT CAN BE SAID TO HAVE RECEIVED LEGISLATIVE APPROVAL BY THE AMENDMENT MADE IN THE SAID PROVISIONS WHEREBY IT WAS PROVIDED IN SECTION 23(1)(B) THAT WHERE THE PROPERTY IS LET AND THE ANNUAL RENT RECEIVED OR RECEIVABLE BY THE O WNER IN RESPECT THEREOF IS IN EXCESS OF THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YE AR TO YEAR, THE AMOUNT SO RECEIVED OR RECEIVABLE SHALL BE DEEMED TO THE ANNUAL VALUE OF THE PROPERTY. 14. THE TRIBUNAL IN ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. (SUPRA) THEN WENT O N TO REFER TO THE DECISION OF HONBLE CALCUTTA HIGH COURT IN TH E CASE OF CIT VS. PRABHABATI BANSALI, 141 ITR 419 WHEREIN IT W AS HELD THAT RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DEWAN DAULAT RAI KAPOOR (SUPRA) AND MRS. S HEILA KAUSHISH (SUPRA) WHILE DECIDING THE ISSUE RELATING TO DETERMINATION OF ACTUAL VALUE OF THE ASSESSEES PROPERTY IN MUMBAI THE INCOME FROM HOUSE PROPERTY MUST BE COMPUTE D ON THE BASIS OF THE SUM WHICH MIGHT REASONABLY BE EXPEC TED TO LET FROM YEAR TO YEAR AND WITH THE ANNUAL MUNICI PAL VALUE PROVIDED SUCH A VALUE IS NOT ABOVE THE STANDARD RENT RECEIVABLE AND THE SAME COULD BE ADOPTED AS THE SAFEST GUIDE FOR THIS PURPOSE. AS MENTIONED BY THE TRIBUNAL I N ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P . LTD. (SUPRA), THE SAID DECISION WAS RENDERED BY THE HONBLE CALCUTTA HIGH COURT AFTER TAKING INTO CONSIDERATION THE PROVISIONS OF SECTION 154 OF THE BOMBAY MUNICIPAL CORPORATION ACT WHEREIN THE MANNER OF DETERMINATION OF RATABLE VALUE WAS LAID DOWN WHICH WAS BASED ON THE ANN UAL RENT FOR WHICH THE PROPERTY MIGHTY REASONABLY BE EXP ECTED TO LET FROM YEAR TO YEAR. THE HONBLE CALCUTTA HIGH COURT HELD THAT THE MUNICIPAL VALUATION AND ANNUAL VALUE U/S 23(1)(A) OF THE INCOME TAX ACT THUS ARE ONE AND SAME . AS NOTED BY THE TRIBUNAL IN ITS ORDER PASSED IN THE CASE O F RECLAMATION REALTY INDIA P. LTD. (SUPRA) THE SAID DEC ISION OF ITA NOS. 1401 & 02/M/10 6 THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF PRABH ABATI BANSALI (SUPRA) HAS BEEN SUBSEQUENTLY FOLLOWED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF M.V. SONAV ALA VS. CIT 177 ITR 246 (BOM) WHEREIN THE QUESTION POSED TO T HEIR LORDSHIPS WAS WHETHER THE ACTUAL COMPENSATION RECEIVED COULD BE TAKEN AS ANNUAL VALUE OF THE PROPERTY AS AG AINST THE MUNICIPAL RATABLE VALUE AND THE SAME WAS ANSWERED BY THE HONBLE BOMBAY HIGH COURT IN THE NEGATIVE THAT IS AGAINST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. 15. IN OUR OPINION, THE ISSUE INVOLVED IN THE PRESENT CASE THUS IS SQUARELY COVERED BY THE DECISION OF CO-ORDINATE BEN CH OF THIS TRIBUNAL IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. (SUPRA) WHICH IN TURN HAS RELIED ON AND FOLLOWED THE JUDGME NTS OF HONBLE APEX COURT AND JURISDICTIONAL HIGH COURT ON A SIMILAR ISSUE AND RESPECTFULLY FOLLOWING THE SAID JUDICIAL PRONOUNCEMENTS, WE REVERSE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO ADOPT THE RENT ACTUALLY RECEIVED BY THE ASSESSEE DURING A.Y. 2003-04 TO 2006-0 7 AS ANNUAL VALUE OF THE PROPERTY BEING MORE THAN THE MU NICIPAL RATABLE VALUE. THE ADDITIONS MADE BY THE A.O. AND C ONFIRMED BY THE LD. CIT(A) ON THIS ISSUE ARE ACCORDINGLY DELETED A LLOWING GROUND NO. 2 OF THE ASSESSEES APPEALS FOR A.Y. 2003-04 T O 2006- 07. 9. RECENT DECISION OF THE (DELHI HIGH COURT)-FULL BE NCH IN THE CASE OF CIT VS MONI KUMAR SUBHAS HAS HELD AS FOLLOWS: IF ASSESSING OFFICER FINDS THAT THE ACTUAL RENT RECEIVE D IS LESS THAN THE FAIR MARKET RENT BECAUSE THE ASSESSEE HAS RECEIVED ABNORMALLY HIGH INTEREST FROM SECURITY DEPO SIT, HE CAN UNDERTAKE NECESSARY EXERCISE IN THAT BEHALF. HOWEVER, BY NO STRETCH OF IMAGINATION THE NOTIONAL I NTEREST ON THE INTEREST FREE SECURITY CAN BE TAKEN AS DETERMIN ATIVE FACTOR TO ARRIVE AT THE FAIR RENT SEC. 23(1)(A) OF THE I.T. ACT, 1961 DOES NOT MANDATE THIS. 10. THEREFORE WE DELETE THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF NOTIONAL INTEREST ON SECURITY DEPOSIT FOR COMPUTING THE ANNUAL VALUE OF THE PROPERTY. THIS GRO UND RAISED BY THE ASSESSEE IS ALLOWED. ITA NOS. 1401 & 02/M/10 7 11. THE SECOND GROUND RAISED BY THE ASSESSEE RELATES TO DISALLOWANCE OF CLAIM OF DEPRECIATION OF `. 7,36,95 4 FOR A.Y. 2005-06 AND `. 3,31,629/- FOR A.Y. 2006-07 IS BAD IN LAW AND NEEDS TO BE DELETED. 12. THE ASSESSEE CLAIMED DEPRECIATION ON PLANT & MACHIN ERY AMOUNTING TO RS.7,36,954/- DURING THE YEAR. HOWEVER, THERE WAS NO PLANT & MACHINERY AS PER SCHEDULE D OF THE BALANCE S HEET. FURTHER, IN THE FORM NO.3CD OF THE AUDIT REPORT, IT WAS MENTIONE D THAT THE ASSESSEE COMPANY STARTED TRADING IN TDR AND DISCONTINUED THE BUSINESS OF MANUFACTURING OF TEXTILE YARNS AND TEXTILE MACHINERY. THEREFORE, THE ASSESSEE WAS NOT ENTITLED FOR ANY DEPREC IATION. THEREFORE, THE AMOUNT OF RS.7,36,954/- WHICH WAS CLAI MED AS DEPRECIATION ON PLANT AND MACHINERY WAS DISALLOWED . 13. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) AND SUBMITTED AS FOLLOWS: IN THE WRITTEN SUBMISSION MADE, IT IS STATED THAT PLANT AND MACHINERY ARE LYING IN THE FACTORY AND THE SAME FORM A PART OF BLOCK OF ASSET. FACTORY WAS VERY MUCH IN OPERATION. IT IS ONLY DUE TO TEMPORARY SUSPENSION OF MANUFACTURING OPERATIONS DU E TO ADVERSE MARKET CONDITIONS, NO PRODUCT HAS BEEN MANUFAC TURED DURING THE YEAR. BUT PLANT AND MACHINERY WAS VERY MU CH READY FOR USE. IT CAN BE NOTICED THAT APPELLANT COMPANY IS STILL HAVING INVENTORIES (RS.17,35,009/-) OF RAW MATERIAL IN ITS BA LANCE SHEET FOR THE YEAR UNDER CONSIDERATION AND SAME WERE SOLD IN AY 2006- 07. HAD THE BUSINESS WAS DISCONTINUED PERMANENTLY IN AY 2005- 06, COMPANY COULD HAVE SOLD THE RAW MATERIAL IN AY 2 005-06 ONLY. PASSIVE USE OF MACHINERY ALSO QUALIFIES FOR DEPRE CIATION. THERE WAS TEMPORARY DISCONTINUANCE OF BUSINESS. HOWEVER BUSINESS WAS TEMPORARILY DISCONTINUED AND IN THAT CASE DEPRECIATION SHOULD BE ALLOWED ON PASSIVE USE OF PLANT AND MACHINERY. ITA NOS. 1401 & 02/M/10 8 14. THE LD. CIT(A) HELD AS FOLLOWS: ON CAREFUL CONSIDERATION OF THE ABOVE FACTS, I DO NO T FIND ANY MERIT IN THE CONTENTIONS OF THE APPELLANT AS IT H AS BEEN ADMITTED THAT THE CONCERNED PLANT AND MACHINERIES WE RE NOT PUT TO USE DURING THE YEAR UNDER CONSIDERATION AS THE APPE LLANT WAS NOT CARRYING ON ANY MANUFACTURING ACTIVITY. THE MER E FACT THAT A PART OF INVENTORY WAS SOLD IN THE SUBSEQUENT YEAR DOES NOT NEGATE THE FACT THAT SUCH ASSETS WERE NOT USED IN THE PR ESENT YEAR. IN SUCH A SITUATION, ONE OF THE PRIMARY CONDITI ONS OF DEPRECIATION WHICH LAYS DOWN THAT THE ASSETS SHOULD BE U SED FOR THE PURPOSES OF BUSINESS. IT MAY BE STATED HERE THAT SIMI LAR ISSUE HAS COME UP FOR CONSIDERATION BEFORE HONBLE BOMBAY H IGH COURT IN THE CASE OF DINESHKUMAR GULABCHAND AGRAWAL V S CIT (2004) 141 TAXMAN 62 (BOM) IN WHICH IT WAS HELD THAT THE WORD USED IN SECTION 32 DENOTES ACTUALLY USED FOR THE PURPO SES OF BUSINESS AND NOT MERELY READY FOR USE. SIMILAR DECISION WAS RENDERED IN ACIT VS RISHIROOP POLYMERS P. LTD. (2006) 102 ITD 128 (MUM) WHERE PLANT AND MACHINERIES WERE NOT PUT T O USE BECAUSE OF LOCK OUT / STRIKE IN THE FACTORY, IT WAS HE LD THAT NO DEPRECIATION COULD BE ALLOWED. RELIANCE COULD ALSO B E PLACED ON THE CASE OF CIT VS ORIENTAL COAL CO. LTD. 206 ITR 68 2 (CAL) IN WHICH IT WAS HELD THAT FOR GRANT OF DEPRECIATION OWN ERSHIP AS WELL S THE ACTUAL USER OF THE ASSET FOR THE PURPOSES OF BUSINESS IS MUST. IN THAT CASE, THE ENTIRE BUSINESS UNDER LOCK OUT IN THE RELEVANT PREVIOUS YEAR AND THE PLANT AND MACHINERIES NOT USED. IT WAS DECIDED THAT THERE WAS NO QUESTION OF GRANTING DEP RECIATION. RELIANCE WAS PLACED ON LIQUIDATORS OF PURSE LTD 25 ITR 265 (SC). IN THE LIGHT OF ABOVE DISCUSSION AND THE POSITION OF LA W AND CITATIONS STATED ABOVE, IT IS HELD THAT THE AO WAS JUST IFIED IN REJECTING THE CLAIM OF DEPRECIATION. HIS ACTION IS, A CCORDINGLY, UPHELD. 15. AGGRIEVED ASSESSEE IS IN APPEAL BEFORE US. THE LD. C OUNSEL FOR THE ASSESSEE SHRI VIJAY MEHTA ARGUED THAT THE BUSINESS IS N OT COMPLETELY COME TO AN END AND ONCE THE ASSET GOES INTO THE BLOCK, THE CONDITION THAT IT HAS NOT BEEN PUT TO USE IS INAPPLICA BLE. THE LD. COUNSEL FOR THE ASSESSEE FURTHER ARGUED THAT THE PLANT A ND MACHINERY ARE VERY MUCH READY FOR USE AND THE COMPANY IS STILL HAVING INVENTORIES OF RAW MATERIAL IN ITS BALANCE SHEET FOR T HE YEAR UNDER ITA NOS. 1401 & 02/M/10 9 CONSIDERATION. FURTHER PASSIVE USE OF MACHINERY ALSO QU ALIFIES FOR DEPRECIATION. THERE WAS ONLY A TEMPORARY DISCONTINUA NCE OF BUSINESS AND HENCE DEPRECIATION SHOULD BE ALLOWED ON PASSIVE U SE OF PLANT AND MACHINERY. 16. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON TH E DECISION OF 247 ITR 36(SC), 231 ITR 738 AND 304 ITR 160. 17. WE HEARD BOTH THE PARTIES. IN THE CASE OF ALLIE D ELECTRONICS AND MAGNETICS LTD. VS DCIT (304 ITR 160), IT HAS BEEN HE LD AS FOLLOWS: A BARE READING OF CLAUSE (III) OF SECTION 32(1) OF TH E INCOME-TAX ACT, 1961, SHOWS THAT ONE OF THE CONDITION S FOR ALLOWING THE DEDUCTION THEREUNDER IS THAT THE MACHIN ERY MUST HAVE BEEN USED FOR THE PURPOSES OF THE BUSINESS DURING TH E PREVIOUS YEAR IN WHICH THE MACHINERY IS SOLD, DISCARDED , DEMOLISHED OR DESTROYED. THAT THERE WAS A CONCURRENT FINDING OF THE THREE AUT HORITIES BELOW, I.E., THE ASSESSING OFFICER, COMMISSIONER OF INCOM E-TAX (APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL TO T HE EFFECT THAT THE MACHINERY WAS NOT PUT TO USE AT ALL DURING T HE RELEVANT PREVIOUS YEAR. THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION UNDER SECTION 32(1)(III). 18. SIMILARLY, IN THE CASE OF CIT VS. J.K. TRANSPORT 2 31 ITR 798, THE MADHYA PRADESH HIGH COURT HELD AS FOLLOWS: REVERSING THE DECISION OF THE TRIBUNAL, THAT THE BASI C CONCEPT UNDERLYING THE ALLOWANCE OF DEPRECIATION IS THAT IT SHOULD RESULT, AS A CONSEQUENCE OF THE MACHINERY BEING ACTUAL LY USED OR EMPLOYED, IN THE EARNING OF INCOME. THEREFORE, SINC E BOTH THE TRUCKS WERE NOT USED IN THE ACCOUNTING YEAR OR PART T HEREOF, THE ASSESSEE WAS NOT ENTITLED TO DEPRECIATION ON THE TRUCKS. ITA NOS. 1401 & 02/M/10 10 HENCE, DEPRECIATION CANNOT BE GRANTED FOR THE PLAN T AND MACHINERY WHICH HAD NOT BEEN ACTUALLY USED IN THE BU SINESS OF THE ASSESSEE. 19. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON THIS DAY OF APRIL, 2011 (S.V. MEHROTRA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED .. APRIL, 2011 RJ ORDER PRONOUNCED ON THIS 4 TH DAY OF MAY, 2011 SD/- SD/- (J. SUDHAKAR REDDY) (ASH A VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 4 TH MAY, 2011 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR B BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NOS. 1401 & 02/M/10 11 DATE INITIALS 1 DRAFT DICTATED ON: 11 .0 4 .2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 19 .0 4 .2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: DATE ON WHICH FILE GOES TO AR _________ ______ 10. DATE OF DISPATCH OF ORDER: _________ ______