THE COMMISSIONER OF IT vs. M/S SHINGAR LAMAPS LTD

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ITA/662/2005HC Punjab & HaryanaPHHC01076707200507 July 2014Author: MR. JUSTICE RAMESHWAR SINGH MALIK,MR. JUSTICE R.C. KATHURIA (RETD.)6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the appeal by the revenue had no merit. The Tribunal had correctly observed that there was a temporary suspension of business activity due to a lull in the market, not an intention to close down. Evidence such as continued payment of minimum electricity charges and office establishment expenses indicated the assessee's intent to resume operations. Furthermore, the Court reiterated its earlier decision in CIT vs. Shahbad Cooperative Sugar Mills Limited, which, relying on CIT vs. Refrigeration & Allied Industries Limited, held that the expression 'used' in Section 32 includes machinery kept ready for use (passive user). The principle is that if an assessee, on bona fide business consideration, installs machinery deemed necessary for its business, the absence of proof of actual use is not sufficient to deny depreciation. Accordingly, the Tribunal's finding that the assessee was entitled to depreciation was upheld, and the additions of ₹9,60,661 and ₹7,46,200 were deleted. The substantial question of law was answered against the revenue.

What were the facts?

The assessee, M/s Shingar Lamps Limited, engaged in manufacturing fluorescent tubes and bulbs, filed its return for assessment year 1998-99 declaring a loss. The Assessing Officer (AO) noticed minimal sales from opening stock and no manufacturing activity. Consequently, depreciation of ₹7,46,200 claimed was disallowed, and other additions were made, resulting in an assessed income of ₹20,44,900. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance of depreciation and some other additions. The Income Tax Appellate Tribunal (Tribunal) partly allowed the assessee's appeal, deleting the disallowance on depreciation by holding that the manufacturing activity was temporarily suspended due to a lull in business. The revenue has appealed this order to the High Court.

What were the issues?

1. Whether on the facts and in the circumstances of the case and in law, the finding of the ITAT that the machinery was kept ready for use is not perverse and unsustainable in view of the fact that the conduct of the assessee shows that it had no intention of resuming the manufacturing activity? (Question of law and fact, turning on Section 32 of the Income Tax Act, 1961). Assessee's Contention: The machinery was installed and ready for use. Actual user is not essential for claiming depreciation under Section 32. Reliance was placed on CIT vs. Shahbad Cooperative Sugar Mills Limited and CIT vs. Refrigeration & Allied Industries Limited. Revenue's Contention: The assessee had not used the machinery during the year under consideration, and therefore, under Section 32 of the Act, deduction on account of depreciation was not admissible. The Tribunal erred in allowing the claim of depreciation.

Which sections of the Income-tax Act were involved?

Section 32,Section 260A,Section 143(3)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision:7.7.2014 The Commissioner of Income Tax, Jalandhar I Jalandhar ……Appellant Vs. M/s Shingar Lamps Limited, Patel Chowk, Jalandhar …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE JASPAL SINGH Present: Mr. Vivek Sethi, Advocate for the appellant. Mr.S.K.Mukhi, Advocate with Mr. Rajiv Sharma, Advocate for the respondent. Ajay Kumar Mittal,J.

1.

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 8.7.2005, Annexure A.3, passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (in short, “the Tribunal”) in ITA No.303/(ASR)/2002 for the assessment year 1998-99, claiming following substantial question of law:- “Whether on the facts and in the circumstances of the case and in law, the finding of the ITAT that the machinery was kept ready for use is not perverse and unsustainable in view of the fact that the conduct of the GURBAX SINGH 2014.08.12 16:13 integrity of this document High Court Chandigarh assessee shows that it had no intention of resuming the manufacturing activity?

2.

A few facts relevant for the decision of the controversy as narrated in the appeal may be noticed. The assesee is a limited company engaged in the business of manufacture and sale of fluorescent tubes and bulbs. Return of income for the financial year relevant to assessment year 1998-99 was filed on 30.11.1998 declaring loss of ` 56,870/-. During the course of assessment proceedings, it was noticed that the assessee had effected sales amounting to ` 30,900/- only during the year and that too out of the opening stock. As there was no manufacturing activity carried out by the assessee during the year, depreciation claimed at ` 7,46,200/- was not allowed. Some other additions were also made. Assessment was made at an income of ` 20,44,900/- vide order passed under Section 143(3) of the Act on 27.2.2001, Annexure A.

1.

Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessed income was reduced in appeal to ` 19,44,900/-. The CIT(A) confirmed the disallowance of depreciation apart from sustaining some other additions vide his order dated 29.8.2002, Annexure A.2 in appeal. Still not satisfied, the assessee filed appeal before the Tribunal. Vide order dated 8.7.2005, Annexure A.3, the Tribunal partly allowed the appeal and deleted the disallowance on account of depreciation by observing that there was temporary suspension of manufacturing activity because of a lull in the business of the assessee as it was suffering losses. Hence the instant appeal by the revenue.

3.

We have heard learned counsel for the parties and perused the record. GURBAX SINGH 2014.08.12 16:13 integrity of this document in CIT vs. Refrigeration & Allied Industries Limited, (2000) 163 CTR (Del) 498 to submit that the machinery was installed during the year and was ready for use. It was not actual user which was essential for claiming depreciation under section 32 of the Act.

6.

After hearing learned counsel for the parties, we do not find any merit in the appeal.

7.

The Tribunal while accepting the claim of the assessee in its order dated 8.7.2005, Annexure A.3 had recorded that there was temporary stoppage of business activity during the assessment year in question due to depression in the business of the assessee. However, the next year saw business activity and there were certain sales carried out by the assessee even during the period relating to current assessment year. There was no intention of the assessee to close down the business as the assessee had paid minimum electricity charges and other office establishment expenses. The Tribunal noticed as under:- “22. Considering the above discussion and the various decisions referred to above, it is clear that it is a case of lull in business of the assessee during the year under appeal because GURBAX SINGH 2014.08.12 16:13 integrity of this document High Court Chandigarh of heavy losses suffered by the assessee in the trading manufacturing activity, therefore the other main objects to minimize losses was kept in mind. Ultimately in the next year, there were sales and there are also sales in the year under consideration. The assessee had to pay minimum electricity charges to the Punjab State Electricity Board and also including office expenses establishment laid down for the purpose of business. These factors would show that the assessee had no intention to close down the business activity in the year under consideration. Accordingly, the orders of the authorities below are set aside on this issue. The entire additions of ` 9,60,661/- and ` 7,46,200/- are deleted. This ground of appeal of the assessee on this issue is allowed.”

8.

Further, this Court in Shahbad Cooperative Sugar Mills Limited’s case (supra) relying upon judgment of the Delhi High Court in Refrigeration and allied Industries Limited’s case (supra) held that it is not the active user which is essential for claiming deduction under Section 32 of the Act. The assessee is entitled for depreciation where there was passive user in which the assessee had kept the asset ready for use. It was observed as under:- “10. We also find that expression ‘used’ in section 32 of the Act has been judicially interpreted to include machinery kept for use, even if the same was not actively used. Passive user has also been held to be user where it may be necessary for business of the assessee to keep the machinery ready for use. Reference may be made to the judgment of Delhi High Court in CIT vs. Refrigeration & Allied Industries Limited, (2000) 163 CTR (Del) 498: (2001) 247 ITR 12 (Del). Therein reliance was placed on the following judgments: (i) Machinery Manufacturers Corporation Limited v. CIT (1957) 31 ITR 203 (Bom.) GURBAX SINGH 2014.08.12 16:13 integrity of this document CIT vs. Dalmia Cement Limited, (1945) 13 ITR 415 (Pat); (iv) (SC); (v) CTR (Bom.) 238: (1979) 118 ITR 309 (Bom) (vi) CTR (Ker) 528: (2000) 244 ITR 452 (Ker). Reference may also be made to dictionary meaning of the word ‘depreciation’ as also the object of allowing depreciation. In the present case, the machinery in question is vapour cell, juice clarifier and fly ash arrestor pad pweitier which according to the assessee had to be kept ready for use for its business expediency. Stand of the assessee is that it resulted in increase of capacity of the plant and that on account of technical justification for the said machinery, items of the machines were installed. Even though the auditors may not have accepted the said stand, the assessee was entitled to free play in joints in taking a decision to install the machinery if in its view the same was necessary for its business. If the assessee was to install such a machinery on its bona fide business consideration, mere absence of proof of actual use thereof was not enough to deny the claim for depreciation. Accordingly, we do not find any ground to interfere with the findings of the Tribunal holding that the assessee was entitled to depreciation on the machinery, as claimed.” GURBAX SINGH 2014.08.12 16:13 integrity of this document High Court Chandigarh

9.

In view of the above, the substantial question of law is answered against the revenue and in favour of the assessee. Consequently,

the appeal stands dismissed. (Ajay Kumar Mittal) Judge July 07, 2014 (Jaspal Singh) ‘gs’ Judge GURBAX SINGH 2014.08.12 16:13 integrity of this document High Court Chandigarh

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