HAMEED MARINE PRIVATE LIMITED,EDALAKUDY, NAGERCOIL vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, NAGERCOIL, INCOME TAX OFFICE, NAGERCOIL
Facts
The assessee claimed depreciation on second-hand machinery. The Assessing Officer (AO) disallowed the claim, allowing depreciation only on the residual value and adding back Rs. 31,41,044. The CIT(A) confirmed this disallowance. The assessee appealed to the Tribunal.
Held
The Tribunal held that Explanation 3 to Section 43(1) cannot be invoked mechanically. The AO failed to record satisfaction that the main purpose of transfer was tax reduction or obtain prior approval from the Joint Commissioner. The conditions for invoking Explanation 3 were not met. Therefore, the disallowance of depreciation was unsustainable.
Key Issues
Whether the disallowance of depreciation on second-hand machinery by invoking Explanation 3 to Section 43(1) is legally sustainable.
Sections Cited
Section 32(1), Section 43(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S.R.RAGHUNATHA
आदेश / O R D E R
PER MANU KUMAR GIRI, JM:
This captioned Appeal filed by the Assessee is directed against the order of the Ld. ADDL/JCIT (A)-4 MUMBAI [CIT(A)] dated 11.07.2025 for Assessment Year 2017-18. 2. The assessee has raised the following grounds of appeal: -
The impugned order is illegal, opposed to the facts, contrary to law, without jurisdiction and against the principles of natural justice and therefore liable to be quashed. 2. For that on the facts of the case, the Assessing Officer issuing the notice u/s.143(2) of the I.T. Act, 1961 on 09.08.2018 did not have jurisdiction over the
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case of the assessee, as there was no mention of the type of scrutiny under which the case of the assessee has been selected, hence the notice is bad-in law and the assessment order passed on the basis of such notice is baseless and non est. 3. The learned assessing officer erred in issuing the notice u/s. 143(2) dated 09.08.2018 without complying with the CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017and so the notice issued u/s. 143(2) is not valid as per Provision of Act and consequently the entire assessment proceedings are invalid. 4. The learned CIT (Appeals) erred in confirming the disallowance of Rs.31,41,044/- towards the depreciation claimed by the assessee on the second hand machinery when the assessing officer did not record any satisfaction note that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost) as required under Explanation 3 to section 43(1). 5. The learned CIT (Appeals) erred in confirming the action of the assessing officer in determining the actual cost of the second hand machinery at Nil without taking the approval of the Addl/Joint CIT as required under Explanation 3 to section 43(1). 6. The learned CIT(A) ought to have known that the purchase of second hand machinery is genuine supported by proper vouchers, transport bills and VAT Paid details etc., 7. The appellant prays for leave to add, alter, amend or modify any or all the grounds at any time before or at the time of the hearing. 3. The assessee is engaged in the business of producing steam sterilized fish meal, fish oil and fish soluble and other extracts. In its return of income, the assessee admitted a total income of Rs.18,68,860/-. In its return of income, the assessee had claimed depreciation on the purchase of second-hand machinery for a total value of Rs.2,14,80,600/-. The depreciation so claimed was for Rs.31,41,044/-. The Assessing Officer (‘AO’ in short) issued notice u/s.143(2) dated 09.8.2018 for scrutiny assessment by CASS and one of the issues considered was that "Opening
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Written Down Value of fixed assets as per ITR of current is greater than closing Written Down Value of fixed assets as per ITR of preceding year". In response, the assessee filed the details of machinery purchased. In the assessment order passed u/s.143(3) dated 06.12.2019, the AO held that "the depreciation claim of old machinery can be allowed only on the residual value of the depreciation claimed by the previous company in which it was installed". Thus, the AO added back the amount of depreciation claimed to the returned income. 4. The assessee has challenged the addition made in the Assessment order dated 06.12.2019 before the CIT(A), who after hearing passed the following order: 5.1. The core issue to be decided in this appeal is depreciation claimed by the appellant for second hand machinery which had been disallowed by the A.O. in its assessment order. The Ground No. 1 to 6 are related with the common issue of rejection of claim of depreciation on second hand machinery and hence all these grounds are adjudicated as under. The A.O. had mentioned following reasons for rejection of claim of depreciation: “During the course of assessment, it is found that the assessee have claimed depreciation for second hand machinery purchased during the year to the tune of Rs.31,41,044/-. The vouchers produced in support of their claim is not in order as it does not contain any particulars regarding the manufacturing company of the machinery, year of the make and other specifications. Further, it is informed that the depreciation claim of old machinery can be allowed only on the residual value of the depreciation claimed by the previous company in which it was installed”. As the appellant had failed to substantiate its claim of depreciation the A.O. had rejected the same and made addition of Rs.31,41,044/-.
During the appellate proceedings for further verification of this issue Remand Report called for from the A.O. which was received on 09/12/2024 and had been considered.
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The comparative study of submission of the appellant and comments on that issue by the A.O. are summarised as under.
Submission of the appellant Comments of the A.O. As per explanation 5 to section 32 The Assessing Officer had not of the Act the condition to be disputed the ownership and usage satisfied are that the assets should of such machinery by the assessee be owned by the assessee and used during the relevant previous year. for purpose of his business, these are mandatory in nature The assessee has satisfactorily The Assessing Officer had given a proved the cost of second hand finding that the copy of the tax machinery purchased by firm and invoices produced in support of such additions are accepted by their depreciation claim was not in Assessing Officer on the basis of order as they did not contain any vouchers produced. particulars regarding the manufacturing company of the machinery, year of the make and other specifications. Further, the Assessing Officer had given a finding that the depreciation claim of old machinery can be allowed only on the residual value of the depreciation claimed by the previous company in which it was installed. The Assessing Officer should have As per Explanation 3 to sub-section known that according to section 1 of section 43 of Act before the 43(1) of the Income, the actual date of acquisition by the assessee, price paid by him for the purchase the assets were at any time used by of machinery shall be the cost to any other person for the purpose of him on which depreciation is his business or profession and the allowable. Assessing Officer is satisfied that the main purpose of the transfer of (ii) The Assessing Officer erred in such assets directly or indirectly to concluding that depreciation is the assessee was the reduction of a allowable only on the residual value liability to income tax by claiming is not correct since that provision is depreciation with reference to an applicable only if the assessee enhanced cost, the actual cost to acquires an asset in an earlier the assessee shall be such amount previous year but no depreciation as the Assessing Officer may with being allowed to him the previous approval of the Joint Commissioner determine having
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regard to all the circumstances of the case. The assessee is willing to produce During the assessment proceedings, documents in support of the second the assessee had already produced hand machinery purchased by him the copy of tax invoices for the provided sufficient time is given. second hand machinery purchased by it. Therefore, the issue is whether depreciation is allowable only on the residual value or on the entire purchase cost of the second hand machinery The condition for claiming The assessee has not explained as depreciation according to the to why Explanation 3 to sub-section Income Tax Act is that the asset 1 of section 43 of the Act does not must be owned by the assessee, apply to his case. used for the purpose of business or Further, the Assessing Officer had profession and should be used given a finding that the copy of the during the relevant previous year. tax invoices produced in support of Therefore, the claim of depreciation their depreciation claim was not in is not invalidated just because the order as they did not contain any same happen to be second hand particulars regarding the machinery. manufacturing company of the machinery, year of the make and other specifications. Further, the Assessing Officer had given a finding that the depreciation claim of old machinery can be allowed only on the residual value of the depreciation claimed by the previous company in which it was installed Ongoing through the Remand report submitted by the A.O. which had made it clear that the appellant had failed to fulfil the pre-conditions for claiming depreciation as per explanation 5 to section 32 of the Act. Hence, in view of the above facts of the case and considering the remand report received from the A.O. I hereby confirm the addition made by the A.O. Thus, Ground No 1 to 6 are hereby dismissed. Ground No. 7 is general in nature and hence not adjudicated and hence dismissed.
In the result, the present appeal of the appellant is ‘dismissed’. Now assessee is in appeal before this Tribunal.
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The assessee has raised grounds on the legality of notice u/s.143(2) and as well as on the merits. Ground nos.2 and 3 are on the invalidity of the notice u/s.143(2) dated 09.8.2018, since it does not in conformity with the CBDT Instruction dated 23.6.2017. Ground Nos.4 to 6 are on the merits of the claim of depreciation. The ld.AR submitted that the assessee had purchased second hand machinery for its business for a total value of Rs.2,14,80,600/-, which was duly capitalised in the books and put to use in the course of the financial year 2016-17 relevant to AY 2017-18 and depreciation was claimed on the said machinery u/s.32 of the Act. The sole reason for disallowing the claim of depreciation by AO and confirmed by the CIT(A) was that depreciation is allowable only on the residual value and not on the cost of machinery to the assessee. He submitted that section 32 does not put any such embargo on the claim of depreciation. The prescription u/s.32(1) is only that the asset should be owned, wholly or partly, by the assessee and used for the purposes of the business or profession. The lower authorities do not deny that any of these conditions are not satisfied. The bone of contention is on the Explanation 3 to Section 43, as per which, according to the AO, the assessee is not entitled for the claim of depreciation. Explanation 3: Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.
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The ld.AR submitted that this Explanation carries two specific conditions to be met by the AO for denying the benefit of 'actual cost' to the assessee. Firstly, the AO should record a 'satisfaction' to the effect that the main purpose of the transfer of such assets, directly or indirectly to the assessee was the reduction of a liability to income tax by way of claiming depreciation with reference to an enhanced cost. He submitted that no such satisfaction was recorded by the AO before substituting the actual cost to the assessee with the residual value of the assets. Secondly, the Explanation lays down the condition that the previous approval of the Joint Commissioner has to be obtained by the Assessing Officer before embarking on the exercise of determining the actual cost. He submitted that no such approval was obtained by the AO for this purpose. Hence, the reliance on Explanation 3 to section 43 is wrong and cannot come to the aid of the department. He further submitted that the assessee had correctly claimed depreciation on the cost of second hand machinery paid by the assessee and is duly evidenced by the purchase bills along with the details of machinery furnished. Therefore, he prayed for allowing the depreciation claimed of Rs.31,41,044/-. 6. We have carefully considered the rival submissions, perused the material placed on record and the orders of the lower authorities. The core issue for adjudication is whether depreciation claimed by the assessee on second-hand machinery amounting to Rs.31,41,044/- was rightly disallowed by invoking Explanation 3 to Section 43(1) of the Act. It is undisputed facts that the assessee purchased second-hand machinery for Rs.2,14,80,600/-. The machinery was capitalised in books. The machinery was put to use during the relevant previous year. Ownership and use were not disputed by the Assessing Officer. The sole basis for disallowance was that depreciation on second-hand machinery is allowable only on the residual value in the hands of the previous owner.
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Section 32(1) allows depreciation where:
• The asset is owned (wholly or partly) by the assessee; and • It is used for the purpose of business or profession.
There is no statutory prohibition in Section 32 against claiming depreciation on second-hand machinery. Explanation 3 to Section 43(1) can be invoked only if: 1. The AO records satisfaction that the main purpose of transfer was reduction of tax liability by claiming depreciation on enhanced cost; and 2. The AO determines actual cost with prior approval of the Joint Commissioner.
Both conditions are mandatory.
The Hon’ble Supreme Court in McDowell & Co. Ltd. vs. CTO (154 ITR 148) emphasized that colourable devices for tax avoidance can be disregarded; however, such conclusion must be based on clear findings and evidence. Further, various judicial precedents have held that Explanation 3 to Section 43(1) cannot be invoked mechanically. Satisfaction must be recorded and prior approval must be obtained. In absence of these statutory requirements, substitution of actual cost is unsustainable. 9. Upon perusal of the assessment order, there is no recorded satisfaction that the main purpose of transfer was tax reduction. There is no finding of collusion or inflated purchase price. There is no material suggesting colourable device. There is no evidence of prior approval of the Joint Commissioner before determining actual cost at residual value or at NIL. The AO has merely proceeded on an erroneous assumption that depreciation on second-hand machinery is allowable only on residual WDV
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in the hands of the previous owner. Such proposition finds no support in the Act. Explanation 3 is a deeming provision and must be strictly construed. The burden lies on the Revenue to establish the conditions prescribed therein. In the absence of statutory compliance, the AO had no jurisdiction to substitute the actual cost declared by the assessee. The CIT(A), while confirming the addition, has also not recorded any independent finding regarding satisfaction or prior approval as mandated under Explanation 3. The remand report also does not indicate compliance with these mandatory requirements. Once ownership and use are admitted, and cost is supported by purchase invoices, depreciation cannot be denied merely because the machinery is second-hand. In view of the above, invocation of Explanation 3 to Section 43(1) is legally unsustainable. Determination of actual cost at residual value (or NIL) without recording satisfaction and without prior approval of Joint Commissioner is invalid. The assessee is entitled to depreciation on actual cost incurred. Accordingly, the disallowance of Rs.31,41,044/- is deleted.
Ground Nos. 4 to 6 are allowed. 10. The assessee has also challenged the validity of notice issued u/s 143(2) dated 09.08.2018 on the ground that: • The notice did not specify the type of scrutiny, and • The same was allegedly not in conformity with CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017. It is an undisputed fact that notice u/s 143(2) was issued within the prescribed time limit and the assessee participated in the assessment proceedings without raising any objection regarding jurisdiction before completion of assessment. The Hon’ble Supreme Court in CIT vs. Laxman Das Khandelwal (2019) 417 ITR 325 (SC) has held that issuance of notice u/s 143(2) within
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prescribed time is mandatory. In the present case, issuance within time is not disputed. Further, mere non-mentioning of the category of scrutiny in the notice does not render the notice invalid when the case was selected under CASS and scrutiny proceedings were duly conducted. CBDT Instructions are administrative in nature and do not override statutory provisions. Unless prejudice is demonstrated, procedural irregularities do not invalidate assessment proceedings. Accordingly, Grounds No. 2 and 3 challenging the validity of notice u/s 143(2) are dismissed. 11. In the result, Grounds relating to validity of notice u/s 143(2) are dismissed. Grounds relating to depreciation are allowed. The addition of Rs.31,41,044/- is hereby deleted.
The appeal of the assessee is partly allowed.
Order pronounced on the 18th day of February 2026, in Chennai.
Sd/- Sd/- (एस. आर. रघुनाथा) (मनु कुमार िग�र) (S.R.RAGHUNATHA) (MANU KUMAR GIRI) लेखा सद*य/ACCOUNTANT MEMBER �या�यक सद*य/JUDICIAL MEMBER
चे�नई/Chennai, +दनांक/Dated: 18th February, 2026.
SNDP, Sr. PS आदेश क ��त,ल-प अ.े-षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF
