Landmark Cases on Depreciation and Allowances

Depreciation is allowable on assets that are kept "ready for use," not just those in "actual use." This interpretation applies to the term "use" in Section 32 of the Income Tax Act.

Depreciation is allowable only if the asset is owned by the assessee and used for the purpose of business. If the property is let out and not used for business purposes, depreciation is not admissible.

An asset kept ready for use in business, even if not actually put to use, is considered 'used' for the purposes of business under Section 32 of the Income Tax Act. This includes situations of forced idleness, such as machinery ready for use but unable to be operated due to labour unrest.

An asset that has become part of a block of assets is entitled to depreciation even if it was lying in passive use.

Depreciation is not allowable on plant and machinery if the factory experienced a strike or lockout, preventing its actual use for business purposes, as the asset must be used for business to be eligible.

Ponds used for aquaculture are considered 'plants' for the purpose of depreciation under Section 32 of the Income Tax Act.

The SONY India case is cited as authority for restricting depreciation claims on software, particularly when payments are for use rather than outright purchase and ownership is disputed.

Expenditure incurred on acquiring land on lease is distinct from the expenditure incurred on outright acquisition of land, and depreciation may be allowable on leasehold rights on land.

When a claim for depreciation is not made in the original return, the Income Tax Officer should estimate income without allowing depreciation allowance, as per CBDT circulars and relevant sections.

Expenses incurred by an assessee for availing an enduring benefit constitute an intangible asset and are eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, even after considering a relevant CBDT circular.

A credit under the MODVAT scheme is considered equivalent to tax paid, meaning it can be treated as such in accounting.

Foreign exchange fluctuations on foreign currency loans used for assets acquired outside India are to be treated according to Section 43A of the Act or AS-11(2003). This applies when there is a change in the rate of exchange after the acquisition of such an asset for business purposes.

Depreciation should be allowed even if machinery is kept idle or not actively in use, as the term 'used' in the context of business purposes is interpreted broadly to include passive use.

An assessee is entitled to claim the balance 10% of additional depreciation in a subsequent assessment year, even before the insertion of specific provisos, if the machinery was put to use for less than 180 days in the first year.

An assessee who makes payment for the acquisition of a vehicle, even if not the legal owner, is considered the beneficial owner and is entitled to depreciation.

The term 'used' in the context of asset depreciation includes both active and passive use, meaning depreciation is allowable even if an asset is merely kept ready for use rather than actively employed.

Higher depreciation can be claimed on motor lorries used for the transportation of goods, even if hire charges are received directly. The case is authority for allowing higher depreciation on such assets, aligning with CBDT circulars.

Unabsorbed depreciation, governed by section 32(2) as amended by the Finance Act, 2001, is available for carry forward and set off against future profits and gains without any time limit.

An assessee is entitled to claim the remaining 10% of additional depreciation in a subsequent year.

Depreciation is allowable even when the assessee's income is estimated. The Assessing Officer has previously allowed depreciation in such scenarios.

Insertion of sub-section (6) to Section 11 of the Income Tax Act is prospective, meaning disallowance of depreciation cannot be made for assessment years prior to 2015-16.

Additional depreciation on machinery installed in a preceding year is an allowable claim. Balance additional depreciation for machinery installed in a preceding year must be allowed.

Stamp duty paid on a license can be capitalized as an intangible asset and is eligible for depreciation. This allows for the deduction of the cost of the license over its useful life.

Depreciation on goodwill acquired through amalgamation is allowable when the goodwill was an existing asset in the books of the amalgamating company and recorded at an enhanced value upon amalgamation.

The 'actual cost' of an asset for depreciation and development rebate purposes is the cost to the assessee, reduced by any portion met by another person or authority.

A terminal building used as a tool of business for air traffic regulation, communication, and navigational control is considered 'plant' for depreciation purposes under the Income Tax Act.

Depreciation on goodwill arising on amalgamation was allowable prior to the amendments made by the Finance Act, 2021, which took effect from April 1, 2021.

Depreciation is allowable under section 32(1)(ii) on the intangible asset arising from the 'right to collect toll' for infrastructure facilities constructed on a Build, Operate, and Transfer (BOT) basis.

An X-ray machine is considered eligible for investment allowance under Section 32A of the Income Tax Act, as the X-ray film produced by it constitutes a different article or thing.

POS terminals and ATMs are not data processing devices and are therefore ineligible for the 60 percent depreciation rate applicable to computers.

Depreciation cannot be claimed on machinery if there is no evidence of its actual use during the assessment year, even if it has been installed. Mere readiness for use is insufficient for depreciation claims.

Depreciation on software expenses is allowable at 60%. Coordinate benches of the Tribunal have consistently held this view.

The High Court holds that the Tribunal was not right in permitting the carry forward of depreciation loss beyond the eight-year period mandated under Section 32 of the Income Tax Act.

Goodwill is an intangible asset eligible for depreciation under section 32 of the Income Tax Act, 1961, in the context of a business transfer through a slump sale. The sixth proviso to Section 32(1) is not applicable to assets recognized only by the successor company pursuant to a slump purchase.

The term 'installed' in relation to plant and machinery refers to the stage when the asset is ready for use. An asset is not considered installed if it requires further installation of other components to be functional.

Depreciation is allowable on the amount paid for goodwill, as goodwill is considered an asset under Explanation 3(b) to Section 32(1) of the Income Tax Act. This is because the amount paid represents future profits.

Expenditure incurred on the purchase of computer software is allowable as revenue expenditure. Depreciation is allowed at 60% on computer software treated as a tangible asset.

Expenditure incurred for acquiring a non-compete right is capital in nature and is entitled to depreciation under Section 32(1)(ii) of the Income-tax Act.

Depreciation can be claimed on toll roads, including on intangible assets like commercial rights, as this constitutes an enduring benefit. The Madras High Court followed the ratio laid down in GVK Jaipur Expressway Ltd.

Depreciation is allowable on a non-compete fee paid as part of an acquisition, as it is an identifiable asset with a quantifiable life. The Assessing Officer's disallowance is not upheld.

When an assessee receives a subsidy towards the cost of capital assets, that subsidy must be reduced from the cost of the fixed assets for the purpose of calculating depreciation. This reduction affects the Written Down Value (WDV) of the asset.

Depreciation is not allowable on all intangible assets, but only on those specifically enumerated in Section 32(1)(ii) of the Income Tax Act.

An assessee is entitled to depreciation on buildings it constructed, even if the land on which they stand is not registered in its name. The term 'ownership' for depreciation purposes under Section 32 of the Income Tax Act is interpreted broadly to include beneficial ownership and the right to use the property for business.

Depreciation is allowable on assets kept ready for use, even if not actually utilized, due to inherent loss of value over time.

Expenditure on leased premises requires ascertainment of its capital or revenue nature before applying Section 32(1) Explanation 1.

The process of bottling gas into cylinders through a complex technical process undertaken in plant and machinery amounts to manufacturing or production for the purposes of Section 32AC of the Income Tax Act.

Structures like ponds used for carrying on a business are considered 'plants' and are eligible for depreciation under Section 32 of the Income Tax Act.

Developers of roadways constructed on a Build-Operate-Transfer (BOT) basis are entitled to claim depreciation at the rate of 10% on the roads.

Depreciation is allowable on assets kept ready for use, even if not actively in operation. The asset must be owned and available for business purposes.

Allowing depreciation does not constitute a double deduction, even when other benefits are received in a similar situation. The Supreme Court's dismissal of an SLP against this decision affirms this principle.