The Hindu Business Line : `For registration' not for consideration

ONE of the conditions to claim depreciation under the Income-tax Act, 1961 is that the asset in question has to be used for assessee's business. This is contained in Section 32 of the Act, which also requires that the asset be owned by the assessee. What constitutes `usage' has been a matter of contention between the assessee and the department. This term conveys different meanings depending on the type of asset in question.

In the case of buildings, there have been disputes in the past as to whether registration of property constitutes ownership and usage/possession, ownership and usage. As regards vehicles, the process of registration under the Motor Vehicles Act is an essential ingredient to determine the ownership of the vehicle and its being ready for use.

An interesting case that came up before the Kerala High Court was about whether a vehicle can be taken as ready to use before registration under the Motor Vehicles Act is complete (CIT vs Air Travel Enterprises India Ltd — 2002 265 ITR 537) case.

Facts, issues

The assessee purchased a vehicle and took delivery of the same on March 30, 1992. A temporary registration valid up to April 24, 1992, was obtained. This enabled the assessee to take vehicle from Ernakulam to Thiruvananthapuram. The assessee also applied for registration as a non-transport vehicle on March 30, 1992, and this was granted on April 3, 1992. In the said certificate it was clarified that "this certificate is valid from March 30, 1992 to March 29, 1997." According to the assessee, it had operated the said vehicle from April 1, 1992, for taking out a tourist party of 13 persons, and, for which, arrangements had been made before that date. However, it was stated that the vehicle was registered as a contract carriage only on May 5, 1992. On the basis of these facts, the assessee claimed depreciation of Rs 1,50,560 on the said vehicle in the assessment for 1992-93. The assessing officer (AO) disallowed the claim for depreciation on the ground that the assessee has not used or kept the vehicle ready for use on or before March 31, 1992.

The first appellate authority, the Commissioner of Income-tax (Appeals), Thiruvananthapuram, dismissed the appeal filed by the assessee by confirming the disallowance. The Income-tax Appellate Tribunal (ITAT) in further appeal, however, allowed the assessee's claim. The matter reached the High Court.

Court decision

The Kerala High Court held that the assessee was not entitled to claim depreciation on the vehicle for AY 1992-93, as the vehicle in question was registered as a contract carriage permit only on May 5, 1992, and only at that point of time it can be said that it was ready for use. So the only question for consideration was whether the assessee had used the vehicle or kept it ready for use on any day during the previous year relevant to the AY 1992-93.

The court reasoned that "the assessee had applied for and obtained a contract carriage licence only on May 5, 1992. The assessee has a case that the vehicle was run on April 1, 1992, for taking a tourist party. As the AO himself had noted the expression "used for the purpose of business" occurring in Section 32 will take in vehicle kept ready for use. So the question is whether it can be said that the vehicle was kept ready for use on March 30, 1992, or March 31, 1992, when the regular contract carriage licence was issued only on May 5, 1992.

"The question on which the notice issued proceeds on the basis that the vehicle was actually used on April 1, 1992. The question is whether the assessee can use the vehicle for carrying tourists on April 1, 1992, when admittedly the contract carriage licence for the vehicle was issued only on May 5, 1992."

The court emphatically held that "we are of the view that in order to say that the vehicle was kept ready for use of carrying persons for hire the vehicle must be registered as a contract carriage and it is only on obtaining the contract carriage permit that it can be said that the vehicle was kept ready for use. Since the contract carriage permit was obtained for the vehicle only on May 5, 1992, it cannot be said legally that the vehicle was kept ready for use on or before March 31, 1992."

The Kerala High Court accordingly denied the claim for depreciation for the AY 1992-93.

Active vs passive user

In the Liquidators of Pursa Ltd vs CIT (1954 25 ITR 265), the Supreme Court explained that the expression `used for the purposes of the business' means that the assets must be used by the owner for carrying on the business and earning profits therefrom.

It has also been held that the assets as, for example, machinery, should have been used, whether actively or passively, at least for part of the accounting year. The user of the asset should be understood in a wide sense to embrace passive as well as active user.

If a machine is kept ready for use at any moment in a particular factory, under an express agreement, from which taxable profits are earned, the machinery can be said to be "used" for the purpose of the business which earned profits, although in fact it had not worked during the year — Whittle Anderson Ltd vs CIT (1971 79 ITR 613 Bombay); Capital Bus Service [P] Ltd vs CIT (1980 123 ITR 404 Delhi); and CIT vs Viswanath Bhaskar Sathe (1937 5 ITR 62 Bombay).

Hence, courts have over the years held that the word `used' has to be understood in a wide sense so as to embrace passive or active users.

Fundamentally, the onus lies on the assessee to establish the usage of the asset to claim depreciation. The language and the conditions laid down in Section 32 of the Act has stood the test of time. An analysis of the decided cases on this subject shows that issues are more on facts than on law.

After the introduction of the block of assets concept from 1988 the test of usage of asset is to be applied at the initial stage of entering the block and not thereafter. This has been held in South Eastern Coalfields Ltd vs Jt CIT (2003 85 ITD 608 Nagpur). In any case, record keeping is a must to establish active or passive use since this is essentially a question of fact.