ORDER
D.C. Agrawal, Accountant Member
1. In this case, the revenue has raised the following grounds :
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow depreciation on the plant and machinery which was not put to use during the previous year relevant to assessment year 1998-99 and without appreciating the fact that the company was under lock-out since October, 1995.
2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 98,576 being 50 per cent of the obsolete stock written off.
2. The facts regarding the first ground are that the Assessing Officer disallowed the depreciation on plant and machinery on the ground that relevant plant and machinery was not put to use during the relevant previous year. It was explained to the Assessing Officer that there was lock-out/strike in the factory which resulted in temporary closure of manufacturing activity. But the assessee-company was not closed down. The company had all the intention to continue with the business and would resume manufacturing as soon as the dispute is settled with the labour. These machines were already put to use in the past and also in subsequent years. These machinery formed part of block of assets, out of which depreciation has been allowed on some. The depreciation is allowable both on active use as well as passive use. The Assessing Officer however, disallowed depreciation on plant and machinery by relying on the decision of Hon’ble Supreme Court in Liquidator of Pursa Ltd. v. CIT . The CIT(A) cancelled the disallowance by observing as under:
I have considered the submissions of the learned AR and I have also gone through the impugned assessment order. I find that the Assessing Officer’s reliance on the Hon’ble Supreme Court judgment under the old Act of 1922 is misplaced inasmuch as in that case the facts were quite different from the facts obtaining in the case of the appellant. In the case before the Apex Court the basic fact was that the assessee had discontinued its business. In the instant case, there is no discontinuance or closure of the business. In the past, admittedly depreciation had been allowed to the appellant on the same assets. It is only because of strikes and lock-outs there is a temporary disruption in the manufacturing activities and such a temporary lull in business does not amount to closure of business once and for all. On the facts of the case courts have held that the plant and machinery and such other assets during periods of strike or temporary lull fall in the category of passive user and deprecation is allowable. The learned AR has cited a series of case laws on the point as under:
(1) 113 Taxman 103 (Del.)
(2) 123 ITR 404 (Del.)
(3) 75 Taxman 30 (Bom.)
(4) 59 ITD 340 (Jabalpur)
(5) 73 ITD 329 (Ahd.)
In view of the facts of the case before me and the case law cited, which supports the appellant’s claim, I hold that the appellant is entitled to depreciation on the assets in question. The Assessing Officer is directed to allow the same. This ground of appeal is decided in favour of the assessee.
3. Before us, the learned DR submission that depreciation has to be allowed only on actual use of the machinery. As the factory was closed, no manufacturing activity was carried out and no depreciation is allowable. The learned DR relied on the decision in the case of Dineshkumar Gulabchand Agrawal v. CIT .
4. On the other hand, the learned authorised representative of assessee supported the order of CIT(A) and submitted that
(i) The assessee had only temporary gone out of manufacturing activity.
(ii) It was not out of business for ever.
(iii) There was a passive use of the plant and machinery.
(iv) Depreciation on other items in the block has been allowed.
(v) Depreciation cannot be disallowed by picking an item from the block. If depreciation is allowed on a part of the items in the block then depreciation has to be allowed on all the items in the block.
(vi) The depreciation has been allowed in the current assessment year under Section 143(3) on plant and machinery and also in subsequent assessment year, under Section 143(3) even though conditions remained the same i.e. the manufacturing activity was stopped for about five years due to lock-out/strike and it is only in this year that Assessing Officer has disallowed depreciation whereas in other years it was allowed by the Assessing Officer either under Section 143(3) or 143(1). He relied on case laws cited before CIT(A).
5. We have heard the rival submissions and considered the facts and materials on record including the case laws cited by both the parties. The case laws cited by the Learned Counsel for the assessee and also relied upon by the CIT(A) are no longer applicable in the present case because of clear decision of Hon’ble Bombay High Court in Dineshkumar Gulabchand Agrawal v. C/r . In our view, the decision of the CIT(A) in allowing the depreciation for the period when factory was under strike/lock-out was not correct. Hon’ble Bombay High Court, in Dineshkumar Gulabchand Agrawal v. CIT , on which the learned DR relied, held that depreciation on asset ready for use but not actually used, cannot be allowed. The Hon’ble Bombay High Court in the above case held as under:
The word ‘used’ in Section 32 of the Income-tax Act, 1961, denotes that the asset has been actually used and not that it is merely ready for use. The expression ‘used’ means actually used for the purposes of the business.
[The Supreme Court has dismissed the special leave petition filed by the assessee against this judgment: see
6. Thus, as per this latest decision of Hon’ble Bombay High Court, the assessee will not be entitled for depreciation on the passive use or on the plant and machinery ready for use. It should be an actual use of the asset for it to be eligible for depreciation. In the case of CIT v. Oriental Coal Co. Ltd. , Hon’ble Calcutta High Court held that where there was strike/lock-out in the factory for two years and the plant and machinery has not been actually used, then assessee would not be entitled for depreciation. Hon’ble Calcutta High Court held in that case as under:
Section 32(1) of the Income-tax Act, 1961, lays down two conditions to be satisfied by an assessee before claiming any depreciation. These two conditions are, firstly, that the plant and machinery must be owned by the assessee and, secondly, the plant and machinery must be used for the purposes of business of the assessee. Therefore, under Sub-sections (1) of Section 32, there should be actual user of plant and machinery for the purposes of business. In certain cases of a pooling arrangement or where plant and/or machinery is kept as standby to provide against breakdown, even a passive user may entitle the assessee to claim depreciation under Section 32 because in both these cases, the machinery is kept ready for use in the factory.
Where the factory of the assessee remained under lock-out throughout the two previous years relevant to the assessment years 1983-84 and 1984-85 and during the lock-out period, the plant and machinery had not been actually used for the purposes of the business :
Held, that depreciation under Section 32 of the Act was not allowable on such plant and machinery.
7. In the present case, there was lock-out and strike for five years and the plant and machinery was not put to use as there was admittedly no manufacturing activity. The depreciation could not be allowed on such non-use in view of the clear verdict of Hon’ble Bombay High Court and Hon’ble Calcutta High Court referred above, which is directly on the point. Further, by merely including an item in the block, will not make it eligible for the depreciation if other conditions for allowability of the claim are not satisfied. Similarly, the ITAT is not bound to follow legally incorrect decision of Assessing Officer taken in other years. We respectfully prefer to follow the judgments of Hon’ble Bombay High Court and Hon’ble Calcutta High Court on the issue. Hence, we reverse the order of CIT(A) on this point and restore that of Assessing Officer. This ground of revenue is, therefore, allowed.
8. The limited issue involved in the second ground is whether 50 per cent disallowance made by the Assessing Officer out of stock written off on account of obsolescence and allowed by CIT(A) is justified. The Assessing Officer disallowed the “written off” by 50 per cent on estimate basis. The assessee had claimed it, as stock had become unusable due to strike/lock-out. The CIT(A) allowed the entire claim on the ground that factum of obsolescence has been accepted by the Assessing Officer by at least allowing 50 per cent of the claim. Then there was no reason why the entire claim should not have been allowed. Before us, learned DR could not point out why only half the claim was allowed and not full. The assessee has a justification to write off the stock because there was strike/lock-out. Therefore, we do not find any reason to interfere in the order of CIT(A) on this ground. This ground of the revenue is therefore rejected.
9. In the result, the appeal of revenue is partly allowed.