JUDGMENT
Arijit Pasayat, C.J.
1. At the instance of the Revenue, the following questions have been referred under Section 256(1) of the Income-tax Act, 1961 (in short “the Act”), for the opinion of this court by the Income-tax Appellate Tribunal, Cochin Bench (in short “the Tribunal”) :
“(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on the tippers ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the mere fact that they were kept ready for use would be enough to the grant of depreciation on the principles of passive user of asset ?”
2. The factual position, as highlighted in the statement of case, is as follows : The assessee purchased two tippers on March 29, 1986, and claimed depreciation for the assessment year 1986-87 on the same. The Assessing Officer did not allow depreciation on the ground that the assessee had not produced any evidence to show that they were put to use before March 31, 1986. He observed that even though tippers were taken delivery on March 29, 1986, at Pondicherry, there was no evidence to show that they were delivered at the work site before March 31, 1986. On appeal the Commissioner of Income-tax (Appeals), Cochin (in short “the CIT (A)”) held that it would take at least a day for the tippers to reach work site and there was no evidence to show that they were put to use before March 31, 1986. Accordingly, he upheld the disallowance. The assessee preferred an appeal before the Tribunal. It produced a copy of the voucher dated March 29, 1986, from T. V. Sundaram Iyengar and Sons Ltd., Pondicherry, for having purchased tippers for a sum of Rs. 5,70,174.30. It was brought to the notice of the Tribunal that the Commissioner of Income-tax (Appeals) himself had observed that tippers were purchased with their fully built body and were ready for use. The only point on which doubt was entertained by the Revenue authorities is that there was no evidence to show that the tippers had reached the work site at Cochin and were put to use. The assessee’s contention was that there can be no evidence for movement of a vehicle on road and that distance between Pondicherry and Cochin could be covered in about ten hours. Tippers are used for the smooth and complete flow of materials during unloading operations and for this purpose, the assessee produced pamphlets containing descriptions, etc., of tippers purchased by it, for smooth flow of materials at construction site. There can be as such no evidence on record. The Tribunal held that the margin of time was enough for tippers to move from Pondicherry to the work site and even if it is accepted, as contended by the Revenue, there was no actual user, the fact that they were kept ready for use would be enough for grant of depreciation on the principle of passive user of the asset. Accordingly, the claim of depreciation was allowed.
3. A reference was sought for by the Revenue and as aforementioned, the said prayer was accepted by the Tribunal.
4. Learned counsel for the Revenue submitted that even though it is accepted that depreciation can be granted when an asset is ready for use by application of the principle of passive user of the asset, yet there must be some material to show that the asset was ready for use at the work site. Purchase was made on March 29, 1996, and considering the time gap necessary for bringing the asset to the work site, the principle of passive user cannot be pressed into service. Only if the assets were actually at the work site, for which there is no material, depreciation could have been granted. Mr. P. Balachandran learned counsel for the assessee, on the other hand, submitted that the authorities themselves had accepted that the maximum time that would be necessary for bringing tippers to the work site is one day. Undisputedly, the tippers were purchased on March 29, 1986. It is inconceivable that the assessee, after spending so much of money, would keep the tippers at Pondicherry without bringing them to the work site. Even if the time period indicated by the Revenue authorities to be necessary for the purpose of bringing the tippers to the work site is accepted, yet latest by March 30, 1986, it was possible for the tippers to reach the work site, and, in fact, had reached the work site. Since the Tribunal has come to a conclusion on the facts about the assets being put to use and in the alternative applying the principle of passive user, the conclusions are irreversible, and no question of law arises.
5. Section 32 of the Act deals with depreciation. There is no requirement that the assets should be used for the whole of the assessment year in question. The term used in Section 32(1) is “owned by assessee”, but that does not bring in a requirement that the assessee should have remained the owner of the asset in question for the entire previous year in question. The object of the Legislature, in granting depreciation allowance under Section 32 of the Act, is to give due allowance to the assessee for wear and tear suffered by the asset used by him in his business so that the net income (total income) is duly arrived at. There is no factual dispute that the assets in question were owned by the assessee. In Machinery Manufacturers Cororation Ltd. v. CIT [1957] 31 ITR 203 (Bom), it was observed that the expression “used” in Section 10(2)(vi) of the Indian Income-tax Act, 1922 (hereinafter referred to as “the old Act”) corresponding to Section 32 of the Act has to be given a wider meaning. The expression includes passive as well as active user. In CIT v. Dalmia Cement Ltd. [1945] 13 ITR 415 (Patna) and CIT v. Viswanath Bhaskar Sathe [1937] 5 ITR 621 (Bom), it was observed that depreciation might be allowed in certain cases even though the machinery was not in use or was kept idle. The question whether the word “used” would include both passive as well as active user was left open by the apex court in Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265. The words “used for the purposes of the business” are capable of a larger and a narrower interpretation. If the expression “used” is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, plant, etc., are actively employed but also cases where there is, what may be described as a passive user of the same in the business. An asset can be said to be in use when it is kept ready for use.
6. Like every other animate and inanimate object, business premises, machinery, plant or furniture employed by an assessee in the course of his business, profession, etc., has a limited effective life. The vigour, strength, capability, etc., of every such object gradually exhausts by the factors of use and time. These have undoubtedly aided the assessee to earn “income” from such business or profession which is subjected to the levy of tax. Unless provision was made for proper recompense of such diminution in the vigour, strength, capability, etc., the apparent profits from the business, profession, etc., would not give a correct picture. Allowance for depreciation is borne out of necessity for such recompense. “Depreciation”, according to Webster’s New World. Dictionary, means “a decrease in value of property through wear, deterioration or obsolescence : the allowance made for this in book-keeping, accounting, etc.”. Depreciation is the inherent decline in the value of an asset from any cause whatsoever (as observed by William Pickles in Accountancy, page 74). Depreciation is the diminution which takes place in the value of a wasting asset despite the amount expended on it in repairs (as stated in The Business Encyclopaedia, Volume II; page 365). Depreciation is the measure of the effective life of an asset owing to use or obsolescence during a given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective life-time, and the amount written off during an accounting period is intended to represent the proportion of such expenditure which has expired during the period (as stated by Spicer and Pegler in Book-keeping and Accounts, 14th edition, page 47). For the purposes of determining the true profits in the commercial sense or under the proper principles of accountancy, the wear and tear of the assets utilised by the assessee for the purpose of earning his profit will have to be considered and allowance will have to be made for wear and tear. This is what is notionally understood as depreciation (see CIT v. Bombay State Transport Corporation [1979] 118 ITR 399 (Bom)). The allowable depreciation amount is a capital loss to the depreciable asset which must be replaced first to give a true or correct picture as otherwise there is bound to be a distorted picture in the profit and loss account. The depreciation amount is to be treated as a charge on the profits (see G. R. Govindarajulu Naidu v. CAT [1973] 90 ITR 13 (Mad)). The principal factors responsible for reduction in value of a capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear ; (ii) unusual damage ; (iii) inadequacy ; and (iv) obsolescence. These factors include not only those relating to physical deterioration, but also those referring to the suitability of the asset as an economically productive unit after a period of time. The depreciation allowance under Section 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed, if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice (see CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672 (Guj)). The two ingredients for depreciation allowance are : (i) that the depreciable asset is owned by the assessee, and (ii) that it is used for the purpose of the assessee’s business or profession subject, however, to the provisions of Section 34. As noted above, the only dispute that was raised by the Revenue is that there was no positive material to show even the existence of the asset at the work site. The Tribunal, on a consideration of factual aspects and more particularly with reference to the observation of the Commissioner of Income-tax (Appeals) about the normal time required for bringing the asset from Pondicherry to Cochin, has recorded a finding about passive user. The said conclusion essentially is factual and it cannot be termed to be one without any basis or illogical. The above being the position, we accept the view of the Tribunal.
7. The questions referred to us are answered in favour of the assessee and against the Revenue.
