IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A. No. 362 of 2006 DATE OF DECISION: 6.8.2007 The Commissioner of Income-tax, Karnal …Appellant Versus M/s Piccadily Agro Industries Ltd., Karnal. …Respondent CORAM: HON’BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present: Mr. Yogesh Putney, Advocate, for the appellant-revenue. Mr. Pankaj Jain, Advocate, Mr. Deepak Aggarwal, Advocate, Ms. Rimpi, Advocate, Mr. Prakul Khurana, Advocate, for the respondent-assessee M.M. KUMAR, J. The revenue has approached this Court by filing the instant appeal under Section 260-A of the Income Tax Act, 1961 (for brevity, ‘the Act’), challenging order dated 31.10.2005 passed by the Income Tax Appellate Tribunal, Chandigarh Bench (A), Chandigarh (for brevity, ‘the Tribunal’), in ITA No. 388/Chandi/2001, in respect of the assessment year 1996-97. The assessee derived income from manufacturing and sale of sugar etc. and filed its return on 26.9.1996 for the assessment year 1996-97 declaring loss of Rs. 4,55,41,581/-. It is apposite to I.T.A. No. 362 of 2006 mention here that the trial production of sugar after setting up and construction of the plant of the assessee was commenced on 23.2.1996. The assessee consumed raw material in the form of sugarcane worth Rs. 2,80,71,662/- and shown manufacturing expenses of Rs. 20,88,295/-. The assessment was completed on 31.3.1999, under Section 143(3) of the Act and depreciation on plant, machinery and building etc. was allowed at Rs. 4,37,61,018/-. Against the order of the Assessing Officer, dated 31.3.1999, the assessee preferred an appeal before the CIT (A). During the pendency of the said appeal, on 19.3.2001, the Commissioner of Income-tax, Panchkula, passed an order under Section 263 of the Act, setting aside the assessment made by the Assessing Officer under Section 143(3) of the Act on 31.3.1999 on the ground that the assessee was not entitled to depreciation because it had not started commercial production of sugar during the relevant period. It was directed that the Assessing Officer would pass fresh order after disallowing the depreciation amounting to Rs. 4,37,61,018/-. Against the aforementioned order of the Commissioner, the assessee preferred an appeal before the Tribunal, which was allowed vide order dated 31.10.2005 by setting aside order of the Commissioner holding that the assessment order dated 31.3.1999 was neither erroneous nor prejudicial to the interest of the revenue. The Assessing Officer in pursuance to order under Section 262, passed another order of assessment under Section 143(3) of the Act on 1.11.2002 against which the assessee preferred an 2 I.T.A. No. 362 of 2006 appeal before the CIT (A), Karnal, which was partly accepted vide order dated 2.9.2003. The revenue went in appeal against order dated 2.9.2003 before the Income Tax Appellate Tribunal, New Delhi, which is stated to be pending for adjudication. Learned counsel for the revenue submitted before us that the following question of law would arise in this matter for determination of this Court:- “Whether on the facts and in the circumstances of the case, the ITAT was right in law in cancelling the order passed by the Commissioner of Income-tax under Section 263 by holding that the assessment order is neither erroneous nor prejudicial to the interest of the revenue inspite of the fact that depreciation on plant and machinery etc. was allowed by Assessing Officer without the commencement of production of sugar on commercial basis.” The main thrust of the argument of learned counsel for the revenue is that it has come on record that the unit of the assessee never started full fledged production and during the relevant period production of sugar was started only on trial basis, therefore, depreciation on plant and machinery etc. is not admissible to the assessee, which has erroneously been allowed by the Assessing Officer. He has then argued that mere installation of equipment in a building would not be sufficient to attract the provisions contained in Section 32 of the Act to claim depreciation on such plant and machinery until and unless the same is put to regular and commercial 3 I.T.A. No. 362 of 2006 production. According to the learned counsel trial production of sugar by using plant and machinery could not be construed to mean that the same was used for the purpose of business. On the other hand, supporting the view taken by the Tribunal as well as the Assessing Officer counsel for the assessee has placed reliance on a judgment of Gujarat High Court in the case of Assistant Commissioner of Income-tax v. Ashima Syntex Ltd., (2001) 251 ITR 133. In the aforementioned case under similar circumstances a question of law as is sought to be emerged in the instant appeal, fell for consideration of the Gujarat High Court and it has been held that law does not require that there must be optimum production for granting the benefit. Law only requires that there must be use of plant and machinery for the purpose of business. The assessee in that case was held entitled to depreciation on the machinery. We have thoughtfully considered the submissions made by learned counsel for the parties, examined the record with the assistance of learned counsel and are of the view that there is no merit in the instant appeal and the same is liable to be decided against the Revenue and in favour of the assessee. It would be appropriate to make a reference to Section 32 of the Act, as it stood at the relevant time, which reads thus: “Depreciation. 32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned, wholly or partly, by 4 I.T.A. No. 362 of 2006 the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed- (i) omitted; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided that no deduction shall be allowed under this clause in respect of- (a) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975, unless it is used- (i) in a business of running it on hire for tourists; or (ii) outside India in his business or profession in another country; and 9b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42: 5 I.T.A. No. 362 of 2006 Provided further that where any asset falling within a block of assets is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this clause in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed under this clause in the case of block of assets comprising such asset: Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991. Explanation 1.- Where the business or procession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or 6 I.T.A. No. 362 of 2006 profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation 2.- For the purposes of this clause “written down value of the block of assets” shall have the same meaning as in clause (c) of sub- section (6) of section 43. (iia) to (vi) omitted xxx xxx xxx xxx” A perusal of the aforementioned provision shows that depreciation is allowable by granting deductions in respect of building, machinery, plant etc. to the assessee if it is used for the purpose of business or profession. It is not disputed before us that production of sugar has commenced on 23.2.1996 and the assessee has consumed raw material in the form of sugar-cane worth Rs. 2,80,71,662/- and has shown manufacturing expenses of Rs. 20,88,295/-. On the bare interpretation of Section 32 of the Act it cannot be claimed that the machinery or plant was not used by the assessee for the purposes of business. In that regard reliance may be placed on the observation made by Hon’ble the Supreme Court in para 10 of the judgment in the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax, Bihar, AIR 1954 SC 253, wherein it has been observed that machinery must have been used atleast for the 7 I.T.A. No. 362 of 2006 part of the accounting year in order to attract Section 10(2)(vii) proviso 2 of the Income-tax Act, 1922. Therefore, we find that the order of the Tribunal does not suffer from any legal infirmity. We are further of the view that the Tribunal has rightly followed the view taken by the Gujarat High Court in the case of Ashima Syntex Ltd. (supra) and rejected the appeal filed by the revenue, which is fully applicable to the instant appeal. Therefore, we do not find any ground to interfere in the view taken by the Tribunal. In view of the above, this appeal is wholly without merit. Dismissed. (M.M. KUMAR) JUDGE (AJAY KUMAR MITTAL) August 6, 2007 JUDGE Pkapoor FIT FOR INDEXING 8