Where machines installed before the end of financial year to be used for trial run and not for production shall be eligible for claiming depreciation.

Case: Commissioner of Income tax vs. Escorts Tractors Ltd.   

Facts:

The assessee being a company filed its return declaring the income as Rs. 1,66,17,084. The assessee claimed normal depreciation, amounting to Rs.23,93,038 on the plant and machinery.

The production department of the company received the said machine two days before the end of financial year for the trial.

The AO disallowed the depreciation on the ground that the machine was not installed in the relevant previous year. In addition, the machine was not used for the production of goods.

The Commissioner (Appeals) upheld the order of the AO.

Aggrieved by the order, the assessee appealed to the Tribunal. The Tribunal allowed the depreciation claimed by the assessee.

On appeal to the High Court.

Held:

The High Court viewed that the machine on which depreciation was claimed was handed over to the concerned department two days prior to the close of the financial year. The machine was to be used for the purpose of trial.

The Revenue argued that as the machine was not used for the purpose of production or manufacture or production, it shall not be eligible for depreciation.

The Tribunal took the view that whenever the installation of machine completes, it shall be ready for or manufacturing and production. It also highlighted that the

purpose of installing machine on trial was to ensure that the machine was working in perfect condition following the installation and could be used henceforth for production and manufacturing purposes.

Section 32 of the Income Tax Act provides that the asset shall be “owned by assessee” and the machine should have been used. Thus, the section does not require that manufacturing or production should have actually commenced. If plant and machinery is kept ready for use, that would be enough to grant depreciation.

To conclude the High Court stated that the machine has been duly installed and was in a working condition before the end of the previous year.  Hence, machines eligible for depreciation even if installed for trial.

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