Actual use of asset is not the sole test for allowability of depreciation – ITAT

Actual use of asset not the sole test for allowability of depreciation and it may be allowed when business only temporarily remained suspended

In a recent judgment ITAT has held that Actual use of asset is not the sole test for allowability of depreciation and that, in appropriate factual circumstances, depreciation may be allowed even where the assets are kept ready for use and the business has only temporarily remained suspended.

ABCAUS Case Law Citation:
5190 (2026) (07) abacus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A)/National Faceless Appeal Centre (NFAC) upholding the disallowance of depreciation on the alleged ground that the assets were not put to use during the year under consideration.

The appellant assesse was a company whose case was selected for scrutiny assessment. Thereafter, the AO framed the assessment vide his order passed under Section 143(3) r.w.s. 144B of Income Tax Act, 1961 (the Act) after making additions by inter alia disallowing of assessee’s claim of depreciation.

Before the ITAT, the assesse submitted that though the assessee-company could not carry on any manufacturing activity during the year under consideration owing to a severe slump and recession in the industry, the same could not constitute a valid ground for disallowing its claim of depreciation under Section 32 of the Act.

It was submitted that the assessee company had only temporarily suspended its manufacturing operations because of heavy losses arising from adverse market conditions and had not permanently discontinued its business. It was submitted that the plant and machinery continued to remain installed at the factory premises and were kept ready for use so that manufacturing activity could be resumed immediately upon receipt of commercial orders.

According to the company, since the machinery had neither been dismantled nor removed from its place of installation, the assets were in a state of passive use and, therefore, the assessee company was entitled to depreciation under section 32 of the Act notwithstanding the absence of actual production during the year.

In support of his aforesaid contention, the assesse relied upon the judgment of the Hon’ble High Court wherein it was held that the expression “used for the purposes of business” contemplated in Section 32 of the Act includes passive use and that, in the case of discarded assets, the requirement of user would stand satisfied if such assets had been used for the purposes of business in the earlier years. It was also observed that the expression “used for the purposes of business” is capable of a wider interpretation and an asset can be regarded as having been used where it is kept ready for use in the business.

The ITAT observed that it is fairly well settled that actual user is not the sole test for allowability of depreciation and that, in appropriate factual circumstances, depreciation may be allowed even where the assets are kept ready for use and the business has only temporarily remained suspended. However, whether the facts of a particular case satisfy the test of passive user is essentially a question of fact to be determined on the basis of the evidence available on record.

The ITAT further observed that neither the AO nor the CIT(A) had examined the assessee’s claim in the backdrop of the aforesaid legal position. The CIT(A), while confirming the disallowance, had not examined whether the manufacturing activity had only temporarily remained suspended; whether the plant and machinery continued to remain installed and ready for commercial production; whether the machinery had been used in the immediately preceding and succeeding years; or whether the surrounding facts support the assessee’s plea of passive user. Also, the applicability of the judicial precedents relied upon by the assesse had not been examined with reference to the factual matrix of the present case.

Accordingly, the ITAT restored the issue relating to the allowability of depreciation to the file of CIT(A) with a direction to re-adjudicate the same afresh after examining the same in the light of the principles governing passive user, as had been looked into by the Hon’ble High Court.

It was directed that the CIT(A) shall for adjudicating the aforesaid issue be at liberty to call for a “remand report” from the AO, if considered necessary, and direct him to verify, inter alia, the books of account and other relevant records of the assessee company for the immediately preceding and succeeding assessment years to ascertain whether the plant and machinery had been put to use during those years and whether the manufacturing activity had remained suspended only during the year under consideration because of adverse market conditions.

Download Full Judgment Click Here >>