User Test and Allowance Distribution

The paper would explore the evolution of ‘user test’ and allowance of depreciation under the Section 32 of the Income Tax Act, 1961. The legislative intention when the Act was passed in dealing with the connotations “used” and “ready to use” have been tried to be deciphered based on the judgements of High Courts and the Apex Court.


Depreciation represents the diminution in the value of a capital asset when applied to the purpose of making profit or gain.[1] The term depreciation means wear and tear of the assets used for the purposes of earning revenue on the user of the assets. The present law which came into force from April 1, 1988 has simplified the position regarding depreciation allowance. There are two broad categories of assets for depreciation: (i) Tangible Assets (ii) Intangible Assets.

The allowance has to be made in computing the profits of the business and does not depend on the genuineness of the books of accounts[2]. The Supreme Court had held that the asset must have been used for the purposes of the business during the accounting year. There is also an important aspect to the provision is that a company may keep its accounts in foreign currency but depreciation will have to be calculated in Indian currency at the point of time of acquisition of the asset[3].

Initial depreciation allowance in respect of certain buildings, machinery and plant under Section 32 (1) (i) (ii) is withdrawn by deletion of clauses (i) (ii) of section 32(1). Furthermore in case of ocean going ships, the straight line method no longer exists and the depreciation is to be calculated only on the written down value.


Section 2(11) defines the term “block of assets” to mean a group of assets falling within a class of assets comprising –

(i)   Tangible assets being buildings, machinery, plant or furniture[4];

(ii)  Intangible assets are the intellectual property rights like patents, copyrights, trademarks, , franchises licences, or commercial rights of a parallel nature, in the context of which the equal percentage of depreciation is prescribed or any other business.[5]

Section 2(11) defines the term “block of assets” to mean a group of assets[6].  There would be difficulty in claiming depreciation in cases where there is only one asset in the block[7]. In the case of Chhabria Trust v. ACIT,[8] it was held that even a single asset would be entitled to depreciation. In the of case of Pachwell Printers v. Assistant[9] the court held that after entering the block the individual assets lose their identity and only the block of assets has to be considered for the purpose of allowing of depreciation[10]. Therefore, the test of user has to be applied upon the block as a whole instead of upon an individual asset[11].


Depreciation under Section 32 of the Income Tax Act which talks about depreciation, it is on the written down value (WDV) of the block of assets. WDV is defined under section 43(6)[12]which defines it as, in the case of block of assets to understand that the WDV of that block of assets in the immediate year preceding to the previous year as reduced by the depreciation which is actually permissible in respect of that block of assets in relation to the preceding previous year and also it is additionally adjusted by:

Increased by the actual cost of any asset falling within that block, acquired during the previous year

Reduced by the money which is payable in the context of any asset that is falling within that block and it is sold or casted off or demolished or damaged during that previous year along with the sum of the scrap value[13].


The general scheme of the act is that the income is to be charged regardless of the exhaustion and diminution in the value, of capital. To this hard principle of taxation and exception is afforded by section 32 (1) which grants an allowance in respect of depreciation in the value of certain capital assets.[14] Five conditions which are necessary to entitle an assessee to the benefit of section 32 (1) are as follows:

(i)  Depreciation allowance is confined to buildings, machinery, plants and furniture.

(ii)  Depreciation allowance is in respect of only those buildings, machinery, plants and furniture which are used in the accounting year.


(iii)   Depreciation allowance is only in respect of the property that is owned by the assessee.


(iv)   Prescribed particulars under rule 5AA which has to be furnished by the assessee for claiming depreciation allowance.


(v)    Depreciation allowances should not in any case exceed the actual cost to the assessee of the buildings, machinery, plants and furniture.


The assets in respect of which depreciation allowance can be claimed must be buildings, machinery, plants and furniture. The determination in any given case of what is or is not ‘machinery’ must depend upon the facts and circumstances of the case.[15]Depreciation is not allowable on the cost of land on which the building is erected[16], or on the expenses incurred for locating the plant site[17], but is allowable on land development cost.[18]


Plant comprises whatever tool is used by a businessman for carrying on his occupation though not his stock in trade which he purchases or creates for sale, but all properties and materials that is either fixed or movable and he keeps it for employment in his business with a degree of stability and durability.[19] The Supreme Court in the case of Scientific Engineering House Ltd v. CIT[20] held that drawings and patterns which constitute know-how and are fundamental to assessee’s manufacturing business are plant.

In deciding whether a building or structure is ‘plant’, a functional test is to be applied that whether it is an apparatus with which the business is carried on or is it the setting or part of the premises in which the business is carried on. If the former is satisfied then it is a plant and if the latter is true then it is not a plant.[21]


If the plant or machinery is not capable of being put to use in the assessee’s business that year,[22] or is not actually used,[23] or if no such business is carried out in that year,[24] no depreciation can be claimed on it.

The term ‘Hire’ and ‘Lease’ have different meanings. The former connotes that the person licenses the use of the property and the latter implies a transfer of an interest in the property. But this stand is incorrect as a lease is also in nature of a licence given to the hirer to use the machinery for a temporary period as held by the Supreme Court in Damodar Valley Corporation v State of Bihar[25].Therefore where an assessee leases an article to a lessee, whether the lessee uses that article or not is not important for once the article has been leased, it has been used in the assessee’s business of leasing.[26]


The Allahabad High Court in the Motor and General Sales Ltd vs. CIT case  held that the law on the very first day of the assessment year should be applied. Also the High Court rejected the Revenue’s argument which stated that the higher rate of depreciation becomes valid from a period which ends after the accounting period.

No depreciation allowance is allowable if the lease is found to be a sham.[27] The Karnataka High Court in the case of Avasarala Automation v CIT[28] held that this device was a sham and being used to avoid tax liability and declined to grant depreciation to the lessor.  On the other hand the High Courts of Orissa[29], Delhi[30], Bombay[31] has held that if the transaction of sale and lease is genuine, then the depreciation cannot be denied.

The cases wherein the asset should have been used in the previous year where the depreciation can be claimable if:

The asset, if it is used for less than 180 days then in such a case 50% of the depreciation is claimable;


But in the case if the use is for 180 days or more then full depreciation claim can be allowed.



No depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of others[32] or if he is not the owner of the property but has only the use or demise of them and has hired them under a hire-purchase agreement.[33] A lessee can claim depreciation allowance on a property if the lessee exercises ownership in his own right and not on behalf of the lessor as held in CIT v Shree Rajasthan Syntex Ltd[34].

In Mysore Minerals v CIT[35] the Supreme Court observed that:

The terms ‘own’, ‘ownership’ and ‘owned’ are generic and relative terms; that they have a wide and also a narrow connotation, and the meaning would depend on the context in which the terms are used.


The term ‘owned’ as occurring in section 32(1) must be assigned a wider meaning and anyone in possession of property in his own title exercising such dominions over the property as would enable others being excluded therefrom and having the right to use and occupy the property or to enjoy its usufruct in his own right would be the owner of the building though a formal deed or title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc.


The basic condition u/s 32 is that asset should be used for the purpose of business or profession i.e. active use versus passive use which is ready to use. The allowance is dependent on fulfilment of two critical conditions. In the first place the asset should have been owned by an individual who claims for the allowance. Just authority and control over property as a matter of right will be adequate. The second place it is important that the asset should have been used in the business wherein the allowance relates.[36]

The common opinion is that ‘use’ does not mean ‘actual use’ but ‘kept ready for use’. The apparatus which is in question should have been engaged by the assessee for no other business than that particular business. In a leading case the Madras High Court deliberated that the depreciation is allowable even in the case when standby spare-parts are though not taken in for use during the year.[37] But the Karnataka High Court stated that in the Act the legislature has used the word ‘used’ so full meaning should be given to it. The user does not amount to simple preparation for use.

In this situation, the matter was taken to the Supreme Court by the I-T department in the N. K. Industries Ltd[38] case.The expression ‘used’ for the purposes of section 32 should have a wider meaning so as to include not only actual user but also passive user.[39]


Under this section 32 (1) (ii) of the IT Act, depreciation can be allowed even on certain definite intangible assets, like:







Any other business or commercial rights of similar nature


Section 32(1)(ii)(a) of the IT Act has been introduced by the Legislature by which additional depreciation at a percentage of 15% of the value of the new plants and machineries which are acquired and installed on or after1st April 2002. It is important to note that both on normal and additional depreciation the assets are acquired after October 1 and are used by the business for a period which is less than One hundred and eighty days and depreciation is available only at a rate of 50% according to second proviso to section 32(1)(b) of the IT Act.

Basic Conditions for eligibility:

New mechanical undertaking should not be shaped by method for part up or recreation of the business effectively in presence or by exchange or hardware or plant at one time utilized for any reason.


Such machinery has not been utilized before establishment either inside or outside India by any other individual. This restriction is different from sections 80IB(2), 10A, 10B etc. where machinery used outside India is also eligible.


It is not installed in office premises or private settlement, including visitor house. It might not be office apparatus or street transport vehicle.


The allowance has to be made in computing the profits of the business and does not depend on the genuineness of the books of accounts. The “user” test is also construed by the courts to understand that even passive user suffices. The expression ‘used’ means actually used for the purposes of the business.[40]There has to be actual and real user in the commercial sense; and mere preparation for use does not meet the requirements or aggregate to be a user.[41]

If the machinery and plant had not at all been used at any time during the accounting year, no allowance could be claimed[42].  For the reason behind claiming of depreciation a ‘kept ready’ concept is not presented, to the assessee even when the Legislature chose to use the word ‘used’. But in a case when the apparatus is not used then the section 32 of the IT Act is not applicable.[43]

Under section 32(2), depreciation allowance is statutory and is not limited clearly to depreciation in the value of asset by purpose of wear and tear. Once asset merged into block it does not have separate identity evidence of use. It is important that one should firstly depend on the evidences and then only court be approached.

It is always advisable that any asset should be timely purchased; steps should be taken for the purpose of putting the asset to its proper and main business use well in advance. Necessary permission and licenses from the government authorities must be obtained well before the crucial date. It is wanted that the amendment is made to use the words ‘use and used’ else at least clarify the legal position in the matter and depreciation is necessarily be permissible to calculate income over a period of time. Thus it can be construed that the omission of word ‘use’ is merely a drafting error which does not have a support by any object to show that the legislative intention has been altered



[1] CIT vs. Anand Theatres, 244 ITR 192

[2] CIT vs. E.I.H. Ltd, 54 DTR 249

[3] CESC Ltd. vs. CIT, [1998] 233 ITR 50 (SC)

[4] CIT vs. Mentha & Allied Products, 47 DTR 284

[5] Bharatbhai J Vyas vs. ITO, 97 ITD 248 (Ahd)

[6]Venkadam vs. Laxminarayan, 43 ITR 526

[7]In Re Finolex Cables Ltd, 29 SOT 595

[8] 87 ITD 181(Mum)

[9] (1996) 59 ITD 340 (Jab-Trib)

[10]CIT vs. Manappuram Central Finance & Leasing Ltd, (2010) 46 DTR 323 (Ker)

[11] CIT vs. Paliwal Glass Works, 326 ITR 407

[12] The Income Tax Act, 1961

[13] CIT vs. Allied Publishers P.Ltd, 68 ITR 546 (Bom)

[14] Burnley Steamship vs. Aikin, 3 TC 275

[15] Calcutta Corporation vs. Cossipore, AIR 1922 PC 27

[16] CIT vs. Alps, 65 ITR 377 (SC)

[17] CIT vs. Periyar, 181 ITR 396

[18] CIT vs. Herdillia, 216 ITR 742

[19] CIT vs. Sundaram, 71 ITR 587; Hinton vs. Maden, 39 ITR 357

[20] 157 ITR 86

[21] R C Chemicals vs. CIT, 134 ITR 330

[22] CIT vs. Air Travel Enterprises India Ltd, 265 ITR 537

[23] Dinesh Kumar Agarwal vs. CIT, 267 ITR 768

[24] CIT vs. Union Carbide, 254 ITR 488

[25] AIR 1961 SC 440

[26] CIT vs. Kotak Mahindra Finance Ltd, 317 ITR 236

[27] CIT vs. Ashok Leyland, 297 ITR 107

[28] 266 ITR 178

[29] Industrial Development Corporation of Orissa vs. CIT, 268 ITR 130

[30] Span Holdings vs. CIT, 294 ITR 83

[31] CIT vs. Zuari Finance Ltd, 271 ITR 538

[32] Poona Electricals vs. CIT, 14 ITR 618

[33] Tara Singh vs. CIT, 47 ITR 756

[34] MANU/IO/0046/2011

[35] 239 ITR 775 (SC)

[36] R.G. Keshwani vs. ACIT, (2009) 116 ITD 133

[37] 292 ITR 362

[38] 305 ITR 274

[39] CIT vs. India Tea & Timber Trading Co, [1996] 221 ITR 857 (Gauhati).

[40] Dinesh Kumar Gulabchand Agrawal vs. CIT, [2004] 267 ITR 768/141 Taxman 62 (Bom)

[41] CIT vs. Suhrid Geigy Ltd, [1982] 133 ITR 884 (Guj)

[42] Liquidators of Pursa Ltd. vs. CIT, [1954] 25 ITR 265 (SC)

[43] CIT vs. YellammaDasappa Hospital [2007] 159 Taxman 58/290 ITR 353 (Kar)


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Ipsita Mishra, Associate @ SAPAA.  She did her BALLB from NLU Odisha. A writer, Food enthusiast and an Adventurer who loves Traveling. She Primarily likes working at the Confluence of Law & Policy.



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Disclaimer:  The views and opinions expressed in this article are those of the authors. All data and information provided on this site is for informational purposes only. makes no representations as to accuracy, completeness, correctness or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.