Rate of depreciation is to be applied on functionality test and not merely on amenities test

The issue in this appeal is regarding the disallowance of depreciation / additional depreciation claimed on plant and machinery amounting to Rs.8,23,073.

In this matter, the assessee is a partnership firm engaged in the business of manufacture and sale of herbal pharmaceutical products (Ayurvedic medicaments and preparations), consumer / personal care products and animal health care products. The AO restricted the depreciation claimed on air conditioners, telephones, office equipments and canteen equipments by treating these assets as furniture and fixtures instead of plant and machinery. Depreciation was allowed on these assets at the rates applicable to ‘furniture and fixtures’ and the excess depreciation claimed amounting to Rs.8,23,073 was disallowed by the AO. The disallowance was made for the reason that these assets are eligible for depreciation at 10% as furniture and fixtures as they are used in the office premises, consumer goods showrooms etc and not used in the factory for the manufacturing/production process. It was stated by the AO that, applying the functionality test, as these assets are not directly used in the production process, depreciation is restricted to the rate allowed for furniture and fixtures only and not on the rate allowed for plant and machinery.

The DRP confirmed the AOs finding that the assets on which higher depreciation is claimed are not proved to be put to use in production process accordingly and fail the functional test. Aggrieved, assessee preferred an appeal before the tribunal.

ITAT observed that most of the assets are air conditioners, telephones, Samsung tab, office equipments and canteen equipments. These assets are in the nature of plant and machinery. Depreciation under section 32 is allowed on assets used for the purpose of business of the assessee. It is not in dispute that these assets are used for the purpose of business of the assessee. The only grievance is these assets are not used in the factory for manufacturing/ production process. There is no condition in section 32 that depreciation on plant and machinery is allowable only if they are used in the factory for manufacturing/production process. For air conditioner used in a trading business is also a plant and machinery and eligible for depreciation at 15%. In the present case, the assessee is in the business of manufacture and sale of ayurvedic medicaments and preparations, consumer/personal care products and animal health care products. The majority of the assets on which depreciation was disallowed are used for the purpose of business, hence, the A.O. was not correct in partly disallowing the depreciation by treating them as furniture fixtures. Accordingly, it remand the matter by allowing the grounds of the Assessee for statistical purposes to examine the issue afresh.

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