Functionality test not description to be applied for determining type of Asset block for Depreciation

The grounds deals with the disallowance of depreciation / additional depreciation claimed on plant and machinery amounting to Rs.8,23,073. 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 clamed are not proved to be put to use in production process accordingly and fail the functional test.

ITAT

6.2 We have considered rival contentions and perused the material on record. Similar issue was considered by the Co- ordinate Bench in assessee’s own case for assessment year 2013-2014 in ITA No.1385/Bang/2017 (order dated 14.07.2020), wherein it was held as under:-

“11. We have heard the rival contentions on this issue and perused the record. It can be noticed that the AO has listed out 46 items. According to AO, these items would fall under the category of ‘Furniture and Fixture’ and they have been classified as “Plant & Machinery” by the assessee. However, a perusal of the list of items of assets extracted above would show that there are certain items like pump sets, refrigerator, camera, telephone, pedestal fan etc., which should fall under the category of “Plant & Machinery”, even if the purpose for which they are put to use are not considered. In respect of remaining items, the contention of the assessee is that these items are used in the factory/lab for the purpose of production or manufacture as part of “Plant & Machinery”. In support of his contention, the ld. AR placed his reliance on the decision rendered by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd., Vs Addl.CIT 147 TTJ 594 (Pune). In the above said case, the Tribunal considered the issue of depreciation allowable on stools, tables, stainless steel racks etc., which were used for laboratory purposes, i.e for the purpose of production or processing of chemical tests in the laboratory leading to the production. The Tribunal took the view that the functionality test of the assets has to be applied for determining its category and in this regard, Pune Bench, in turn, relied upon the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautical Ltd.,(HAL) Vs CIT 206 ITR 338, wherein it was held that for determining what constitutes “plant”, the ‘functional test’ and not merely ‘amenities test’ has to be applied. It was also held by the Hon’ble Karnataka High Court that the bins, racks and shelves kept in workshop would constitute plant and machinery.

12. Before us, the ld. DR placed has placed reliance on the decision rendered by the Hon’ble Madras High Court in the case of Dinamalar Ltd.(supra). We have gone through the said case-law and notice that the assessee therein had claimed higher rate of depreciation applicable to computers in respect of peripherals used along with the computers. In that context, Hon’ble Madras High Court has taken the view that the peripherals cannot be classified as computers for claiming higher rate of depreciation as applicable to “Computers”. In our view, the above said decision has been rendered in a different context, i.e., within the category of ‘Plant and Machinery’, the sub-question was whether the peripherals could be classified as Computers. Since the functions performed by the peripherals are different from that of a computer, the High Court held that they cannot be classified as “Computers”. We notice that the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd (supra), which was followed by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd.(supra) would apply to the facts of the present case.

13. We have noticed that certain items of assets are in the nature of Plant and machinery. It is the claim of the assessee that other items are also used as part of Plant and Machinery. Hence, we are of the view that this issue requires fresh examination at the end of the AO in accordance with the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd (supra). Accordingly, we restore this issue to the file of the AO for examining the same afresh in the light of discussions made supra by following the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Limited (supra).”

6.3 In the instant case, the A.O. has listed out the assets on which depreciation was claimed as plant and machinery at pages 3 to 8 of the assessment order. From the description of assets, we find 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. As in the earlier year the matter needs a fresh examination by AO. Further, as regards machinery or plant installed in any office premises or residential accommodation including accommodation in the nature of guest house, the additional depreciation cannot be allowed. We accordingly remand the matter by allowing the grounds of the Assessee for statistical purposes to examine the issue afresh by considering the Tribunals order in assessee’s own case for the earlier year (supra).