TMI Blog2009 (7) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... even a single asset can possibly form a 'block of assets' within the meaning of s. 2(11) of the Act, the assessee had gainfully claimed loss in respect of Gurgaon office structure as short-term capital loss in terms of s. 50(2) of the Act. 3. That the learned authorities below erred in not holding that within a 'class of assets' there can be independent 'group of assets' identifiable by their nature and use having the same rate of depreciation, each such group being a block of assets in the said class of assets. 4. That the learned authorities below erred in not holding that capital expenditure represented by Gurgaon office structure on which depreciation was allowed by virtue of a deeming provision of the Act was for a limited purpose, only and therefore within a class of assets it formed an independent 'group' or 'block'. 5. That the learned CIT(A) erred in holding that Note 3 to the depreciation table only clarified the applicant rate of depreciation and that it was of no significance in determining whether or not such assets comprised a block within themselves." 3. The relevant facts giving rise to the issue raised in the aforesaid grounds may be summarized as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to claim depreciation thereupon as owner. 4. In the previous year relevant to the asst. yr. 2004-05, which is under consideration, the assessee vacated the said lease premises and handed over the possession of the premises to the landlord together with all the additions or alterations made thereto by the assessee by way of capital expenditure incurred thereupon. Thus, so far as the assessee is concerned, it was the constructive transfer of the additions or improvements made to the leased premises to the lessor/owner/of the said premises. The WDV of said structure as on 2003-04 as Rs. 61,79,040. After adjusting the amount it received towards the capitalized value of the leased premises against the opening amount of the WDV of the leased premises, the assessee wrote off the balance amount of Rs. 56,79,040 in its accounts as "assets written off' and claimed short-term capital loss to that extent. However, the AO disallowed the assessee's said claim short-term capital loss of Rs. 56,79,040 and adjusted the shortfall against the aggregate WDV of block of assets of "building" comprising of (i) building owned by the assessee; and (ii) the capitalized expenditure incurred on lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessed income." 6. The AO rejected the assessee's claim by observing and holding as under: "7. I have gone through the submissions of the assessee but do not find any merit in the same because of the following reasons: (a) Sec. 2(11) of the IT Act defines block of assets as a group of assets falling within a class of assets comprising tangible and intangible assets in respect of which the same percentage of depreciation is prescribed. Thus, the acid test for an asset to fall in a block of assets is the rate of depreciation allowable as per IT Rules, 1962 and not whether it is acquired on ownership basis or leasehold basis. (b) In the present case, a perusal of the balance sheet and its annexures shows that after the Gurgaon office structure is discarded by the assessee, the same class of assets under the head 'Building' in the schedule of fixed assets continues to exist as per last balance sheet on which same rate of depreciation, i.e., 10 per cent is applicable. During the year the assessee has claimed depreciation of Rs. 1,06,33,669. It is evident, therefore, that the block of assets which comprises of 'office premises'/'building' has not ceased to exist as argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on) on the ground that s. 2(11) of the IT Act defines block of assets as a group of assets falling within a class of assets comprising tangible and intangible assets in respect of which the same percentage of depreciation is prescribed. Since, in the present case, the block of the assets under the head 'Office premises'/'Building' had not ceased to exist, the provisions of s. 50(2) of the IT Act were not applicable. Hence, the amount of Rs. 56,79,040 debited in the P L a/c was added back and deprecation @ 10 per cent amounting to Rs. 5,67,904 was allowed. The contention of the appellant is basically that Gurgaon office structure comprises a distinct block of assets on its own that had ceased to exist. This contention of the appellant is not acceptable for the simple reason that no separate block by the name 'office structure' has been prescribed. It has to be a part of one of the blocks as defined under s. 2(11) and listed in Part A(I) of Appendix I. The other items have to classified as 'furniture and fittings' or 'purely temporary erections'. So far as reference to Note 3 to the depreciation table is concerned, suffice it to say that it only clarifies the applicable rate of depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucture even though falling in a broad class of "building" is a separate block itself as it is only a deemed building owned by the assessee by virtue of provisions contained in Expln. 1 to s. 32(1) of the Act and not building actually owned by the assessee because the capital expenditure incurred by the assessee on leased premises by way of improvements and alterations thereto by no stretch of imagination could be considered to be a building by themselves being owned by assessee. In support of the contention that Gurgaon office structure and other buildings actually owned by the assessee are to be considered separate and independent block of assets, the learned counsel for the assessee has made a reference to the Note 3 appended to the old Appendix I under r. 5 of the IT Rules. He, therefore, submitted that Gurgaon office structure is to be considered as a different and separate block of assets other than the block of assets comprising of buildings actually owned by the assessee. He, therefore, submitted that the money received by the assessee in respect of leased premises surrendered to its landlord is to be adjusted against the WDV of Gurgaon office structure only, and the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered to be a building owned by the assessee vide Expln. 1 to s. 32(1) of the Act, are separate block of assets falling within the same class of assets for the purpose of granting depreciation thereupon, and determining WDV thereof and consequential surplus or shortfall on their transfer, etc. 18. In the present case, the assessee had a building owned by it having WDV amounting to Rs. 1,30,98,300 as on1st April, 2000. During financial year beginning from1st April, 2000to31st March, 2001, the assessee had taken certain premises at Gurgaon on lease and had incurred capital expenditure by way of additions or alterations or doing certain works in or in relation to the said leased premises. The total such expenditure incurred on leased premises during financial year 2000-01 was Rs. 80,29,941. Both the assets falling within block of building were used for office purposes. The assessee claimed depreciation @ 10 per cent in respect of the building owned by it as well as in respect of the Gurgaon office structure, in respect of which capital expenditure incurred by the assessee towards construction of any structure or of doing any work by way of renovation or extension of or improve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, have been included under Block "A", and depreciation has also been claimed at the same rate of 10 per cent and total WDV of Block 'A' has been determined including individual WDV of both the above two assets falling within same class of assets. In the light of the aforesaid facts, it is now to be decided as to whether the building owned by the assessee and the Gurgaon office structure, which has been treated as a building owned by the assessee within the meaning of Expln. 1 to s. 32(1), are covered by same block of assets or not. 20. Sub-s. (11) of s. 2 defines the expression "block of assets" as under: "(11) 'block of assets' means a group of assets falling within a class of assets comprising- (a) tangible assets, being building, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed." 21. It is not in dispute that block of assets is a concept introduced w.e.f.1st April, 1998in the IT Act. As per definition of block of assets provided under s. 2(11) of the Act, blo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed as "block of assets", and the WDV in the case of block of assets shall be the aggregate of the WDV of all the assets falling within that block of assets, as worked out in the manner provided under s. 43(6)(c) of the Act. In the present case, the assessee has claimed same percentage of depreciation in respect of both the building owned by the assessee and Gurgaon office structure in respect of which the assessee has incurred capital expenditure and which has been considered to be the building owned by the assessee, and both the assets are falling within same class of assets being office premises used for assessee's profession. These two assets, that is, building owned by assessee and Gurgaon office structure falling within same class of assets are part of same block of assets in respect of which same percentage of depreciation is prescribed under the Rules. Thus, the WDV in the case of block of assets "building" shall be taken to be the WDV of all the same class of buildings falling within that block of assessment at the beginning of the previous year, which is to be adjusted by the increase or reduction of the items as specified in cl. (c) of sub-s. (6) of s. 43 of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eto treats the structure or work done by the assessee in or in relation to the leased building as a building owned by the assessee. Therefore, as a natural or inevitable corollary, a meaning given to structure or work done by the assessee in or in relation to a leased building under Expln. 1 to s. 32(1) shall be given equal effect while determining its class of assets and WDV thereof. To put it differently, to ascertain the class of 'block of assets' under which it would fall and to determine the 'WDV' thereof, the said work or structure done by the assessee in or in relation to a leased building shall be treated as 'a building owned by the assessee' and it would, thus, be taken at par with other building falling within the same class of building owned by the assessee. If the Expln. 1 to s. 32(1) of the Act says that for the purpose of s. 32(1) of the Act, you must imagine the work or structure referred to in that Explanation done by the assessee in or in relation to a leased building as a building owned by the assessee, it cannot be interpreted to mean that having done so while claiming depreciation under s. 32(1) in respect of said work or structure referred to in that Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provement is effected. Where the structure is constructed or the work is done by way of extension of any such building, the percentage to be applied would be such percentage as would be appropriate, as if the structure or work constituted a separate building." 27. On reading of the aforesaid Note 3 of Appendix I under r. 5 of IT Rules, it is clear that to determine the percentage of depreciation to be applied in respect of any structure or work done by way of renovation or improvement in or in relation to a building referred to in Expln. 1 of cl. (ii) of sub-s. (1) of s. 32, one has to first determine the class of building in or in relation to which said renovation or improvement has been effected. In other words, the percentage of depreciation as may be applicable to any class of building in relation thereto such renovation or improvement has been effected, shall be applied to said structure or work done by way of renovation or improvement in or in relation to that class of building. In the present case, the assessee had taken on lease a barren hall, in or in relation to which the assessee had incurred capital expenditure by way of constructing wooden partition for lawyer's cham ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, the said Note 3 is also of no help to the assessee so that the actual building owned by the assessee used for office purposes and the Gurgaon office structure, which is also used for office purposes, falling within same class of assets in respect of which same rate of depreciation is prescribed, shall be treated as separate block of assets. They can be considered as a separate building but cannot be considered to be the separate block of buildings falling within same class of buildings in as much as both the items fall within the same class of assets being "building" used for official purposes and in respect of which same rate of depreciation 1S prescribed. 28. In the light of the view we have taken above, the shortfall between individual WDV of Gurgaon office structure and the amount realized by the assessee on its transfer shall have to be reduced from opening aggregate WDV of Block "A" comprising both the building owned by the assessee and Gurgaon office structure falling within the same block of assets on which same rate of depreciation at 10 per cent is applicable, and the depreciation in the present assessment year shall then be allowed on the resultant amount as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
