TMI Blog2002 (6) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be allowed as deduction even though the ponds were not used during the assessment year 1997-98 in view of the decisions of the Jabalpur and Ahmedabad Benches of ITAT in the cases of Packwell Printers v. Asstt. CIT [1996] 59 ITD 340 and Inductotherm (India) Ltd. v. Dy. CIT [2000] 73 ITD 329 and hence the Assessing Officer is not justified in disallowing the depreciation. (a) The CIT(A) ought to have seen that in view of the Circular No. 469 dated 23-9-1986 issued by the CBDT when once the value of asset forms part of the block of assets the written down value of such asset has to be reduced by monies payable in respect of any asset falling within the block which is sold, discarded, demolished or destroyed during the previous year together with the amount of the scrap value, if any. 2. As the issue involved in both these appeals is one and the same, for the purposes of convenience, they are heard together and disposed by way of this common order. 3. The brief facts of the case as gathered from the record are as follows. The assessee is a partnership firm carrying on the business of farming and trading of shrimps. During the previous year relevant to the assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on this item. It is also not a case of passive use of the ponds, since the land containing the ponds have been handed back to the lessor farmers and the assessee can no longer avail of its use." 5. On appeal, the ld. CIT(A) held as follows: (Para-10, Page-7 of the CIT(A)'s Order) "I have carefully considered the various submission made by the ld. counsel and I have also perused the relevant case records. In this case 107.86 acres of land was taken on lease from various farmers for doing Shrimp farming. The lands were taken in the previous year relevant for the assessment year 1995-96. An amount of Rs. 52,59,390 is stated to have been spent in the construction of ponds and no depreciation was claimed in assessment year 1995-96 though there was export sale to the tune of Rs. 5.82 crores. The entire profit was claimed as exempt under section 80HHC. In assessment year 1996-97 depreciation on ponds has been claimed at Rs. 13,14,847 at the rate of 25% on cost of construction amounting to Rs. 52,59,390. The WDV as on 31-3-1995 was arrived at Rs. 39,44,543. In this year there was no export sale on which deduction under section 80HHC could be claimed. In the subsequent assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and effect of the amendment of section 32, he argued are explained in Circular No. 469 dated 23-9-1986. He took this bench through the relevant sub-clauses of section 32 and of the circular and submitted that from this circular, it is clear that as far as discarded assets are concerned, the adjustment that is required to be made under the new concept of "block of assets" with regard to buildings for the purposes of allowing depreciation is to reduce the monies receivable consequent to such discarding which in the case of this assessee is 'nil'. Based on the Board's Circular supra, the ld. counsel for the assessee Shri Koteswara Rao argued that once the value of assets forms part of the block of assets, the W.D.V. of such assets has to be reduced by monies realisable in respect of that asset on discarding, when any asset falling within that block is discarded during the previous year. Ld. counsel for the assessee submitted that once the value of the assets forms part of the block of assets, depreciation has to be allowed on the entire block irrespective of use of the assets during the assessment year. In this connection. Ld. counsel for the assessee, relied on the judgment of the Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e very same block of plant and machinery 25 per cent depreciation was claimed and allowed for the assessment year 1996-97. Under these circumstances, the issue for consideration is whether the depreciation is allowable on that portion of the written down value of the block of assets represented by the value of ponds which have been handed back to the lessors of the land. The other fact that is not in dispute is the entire block consisting of this class of assets i.e. plant and machinery, has not been wiped off or eliminated during these two assessment years as the assessee had other assets in the block. 10. Before coming to the conclusion on this issue, it would be useful to reproduce for ready reference, Board Circular No. 469 dated 23-9-1986. Only the relevant portions of the Circular are extracted hereunder: "6.1 In his Budget speech for the year 1986-87, the Finance Minister had announced as under: "96. As promised in the Long-Term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation in respect of blocks of assets instead of the present system of depreciation on individual assets. Simultaneously, I propose to rationalize the rate structure, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery, plant and furniture in respect of which the same percentage of depreciation is prescribed. The necessary amendments to the Income-tax Rules prescribing the percentage of depreciation in regard to various blocks of assets will be made accordingly which will be effective from 2-4-1987, i.e. for the assessment year 1988-89 and onwards. In view of these accelerated rates of depreciation, the extra shift allowance being allowed to some items of plant and machinery enumerated in appendix I to the Income tax Rules will cease to be admissible when the new rates come into force. (b) Under the existing provisions of section 32(1)(i), depreciation in the case of ocean-going ships is allowed at such percentage on the actual cost thereof as may be prescribed..........As a consequence, the provisions of section 32(1)(i) have been omitted by the Amending Act. (c) Section 32(1)(ii) provides that depreciation will be allowed as a prescribed percentage of the written down value of buildings, machinery, plant and furniture. The Amending Act has provided that in the case of any block of assets, depreciation will be allowable at a prescribed percentage of the W.D.V. thereof. (d) The prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he block of assets in the immediately preceding previous year, shall be reduced by the depreciation actually allowed in respect of the block of assets in relation to the said preceding previous year. (ii) The sum arrived at as above shall be increased by the assessee during the previous year. (iii) The sum so arrived at shall be reduced by the sale proceeds and other amounts receivable by the assessee in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous year. (6) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons: (A) The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased the actual cost of any new asset acquired, or (B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the factory building and the godown in December for Rs. 9,00,000 if there is no asset left in the relevant block at the end of the year, the new provisions of section 50(2) of the Income-tax Act will apply as follows: WDV at the beginning of the year Rs. 10,00,000 Add: actual cost of new asset acquired Rs. 2,00,000 ------------- Rs. 12,00,000 Less: Sale proceeds received in respect of all the Assets from that block sold during the year Rs. 9,00,000 ------------- Loss deemed to be short-term capital loss under section 50(2) Rs. 3,00,000 ------------- 11. The Jabalpur Bench of the ITAT in the case of Packwell Printers, held as follows: (vide head note of the reported decision) "The legislature felt that keeping the details with regard to each and every depreciable assets was time consuming both for the assessee and the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en provided to reduce the amount of depreciation by reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any. Unless and until scrap value of the machinery which has been discarded, demolished or destroyed during the previous year is ascertained the same cannot be reduced for the purpose of computing depreciation. In the instant case, the machinery in question was only scrapped during the year that meant it had not been used during the previous year. The scrap value of the same had not been ascertained as yet which would be possible only after selling the same. Therefore, nothing could be reduced at present from the written down value of the block assets." The Patna Bench of the ITAT in the case of Parikh Engg. Body Bldg. Co. Ltd. v. Asstt. CIT [1999] 69 ITD 207, vide head note of its decision, held as under:-- "The Assessing Officer was not justified in estimating higher profit on sale of the leased vehicles. There was no basis and there was no material on record to warrant and support the Assessing Officer's estimates. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be made under the concept of 'block of assets' for the purposes of allowing depreciation is to reduce the monies receivable consequent to such discarding from the block. In the case of the assessee, as no money whatsoever was payable to him on handing over the ponds constructed on leased land to the owners of land, there can be no amount whatsoever that can be reduced from the block of assets. Hence, the block continues at its written down value. Once an asset has been included in the block, it loses its individual identity and what we are concerned is only the WDV of the block and nothing else. The assessee, in our considered opinion has rightly not claimed revenue loss for assets surrendered, nor short-term capital loss under section 50(2). The claim of the assessee is in accordance with the intention of the scheme of depreciation consequent to the introduction of block of assets concept and this is clear from the Circular of the board supra. 12. Even otherwise, a comparison between the provisions for allowance of depreciation and terminal depreciation that existed upto 1-4-1988 and the provisions for allowance of depreciation and those relevant to shortterm capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequent to the adjustments made as reckoned or considering separately individual value of the asset discarded is not permissible. 13. For easy appreciation of the new concept, let us consider the following example. If a block of assets consists of 2 assets, one of the value of Rs. 1 lakh and the other of the value of Rs. 50,000 and depreciation is being granted on the same, say at 25% and if the depreciation granted during the previous year is Rs. 37,500, then the W.D.V. at the end of the year is Rs. 1,12,500. Now, if the asset of the value of Rs. 1 lakh is sold or discarded and the amount realised on the same is Rs. 10,000, then the depreciation is to be granted on the block represented by the WDV of Rs. 1,12,500 - Rs. 10,000 is Rs. 1,02,500 which comprises of the remaining individual asset of original value of Rs. 50,000 and WDV of Rs. 37,500 only. In this example, the depreciation is to be allowed even on the value of Rs. 65,000, which represents the deficit of sale value of the first asset over its written down value though the asset has been sold. In the same manner, in the case on hand depreciation is to be allowed on that value of discarded asset represented by the excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between the procedure of granting depreciation allowance and the terminal depreciation in case of assets scrapped, would also be clear from the present provisions of section 32(1)(iii), which have been introduced w.e.f. 1-4-1988, providing for terminal depreciation in case of asset belonging to business of power generation. In this class of assets, i.e. assets belonging to power generation, individual identity of the asset is retained as was the case prior to the introduction of the concept of 'block of assets.' In respect of such assets, in case an asset is sold or discarded or scrapped, the difference between the original cost or the W.D.V. and the scrap value or sale value has to be allowed as deduction in cases of shortfall. Similarly, in case of a surplus it is taxed under the re-introduced section 41(2) as balancing charge. As already stated, these two sections have not been made applicable to block of assets classified as clause (ii) under section 32(1). 15. As to the question of ownership vis-a-vis allowance of depreciation, section 32(1A) of the Income-tax Act, 1961 as it originally existed prior to the introduction of the concept of "block of assets' provided for dep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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