TMI Blog2009 (12) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... ening WDV by the actual cost of any asset falling within that block, acquired during the previous year. Once an asset is included in the block of assets it s remained in block for its entire life. The end of asset, i.e., to go out from block is only in accordance with the provisions. In the case under consideration, the admitted facts are that the division of Surat had been closed but the block of assets of the closed unit, (the division of Surat) along with other assets of the block were used for the purpose of business in earlier years. The year under consideration is not the first year of the assets acquired. The assets of closed unit still remained exist/part of the block of assets. The assets did not fall under any of the above exceptional three conditions. The said block of assets was used for the purpose of business during the year. Under the circumstances, the assets of the said closed unit amounts to use for the purpose of business in the year under consideration, we are, therefore, of the considered view that the assessee is entitled for depreciation. We, accordingly, allow the claim of the assessee. - A.L. GEHLOT AND SMT. ASHA VIJAYARAGHAVAN, JJ. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85 ITD 608 (Nag.). Inductothern (India) Ltd. v. Dy. CIT [2000] 73 ITD 329 (Ahd.). Natco Exports v. Dy. CIT [2003] 86 ITD 445 (Hyd.). Asstt. CIT v. SRF Ltd. [2008] 21 SOT 122 (Delhi). Goetze (India) Ltd. v. Dy. CIT [2008] 25 SOT 171 (Delhi). 5. The learned DR on the other hand relied upon the order of CIT(A) and submitted that the words intensity of use , etc., mentioned in the Circular No. 469 ( supra ) means there must be some use that does not mean that assets not to use at all are eligible for depreciation. The learned DR further submitted that section 43(6) provides methodology of calculation of depreciation whereas the basic requirement of section 32 is that the asset must be used for the purpose of business. The learned DR submitted that while interpreting the revenue statutes require rational construction to achieve the intention of the legislation. Strictly literal construction leads to absurd results, which is not intended to be subserved by the object of the legislation. The learned DR submitted that the Legislature was never intended if the assets are not used for the purpose of business, deprecia- tion is allowable. The learned DR reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer while making assessment under section 143(3) of the Act disallowed the depreciation following assessment year 2001-02. The learned AR submitted that the Assessing Officer has accepted the short-term capital gain in assessment year 2006-07, it means, the Assessing Officer has accepted the allowance of depreciation in earlier years also. The learned AR submitted that the issue is squarely covered by the decision of ITAT in [IT Appeal No. 822 (Mum.) of 2005] for assessment year 2001-02 in the case of GR Shipping Ltd. vide order, dated 17-7-2008 wherein the ITAT has considered the judgment of the Hon ble Bombay High Court in the case of Dinesh Kumar Gulabchand Agrawal ( supra ) and held that the said judgment is not applicable to the facts of the case as in the present case, the assessee has already used the asset for the purpose of business. The asset has already entered the block of assets. Whereas in Dinesh Kumar Gulabchand Agrawal s case ( supra ), the asset in question was not at all put to use. The learned AR submitted that the revenue filed appeal against the order of the ITAT in the case of GR Shipping Ltd. ( supra ) before the Hon ble jurisdictional Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elps the assessee instead of the revenue. The Apex Court held that where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. We will try to resolve the issue under consideration by applying the above rule of interpretation. The judgment of Hon ble jurisdictional High Court in the case of Dinesh Kumar Gulabchand Agrawal ( supra ) cited by the learned DR has been distinguished by the ITAT in the case of GR Shipping Ltd. ( supra ) observing that in that case asset in question was not at all put to use. The issue in the case under consideration before us is whether under the facts and circumstances of the case, the assessee entitles to depreciation on the assets of closed unit. The assessee was carrying on two businesses having one division at Dombivili and the other at Surat. Division at Surat was meant fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14th edition, page 47). For the purposes of determining the true profits in the commercial sense or under the proper principles of accountancy, the wear and tear of the assets utilised by the assessee for the purpose of earning his profit will have to be considered and allowance will have to be made for wear and tear. This is what is notionally understood as depreciation. The allowable depreciation amount is a capital loss to the depreciable assets which must be replaced first to give a true or correct picture as otherwise there is bound to be a distorted picture in the profit and loss account. The depreciation amount is to be treated as a charge on the profits. The principal factors responsible for, reduction in value of a capital asset and, therefore, responsible for depreciation are : ( i ) ordinary wear and tear; ( ii ) unusual damage; ( iii ) inadequacy; and ( iv ) obsolescence. These factors include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time. 7.2 Now we come to relevant statutory provisions of the Act which are as under : 7.2.1 Section 32 deals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof: Provided that such deficiency is actually written off in the books of the assessee.] Explanation. For the purposes of this clause, (1) moneys payable in respect of any building, machinery, plant or furniture includes ( a )any insurance, salvage or compensation moneys payable in respect thereof; ( b )where the building, machinery, plant or furniture is sold, the price for which it is sold,. . . . (2) sold includes a. . . . (iv) [***] (v) [***] (vi) [***] (1A) [***] [(2) 7.2.2 The depreciation allowance under section 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The following are the ingredients for depreciation allowance : ( i )that the depreciable asset is owned by the assessee, and ( ii )that it is used for the purpose of the assessee s business or profession, ( iii )the deductions shall be allowed - in the case of any block of assets, such percentage on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (ii )in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i). 7.5 Used for the purposes of the business or profession . 7.5.1 In the case under consideration crux of the matter/issue to be examined centralises to the word used of asset, therefore, that requires detail discussions which we are doing after examining other aspects of the scheme of depreciation as per block of asset. 7.6 How the scheme of depreciation on block of asset works. 7.6.1 Now let us examine the scheme of depreciation on block of asset, how it works. If there are no changes in block of asset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause ( iia ), as the case may be. 7.6.2.2 The next step to be taken is to allocate the asset to the respective block. As per the definition, block of assets as provided in section 2( 11 ) of the Act, it is to be grouped in assets, which falls within a class of assets, being building, machinery, plant or furniture in respect of which same percentage of depreciation is prescribed. According to the clause ( ii ) of section 43( 6 )( c ), the opening written down value as on the first day of relevant previous year shall be increased by the actual cost of any asset falling within that block which is acquired by the assessee during the previous year. 7.7 Sold, discarded, demolished or destroyed of asset 7.7.1 Sale, discarded, demolished or destroyed of asset out of block of asset, this situation of block of asset is taken care by the clause ( iii ) of sub- section (1) of section 32 of the Act, which provides that in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause ( i ) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation for the assessment year 1987-88 is the general rate of fifteen per cent. Further that for the assessment year 1987-88, the written down value of these items of plant and machinery before allowing depreciation for that year was as follows : Rs. Item 1 1,50,000 Item 2 2,00,000 Item 3 3,00,000 Total 6,50,000 The depreciation that will be allowable in respect of these items for the assessment year 1987-88 as also the written down value of these items at the beginning of the assessment year 1988-89 will be as follows : Depreciation WDV at the beginning of the assessment year 1988-89 Rs. Rs. Item 1 22,500.00 1,27,500.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-clause ( ii ) of clause ( a ) and clause ( c ) of section 30, clauses ( i ) and ( ii ) of sections 31 and 36 [clause ( ii ) of sub-section (1)] of section 32 shall be restricted to a fair proportionate part thereof which the 37 [Assessing] Officer may determine, having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession. 7.8.2 In the above section, a question of proportionate allowance would arise only when the asset in question is not exclusively used for the purpose of business, which means it was used for the purpose of business as well as non-business purposes. Thus, if the asset is neither used for business purposes nor for non-business purposes but remained in block of assets the provision of section 38(2) is not applicable. The above section has been examined by the ITAT Special Bench, Chandigarh in the case of Gulati Saree Centre ( supra ). The following question was referred for the opinion of the Special Bench : Whether, after the introduction of the concept of block of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case under consideration assets remained in block of assets and were not used for non-business purposes like personal use, etc. 7.9 Depreciation and capital gain on transfer of asset 7.9.1 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 determining the capital gains has been substituted by new provisions by the Amending Act. The particulars of these provisions, overriding section 2( 42A ) of the Income-tax Act, are as under : (A)The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the following amounts, namely : (i)expenditure incurred wholly or exclusively in connection with such transfer or transfers; (ii)the written down value of the block of assets at the beginning of the previous year; and (iii)the actual cost of any asset falling within the block of assets acquired during the previous year, such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, full value of consideration received on transfer would not exceed the aggregate of ( a ), ( b ) and ( c ) above and, hence, there would be no chargeable capital gains. It is to be noted that there cannot be a loss under the head Capital gains so long as the block of assets continues to exist. ( v )The above discussion can be summed up as under : In the case of block assets, depreciation under section 32 can be claimed on the written down value as computed under section 43( 6 ) provided as on the last day of the previous year the following two requirements are to be fulfilled : (1)there must be at least one asset in the block; and (2)there must be some value for the block on which prescribed percentage can be applied. When any one or both the abovementioned requirements are not satisfied on transfer of any asset from the block, the provisions of section 32 cease to apply and automatically the provisions of section 50 become applicable resulting in short-term capital gains/loss. 7.10 Other relevant amendments 7.10.1 The existing provisions of sub-sections (2) and (2A) of section 41 of the Income-tax Act and the Explanation thereunder relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the case of CIT v. Visyanath Bhaskar Sathe [1937] 5 ITR 621 (Bom.). The facts of that case were that the assessee was the owner of a ginning factory and during the financial year joined a pool formed by several owners of such factories. In accordance with the agreement with the pool, only some of the factories were allowed to work and the others remained idle getting, of course, their share in the profits earned by the pool. The assessee s factory remained idle accordingly but duly received its share in the profit made under the arrangement. For the assessment year 1935-36 which was under dispute, the assessee submitted his return of income showing therein certain income after deducting an amount on account of depreciation in respect of the building, machinery and plant pertaining to his ginning factory. The ITO disallowed the assessee s claim for depreciation on the ground that as the factory remained idle during the year of account, no such allowance was admissible. On reference Hon ble Bombay High Court held that the word used in section 10(2)(vi) of 1922 Act denotes actual user, and not merely being capable of being used. But that does not dispose of the question whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the word used as indicated in the authorities it was clear that even these presses which remained under forced idleness were in use during the entire period of the year. (d )The issue regarding use was come before Hon ble Allahabad High Court in the case of Niranjan Lal Ram Chandra v. CIT [1963] 49 ITR 177 . The facts of that case were that the assessee-firm was carrying on the business of plying motor trucks and Lorries on hire. On first day of accounting year relevant to the assessment year 1947-48, it sold two trucks. The difference between the original cost and the written down values of the two trucks were not known, but they were admittedly greater than the profits earned by the assessee on said sale. The assessee had made a profit from its business of hiring out trucks. The ITO assessed it on the whole of this amount, applying the provision of section 10(2)(vii) of 1922 Act read with the second proviso thereto. He rejected the assessee s contention that the second proviso was inapplicable because the trucks were sold on the very first day of the previous year and, therefore, could not be said to have been used during the previous year for the purposes of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the sale, and it might be said that the sale put them out of use, but this happened during the day of 1-1-1946, and the effect of the sale did not relate back to the first moment of 1-1-1946. If they were in use for any length of time on 1-1-1946, i.e., during a few hours, it was enough, the period of user being of no consequence. They were available for being driven on hire, and, therefore, were in use just before they were sold. When they had admittedly been in use up to a few hours before their sale and they were not put out of use, the sale must be held to be sale of plant used for the purposes of the assessee s business. (e )The Hon ble Supreme Court in the case of Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 held that the words used for the purposes of the business obviously mean used for the purpose of enabling the owner to carry on the business and earn profits in the business. In other words, the machinery or plant must be used for the purpose of that business which is actually carried on and the profits of which are assessable under the Act. It is further held that the word used has been read in some of the pool cases in a wide sense so as to include a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent for non-residential buildings . 7.12.2 This new scheme of depreciation on block of assets is based on Report of Economic Administration Reforms Commission as stated in the said Circular reads as under : 6.3 As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Bhaskar Sathe [1937] 5 ITR 621 (Bom.) where in the Court examined the words used and held that the word used in section 10(2)( vi ) of 1922 Act denotes actual user, and not merely being capable of being used. But that does not dispose of the question whether, when machinery is kept ready for use at any moment in a particular factory under an express contract from which taxable profits are earned, the machinery can be said to be used for the purposes of the business which earns the profits, although it is not actually worked. The business from which the profits were derived was that of ginning factories, and the contribution of the assessee to that business was the obligation to keep his machinery ready for actual use at any moment. It was further held that the word used in section 10(2)( vi ) of 1922 Act may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season. The ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and in the case, the profits of the assessee during the year under ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section of word used for the purpose of business as provided in section 32 of (1) of the Act for the concept of depreciation on block pf assets can be summarized, that use of individual asset for the purpose of business can be examined only in the first year when the asset is purchased. In subsequent years use of block of assets is to be examined. Existence of individual asset in block of assets itself amounts to use for the purpose of business. This view is fully supported by various provisions of the Act which were amended consequence to the scheme of depreciation on block of assets including to proviso to section 32 of the Act of which detailed discussion is made in above Para of this order. The said proviso to section 32 requires that whore an asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause ( i ) or clause ( ii ) or clause ( iia ), as the case may b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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