TMI Blog2010 (12) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... icular asset is not used in the relevant assessment year. Whenever such an asset is sold, it would result in short-term capital gain, which would be exigible to tax and for this reason, we say that there is no loss to Revenue either - Decided in favor of the assessee - IT Appeal Nos. 161 and 617 of 2006 and 1104 of 2008, IT Appeal Nos. 998 and 1283 of 2008 - - - Dated:- 24-12-2010 - A.K. Sikri and Suresh Kait, JJ. N.P. Sahni, P.L. Bansal and Sanjeev Sabharwal for the Revenue C.S. Aggarwal with Prakash Kumar for the Assessee JUDGEMENT A.K. Sikri, J:- 1. In all these appeals, with the same assessee as respondent, and pertaining to different assessment years, the issue which arises for consideration is the same. It relates to the depreciation in respect of the assessee's unit at Bhopal. The AO had denied the depreciation while passing different assessment orders in respect of all these years on the ground that unit at Bhopal was closed throughout the year(s). The orders of the AO were confirmed by the CIT(A). The Tribunal however, reversed those orders and allowed the depreciation. The Revenue feels aggrieved by the impugned order of the Tribunal, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is temporary closed for a year or so its commercial activities are in lull for that period, the assessee cannot be deprived from its claim of depreciation unless and until it is proved that the assessee has closed its business forever and had no intentions of its revival. In the instant case the assessee is regularly engaged in production activities and its unit at Bhopal was temporarily closed, but its closure for a temporary period does not disentitle the assessee from claim of depreciation thereon because it admittedly forms a part of the block of assets and other part of the block of assets were remained in use during the year. We, therefore, do not find any justification in disallowance of depreciation on this unit at Bhopal, which was temporarily closed. We, accordingly direct the AO to allow depreciation on this Bhopal unit to the assessee. We find support from the various judgments referred to by the assessee. Accordingly, this issue is decided in favour of the assessee." 6. Challenging the aforesaid approach of the Tribunal, the learned counsel for the Revenue, contended that the depreciation was allowable under s. 32 of the IT Act (hereinafter referred to as 'the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es evident that on two grounds, viz., the depreciation is allowed viz.:- (1) There was a passive user of the assets at Bhopal unit, which will be treated as "used for the purpose of business". (2) As it was a case of depreciation on block assessment (sic of assets), the assets of Bhopal unit could not be segregated for the purpose of allowing depreciation and depreciation had to be allowed on entire block of assets. Whereas the Revenue has challenged the justification on both the counts, the assessee asserts that each of them is valid. We, thus, proceed to discuss them in seriatim. (1) Whether the assets of Bhopal unit can be treated as 'used':- 10. It would be apposite to discuss the principle of law which is relevant for deciding the liability (sic eligibility) of depreciation or otherwise in a given case. For this purpose, we will refer to some of the judgments underlying the relevant principle. 11. There is no quarrel about the legal position that s. 32 of the Act deals with depreciation. It is also clear that in order to avail this depreciation, it is to be proved that the asset was "used" for the purpose of business. Immediate question that arises for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assets in question were owned by the assessee. In Machinery Manufacturers Corporation Ltd. vs. CIT (1957) 31 ITR 203 (Bom), it was observed that the expression 'used' in s. 10(2)(vi) of the Indian IT Act, 1922 (hereinafter referred to as "the old Act") corresponding to s. 32 of the Act has to be given a wider meaning. The expression includes passive as well as active user. In CIT vs. Dalmia Cement Ltd. (1945) 13 ITR 415 (Pat) and CIT vs. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom), it was observed that depreciation might be allowed in certain cases even though the machinery was not in use or was kept idle. The question whether the word 'used' would include both passive as well as active user was left open by the apex Court in Liquidators of Pursa Ltd. vs. CIT (1954) 25 ITR 265 (SC). The words 'used for the purposes of the business' are capable of a larger and a narrower interpretation. If the expression 'used' is construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, plant etc., are ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. The depreciation allowance under s. 32 is, however, a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed, if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice [see CIT vs. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj)]. 16. In the case of Capital Bus Service (P) Ltd. vs. CIT (1980) 17 CTR (Del) 155 : (1980) 123 ITR 404 (Del), this Court remarked that the words "used for the business" are capable of larger and a narrower interpretation. If the expression "used" is to be construed strictly, it can be taken as connoting or requiring the active employment or the actual working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tood in the sense that the asset is ready for use, but could not be used for part of a year or even whole year. 20. The learned counsel appearing for the Revenue, however, articulated their plea on altogether different level. Their submission was that if the property is not put to use for number of years, the assessee should (sic not) be allowed the benefit of depreciation on the purported ground that it was 'passive user'. In other words, it was argued that in the instant case the entire Bhopal unit and not a part of the said unit, was nonfunctional and assets of that unit were not put to use for number of years. A fervent plea was, thus, made that in case like this, principle of 'passive user' cannot be extended. 21. We feel that counsel for the Revenue is right in their submissions. In the instant case, the entire Bhopal unit came to a standstill and there was a complete halt in its functioning from the asst. yr. 1997-98. In that year, the AO still allowed the depreciation treating it to be a 'passive user'. However, when it was found that even in subsequent year, the Bhopal unit remained non-functional, AO(s) disallowed the depreciation. Present appeals relate to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the introduction of 'block of assets' concept in s. 2(11) by amendment made w.e.f. 1st April, 1988, the assessee was entitled to claim depreciation on the entire block of assets and it was no more open to the Revenue as to whether particular asset is put to use or not. 25. We have considered these submissions of the learned counsel for the parties and are of the opinion that the arguments of the learned counsel for the assessee have to prevail. Mr. Aggarwal, learned senior counsel for the assessee is right in his submission that the position concerning the manner in which the depreciation is to be allowed, has gone a sea change after the amendment of s. 32 by the Taxation Laws (Amendment) Act, 1986. Sec. 32(1) of the Act allows the depreciation on the WDV of the assets. 26. Sec. 2(11) of the Act defines the term 'block of assets' as under:- "2(11) 'Block of assets' means a group of assets falling within a class of assets comprising:- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed. With this amendment, individual assets have lost their identity and concept of 'block of assets' has been introduced, which is relevant for calculating the depreciation. It would be of benefit to take note of the circular issued by the Revenue itself explaining the purpose behind the amended provision. The same is contained in CBDT Circular No. 469, dt. 23rd Sept., 1986 [(1987) 59 CTR (St) 9], wherein the rationale behind the aforesaid amendment is described 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 AO 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 desegregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per s. 32(1)(iii) or taxing the balancing charge as per s. 41(2) of the IT Act necessitate the keeping of records of depreciation already ..... X X X X Extracts X X X X X X X X Extracts X X X X
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