Tribunal grants depreciation on closed division assets, broadens 'used' definition under block system

The Tribunal allowed the appeal, granting the claimed depreciation on the assets of the closed Surat division. The Tribunal interpreted the term "used" in a broader sense under the block system, emphasizing that assets in the block remain eligible for depreciation even if not actively used. The closure of the Surat division did not disqualify the assets from depreciation as they were part of the block used for business purposes.

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Issues Involved:
Disallowance of proportionate depreciation on account of the closure of one unit out of two units of the assessee.

Issue-wise Detailed Analysis:

Disallowance of Proportionate Depreciation:
The sole issue in this appeal was the disallowance of proportionate depreciation of Rs. 7,27,249 due to the closure of the Surat division of the assessee's business. The assessee had two divisions: one at Dombivili for dyeing (Swati Dyeing) and the other at Surat for yarn texturising (Swati Polyester). The Surat division had been closed for two to three years, but the assessee claimed depreciation on its assets. The Assessing Officer disallowed this claim, and the CIT(A) confirmed the disallowance, stating the assets were not used during the relevant accounting year.

Arguments by the Assessee:
The learned AR argued that after the introduction of the block system for allowing depreciation, depreciation is allowable on the entire block even if some assets within the block have not been used. The AR referred to CBDT Circular No. 469, dated 23rd September 1986, and several judicial precedents to support this contention, stating that the word "used" in Section 32 should be interpreted as the use of the block as a whole, not individual assets.

Arguments by the Revenue:
The learned DR contended that the term "used" in Section 32 denotes actual use for the purpose of business, and assets not used at all are not eligible for depreciation. The DR cited various judicial decisions to support the argument that the assets must be actively used in the business to qualify for depreciation.

Tribunal's Analysis:
The Tribunal examined the concept of depreciation on block assets, the statutory provisions, and relevant judicial interpretations. It was noted that the block system was introduced to simplify the process of claiming depreciation and reduce elaborate bookkeeping. The Tribunal emphasized that under the block system, once an asset is included in the block, it remains part of the block until it is sold, discarded, demolished, or destroyed.

Interpretation of "Used for the Purposes of the Business":
The Tribunal referred to various judicial decisions to interpret the term "used" in a broader sense, encompassing both active and passive use. It was noted that machinery kept ready for use or under repair can still be considered "used" for the business. The Tribunal highlighted that the concept of depreciation on block assets allows depreciation on the entire block, and the existence of an asset in the block itself amounts to its use for business purposes.

Conclusion:
The Tribunal concluded that the assets of the closed Surat division, being part of the block of assets, were eligible for depreciation. The block of assets was used for the business, and the assets of the closed unit did not fall under the exceptions where depreciation would be disallowed. Therefore, the assessee was entitled to the claimed depreciation.

Final Order:
The appeal of the assessee was allowed, granting the claimed depreciation on the assets of the closed Surat division.

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