Appellant entitled to block asset depreciation despite individual use: Court clarifies tax law

Sony India Pvt. Ltd. Versus Commissioner of Income Tax

Sony India Pvt. Ltd. Versus Commissioner of Income Tax - TMI Issues Involved:
1. Entitlement to depreciation under Section 32 of the Income Tax Act, 1961, for the balance written down value relating to a unit forming part of the block of assets.
2. Entitlement to depreciation for assets sold prior to the end of the accounting year but not used during the assessment year.

Issue-wise Detailed Analysis:

1. Entitlement to Depreciation under Section 32:
The appellant, a subsidiary of Sony Corporation, Japan, sold its Daru Hera unit and claimed depreciation of Rs. 4,42,22,475/-. The Assessing Officer (AO) disallowed the claim, stating the assets were neither owned nor used by the appellant for business purposes during the relevant year. The Income Tax Appellate Tribunal (ITAT) upheld this decision, noting that the assets were part of a block of assets that ceased to exist upon transfer. The ITAT emphasized that the appellant failed to establish that the manufacturing and trading activities constituted a composite business. Consequently, the provisions of Section 32 regarding ownership and usage were invoked, leading to the denial of depreciation.

2. Depreciation for Assets Sold Prior to the End of the Year:
The appellant argued that with the introduction of the Finance Act, 1988, and changes to Sections 43 and 50, the tax treatment of a block of assets should not depend on whether the entire block or parts of it were sold or transferred. The appellant cited precedents from CIT v. Oswal Agro Mills Ltd., CIT v. Ansal Properties and Infrastructure Limited, and CIT v. Bharat Aluminium Co. Ltd. The Court noted that Section 50 applies when a block of assets ceases to exist due to the transfer of all assets within that block. It was observed that the AO and appellate authorities did not find that the block of assets ceased to exist or that there was a surplus after adding the elements mentioned in Section 50.

Relevant Provisions and Interpretations:
- Section 2(11) defines "block of assets" as a group of assets within a class, comprising tangible and intangible assets with the same depreciation rate.
- Section 32(1) allows depreciation on tangible and intangible assets owned and used for business purposes.
- Section 43(6)(c) defines "written down value" for a block of assets, adjusted for acquisitions and disposals during the year.
- Section 50 deals with the computation of capital gains for depreciable assets, stating that if a block of assets ceases to exist due to the transfer of all assets, the income from such transfer is deemed to be capital gains.

Court's Analysis:
The Court referred to its previous rulings in Oswal Agro Mills Ltd. and Ansal Properties, which highlighted that the concept of "block of assets" simplifies depreciation calculations and eliminates the need for detailed record-keeping for each asset. The legislative intent behind the amendments was to streamline the process and avoid the cumbersome task of maintaining separate records for each asset. The Court rejected the Revenue's contention that each asset must be used during the relevant assessment year to claim depreciation, noting that this would contradict the purpose of the amendments.

Conclusion:
The Court concluded that the appellant is entitled to depreciation on the block of assets, even if individual assets were not used during the assessment year or were sold before the end of the year. The reliance on Allied Electronics and Magnetics Ltd. v. CIT was deemed unhelpful to the Revenue, as it did not consider the amendments that introduced the concept of block assets. Consequently, both questions of law were answered in favor of the appellant, and the appeals were allowed.