2010 (12) TMI 947 - HC - Income Tax

Depreciation Allowed on Block of Assets Despite Individual Unit Being Unused; Amended s.32 and CBDT Circular 469 Apply

HC allowed the assessee's claim for depreciation on an asset forming part of a block of assets despite that particular unit remaining closed and unused. ... Depreciation under s. 32 - concept of 'block of assets' - CBDT Circular No. 469 - AO asked the assessee to explain on what basis the assessee was claiming depreciation on this unit, which remained closed - assessee had submitted that the unit at Bhopal remained dormant and could not function due to various reasons - Held that:- As per amended s. 32, deduction is to be allowed in the case of any block of assets, such percentage on the WDV thereof as may be prescribed as per Circular No. 469, dt. 23rd Sept., 1986 thus it is difficult to accept the submission of the Revenue that for allowing the depreciation, user of each and every asset is essential even when a particular asset forms part of 'block of assets'. It is also essential to point out that the Revenue is not put to any loss by adopting such method and allowing depreciation on a particular asset, forming part of the 'block of assets' even when that particular 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 Issues Involved:1. Whether the assets of the Bhopal unit can be treated as 'used' for the purpose of business.2. Whether depreciation is allowable on the entire block of assets even if a particular asset within that block is not used.Issue-Wise Detailed Analysis:1. Whether the assets of the Bhopal unit can be treated as 'used' for the purpose of business:The primary issue in these appeals is whether the assets of the Bhopal unit, which remained closed throughout the year(s), can be treated as 'used' for the purpose of business, thereby qualifying for depreciation under Section 32 of the IT Act.- Legal Principle: Section 32 of the IT Act stipulates that for an asset to qualify for depreciation, it must be 'used' for the purpose of business. The term 'used' has been interpreted by various judgments to include both active and passive use. Passive use implies that the asset is kept ready for use, even if it is not actually used during the assessment year.- Relevant Judgments: The court referred to several judgments to elucidate the meaning of 'used'. In CIT vs. Refrigeration and Allied Industries Ltd., it was held that passive user, where an asset is kept ready for use, qualifies for depreciation. Similarly, in Capital Bus Service (P) Ltd. vs. CIT, it was observed that the term 'used' includes both active and passive use.- Tribunal's Findings: The Tribunal allowed the depreciation on the Bhopal unit by stating that the unit was temporarily closed and formed part of the block of assets. The Tribunal held that temporary closure does not disentitle the assessee from claiming depreciation.- Revenue's Argument: The Revenue argued that the assets must be actively used or at least kept ready for use for depreciation to be allowed. They contended that the Bhopal unit had been non-functional for six years, which cannot be considered as passive use.- Court's Conclusion: The court agreed with the Revenue's argument, stating that the term 'used' cannot be stretched to cover non-use for several years. The court emphasized that the Bhopal unit's prolonged non-functionality disqualifies it from being considered as 'used' for the purpose of business.2. Whether depreciation is allowable on the entire block of assets even if a particular asset within that block is not used:The second issue pertains to the concept of 'block of assets' and whether depreciation can be claimed on the entire block even if a particular asset within that block is not used.- Concept of Block of Assets: After the amendment to Section 32 by the Taxation Laws (Amendment) Act, 1986, depreciation is allowed on the entire block of assets rather than on individual assets. Section 2(11) defines 'block of assets' as a group of assets falling within a class of assets with the same depreciation rate.- Tribunal's Findings: The Tribunal accepted the assessee's argument that after the introduction of the 'block of assets' concept, it is not permissible to segregate a particular asset for depreciation purposes. Depreciation should be allowed on the entire block of assets.- Revenue's Argument: The Revenue contended that the conditions laid down in Section 32 must be satisfied for each asset, and the concept of 'block of assets' is merely a mode of calculation.- Court's Conclusion: The court upheld the Tribunal's conclusion, stating that with the amended provisions, depreciation is to be allowed on the block of assets as a whole. The court noted that this amendment was intended to simplify the process and reduce the need for maintaining detailed records for each asset. The court also highlighted that the Revenue is not at a loss because any gain from the sale of an asset within the block would be taxed as short-term capital gain.Final Judgment:The court dismissed the appeals, upholding the Tribunal's decision to allow depreciation on the Bhopal unit as part of the block of assets. The court emphasized that the legislative intent behind the amendment was to simplify the process of claiming depreciation and that the Revenue's argument would defeat this purpose. The court concluded that the assessee is entitled to claim depreciation on the entire block of assets, even if a particular asset within that block is not used in the relevant assessment year.