Depreciation on leasehold ponds discarded and handed to landowners without payment-block of assets rule under s. 32 upheld.

Depreciation on ponds constructed on leased land was disputed after the ponds were discarded and handed over to the landowners without any consideration. The ITAT held that once an asset forms part of a "block of assets" under s. 32(1)(ii), it loses individual identity; unless any money is payable on transfer/discarding, nothing can be reduced from the block and s. 50 is not attracted. Ownership for depreciation is satisfied by the deeming fiction applicable to leasehold improvements, and prior allowance of depreciation on the same basis bound the Revenue; non-claim in one year was immaterial as depreciation is not mandatory (Mahindra Mills). Depreciation on the WDV of the block, including the discarded ponds, was allowed; CIT(A) was set aside and the appeals were allowed.

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Issues Involved:
1. Disallowance of depreciation on ponds.
2. Application of the concept of "block of assets" for depreciation.

Summary:

Issue 1: Disallowance of depreciation on ponds

The CIT(A) erred in sustaining the disallowance of depreciation of Rs. 9,86,136 made by the Assessing Officer. The CIT(A) should have recognized that once the value of an asset forms part of a block of assets, depreciation is to be allowed on the entire block irrespective of the use of any item within the block during the assessment year. The ponds, although not used during the assessment years 1997-98 and 1998-99, formed part of the block of assets, and thus depreciation should not have been disallowed. The CIT(A) failed to consider the decisions of the Jabalpur and Ahmedabad Benches of ITAT in the cases of Packwell Printers v. Asstt. CIT [1996] 59 ITD 340 and Inductotherm (India) Ltd. v. Dy. CIT [2000] 73 ITD 329, which support the allowance of depreciation on such assets.

Issue 2: Application of the concept of "block of assets" for depreciation

The assessee, a partnership firm engaged in shrimp farming, had constructed ponds on leased land and claimed depreciation on these ponds as part of the block of assets. The Assessing Officer disallowed the depreciation on the grounds that the ponds were no longer owned or used by the assessee after the land was returned to the lessors. The CIT(A) upheld this disallowance, citing that the ponds were not used for business purposes and were returned without any consideration.

The ITAT, however, emphasized the concept of "block of assets" introduced by the Taxation Laws (Amendment) Act, 1986. According to Circular No. 469 dated 23-9-1986, once an asset forms part of a block, it loses its individual identity, and depreciation is to be allowed on the entire block. The ITAT referred to the judgments of the Jabalpur Bench in Packwell Printers and the Ahmedabad Bench in Inductotherm (India) Ltd., which support the allowance of depreciation on the entire block of assets, even if individual assets within the block are not used or are discarded.

The ITAT concluded that the depreciation on ponds, which formed part of the block of assets, should be allowed as deduction even though the ponds were discarded and not used during the assessment years in question. The ITAT set aside the order of the CIT(A) and allowed the appeals of the assessee.

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