2002 (6) TMI 168 - AT - Income Tax

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. ... Depreciation on ponds - comparison between the provisions for allowance of depreciation and terminal depreciation - concept of 'block of assets' for depreciation - entitlement to terminal depreciation to the extent of the value of the entire W.D.V - HELD THAT:- In the case of the assessee, as no money whatsoever was payable to him on handing over the ponds constructed on leased land to the owners of land, there can be no amount whatsoever that can be reduced from the block of assets. Hence, the block continues at its written down value. Once an asset has been included in the block, it loses its individual identity and what we are concerned is only the WDV of the block and nothing else. The assessee, in our considered opinion has rightly not claimed revenue loss for assets surrendered, nor short-term capital loss under section 50(2). The claim of the assessee is in accordance with the intention of the scheme of depreciation consequent to the introduction of block of assets concept and this is clear from the Circular of the board supra. The distinction between the procedure of granting depreciation allowance and the terminal depreciation in case of assets scrapped, would also be clear from the present provisions of section 32(1)(iii), which have been introduced w.e.f. 1-4-1988, providing for terminal depreciation in case of asset belonging to business of power generation. In this class of assets, i.e. assets belonging to power generation, individual identity of the asset is retained as was the case prior to the introduction of the concept of 'block of assets.' In respect of such assets, in case an asset is sold or discarded or scrapped, the difference between the original cost or the W.D.V. and the scrap value or sale value has to be allowed as deduction in cases of shortfall. Similarly, in case of a surplus it is taxed under the re-introduced section 41(2) as balancing charge. As already stated, these two sections have not been made applicable to block of assets classified as clause (ii) under section 32(1). As to the question of ownership vis-a-vis allowance of depreciation, section 32(1A) of the Income-tax Act, 1961 as it originally existed prior to the introduction of the concept of 'block of assets' provided for depreciation allowance in respect of any addition, renovation, extension of or improvement to a building which the assessee does not own but in respect of which he holds lease or other right of occupancy. After the introduction of the concept of 'block of assets' this provision has been omitted and Explanation 1 after the second proviso to section 32(1)(iii) has been inserted, which also provides for depreciation in situations above by deeming that the building is owned by the assessee. Hence, the revenue had allowed depreciation on the ponds constructed on the leased lands in earlier years on the same principle. The decision cannot be other-wise now. The fact that the assessee has not claimed depreciation for a particular year does not affect our decision in this case as the Honourable Supreme Court has held that claim for depreciation is not mandatory, in the case of Mahindra Mills. From the above, it is clear that as long as an asset forms part of the block of assets and the block continues to exist, provisions of section 50 do not come into play and depreciation has to be allowed on that portion of the W.D.V. of the assets which have been scrapped, after reducing the scrap value from the block of assets. This view is fortified by the judgments of Jabalpur Bench of the ITAT in the case of Packwell Printers,[1996 (5) TMI 112 - ITAT JABALPUR], the judgment of the Ahmedabad Bench of the ITAT in the case of Inductotherm (India) Ltd [1999 (6) TMI 45 - ITAT AHMEDABAD-C] and the judgment of the Patna Bench of the ITAT in the case of Parikh Engg. & Body Bldg. Co. Ltd.[1998 (7) TMI 142 - ITAT PATNA]. Therefore, in view of the decisions and interpretation of the concept of 'block of assets' depreciation on ponds which is forming part of the block of assets has to be allowed as deduction even though these ponds were discarded and not used and not owned by it during the assessment years in question, as the assessee was not entitled to any scrap value whatsoever, consequent to discarding. Thus, we uphold the claim of the assessee for depreciation for both the assessment years and set aside the order of the ld. CIT(A). In the result, appeals of the assessee are allowed. 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 pondsThe 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 depreciationThe 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.