Depreciation on "block of assets" where some units weren't used: s.32/s.43(6) claim allowed; s.38(2) inapplicable.

Depreciation under s.32 read with s.43(6) for AY 2003-04 was disputed on the ground that certain units within a "block of assets" were not used during the relevant year. The HC held that, post 01.04.1999, depreciation is allowable with reference to the block, not individual assets or their attribution to specific units; if the assessee's business continues and the block is used, the entire block is treated as "put to use," with adjustments only to the block's written down value for additions/deletions. The HC further held s.38(2) was inapplicable absent any non-business or personal use. Depreciation was allowed; the appeal was decided in favour of the assessee.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether depreciation could be disallowed or proportionately reduced on the ground that certain plants/units were not operated during the relevant year, when the underlying assets formed part of a "block of assets" and the assessee's business continued.

(ii) Whether Section 38(2) justified restricting depreciation in the circumstances of the case.

(iii) Whether the Court should interfere where the same depreciation issue had already been decided in favour of the assessee for an earlier year and that decision had attained finality.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Depreciation on non-operated units when assets are within a "block of assets"

Legal framework (as discussed by the Court): The Court examined the statutory "block of assets" concept introduced with effect from 01.04.1988, and the definition of "block of assets" (including tangible and intangible assets) as applicable from 01.04.1999. The Court also proceeded on the scheme that depreciation is computed with reference to the block, with adjustments to the block value when the composition changes.

Interpretation and reasoning: The Court held that, under the block-of-assets regime, depreciation is granted with reference to the block rather than to individual assets or individual units/plants. Therefore, "attribution" of depreciation to specific units that were not operated does not arise. The Court accepted that, so long as the assessee continues in business (an admitted fact), the assets in the block are regarded as "put to use" for purposes of allowing depreciation on that block, notwithstanding that particular units were not operated for the relevant period and were sold later.

Conclusion: Proportionate reduction/disallowance of depreciation on the premise that certain units were not operated was not sustainable once those assets formed part of the relevant block of assets and the block was in use through the continuing business. Depreciation was to be allowed on the block, subject to the statutory block-adjustment mechanism.

Issue (ii): Applicability of Section 38(2) to restrict depreciation

Legal framework (as discussed by the Court): The Court considered Section 38(2), which permits restriction of deductions where machinery (or other assets) is not exclusively used for the purposes of business or profession, to a fair proportion determined having regard to the user for business.

Interpretation and reasoning: The Court found Section 38(2) inapplicable because there was no dispute that the assets were used exclusively for the assessee's business or profession. The case was not one of mixed or personal/non-business use; rather, the Revenue's objection was based on non-operation of certain units.

Conclusion: The argument to restrict depreciation by invoking Section 38(2) was rejected.

Issue (iii): Effect of earlier year's final decision on the same issue

Interpretation and reasoning: The Court noted that the identical issue had arisen for the earlier assessment year and had been decided in favour of the assessee by the Tribunal, and that decision had attained finality as it was not challenged further. The appellate authorities had followed that earlier final determination.

Conclusion: This finality provided an additional ground to decline interference and to uphold the allowance of depreciation on the block (with the direction that statutory adjustments to the block value be made where applicable when computing depreciation).

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