TaxTMI 
TaxTMI 
2009 (7) TMI 177
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....hat the learned authorities below erred in not holding that when even a single asset can possibly form a 'block of assets' within the meaning of s. 2(11) of the Act, the assessee had gainfully claimed loss in respect of Gurgaon office structure as short-term capital loss in terms of s. 50(2) of the Act. 3. That the learned authorities below erred in not holding that within a 'class of assets' there can be independent 'group of assets' identifiable by their nature and use having the same rate of depreciation, each such group being a block of assets in the said class of assets. 4. That the learned authorities below erred in not holding that capital expenditure represented by Gurgaon office structure on which depreciation was allowed by virtue of a deeming provision of the Act was for a limited purpose, only and therefore within a class of assets it formed an independent 'group' or 'block'. 5. That the learned CIT(A) erred in holding that Note 3 to the depreciation table only clarified the applicant rate of depreciation and that it was of no significance in determining whether or not such assets comprised a block within themselves." 3. The relevant facts giving rise to the....
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....is to be treated as the building owned by the assessee entitling the assessee to claim depreciation thereupon as owner. 4. In the previous year relevant to the asst. yr. 2004-05, which is under consideration, the assessee vacated the said lease premises and handed over the possession of the premises to the landlord together with all the additions or alterations made thereto by the assessee by way of capital expenditure incurred thereupon. Thus, so far as the assessee is concerned, it was the constructive transfer of the additions or improvements made to the leased premises to the lessor/owner/of the said premises. The WDV of said structure as on 2003-04 as Rs. 61,79,040. After adjusting the amount it received towards the capitalized value of the leased premises against the opening amount of the WDV of the leased premises, the assessee wrote off the balance amount of Rs. 56,79,040 in its accounts as "assets written off' and claimed short-term capital loss to that extent. However, the AO disallowed the assessee's said claim short-term capital loss of Rs. 56,79,040 and adjusted the shortfall against the aggregate WDV of block of assets of "building" comprising of (i) building owned....
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....hort-term capital loss and we pray that it may be allowed in arriving at the assessed income." 6. The AO rejected the assessee's claim by observing and holding as under: "7. I have gone through the submissions of the assessee but do not find any merit in the same because of the following reasons: (a) Sec. 2(11) of the IT Act defines block of assets as a group of assets falling within a class of assets comprising tangible and intangible assets in respect of which the same percentage of depreciation is prescribed. Thus, the acid test for an asset to fall in a block of assets is the rate of depreciation allowable as per IT Rules, 1962 and not whether it is acquired on ownership basis or leasehold basis. (b) In the present case, a perusal of the balance sheet and its annexures shows that after the Gurgaon office structure is discarded by the assessee, the same class of assets under the head 'Building' in the schedule of fixed assets continues to exist as per last balance sheet on which same rate of depreciation, i.e., 10 per cent is applicable. During the year the assessee has claimed depreciation of Rs. 1,06,33,669. It is evident, therefore, that the block of assets which ....
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....ts P&L a/c. The AO disallowed the claim of Rs. 51,11,136 (after allowing depreciation) on the ground that s. 2(11) of the IT Act defines block of assets as a group of assets falling within a class of assets comprising tangible and intangible assets in respect of which the same percentage of depreciation is prescribed. Since, in the present case, the block of the assets under the head 'Office premises'/'Building' had not ceased to exist, the provisions of s. 50(2) of the IT Act were not applicable. Hence, the amount of Rs. 56,79,040 debited in the P&L a/c was added back and deprecation @ 10 per cent amounting to Rs. 5,67,904 was allowed. The contention of the appellant is basically that Gurgaon office structure comprises a distinct block of assets on its own that had ceased to exist. This contention of the appellant is not acceptable for the simple reason that no separate block by the name 'office structure' has been prescribed. It has to be a part of one of the blocks as defined under s. 2(11) and listed in Part A(I) of Appendix I. The other items have to classified as 'furniture and fittings' or 'purely temporary erections'. So far as reference to Note 3 to the depreciation table ....
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.... the assessee are separate block of assets. He further submitted that Gurgaon office structure even though falling in a broad class of "building" is a separate block itself as it is only a deemed building owned by the assessee by virtue of provisions contained in Expln. 1 to s. 32(1) of the Act and not building actually owned by the assessee because the capital expenditure incurred by the assessee on leased premises by way of improvements and alterations thereto by no stretch of imagination could be considered to be a building by themselves being owned by assessee. In support of the contention that Gurgaon office structure and other buildings actually owned by the assessee are to be considered separate and independent block of assets, the learned counsel for the assessee has made a reference to the Note 3 appended to the old Appendix I under r. 5 of the IT Rules. He, therefore, submitted that Gurgaon office structure is to be considered as a different and separate block of assets other than the block of assets comprising of buildings actually owned by the assessee. He, therefore, submitted that the money received by the assessee in respect of leased premises surrendered to its land....
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....as been made by the assessee and the said capital expenditure or structure or work has been considered to be a building owned by the assessee vide Expln. 1 to s. 32(1) of the Act, are separate block of assets falling within the same class of assets for the purpose of granting depreciation thereupon, and determining WDV thereof and consequential surplus or shortfall on their transfer, etc. 18. In the present case, the assessee had a building owned by it having WDV amounting to Rs. 1,30,98,300 as on1st April, 2000. During financial year beginning from1st April, 2000to31st March, 2001, the assessee had taken certain premises at Gurgaon on lease and had incurred capital expenditure by way of additions or alterations or doing certain works in or in relation to the said leased premises. The total such expenditure incurred on leased premises during financial year 2000-01 was Rs. 80,29,941. Both the assets falling within block of building were used for office purposes. The assessee claimed depreciation @ 10 per cent in respect of the building owned by it as well as in respect of the Gurgaon office structure, in respect of which capital expenditure incurred by the assessee towards constr....
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....---------------------------------------------- 19. Similar depreciation schedule has been prepared by the assessee in subsequent assessment years including the assessment year under consideration by including, building as well as Gurgaon office structure under the main Block "A" in respect of which depreciation @ 10 per cent has been claimed by the assessee and also allowed by the AO. In the schedule of depreciation for income-tax purposes, the assessee has included furniture and fixtures under Block B and included vehicles, air-conditioners, refrigerators, typewriters, office equipment, intercom, telephone, fax, xerox copier, security alarm system, cellular phone and pager, safe and franking machines under Block 'C' giving individual WDV etc. of each asset as well as aggregate WDV of each Blocks 'A', 'B' and 'C'. In the aforesaid schedule of depreciation, both the items of building, that is, building owned by assessee and Gurgaon office structure, which has been considered to be a building owned by the assessee, have been included under Block "A", and depreciation has also been claimed at the same rate of 10 per cent and total WDV of Block 'A' has been determined including indi....
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....vious year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the WDV as so increased. 23. Here, we would clarify that we have taken a note of definition of WDV in case of any block of assets as it is applicable to the asst. yr. 1989-90 and thereafter, and the other part of s. 43(6)(c), which is not relevant and material to decide the controversy in the present case, has been ignored by us. 24. From the definition of block of assets given under s. 2(11) of the Act and the definition of WDV of block of assets as given under Expln. 2 to s. 32(1) r/w cl. (c) of sub-s. (6) of s. 43, it is clear that the group of assets falling within a class of assets comprising tangible assets, being building machinery, plant or furniture, and intangible assets being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed are described as "block of assets", and the WDV in the case of block of assets shall be the aggregate of the WDV of all the assets falling within that block of assets, as wor....
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.... the purpose of s. 32(1) of the Act. In this view of the matter, there is no doubt that the work or structure done by the assessee in or in relation to the leased building has to be treated as "a building owned by the assessee" for the purposes of s. 32(1) of the Act and also for any other provisions, which are incidental thereto or inevitable corollaries thereof. It is well-settled that while giving effect to legal fictions, all facts and circumstances incidental thereto and inevitable corollaries thereof have to be assumed. When the law required that an imaginary state of affairs should be treated as real, then unless prohibited from doing so, one must also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanies it. The s. 32(1) provides for a deduction in respect of depreciation in the case of any block of assets at such percentage on the WDV thereof as may be prescribed; and, for the purpose of s. 32(1), Expln. 1 thereto treats the structure or work done by the assessee in or in relation to the leased building as a building owned by the assessee. Therefore, as a natural or inevit....
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....rofession carried on by the assessee and depreciation has been allowed in respect of both the said buildings at the same rate of 10 per cent 26. The assessee has relied upon Note 3 appended to old Appendix I under r. 5 of IT Rules in support of the contention that the Gurgaon office structure, which is deemed building owned by assessee, and building actually owned by assessee are to be considered as different block of assets for the purpose of allowing depreciation or for the purpose of allowing capital loss under s. 50(2) of the Act and/ or otherwise business deduction under s. 32(1)(iii) of the Act. Note 3 to Appendix I under r. 5 of IT Rules reads as under: "3. In respect of any structure or work by way of renovation or improvement in or in relation to a building referred to in Expln. 1 of cl. (ii) of sub-s. (1) of s. 32, the percentage to be applied will be the percentage specified against sub-item (1) or (2) of Item I as may be appropriate to the class of building in or in relation to which the renovation or improvement is effected. Where the structure is constructed or the work is done by way of extension of any such building, the percentage to be applied would be such ....
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....nt in or in relation to a building referred to in Expln. 1 of sub-s. (1) of s. 32. For the purpose of identifying the class of assets comprising different assets of similar nature, the way or manner through or by which the assessee has been considered to be owner thereof is not material, but what is material is the nature and class of assets. We, therefore, do not find any conflict between the clarification given under Note 3 of Appendix I and the definition of block of assets given under s. 2(11) r/w Explns. 1 and 2 of s. 32(1) of the Act. The interpretation given to the Note 3 of Appendix I by the learned counsel for the assessee seems to be misconceived, insofar as the assessee's contentions that any structure or work done by assessee by way of renovation or improvement or extension in or in relation to the leased premises as contemplated in Expln. 1 of sub-s. (1) of s. 32 is to be treated as separate block of assets distinct and different from same class of assets, which is otherwise owned by the assessee, is concerned. Thus, the said Note 3 is also of no help to the assessee so that the actual building owned by the assessee used for office purposes and the Gurgaon office struc....