AI Drafter 
TaxTMI 
TaxTMI 
2009 (12) TMI 667
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....hat the assessee had claimed depreciation on the assets of Surat Division, which was closed. He disallowed the claim of depreciation of the assessee and the same has been confirmed by the CIT(A) observing that the assets were not used during the relevant accounting year as the Division at Surat was closed. 4.The learned AR submitted that after insertion of block system for allowing depreciation, the depreciation is allowable on entire block even some of the assets of block have not been used. The learned AR drew our attention on CBDT Circular No. 469, dated 23rd September, 1986, which has been issued by the CBDT at the time of insertion of block system of depreciation by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986. 4.1 The learned AR further submitted that by new scheme for allowing depreciation from assessment year 1989-90, section 43(6) has been inserted which provides that depreciation shall be worked out on WDV as per the above section. The learned AR further submitted that the word 'used' appear in section 32 mean the use of block as a whole not an individual asset. In support of his contention, the learned AR has relied upon the following decisi....
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....year, it was not entitled to depreciation in respect of those vehicles - Held, yes 5.4 Dinesh Kumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768 (Bom.) - Short note - Vehicle, kept ready for use, but not actually used, is not entitled to depreciation - Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of - Whether word 'used' denotes actually 'used' for purposes of business and not merely ready for use - Held, yes - Whether where vehicle was not actually used, but it was kept ready for use, assessee was not entitled to claim the benefit of depreciation on such assets - Held, yes 6. After hearing the case, it has come to the notice that there is a decision of ITAT Special Bench, Chandigarh in the case of Gulati Saree Centre v. Asstt. CIT [1999] 71 ITD 73 on the issue. Therefore, the case was re-fixed to hear to both the sides on the issue. 6.1 The learned AR reiterated its submissions, which were made earlier and submitted that in assessment year 2006-07, the assessee has sold assets of the Unit-II and shown short-term capital gains calculated in accordance with section 50 of the Act. The short-term capital gain has been accepted by the Department under....
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....e decision of ITAT Special Bench. The learned DR submitted that there were two units of the assessee, which were having common management; common books of account, common funds, therefore, both the units constitute the same business. When the assessee did not use the assets of Unit-II, the assessee is not entitled to depreciation. The learned DR in support of his contention relied upon the judgment of Patna High Court in the case of Chhabirani Agro Industrial Enterprises Ltd. v. CIT [1991] 191 ITR 226 . The learned DR further submitted that the Hon'ble jurisdictional High Court in the case of Dinesh Kumar Gulabchand Agrawal (supra) has clearly held that 'use' in section 32 denotes actually used for the purpose of the business. Since in the case under conside-ration, there was no use of the assets, therefore, depreciation has been rightly disallowed. 7. We have heard the learned representatives of the parties and perused the record as well as gone through the decisions cited. In principle we agree with the ratios laid down in the decisions cited by learned DR, as those decisions have been decided on facts of respective cases and under the circumstances where there was no concept ....
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....actors of use and time. These have undoubtedly aided the assessee to earn "income" from such business or profession which is subjected to the levy of tax. Unless provision was made for proper recompense of such diminution in the vigour, strength, capability, etc., the apparent profits from the business, profession, etc., would not give a correct picture. Allowance for depreciation is borne out of necessity for such recompense. "Depreciation", according to Webster's New World Dictionary, means "a decrease in value of property through wear, deterioration or obsolescence: the allowance made for this in book-keeping, accounting, etc.,". Depreciation is, the inherent decline in the value of an asset from any cause whatsoever (as observed by William Pickles in Accountancy, page 74). Depreciation is the diminution which takes place in the value of a wasting asset despite the amount expended on it in repairs (as stated in The Business Encyclopaedia, Volume II, page 365). Depreciation is the measure of the effective life of an asset owing to use or obsolescence during a given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effecti....
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.... purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause ( ii) [or clause (iia)], as the case may be :] [Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed.] Explanation.-For the purposes of this proviso,- (a).................................. (b)........................... [Provided also .............. [Provided also............. . [Explanation 1.-.................... Explanation 2 [Explanation 3.-........................... Explanation 4.-.................. [Explanation 5.-.................. Pr....
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....assets" means a group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed." 7.3.2 As per the above definition, "block of assets" means (i) group of assets, (ii) which falls within a class of assets, being building, machinery, plant or furniture, (iii) in respect of which same percentage of depreciation is prescribed. In section 2(11), there is neither any explicit nor implied condition that the asset should be used for the purpose of business during the year under consideration. The user of the asset is important for the purpose of actual allowability of the depreciation, but not for determining whether the asset falls within the block of assets or not. This shows that the main object of introducing the block of assets concept was only to reduce time and effort spent in detailed record maintenance. 7.4 "written down value" 7.4.1 The other terms relevant to be examine is "written down value" which is provided in clause (c) of section 43(6) of the Act. Clause (c) of section 43(6) reads as under :- "43(6) "Written down value" means- (a) ** ** ** ....
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....tion to the said preceding previous year. All other situations of changes in block of asset are being taken care by respective provisions of the Act. The different changing situations and related provisions for depreciation on block of asset are discussed as under :- 7.6.2 Purchase of new asset. 7.6.2.1 When any new asset is purchased, for getting depreciation allowance the assessee is to satisfy following two basic conditions as laid down in section 32 of the Act : (i)That asset is owned, wholly or partly, by the assessee. This condition can be checked and verified then and there at the time of purchases of asset itself. (ii)That asset is used for the purposes of the business or profession. As regard this condition it is relevant to state that business profit for the purpose of income-tax is to be calculated in accordance with books of account maintained on the basis of financial year. All the adjustments in books of account including depreciation are to be made only at the end of the year, therefore, by that time an assessee can ascertain the situation whether the asset purchased has been used for the purpose of business or not. Whether the proviso to sect....
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....n on block of asset, the Board issued a Circular No. 469, dated 23-9-1986 reported in 162 ITR Statutes page 21 and clarified that the objective underlying the terminal adjustment is to ensure that the total depreciation in relation to any particular item of asset is limited to 100 per cent. This is achieved by the existing provisions of section 32(1)(iii) allowing a deduction for the shortfall in the year of sale, etc. Conversely section 41(2) of the Income-tax Act provides for taxing in the year of sale, etc., the excess depreciation allowed in the past. Because of the introduction of the system of allowing depreciation on blocks of assets at enhanced rates, both these provisions have lost their relevance and, hence, they have been omitted by the Amending Act. Under the new system, the moneys payable in respect of assets sold, discarded, demolished or destroyed will be reduced from the written down value of the block. The existing provisions of sub-sections (2) and (2A) of section 41 of the Income-tax Act and the Explanation there-under relating to balancing charge in respect of discarded assets have been omitted. Both the above situations purchase of new asset and sold, discarded....
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....year 5,52,500 -The actual cost of the new asset acquired during the 2,50,000 previous year 8,02,500 Less : Sale proceeds in respect of the assets sold 2,00,000 Rs. WDV of the block for the assessment year 1988-89 6,02,000 Depreciation for the assessment year 1988-89 at 2,00,667 33 1/3 per cent of Rs. 6,02,000 WDV for the assessment year 1989-90 4,01,333 7.8 Asset not exclusively used for the purposes of the business or profession 7.8.1 Section 38(2) of the Act deals with this situation of Asset not exclusively used for the purposes of the business or profession, which reads as under :- "(2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-clause (ii) of clause (a ) and clause (c) of section 30, clauses (i) and (ii) of sections 31 and 36 [clause (ii) of sub-section (1)] of section 32 shall be restricted to a fair proportionate part thereof which the 37 [Assessing] Officer may determine, having regard to the user of such building, machinery, plant or fur....
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....separately worked out and details of vehicles were also given. Thus, it was held that the provisions of section 38(2) had been rightly invoked by the Commissioner (Appeals) and he was right in sustaining the disallowance out of depreciation as made by the Assessing Officer. 7.8.5 In principle we respectfully agree with the finding of the ITAT Special Bench Chandigarh that even after introduction of the concept of block of assets the individual assets is identifiable and under the circumstances that cars owned by the assessee-firm were being used for personal purposes of the partners also, disallowance of part depreciation was justified. But this decision of ITAT Special Bench Chandigarh does not help to the revenue as in the case under consideration assets remained in block of assets and were not used for non-business purposes like personal use, etc. 7.9 Depreciation and capital gain on transfer of asset 7.9.1 Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act. The particulars of....
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....value of the block of assets at the beginning of the year24,000 (Rs. 10,000 + 9,000 + 5,000) (c)actual cost of the assets acquired during the Previous year7,000 (Rs. 4,000 + 3,000) Aggregate of (a), (b) and (c )31,800 (Rs. 800 + 24,000 + 7,000) Excess - Rs. 38,000 less 31,800 = Rs. 6,200 to be taxed as short-term capital gains under clause (1) of section 50. (vi)If in that previous year the assessee purchased two more assets A and B forming part of same block for Rs. 7,000 and Rs. 8,000 respectively. Short-term capital gains under clause (1) of section 50 cannot be calculated as assets worth more than Rs. 6,200 which purchased is forming part of block of assets. On such purchase being made aggregate of (a), (b), (c ) would exceed Rs. 38,000 and, hence, full value of consideration received on transfer would not exceed the aggregate of (a), (b) and (c ) above and, hence, there would be no chargeable capital gains. It is to be noted that there cannot be a loss under the head 'Capital gains' so long as the block of assets continues to exist. (v)The above discussion can be summed up as under :- ....
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....xceed the actual cost to the assessee in respect of such assets. By the Amending Act, these sub-sections have been deleted in view of the switchover to the system of allowing depreciation on blocks of assets. 7.11 "Used for the purposes of the business or profession" 7.11.1 As stated above that in the case under consideration, the crux of the matter/issue centralises to the word "Used for the purposes of the business or profession", therefore, that requires detailed discussions. As stated above that one of the ingredients for depreciation allowance is "used for the purpose of business". The expression 'use or used' has several times received interpretation not only at the hands of various High Courts but by the Supreme Court , some of them are as under :- "(a )Hon'ble jurisdictional High Court examined the words "used" in the case of CIT v. Visyanath Bhaskar Sathe [1937] 5 ITR 621 (Bom.). The facts of that case were that the assessee was the owner of a ginning factory and during the financial year joined a pool formed by several owners of such factories. In accordance with the agreement with the pool, only some of the factories were allowed to work and the others rem....
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.... the answer to the question was self-evident. The vehicles continued to be in use for business of the assessee even though the same were under repairs. Thus, the assessee was entitled to depreciation on the written down value of the trucks which were under repairs throughout the relevant accounting years but were used for the purpose of the business earlier and later. (c )Hon'ble Bombay High Court in the case of Whittle Anderson Ltd. v. CIT [1971] 79 ITR 613 held that although two out of the four presses which were directly in the pooling arrangement were to remain idle while the two presses worked, it is clear that the owners of those presses which were idle had to keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time and having regard to the definition of the word 'used' as indicated in the authorities it was clear that even these presses which remained under forced idleness were in use during the entire period of the year. (d )The issue regarding 'use' was come before Hon'ble Allahabad High Court in the case of Niranjan Lal Ram Chandra v. CIT [1963] 49 ITR 177 . The facts of that cas....
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....ged in an accident (and then hold that it had not been in use since the last active user). The Court held that article was continue to be in use after the last active user, even if it is sold or is lost, provided it was kept in a fit condition and was available for active use. The Court held that the trucks in the instant case were admittedly in use during the accounting period ending on 31-12-1945, and were in running order on 1-1-1946, and capable of being put to active use. If there was no evidence that they were driven for hire on 1-1-1946, there was also no evidence that they were put out of use at the beginning of that day. If they were in use up to the midnight of 31-12-1945, nothing happened in order to put them out of use at the first moment of 1-1-1946, or at any subsequent date, but prior to their sale. They could not be used after the sale, and it might be said that the sale put them out of use, but this happened during the day of 1-1-1946, and the effect of the sale did not relate back to the first moment of 1-1-1946. If they were in use for any length of time on 1-1-1946, i.e., during a few hours, it was enough, the period of user being of no consequence. They were av....
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....s as also by providing for depreciation at higher rates so as to ensure that more than 80 per cent of the cost of the plant and machinery is written off in a period of 4 years or less. This will render replacement easier and help modernization. Apart from those items which are eligible for 100 per cent depreciation in the initial year itself, there are at present different rates for plant and machinery. I propose to have only two rates of depreciation at 33-1/3 per cent and 50 per cent. Plant and machinery used as anti-pollution devices and those using indigenous know-how are proposed to be placed in a block carrying the higher rate of depreciation of 50 per cent. Buildings meant for low-paid employees of industrial undertakings will be entitled to depreciation at 20 per cent as against the general rate of 5 per cent for residential buildings and 10 per cent for non-residential buildings'." 7.12.2 This new scheme of depreciation on block of assets is based on Report of Economic Administration Reforms Commission as stated in the said Circular reads as under :- "6.3 As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing syste....
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....ed in section 38(2) of the Act and the provisions related to taxability of Capital gain on transfer of asset from block and ceases to exist of block as provided in section 50 of the Act. Section 32(1)(iii) lays down the details and requirement with respect to claim of depreciation, inter alia, of discarded machinery, obviously, when a thing is discarded it is not used. Thus, 'use' and 'discarding' are not in the same field and cannot stand together. However, if we adopt a harmonious reading of the expressions 'used for the purposes of the business' and 'discarded' then it would show that 'used for the purpose of business' only means that the assessee has used the machinery for the purposes of the business in earlier years. This type of interpretation is supported by the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Visvanath Bhaskar Sathe [1937] 5 ITR 621 (Bom.) where in the Court examined the words 'used' and held that the word 'used' in section 10(2)(vi) of 1922 Act denotes actual user, and not merely being capable of being used. But that does not dispose of the question whether, when machinery is kept ready for use at any moment in a particular factory unde....
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....of depreciation on block assets one doubt comes to the mind that how depreciation can be allowed on assets which were not used for the purpose of business. The reply to this doubt is available in the object of the scheme and respective consequence amendments in the Act. The Legislature was aware about this situation, therefore, various corresponding amendments were made in respective provisions of the Act, if any depreciation has been claimed on an asset of block of assets which was not used, than the profit/income for that year will be reduced but this aspect of the matter has been taken care by the amended section 50 of the Act, when asset is transferred/sold and block ceases the calculation of short- term capital gain will be more as in those cases WDV will be less. 7.15 In the light of above discussions, the condition/requirement of section of word 'used for the purpose of business' as provided in section 32 of (1) of the Act for the concept of depreciation on block pf assets can be summarized, that use of individual asset for the purpose of business can be examined only in the first year when the asset is purchased. In subsequent years use of block of assets is to be examin....