TaxTMI 
TaxTMI 
2010 (12) TMI 947
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....e Tribunal, as according to it, depreciation was not allowable. It is on this aspect that the matter was heard at length. 2. Since IT Appeal No. 161 of 2006 was treated as lead matter, we take note of the facts from this appeal. 3. In this appeal, which relates to the asst. yr. 1998-99, the assessee had claimed depreciation of Rs. 9.31 crores on its various assets. This included the claim of depreciation in respect of closed unit at Bhopal. The AO asked the assessee to explain on what basis the assessee was claiming depreciation on this unit, which remained closed. In response, the explanation of the assessee was that the depreciation was to be allowed as the said assets of Bhopal unit remained part of the block of assets and were ready for passive use, which was as good as real use. The assessee referred to the judgment of the Kerala High Court in case of CIT vs. Geo Tech Construction Corporation (2000) 162 CTR (Ker) 528 : (2000) 244 ITR 452 (Ker). The AQ, however, was not impressed with this position taken by the assessee and disallowed the depreciation on Bhopal unit which was in the sum of Rs. 43,41,528. 4. The appeal preferred by the assessee befo....
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....2 of the IT Act (hereinafter referred to as 'the Act') only if the twin conditions stipulated therein were fulfilled and these were:- (a) The assets should be owned, wholly or partly by the assessee; and (b) It should be used for the purpose of business or profession. 7. It was a submission of the learned counsel that the second condition in the instant case was not satisfied. They argued that the provisions for depreciation on "block of assets" related to the mode of calculation and merely because the assets formed the part of the assets would not mean that the depreciation was to be allowed on the entire block even when a particular asset from the said block was not used for the purposes of business in the relevant assessment year and the precondition stipulated under s. 32 was not satisfied. They further submitted that the expression 'used' mentioned in s. 32 of the Act would include actual use or at least kept ready for use which would mean that non-user was for temporary period. On the other hand, in the instant case, the Bhopal unit remained non-functional for six years and when whole unit was non-functional, it cannot be said that the assets of ....
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....ation, it is to be proved that the asset was "used" for the purpose of business. Immediate question that arises for consideration is : What is the meaning that is to be ascribed to the "user of asset". 12. It cannot be disputed that by catena of judgments, it stands settled that the assessee should have used the asset for the whole of assessment year in question to claim full depreciation. Passive user of the asset is also recognized as "user for purpose of business". This passive user is interpreted to mean that the asset is kept ready for use. If this condition is satisfied, even when it is not used for certain reason in the concerned assessment year, the assessee would not be denied the depreciation. This was so discussed and restated, after taking stock of various judgments, by a Division Bench of this Court in CIT vs. Refrigeration and Allied Industries Ltd. (2000) 163 CTR (Del) 498 : (2001) 247 ITR 12 (Del). In that case, the assessee owned a cold storage at Karnal. The machinery installed, was not put to use during the whole of the previous year. The non-user was on account of the fact that there was very weak crop of potatoes available in the season and potatoes d....
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.... or building in the business. On the other hand, the wider meaning will include not only cases where the machinery, plant etc., are actively employed but also cases where there is what may be described as a passive user of the same in the business. An asset can be said to be in use when it is kept ready for use." 14. The Court gave the rational for providing depreciation in the following words:- "5. Like every other animate and inanimate object, business premises, machinery, plant or furniture employed by an assessee in the course of his business, profession, etc. have a limited effective life. The vigour, strength, capability, etc., of every such object gradually exhausts by the factors 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, ....
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....apable of larger and a narrower interpretation. If the expression "used" is to be construed strictly, it can be taken as connoting or requiring the active employment or the actual working of a machinery, plant or building in the business, etc. On the other hand, wider meaning would include passive user of the same in the business. After taking note of the various judgments, the Court opined that survey of those decisions clearly shows that the consensus of judicial opinion is in favour of adopting the liberal interpretation was provided as under:- "18. Though it is true that a machinery generally depreciates with actual user, the decisions indicate that it is not necessary to import this concept in interpreting the expression 'used' is the statute. In the first place, a machinery may well depreciate even where it is not used in the business and even due to non-user or being kept idle. Secondly, a very strict correlation between the actual use of machinery and the concept of depreciation would lead to several anomalies and difficulties, for a machinery cannot be used throughout the day and night or even throughout the working hours or even during the days when the business....
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....llowed the depreciation treating it to be a 'passive user'. However, when it was found that even in subsequent year, the Bhopal unit remained non-functional, AO(s) disallowed the depreciation. Present appeals relate to the assessment years from 1998-99. In the process six years passed till the last assessment year before us, but there was no sign of this unit becoming functional. The 'passive user', in these circumstances, cannot be extended to absurd limits. Otherwise, the words "used for the purpose of business" will lose their total sanctity. It cannot be the intention of the legislature that the word 'used' when it is to be interpreted in a wider sense to mean 'ready to use', the same is stretched to the limits of non-user for number of years. 22. We may point out at this stage that some of the High Courts have taken the view that the expression 'used' should mean actual user [see CIT vs. J.K. Transport (1998) 150 CTR (MP) 264 : (1998) 231 1TR 798 (MP), CIT vs. Suhrid Geigy Ltd. (1981) 25 CTR (Guj) 280 : (1982) 133 1TR 884 (Guj), Malabar Agricultural Co. Ltd. vs. CIT (1997) 137 CTR (Ker) 346 : (1998) 229 1TR 548 (Ker), Dineshkumar Gulabchand Agrawal vs. CIT (2004) 267....
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....class of assets comprising:- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed." 27. Along with the aforesaid amendment, definition of WDV as contained in s. 43(6) has also been amended and the amended provisions read as under:- "43(6). 'Written down value' means:- (a) .................. (b) .................. (c) In the case of any block of assets,- (i) In respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the WDVs of all the assets falling within that block of assets at the beginning of the previous year and adjusted,- (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or dest....
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....fferentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more desegregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per s. 32(1)(iii) or taxing the balancing charge as per s. 41(2) of the IT Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture." 31. It becomes manifest from the reading of the aforesaid circular that the legislature felt that keeping the details with regard to each and every depreciable asset was time consuming both for the assessee and the AO. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of asset falling....