TaxTMI 
TaxTMI 
1999 (8) TMI 116
X X X X Extracts X X X X
X X X X Extracts X X X X
....sition that after the amendment in section 32 with effect from 1-4-1988 an individual asset loses its identity and for allowing depreciation the entire block has to be considered. On the other hand, the case of the Revenue was that such an interpretation would negate the provisions of section 38(2) of the Income-tax Act, 1961 (for short the Act). The Revenue had relied on the decision of the Chandigarh Bench of the Tribunal in the case of Singla Agencies v. Asstt. CIT [1997] 60 ITD 410, which had taken the view that an asset did not lose its identity after introduction of the concept of block of assets and that the provisions of section 38(2) were still applicable. 3. We have heard Shri Brij Mohan Khanna, the learned counsel for the assessee and Shri Yog Raj Saini, Representative for the Revenue, at length for two days on 8-7-1999 and 9-7-1999. 4. Grounds Nos.-1 and 2 raised by the assessee are as follows: "1. That the Id. CIT(A)has failed to appreciate the amended provisions governing the allowance of depreciation and has thereby erred in upholding the disallowance of 1/4th depreciation on car. 2. That depreciation is permissible on block of assets and any particular i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wherein it was held that section 38 was nut applicable where the asset was wholly applied for the purpose of business. It observed that the assessee had to maintain a head office and merely because HO also supervise coffee estates the income from which was not taxable, a bifurcation could not be made between the user of the assets towards taxable sources of income and non-taxable sources of income. The entire depreciation in respect of assets used in HO was deductible from the taxable income. Ld. counsel pointed out that even the said decision is with reference to the provisions of section 32, read with section 38, as they stood before there amendment w.e.f. 1-4-1998. Ld. counsel stressed that an individual item in a block of assets would lose its identity and that the depreciation has to be allowed w.e.f. a block of assets after amendment of section 32 by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1-4-1998. He, therefore, urged that the provision of section 38(2) have no application where one item out of block of assets is used for non-business purposes. Ld. counsel emphasised that the provisions of section 38(2) would apply to the entire block of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i)." Ld. counsel pointed out that in relation to the assessment year commencing on 1-4-1988, the aggregate of the w.d.v. of all the assets falling within any block of assets at the begining of the previous year has to be taken and then adjusted by increase at actual cost of any asset falling within that block acquired during the previous year and by reduction of moneys payable in respect of any asset falling within that block which is sold or discarded etc. during the previous year. He, therefore, emphasised that as on 1-4-1998, w.d.v. of the entire block of assets has to be taken and then further adjusted as provided in section 43(6)(c). In view of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nch of the Tribunal did not consider that where w.d.v. in respect of any block of assets became nil and the assessee earned profit on sale of that block of assets, then capital gains would have to be determined under section 50(2). Ld. counsel emphasised that the w.d.v. is to be determined w.r.t. the depreciation actually allowed and, therefore, the assessee is liable to pay tax in one year or the other. Ld. counsel thus concluded that the provisions of section 38(2) would only apply to the entire block of assets and not to any particular asset comprised therein, as after the introduction of the concept of 'block of assets' in section 32, the individual asset comprised within the block of asset loses its identity. On a query from the Bench as to whether the provisions of Appendix I, which is a piece of subordinate legislation, would override the provisions of section 38(2), ld. counsel submitted that the provisions of section 38(2) should be interpreted in the light of amendment made in section 32 and in the light of the entries in Appendix I, wherein cars were included within 'Machinery and Plant' for the purpose of depreciation @ 33.33% ld. counsel relied on the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al observed that '.. it is very much possible to compute the disallowance in suitable cases of a fair proportion of depreciation as visualised by section 38(2). The exercise may be time consuming or difficult but it cannot be said that in the changed scheme of things, disallowance under section 38(2) is not capable of computation'. He further submitted that the decision in the case of Packwell Printers is on different facts and that no personal usage was involved and that the present issue was not before the Tribunal. Similarly, he submitted that the decision in the case Ms. Sushma Malik is also distinguishable on facts as the car was used for business purposes and the issue of personal usage was not there. He pointed out that even the decision in the case of Waterfall Estates Ltd. was on different facts and the issue therein was that assets had been used for business purposes and not for personal purposes of the assessee. 5.2 Ld. counsel, in his reply, reiterated that the provisions of section 38(2) are applicable only to block of assets and not to individual item comprised therein. He submitted that in the case of the assessee two items, i.e., equipment and vehicles co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rder of the departmental authorities. We have also perused the relevant documents field by ld. counsel in the paperbook to which our attention was invited during the course of hearing. We have also seen the case law relied upon by both parties. It is observed that the issue before the Jabalpur Bench in the case of Packwell Printers was as to whether the Assessing Officers was right in disallowing the claim of depreciation on the truck which was damaged in an accident and could not be used during the year under consideration. It was urged before the Tribunal that there was thorough change in the system of allowing depreciation from assessment year 1988-89 and that depreciation was to be allowed on the block of assets and not upon the individual asset. The Tribunal observed as under:- "In the instant case when the two trucks out of the three in the block were used for the purpose of business, the depreciation had to be allowed on the w.d.v. of the said block of assets, as per the percentage of depreciation prescribed in respect of the block of assets. It held that the depreciation was allowable on all the trucks of the assessee. In the process, the Tribunal also observed as under:....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TO, after taking into account the user of the building, plant, machinery or furniture for the purpose of business or profession. It also held that in case of a mixed user of the buildings etc, the claim for depreciation has to be considered under section 38(2) and not under section 32(1). Though the said decision, as mentioned by learned counsel for the assessee, pertains to assessment years 1971-72 and 72-73, we feel that the underlying ratio thereof is valid even after the amendments made by 1986 Act w.e.f. 1-4-1988 in sections 32, 38(2) and other related provisions of the Act. We feel that even after introduction of the concept of block of assets, the provisions of section 38(2) would continue to apply and the Assessing Officer is empowered to restrict depreciation to a fair proportionate part thereof, having regard to the user of the building, machinery, plant or furniture for the purposes of business or profession. Here, we may refer to the decision of the Tribunal in the case of Singla Agencies, wherein it was held that identity of an asset is not lost on entering the block of assets. In that case, the Tribunal observed that 'block of assets' is sub-divided into four ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....class of assets being buildings, machinery, plant or furniture in respect of which the same percentage of depreciation is prescribed. Further the provisions of section 38(2) were also amended by 1986 Act w.e.f. 1-4-1988 so as to retain reference to only clause (ii) of sub-section (1) of section 32. Obviously, the purpose of the said amendment was to syncronise the provisions of section 38(2) with the concept of block of assets as introduced in clause (ii) of sub-section (1) of section 32. We, therefore, feel that the provisions of section 38(2) have to be read harmoniously with the amendments made in section 32(1)(ii) and other related provisions and that the said provisions of section 38(2), which are very much part of the statute book, cannot be so construed as to do violence to the intention underlying the said provisions, which is to enable the Assessing Officer to restrict the depreciation allowance under section 32(1)(ii) to a fair proportionate part thereof in case a building, machinery, plant or furniture is not exclusively used for the purpose of business or profession. We thus agree with the ld. D.R. that if the intention was otherwise, the provisions of section 38(2) wou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isions of section 50(2) deal with a situation where the w.d.v. of any block of assets may be reduced to nil, as such block may cease to exist for the reason that all assets in that block are transferred during the previous year. Thus, the said provisions deal with computation of capital gains arising in such a situation as gains from short term capital assets. We feel that the said provisions also do not come in the way of applying the provisions of section 38(2) in case of an asset which is otherwise identifiable within the resisting block of assets. The provisions of section 50(1) would apply where block of asset does not cease to exist. We may also mention that in the case of the assessee, w.d.v. of vehicles is separately worked out at Rs. 1,19,290 and details of vehicles are also given in Annexure C-1. Thus, in view of the foregoing discussion we hold that the provisions of section 38(2) of the Act have been rightly invoked by the CIT(A) and he was right in sustaining the disallowance out of depreciation as made by the Assessing Officer. Since the assessee did not agitate that the disallowance of 1/4th of car depreciation was on high side, we are not going into that question. A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pect of the goods allegedly stolen, although no documents in respect of claim initially made in September, 1987, were furnished. He noted that nothing happened till 22-2-1990, when in response to a letter from the assessee dated 19-5-1989 New India Assurance Company informed that "the package of sarees was stolen from the verandah of the shop and the claim had been filed as 'no claim'," since there was no visible/forcible entry, which was beyond the scope of the shopkeeper's burglary policy. Ld. CIT(A) observed that the assessee was a popular dealer of sarees and was having sufficient staff for security under it own employment and it was difficult to believe that a parcel could be removed from just outside the shop without being noticed. He also mentioned that it was even more difficult to believe that when more parcels were not lifted by the thief, a huge parcel of 50-60 kg. could be removed by them without being noticed by anybody in the shop and that too in full day light as the missing parcel was noted at 1.30 p. m. He also observed that the assessee has not been able to furnish any evidence except copy of FIR to establish that it incurred a loss of Rs. 95,901 on ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dia Assurance Co. Ltd. is placed, whereby the claim was rejected and filed as 'no claim'. He further referred to pages 13-14 of the paperbook, where a copy of reply dated 11-7-1991 given to the CIT is placed. The assessee mentioned at page 2 of the said reply that the "amount of claim Rs. 95,901 duly appeared in the balance sheet for the years ending 31-3-1988 and 31-3-1989. The amount was due to it in connection with its business and had become bad during the accounting period due to the claim having been turned down by the Insurance Company and, therefore, it had been rightly claimed as a deduction during the year under consideration". The assessee also mentioned that photocopies of relevant documents were being enclosed. Ld. counsel further invited our attention to page 4 of the paperbook, where in the list of sundry debtors as on 31-3-1988 attached to the balance sheet, an entry of Rs. 95,901.25 is shown against New India Assurance Company on account of the claim. He submitted that the assessee had debited the claim against the Insurance Company. Ld. counsel was fare enough to mention that the claim of theft was not made in the assessment year relevant to the accounting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....981, which was the date falling during the accounting period relevant to the present assessment year. The assessee also contended that the entry tax pertained to Diwali years 1977-78 and 1978-79 and the assessments to entry tax in respect of the said two years were made on 30-12-1981 and 28-6-1982 and these two dates fell during the accounting period relevant to assessment year 1983-84. The AO disallowed the claim because the assessee was maintaining accounts on mercantile basis. The CIT(A) and the Tribunal allowed the claim. On a reference, the Hon'ble High Court held that the deduction was rightly allowed to the assessee during assessment year 1983-84, taking a pragmatic approach in the matter; (iii) CIT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. [1999] 237 ITR 253/102 Taxman 433 (Bom.). In the said case, the assessee acquired import entitlement, by paying premium, for purchase of spare parts. The assessee approached the Textile Commissioner for a clarification whether import entitlement under the scheme issued by the Government could be transferred by a textile mill to rayon textile industries. The Commissioner agreed that such a transfer could be made. The assessee-compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of entry tax. He submitted that similarly the decision in the case of Gwalior Rayon Silk Mfs. (Mvg.) Co. Ltd. related to claim of loss on purchase of import entitlement in view of the clarification given by the Textile Commissioner and ultimately the Government refusing permission to the assessee to import essential spares of rayon plant under the said scheme. Ld. D.R. relied on the following decisions:- (a) CIT v. East India Hotels Ltd. [1994] 207 ITR 881 (Cal.), wherein it was held that royalty for previous year relevant to assessment year 1971-72 was not allowable in assessment year 1972-73. In the said case, the Hon'ble High Court observed that the agreement was effective from 1-4-1970; (b) Vanaja Textile Ltd. v. CIT [1994] 208 ITR 161 (Ker.), wherein it was held that in view of the mercantile system of accounting electrical surcharge payable under order passed in 1968 was not deductible in assessment year 1979-80. 7.5 Ld. counsel, in his reply, submitted that the assessee had put for the claim of loss before the New India Assurance Company and, therefore, it did not make a claim of loss in assessment year 88-89, as it was trying to exhaust the remedy of recovering ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....livery register at page 129 and it was delivered to the assessee on 4-9-1987. This letter has not been discussed by the ld. CIT(A) while holding that the loss was unbelievable. We feel that in view of the documents on file, i.e. FIR dated 4-9-1987, letter of Indian Airlines dated 18-9-1987, the list of sundry debtors attached to the balance sheet as on 31-3-1988 and the letter of Insurance (Assurance) Company dated 22-2-1990, it is difficult to hold that the loss did not occur. The only issue is as to during which year the loss is allowable. Each case is to be seen in the light of the facts of that case. It is observed from the commentary 'Law of Income Tax' by Sampath Iyengar, Vol. 2, 9th edition, pages 1716-1717 that Hon'ble Madhya Pradesh High Court held in the case of CIT v. Durga Jewellers [1988] 172 ITR 134 that where theft in business premises had taken place on 13-8-1974 and part of articles were recovered and final report; was made to the Police on 21-11-1974, the accounting year of the assessee being from 14-11-1974 to 3-11-1975, the loss was allowable in assessment years 76-77. Hon'ble Supreme Court in the case of Associated Banking Corpn. of India Ltd. v....