CYBERSOL TECHNOLOGIES PVT. LTD.,MUMBAI vs. ITO 8 (1)(2), MUMBAI

The only issue in the appeal of the Assessee is whether the depreciation is allowable on the scrapped / discarded assets which were forming part of block of assets.

Briefly stated the facts are that the Assessee during this assessment year vacated its rented premises at Gemstar Commercial Complex and moved to the new premises at Raheja Metroplex. In the process, the Assessee disposed off certain assets which could not be salvaged and moved to the new rented office and these are assets that had to be scrapped. The Assessing Officer while completing the assessment noticed that the Assessee claimed depreciation on these scrapped / discarded assets also without reducing them from WDV of the block of assets. The Assessing Officer required the Assessee to explain why the depreciation claimed on these discarded assets should not be disallowed. The Assessee filed its reply submitting that Assessee discarded some of the building materials in the nature of lease hold improvements and other assets. It is submitted that as per the provisions of Section 43(6), the opening WDV of block of assets of any previous year shall be adjusted as mentioned therein. It was submitted that the Assessee has not discarded all the assets in the block and hence is entitled to depreciation on the closing WDV.

Without prejudice to the above submissions, it was claimed by the Assessee that if it is assumed that the block has ceased to exist, then the WDV as on 01.04.2011 shall be treated as short term capital loss as per section 50 of the Income Tax Act and allowable as a deduction and is eligible to be set off against the income under the head ‘Profits & Gains from Business’.

Not convinced with the submissions of the Assessee, the Assessing Officer disallowed the depreciation on the discarded assets observing that in the Assessee’s case, there is no existence of assets and they are not put to use. Therefore he held that the depreciation claimed by the Assessee on non- existing assets and the asset which is not used for the business, the depreciation is not allowable. On appeal, the Ld. CIT (Appeals) agreed with the view of the Assessing Officer. He also placed reliance on the decision of the Bombay High Court, Nagpur Bench in the case of Dinesh Kumar Gulabchand Agarwal Vs. CIT [267 ITR 768], and the decision of Calcutta High Court in the case of CIT Vs. Oriental Coal Company Ltd. [206 ITR 682].

The Ld. Counsel for the Assessee before us vehemently reiterated the submissions made before the lower authorities. He further submits that Clause 11 of section 2 of Income Tax Act defines ‘Block of Assets’ as a ‘group of assets falling within a class of assets comprising (a) tangible assets being building, 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. The Ld. Counsel submits that the cost of assets forming part of the block of assets gets merged with the WDV of the block and their individual identity is lost as per the concept of block of assets under the Income Tax Act. Therefore, he submits that it is impossible and impractical to identify the WDV of any individual asset and reduce it from the block of assets. The Ld. Counsel further submits that the expression used in section 32 that is ‘used for the purpose of business or profession’ does not relate to the use of

The Ld. Counsel for the Assessee further submits that on analyzing the provisions of section 32 and 43(6)(c) of the Act, Assessee is allowed to claim depreciation on the following conditions : (1) Assessee must be owner of the asset. (2) Asset must be used for the purposes of business or profession. (3) Asset must be used during the previous year and, (4) The depreciation to be computed on cost or WDV of block of assets at the rate prescribed. Ld. Counsel submits that WDV includes the value of discarded assets. The Ld. Counsel further submits that the Assessing Officer’s contention that there is no existence of assets and the discarded assets are not put to use, has no relevance because of the concept of block of assets.

Ld. Counsel for the Assessee placing reliance on the decision of Hyderabad Bench in the case of DCIT Vs. Coromandel Bio Tech Industries (I) Ltd. [20 Taxmann 520] submits that in order to allow claim for depreciation, use of individual assets for the purpose of business can be examined only in first year of purchase and in subsequent years when use of block of assets to be examined existence of individual asset in block of assets itself amounts to use for purpose of business. The Ld. Counsel submits that in this case depreciation was allowed to the Assessee on ponds and plant & machinery forming part of block of assets even though these ponds and plant & machinery were discarded

The Ld. DR vehemently supported the orders of the authorities below.

We have heard the rival submissions, perused the orders of the authorities below and the decisions relied on before us. The issue to be decided in this appeal is as to whether the depreciation on assets is allowable on the discarded assets which were already forming part of block of assets and when part of assets of the block were discarded / scrapped. The Assessing Officer denied the depreciation on the assets discarded by the Assessee observing that there is no existence of assets and the Assessee has not put to use the assets during the relevant assessment year. The Ld. CIT (Appeals) referring to the decision of the Bombay High Court in the case of Dinesh Kumar Gulabchand Agarwal Vs. CIT (supra) denied the claim for depreciation.

We find that considering this decision i.e. Dinesh Kumar Gulabchand Agarwal Vs. CIT (supra), the Co-ordinate Bench of this Tribunal in the case of GR Shipping Ltd. Vs. JCIT (supra) held that the Assessee is entitled to claim depreciation on Barge which met with an accident and sunk in the ocean and

The Appeal filed by the Revenue against the above decision of the Co- ordinate Bench is dismissed by the Bombay High Court holding as under : “The question sought to be raised in this appeal is based on the ground of non user of the Barge in the subject A.Y., though they were used in the previous A.Y. According to Revenue depreciation would not be available under Section 32 of the Income Tax Act. The question sought to be canvassed is squarely covered by two judgements of this Court one in the case of Whittle Anderson Ltd. Vs. CIT 79 ITR 613 and another in the case of CIT Vs G N Agrawal (Individual) 217 ITR 250. In this view of the matter, appeal stands dismissed for want of substantial question of law. No order as to costs.”

We also find that the Co-ordinate Bench considered this issue in the case of Swati Synthetics Ltd (supra), wherein it was held as under : “7.14 In concept 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 s. 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 s. of word 'used for the purpose of business' as provided in s. 32 of (1) of the Act for the concept of depreciation on block of 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 examined. Existence of individual asset in block of assets itself amounts to use for the purpose of business. This view is fully supported by various provisions of the Act which were amended consequence to the scheme of depreciation on block of assets including to proviso to s. 32 of the Act of which detailed discussion is made in above para of this order. The said proviso to s. 32 requires that whore an asset is acquired by the assessee during the previous year and is put to use for the 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 ci. (i) or ci. (ii) or cI. (iia), as the case may be. When an asset purchased is satisfied the above condition in the year of purchase that asset will be included in the respective block of asset. Depreciation for that year will be calculated on WDV in accordance with s. 43(6) of the Act by the increase opening WDV by the actual cost of any asset falling within that block, acquired during the previous year. Once an asset is included in the block of assets its remained in block for its entire life. The end of asset, i.e., to go out from block is only in accordance with the provisions of the Act. There are following three situations provided in the statutes when an individual asset of the block goes out of block : "(1) An asset is sold or discarded or demolished or destroyed during that previous year as provided in ss. 43(6)(c)(i)(b) and 32(1)(iii) of the Act.

Further, the Hon’ble High Court of Delhi in the case of CIT Vs Yamaha Motor India (P) Ltd. (supra) held as under : “No doubt, the expression used in S. 32 is 'used for the purposes of the business'. However, this expression has to be read harmoniously with the expression 'discarded' as found in clause (iii) of Ss. (1). 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 a harmonious reading of the expressions 'used for the purposes of the business' and 'discarded' is adopted, then it would show that 'used for the purposes of the business' only means that the assessee has used the machinery for the purposes of the business in earlier years. It is not disputed that in the facts of the present case, the machinery in question was in fact used in the previous year and depreciation was allowed on the block of assets in the previous years. Taking therefore a realistic approach and adopting a harmonious construction, the expression 'used for the purposes of the business' as found in S. 32 when used with respect to discarded machinery would mean that the user in the business is not in the relevant financial year/previous year, but in

In view of what is discussed above and following the above decisions we hold that the Assessee is entitled for depreciation on the assets which were discarded as the assets were forming part of block of assets. The block continues and did not cease to exist as only part of assets of the block were discarded not the entire block.

In the result, appeal of the Assessee is allowed.