Allowability of depreciation on Assets forming part of Block of Assets if the same was not used during the year

Allowability of depreciation on Assets forming part of Block of Assets if the same was not used during the year

CIT Vs Oswal Agro Mills Ltd (Delhi High Court)- ITA No. 161 of 2006 and others dated 24 December, 2010)

Facts :-

• The Assessee had a unit at Bhopal which was not functioning since the assessment year 1997-98. For the assessment year 1998-99, the assessee claimed depreciation in respect of closed unit at Bhopal on the ground that depreciation would be allowable since the assets of Bhopal unit formed a part of block of assets and were ready for passive use, which was as good as real use.

• The AO, however rejected the assessee’s contention and disallowed depreciation on Bhopal unit on the ground that unit at Bhopal was closed throughout the year and had not been put to use.

• The Commissioner of Income-tax (Appeals) also confirmed the dis allowance made by the AO.

• On an appeal made to the Tribunal, it allowed the depreciation since the Revenue authorities:

– had not brought out on record that the Bhopal unit was finally closed or sold out in succeeding years, though it was closed during the year,

– had also not bought on record that the assets of Bhopal unit do not form part of block of assets, and that

– Depreciation was allowable on the entire block of assets if part of block is not used but the remaining part was in continuous use.

Issues before the High Court (HC) :- Whether depreciation is allowable on the assets of a closed unit on the grounds that the assets were in passive use and the assets remained part of the block of assets?

Observations and Ruling of the HC

• HC addressed the issue of allowance of depreciation on two grounds, namely:-

– Whether a passive use of the assets at Bhopal unit could be considered as “used for the purpose of business”,

– Where the assets of Bhopal unit could not be segregated for the purpose of claim of depreciation in case of depreciation on block of assets, whether the depreciation was to be allowed on entire block of assets.

• As regards the first issue of “used for the purpose of business”, the HC observed that:

– A passive use (i.e. an asset is kept ready for use, but could not be used for a part of the year or even the whole year) of an asset is also recognized as a use of the asset for the purpose of business.

– Depreciation cannot be denied if the asset is used for the purpose of business even though it is not used for certain reasons in the concerned assessment year.

– However, based on the facts of the case, the HC observed that the concept of passive user could not be extended to absurd limits as there were no signs of Bhopal unit becoming functional even after the lapse of six years. The words “ready to use” could not be interpreted in a wider sense to include non-user for number of years. In such a case, the words “used for the purposes of business” would lose their sanctity and become superfluous.

– Accordingly, the HC held that depreciation was not allowable in respect of assets of Bhopal unit on the ground of non-user of number of years.

• As regards the other issue on “depreciation on block of assets”, the HC observed that:

– The manner in which depreciation is to be allowed had undergone a sea change after the introduction of the concept of block of assets with effect from 1 April 1988.

– Depreciation is to be allowed on the percentage of the Written Down Value (WDV) of block of assets, thus, any particular asset cannot be segregated on the ground that it was not put to use.

– The concept of block of assets having been introduced for calculating depreciation, the individual assets loose their identity

– The intention of the legislature was also to provide for allowing depreciation on the entire block of assets instead of each individual asset as evident from Central Board of Direct Taxes (CBDT) Circular No. 469 dated 23 September 1986.

– HC held that use of each and every asset was not essential since maintaining the details of each asset separately was not required.

– HC concluded that the Revenue was not put to any loss by allowing depreciation on a particular asset even if the same is not used in the relevant assessment year as the same would result into short term capital gains chargeable to tax when such asset would be sold.

Conclusion

• The above ruling re-emphasizes the concept of block of assets for claim of depreciation on assets forming part of the block of assets, even though some of the assets have not been used during the year.

• The ruling reiterates the passive user concept for the purpose of claiming depreciation; however, the same should not be extended for absurd time periods.