Case Law Details
RELEVANT PARAGRAPH
7.12.1 The block concept of deprecation was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 01-04-1988 .The Board issued a circular (Circular No. 469 dated 23rd September, 1986 reported in 162 ITR statutes page 21). The purpose / object of the scheme of depreciation on block of assets which has been clarified by the Finance Minister in his budget speech which is reproduced from the said circular as under:-
“(iii) New provisions for allowing depreciation in respect of blocks of assets
6.1 In his Budget Speech for the year 1986- 87, the Finance Minister had announced as under :
“96. As promised in the Long Term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation in respect of blocks of assets instead of the present system of depreciation on individual assets. Simultaneously, I propose to rationalise the rate structure by reducing the number of rates 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 modernisation. 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 331/3 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 system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more dis aggregated has to be the record- keeping. Moreover, the practice of granting the terminal allowance as per section 32(l)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax 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”
7.13 From above discussions was noticed that the concept, of allowing depreciation on block of assets has been introduced in the statutes with certain objects. The calculation of depreciation in respect of each capital asset separately requires elaborate book keeping and process of checking by the AO is time consuming. The practice of granting terminal allowance for taxing the balancing charge under the income tax necessitate the keeping of records and depreciation already availed by each asset eligible for depreciation necessitated simply the system of allowing depreciation of block of assets have been introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986., with effect from 01.04.1988 to give effect to this new system regarding depreciation balancing charge and capital gain relevant provisions were also amended accordingly. No doubt, the expression used in s. 32 is ‘used’ for the purposes of the businesses. However, this expression has to be read in commercial sense and it is to be interpreted on the principle of interpretation of harmonious constructions with the expression of the word ‘used’ in section 32(1), the words ‘acquired during the previous year” in section 43(6), An Asset not exclusively used for the purposes of the business or profession but used other than business purposes as provided in section 38(2) of the Act and the provisions related to tax ability 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(l)(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’ arc 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 judgement of Honourable jurisdictional High Court in the case of Commissioner of Income Tax v. Visvanath Bhaskar Sathe [1937] 5 ITR 21 (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 under an express contract from which taxable profits are earned, the machinery can be said to be used for the purposes of the business which earns the profits, although it is not actually worked. The business from which the profits were derived was that of ginning factories, and the contribution of the assessee to that business was the obligation to keep his machinery ready for actual use at any moment. It was further held that the word ‘used’ in section 10(2)(vi) of 1922 Act may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season. The ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and in the case, the profits of the assessee during the year under assessment could not have been earned except by his maintaining his factory in good working order, and that involves the user of the factory and the machinery. Recently after introducing the block concept of depreciation, Honourable jurisdictional High Court dismissed the appeal of revenue vide their judgement dated 28.7.2009 for want of substantial question of law appeal filed by the Revenue against the order of the ITAT Mumbai in the case of G.R Shipping Ltd ITA NO 822/Mum/ 05 order dated 17.7.2008. The ITAT held that depreciation on (Ship) Barge which included in block of asset therefore deprecation is allowable even though said Barge was not used for the purpose of business during the financial year. The Honourable jurisdictional High Court in the said case of G.R. Shipping Ltd., against the revenue appeal, in Income Tax Appeal No. 598 of 2009, vide order dated 28**> July, 2009, held as under:-
“1. Heard learned counsel for the parties.
2. 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. *
7.14 In concept of deprecation on block assets one doubt conies to the mind that how deprecation 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 deprecation on block of assets can be summarised, 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 asset 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 asset including to proviso to section 32 of the Act of which detailed discussion is made in above Para of this order. The said proviso to section 32 requires that where 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 clause (i) or clause (ii) or clause (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. Deprecation for that year will be calculated on written down value in accordance with section 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 it’s 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 sections 43{6)©(i)(B) and 32(l)(iii) of the Act .
2) An Asset not exclusively used for the purposes of the business or profession but used other then business purposes as provided in section 38(2) of the Act.
3) where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the amounts stated in section 50 of the Act and where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year.
7.16 In the case under consideration the admitted facts are that the division of Surat had been closed but the block of assets of the closed unit, (the division of Surat) along with other assets of the block were used for the purpose of business in earlier years. The year under consideration is not the first year of the assets acquired. The assets of closed unit still remained exist/ part of the block of assets. The assets did not fall under any of the above exceptional three conditions. The said block of assets was used for the purpose of business during the year. Under the circumstances the assets of the said closed unit amounts to use for the purpose of business in the year under consideration , we are, therefore, of the considered view that the assessee is entitled for deprecation. We accordingly allow the claim of the assessee.
