Depreciation under Block of Assets Allowed even for Non Used Assets during the Year

Bharat Mines and Mineral Vs ACIT (ITAT Bangalore)

The issue under consideration is whether under block of assets, the depreciation allowed even for those assets which have not been used during the year under consideration?

ITAT states that the existence of individual asset in block of assets itself amounts to use for the purpose of business. The Tribunal also held that ‘used for the purpose of business’ as provided in section 32(1) of IT Act for the concept of depreciation on block of assets can be summarized by saying that use of individual asset for the purpose of business can be examined only in the first year when the asset is purchased and in subsequent years, use of block of assets for the purpose of business is satisfied on this finding alone that there is existence of asset in the block of assets. In the present case, this is not the case of the AO that some asset of building block and plant & machinery block are not existing in the respective block of assets. In respect of each of these two blocks, the AO is also allowing depreciation in respect of some assets included in these two blocks. Hence in our considered opinion, part amount of depreciation disallowed by the AO in respect of some asset in each of these two blocks is not justified and it is not as per law. Therefore in our considered opinion, depreciation is allowable on both the blocks in full and the same cannot be reduced in the manner done by the AO. Accordingly, the appeal filed by the assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal is filed by the assessee and the same is directed against the order of ld. CIT(A)-1, Bangalore dated 04.04.2018 for Assessment Year 2014-15.

2. The grounds raised by the assessee are as under.

“1. That the order of the authorities below in so far as it is against the appellant is against the law, facts, circumstances, natural justice, without jurisdiction, bad in law and all other known principles of law.

2. That the total income and total tax computed is hereby disputed.

3. That the authorities below erred in disallowing depreciation relating to fixed assets amounting to Rs.3,88,36,290/-.

4. That the authorities below erred in holding that under the facts and circumstances the decision of the Hon’ble Supreme Court results in total stoppage of business of permanent nature.

5. That the authorities below erred in assuming that the plant was not operational.

6. That the CIT-A erred in confirming the disallowance of depreciation by rejecting the ground on ‘Block of Asset’ concept.

7. That the authorities below erred in relying on irrelevant material and ignoring the relevant material.

8. For the above and other grounds and reasons which may be submitted during the course of hearing of the appeal, the assessee requests that the appeal be allowed as prayed and justice be ”

3. The relevant facts in brief are that it is noted by the AO in Para 3 of the assessment order that it is noticed that assessee has claimed an amount of Rs. 5,85,98,656/- towards depreciation for the present year. The AO has further noted that fixed assets of the assessee include Building and Plant and Machinery related to the mining activity of the assessee. The AO further noted in the same para that assessee has not carried out any mining activity during the Financial Year 2013-14 relevant to Assessment Year 2014-1 5. The AO has also noted that assessee has income only from contract receipts for transportations and rake loading charges. Thereafter the AO has noted that the assessee was issued show cause notice asking the assessee to explain as to why the depreciation should not be disallowed on the Plant and Machinery and Building which is not utilized for the purpose of business. The assessee submitted reply vide letter dated 05.12.2016 received by the AO on 06.12.2016 which is reproduced by the AO in Para 3.2 of the assessment order. In the said written submissions, the assessee has placed reliance on the judgement of Hon’ble Madras High Court rendered in the case of CIT Vs. Southern Petrochemical Industries Corpn. Ltd. as reported in 301 ITR 255. He also placed reliance on the judgement of Hon’ble Karnataka High Court rendered in the case of CIT & Anr Vs. Blend Well Bottles (P) Ltd. as reported in 323 ITR 18. Reliance is also placed on another judgement of Hon’ble Madras High Court rendered in the case of CIT Vs. Southern Hydro Carbon Ltd. as reported in 146 CTR 55. The AO held that these judgements are not applicable in the present case because the facts are different. The AO has noted that the assessee M/s. Bharat Mines and Minerals has been classified under Category ‘C’ i.e. the assessee has carried out illegal mining and is found to be involved in flagrant violation of the Forest (Conservation) Act. The AO has also noted that Central Empowered Committee (CEC) has recommended for cancellation / determination of mining leases falling under category ‘C’ and to allot such mines to the end users through bidding in a transparent way. After considering the judgements relied upon by the ld. AR of assessee before the AO, the AO has made disallowance of Rs. 3,88,36,290/- out of depreciation claimed by the assessee of Rs. 5,85,98,656/-. Being aggrieved, the assessee carried the matter in appeal before CIT(A) but without success and now the assessee is in further appeal before us.

4. It is submitted by ld. AR of assessee that copy of financial statements of the assessee for Financial Year 2011-12 is available on pages 160 to 163 of paper book and the same for Financial Year 2012-13 are available on pages 164 to 167 of paper book. He pointed out that as per the schedule 13 of other income for Assessment Year 2012-13 available on page no. 162 of paper book, there is income of Rs. 12 Lakhs on account of lease rent receipts, Rs. 2,39,909/- on account of loading charges receipts and Rs. 4,37,925/- on account of weighment charges receipts. He further submitted that similarly for Financial Year 2012-13 also, similar receipts are there as can be seen on page no. 166 of paper book which shows receipt of Rs. 12 Lakhs on account of Lease Rent Receipts, Rs. 2.40 Lakhs on account of Loading Charges Receipts and Rs. 22,22,159/- on account of Weighment Charges Receipts. Regarding current Assessment Year, he submitted that the copy of audited financial statements is available on pages 66 to 78 of paper book and in particular, our attention was drawn to page no. 73 of paper book where in schedule 9, the details of other income are available which includes Contract Income of Rs. 8,24,72,035/-. Reliance was placed by him on the following judicial pronouncements.

A) CIT &Anr Vs. Blend Well Bottles (P) Ltd. (supra)

B) CIT Vs. Southern Petrochemical Industries Corpn. Ltd. (supra)

C) CIT Vs. Southern Hydro Carbon Ltd. (supra)

D) Bharat Aluminium Co. Ltd. Vs. CIT,(2010)187 Taxman111(Delhi HC) E) Swati Synthetics Ltd. Vs. ITO, (2010) 38 SOT 0208 (Mumbai Trib.)

5. We have considered the rival submissions. First of all, we reproduce the details of depreciation amount of Rs. 3,88,36,290/- for which disallowance has been made by the AO and these details are available on page no. 6 of the order of CIT(A) and hence, the same are reproduced hereinbelow for ready reference.

6. On page no. 72 of the paper book is the complete details of depreciation claimed by the assessee of Rs. 5,85,98,656/-. These details are also reproduced hereinbelow for ready reference.

7. From the above two charts, it is seen that out of building block, disallowance has been made in respect of Mine Building &Borewell of Rs. 2,25,654/-, Mine Development Expenses of Rs. 2,78,757/-, Building @ RNPR of Rs. 47,97,054/- but no disallowance was made out for Railway siding Building for which the assessee has claimed depreciation of Rs. 10,58,750/- and this stands fully allowed by the AO out of 10% depreciation block. Out of plant and machinery 15% block, the AO has made disallowance of total amount of Rs. 2,46,20,415 & Rs. 74,44,638/-. Similarly in respect of 33 KV Power Line (Ranjithpura) 15% block also, the AO has made total disallowance of the claim of Rs. 14,69,772/-. In respect of Railway siding tracks 15% block and Railway siding Weigh bridge 15% block, the claim of the assessee for depreciation of Rs. 1,75,93,266/- and Rs. 1,74,616/- respectively was allowed by the AO. Hence it is seen that disallowance has been made by the AO in respect of two blocks i.e. 10% building block, 15% plant and machinery block and in both these blocks, depreciation has been allowed by AO on some items whereas the AO disallowed depreciation on some items in each of these two blocks. In the light of these facts, now we examine the applicability of various judgements cited by ld. AR of assessee as noted

8. We first examine the applicability of Tribunal order rendered in the case of Swati Synthetics Ltd. vs. ITO (supra). Para 7.15 of this Tribunal order is relevant and hence the same is reproduced from page no. 61 of paper book.

“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 cl. (i) or cl. (ii) or cl. (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.

(2) An asset not exclusively used for the purposes of the business or profession but used other than business purposes as provided in s. 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 s. 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.””

9. From the above Para reproduced from this Tribunal order, it is seen that it is held by the Tribunal that the existence of individual asset in block of assets itself amounts to use for the purpose of business. The Tribunal also held that ‘used for the purpose of business’ as provided in section 32 (1) of IT Act for the concept of depreciation on block of assets can be summarized by saying that use of individual asset for the purpose of business can be examined only in the first year when the asset is purchased and in subsequent years, use of block of assets for the purpose of business is satisfied on this finding alone that there is existence of asset in the block of assets. In the present case, this is not the case of the AO that some asset of building block and plant & machinery block are not existing in the respective block of assets. In respect of each of these two blocks, the AO is also allowing depreciation in respect of some assets included in these two blocks. Hence in our considered opinion, part amount of depreciation disallowed by the AO in respect of some asset in each of these two blocks is not justified and it is not as per law.

10. We have also seen that as per Para 7.15 of the Tribunal order as reproduced above, three situations have been provided in the statutes when an individual asset of the block goes out of block.

a) The first condition specified shows that the asset was sold or discarded or demolished or destroyed during the relevant previous year as provided in ss. 43(6)(c)(i)(b) and 32(1)(iii) of the Act.

b) The second specified condition is 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 IT Act.

c) The third specified condition is 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 IT 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.

11. In the present case, none of the three conditions are being satisfied and therefore in our considered opinion, depreciation is allowable on both the blocks in full and the same cannot be reduced in the manner done by the AO. This is not the case of the AO that there is no business income of the assessee because part depreciation is allowed by the AO also. The objection of the AO is this that the assessee is engaged in illegal mining activity and for this reason, the mining license is cancelled. This is not the case of the AO that the assets in question cannot be used by the assessee in some other business. In fact, this is admitted by the AO also that part assets of these two blocks are being used for business purpose and AO himself allowed part depreciation for each of these two blocks. Now the question is this that if some assets of a block of assets are not used in a particular year, whether for allowing depreciation, we have to ensure that each item of the block of assets was used for business purpose. In our humble opinion, this is not the requirement of law that in the block of assets concept, business use of each of the assets of the block has to be seen and examined and depreciation is to be allowed only in respect of the assets used. One example will clarify our opinion. Suppose, there is an asset with W.D. V. of Rs. 10 Lacs included in a block of Assets of Rs. 100 lacs and the same is sold for Rs. 5 lacs. In that situation, the amount of sale proceeds received Rs. 5 lacs has to be reduced from the block i.e. Rs. 100 lacs and on the balance amount of the block i.e. Rs. 95 lacs, depreciation is to be allowed. We note that in this case, one of the assets is not even owned by the assessee because it was sold out but still, depreciation is allowable on WDV less sale proceeds. Hence, it is clear that business use of each item of a block of assets is not necessary for allowing depreciation on the block. We therefore delete the disallowance of depreciation made by the AO by respectfully following the tribunal order rendered in the case of Swati Synthetics Ltd. vs. ITO (supra. Since, we decide the issue in favour of the assessee by following this tribunal order, other cited judgments are not being discussed.

12. In the result, the appeal filed by the assessee is allowed.