2009 (12) TMI 667 - AT - Income Tax

Proportionate depreciation on account of close of one unit out of two units of the assessee - assets were not used during the relevant accounting year as the Division at Surat was closed - HELD THAT - The proviso to section 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 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. Depreciation for that year will be calculated on written down value in accordance with section 43( 6 ) 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. 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 depreciation. We accordingly allow the claim of the assessee.

Issues Involved:
Disallowance of proportionate depreciation on account of the closure of one unit out of two units of the assessee.

Issue-wise Detailed Analysis:

Disallowance of Proportionate Depreciation:
The sole issue in this appeal was the disallowance of proportionate depreciation of Rs. 7,27,249 due to the closure of the Surat division of the assessee's business. The assessee had two divisions: one at Dombivili for dyeing (Swati Dyeing) and the other at Surat for yarn texturising (Swati Polyester). The Surat division had been closed for two to three years, but the assessee claimed depreciation on its assets. The Assessing Officer disallowed this claim, and the CIT(A) confirmed the disallowance, stating the assets were not used during the relevant accounting year.

Arguments by the Assessee:
The learned AR argued that after the introduction of the block system for allowing depreciation, depreciation is allowable on the entire block even if some assets within the block have not been used. The AR referred to CBDT Circular No. 469, dated 23rd September 1986, and several judicial precedents to support this contention, stating that the word "used" in Section 32 should be interpreted as the use of the block as a whole, not individual assets.

Arguments by the Revenue:
The learned DR contended that the term "used" in Section 32 denotes actual use for the purpose of business, and assets not used at all are not eligible for depreciation. The DR cited various judicial decisions to support the argument that the assets must be actively used in the business to qualify for depreciation.

Tribunal's Analysis:
The Tribunal examined the concept of depreciation on block assets, the statutory provisions, and relevant judicial interpretations. It was noted that the block system was introduced to simplify the process of claiming depreciation and reduce elaborate bookkeeping. The Tribunal emphasized that under the block system, once an asset is included in the block, it remains part of the block until it is sold, discarded, demolished, or destroyed.

Interpretation of "Used for the Purposes of the Business":
The Tribunal referred to various judicial decisions to interpret the term "used" in a broader sense, encompassing both active and passive use. It was noted that machinery kept ready for use or under repair can still be considered "used" for the business. The Tribunal highlighted that the concept of depreciation on block assets allows depreciation on the entire block, and the existence of an asset in the block itself amounts to its use for business purposes.

Conclusion:
The Tribunal concluded that the assets of the closed Surat division, being part of the block of assets, were eligible for depreciation. The block of assets was used for the business, and the assets of the closed unit did not fall under the exceptions where depreciation would be disallowed. Therefore, the assessee was entitled to the claimed depreciation.

Final Order:
The appeal of the assessee was allowed, granting the claimed depreciation on the assets of the closed Surat division.

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