2014 (10) TMI 288 - AT - Income Tax

Depreciation on second hand machinery Failure to produce WDV Invocation of explanation 3 of section 43 Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the AO disallowed depreciation to the extent of ₹ 1,59,54,775/- by allowing depreciation whereby depreciation was allowed on WDV of assets in the hands of the Ceat Ltd. and not on the basis of actual cost paid by the assessee CIT(A) was rightly of the view that the assessee was eligible for depreciation on actual cost paid for the assets taken over from Ceat Ltd. Decided against revenue. Depreciation on machinery used for production of two-three wheeler tyres used for part of year Held that - The AO has not appropriately appreciated the concept of allowance of depreciation in section 32 with the introduction of block of assets w.e.f. 01.04.1988. The depreciation in terms of the block of assets concept is to be allowed on the actual cost or WDV of the particular block of assets , even if it is found that a particular asset comprised in the block of asset has not been put to use - The proposition is founded on the concept that depreciation is allowable with respect to the block of assets and not the individual assets relying upon COMMISSIONER OF INCOME TAX Versus BHARAT ALUMINIUM COMPANY LTD. 2010 (8) TMI 26 - DELHI HIGH COURT - certain Plant & Machinery was not put to use in the relevant year and therefore depreciation thereupon was not allowed - whether an individual asset is put to use in a particular year or not is of no consequence inasmuch as the requirement of law is to establish the use of concerned block of assets and not use of particular assets individually. It has been explained before us that the production of two-three wheeler tyres was abandoned by the assessee and hence the nonuse of such machinery - the assets are forming part of block of assets and there is no requirement of law, each of the item of assets comprised in the block of asset is put to use in order to claim depreciation - CIT(A) made no mistake in allowing assessee s claim for depreciation in relation to part of the machinery relating to the manufacture of two-three wheeler tyres - the assets were already in use and were forming part of the block of assets at the beginning of the year under consideration and on such block of assets , depreciation was being claimed and allowed in the past - the fact that assets were not in use hereinafter cannot be a reason to deny depreciation on such assets which form part of the block of assets, i.e. Plant & Machinery the order of the CIT(A) is confirmed Decided against revenue.

Summary

Issues Involved:
1. Depreciation on second-hand machinery.
2. Invocation of Explanation 3 of Section 43 of the Income-tax Act.
3. Depreciation on machinery used for part of the year.
4. Disallowance of depreciation on impaired assets.

Detailed Analysis:

1. Depreciation on Second-hand Machinery:
The first issue pertains to the Revenue's challenge against the allowance of depreciation on second-hand machinery. The Assessing Officer (AO) disallowed the depreciation based on the written down value (WDV) of the assets in the hands of the previous owner, Ceat Ltd., rather than the actual cost paid by the assessee. This disallowance was rooted in the AO's belief that the transaction involved overvaluation to claim higher depreciation. However, the Tribunal had previously ruled in favor of the assessee, allowing depreciation based on the actual cost paid. This decision was upheld by the High Court and the Supreme Court, rendering the Revenue's current appeal devoid of merit. Consequently, the appeal was dismissed.

2. Invocation of Explanation 3 of Section 43 of the Income-tax Act:
The second issue is closely related to the first, involving the AO's application of Explanation 3 of Section 43 to restrict depreciation claims. The AO argued that the assets were overvalued to claim higher depreciation. The CIT(A) negated this action, following the Tribunal's earlier order which had become final. The Tribunal reiterated that the assessee was entitled to depreciation on the actual cost paid for the assets, dismissing the Revenue's appeal.

3. Depreciation on Machinery Used for Part of the Year:
In the appeals for the assessment years 2002-03, 2003-04, and 2004-05, the Revenue contested the CIT(A)'s decision to allow depreciation on machinery used only for part of the year. The machinery in question was part of the block of assets used for manufacturing two-three wheeler tyres, which the assessee ceased producing during the year. The AO disallowed depreciation on the grounds that these assets were retired and considered impaired. However, the CIT(A) allowed the claim, emphasizing that under the block of assets concept, individual assets lose their identity, and depreciation is allowed on the entire block regardless of individual asset usage. This view was supported by various judicial precedents, including decisions from the Delhi and Gujarat High Courts.

4. Disallowance of Depreciation on Impaired Assets:
The final issue involved the AO's disallowance of depreciation on impaired assets. The CIT(A) and the Tribunal upheld the assessee's claim, stating that under the block of assets concept, depreciation is allowed on the entire block, not individual assets. The Tribunal cited several judgments affirming that once assets form part of a block, their individual usage is irrelevant for depreciation purposes. The Tribunal also distinguished the present case from others where assets were not used in the year of acquisition, noting that in this case, the assets were used in prior years and formed part of the block.

Conclusion:
The Tribunal dismissed all the Revenue's appeals, affirming the CIT(A)'s orders allowing depreciation on the actual cost of second-hand machinery and on impaired assets within the block of assets, irrespective of individual asset usage. The judgments emphasized the concept of block of assets, where individual asset identity is lost, and depreciation is allowed on the entire block.