2018 (8) TMI 1544 - AT - Income Tax

Depreciation on intangible assets acquired during the course of running of proprietorship-firm - block of assets - Held that - Once an asset is part of the block of assets and depreciation is granted on that block it cannot be denied in its subsequent year on the ground that one of the assets is not used by the assessee in some of years. The concept user of assets has to apply upon block as a whole instead of an individual asset. The above issue could be raised in the AY 2005-06 when the assets entered into the block. Once the assets became part of a block of assets in AY 2005-06 and depreciation is granted on that block the issue cannot be agitated in the AYs 2006-07 and 2007-08. - Decided against revenue

Summary

Issues:
Disallowance of depreciation on intangible assets acquired by the assessee from proprietary concern pursuant to conversion u/s 47(xiv) of the Income Tax Act 1961.

Analysis:
1. The Revenue appealed against the CIT(A)'s order regarding the disallowance of depreciation on intangible assets acquired by the assessee from a proprietary concern. The assessee claimed depreciation on intangible assets worth ?36,75,000, acquired through conversion under section 47(xiv) of the Act.
2. The AO disallowed the depreciation claim, stating that the proprietary concern did not possess any intangible assets transferred to the assessee. The AO cited Accounting Standard (AS)-26 and the 5th proviso to section 32(1) to support the disallowance.
3. The CIT(A) allowed the appeal, emphasizing that the AO should have disallowed the depreciation in the year of acquisition, i.e., AY 2005-06. The 5th proviso to section 32 was deemed applicable only in the year of succession, not in subsequent years.
4. During the hearing, the Revenue argued that the proprietary concern did not possess intangible assets fitting the Act's definition, supporting the AO's decision. The assessee's counsel reiterated the conversion details and the claim for depreciation based on the acquisition cost.
5. The Tribunal noted that the AO had allowed depreciation in AY 2005-06, and assets forming part of a block of assets are entitled to depreciation, relying on various judicial precedents.
6. Citing relevant case laws, the Tribunal upheld the CIT(A)'s decision, stating that once assets are part of a block and depreciation is granted, the issue cannot be raised in subsequent years.
7. Consequently, the appeals were dismissed, affirming the CIT(A)'s order.

This detailed analysis covers the issues related to the disallowance of depreciation on intangible assets acquired by the assessee, the arguments presented by both parties, and the judicial reasoning behind upholding the CIT(A)'s decision.