2009 (7) TMI 177 - AT - Income Tax

Summary

Issues Involved:

1. The treatment of "write off of assets" related to the Gurgaon office structure as short-term capital loss.
2. The classification of the Gurgaon office structure as an independent block of assets within the class of assets being "building".
3. The application of Section 50(2) of the IT Act regarding the cessation of a block of assets.
4. The alternative claim for deduction under Section 32(1)(iii) of the IT Act.

Detailed Analysis:

1. Treatment of "write off of assets" as short-term capital loss:

The assessee claimed a short-term capital loss of Rs. 51,11,136 due to the write-off of assets related to the Gurgaon office structure. The AO disallowed this claim, treating the Gurgaon office structure as part of the same block of assets as other buildings owned by the assessee. The AO adjusted the shortfall against the aggregate WDV of the block of assets of "building" and after considering the current year's depreciation, added Rs. 51,11,136 to the returned income.

2. Classification of the Gurgaon office structure as an independent block of assets:

The assessee argued that the Gurgaon office structure should be treated as an independent block of assets within the class of assets being "building". The AO rejected this argument, stating that according to Section 2(11) of the IT Act, a block of assets is defined by the rate of depreciation, not by ownership status. The AO noted that the block of assets under "building" continued to exist and thus, Section 50(2) was not applicable.

3. Application of Section 50(2) of the IT Act:

The AO and CIT(A) both held that since the block of assets under "building" had not ceased to exist, the provisions of Section 50(2) were not applicable. The CIT(A) emphasized that the Gurgaon office structure did not constitute a separate block of assets but was part of the same block of assets under "building". The CIT(A) also noted that Note 3 to the depreciation table only clarified the applicable rate of depreciation and did not create a separate block of assets.

4. Alternative claim for deduction under Section 32(1)(iii) of the IT Act:

The assessee raised an additional ground, claiming the loss under Section 32(1)(iii) of the Act. The Tribunal admitted this ground for consideration. The assessee contended that the Gurgaon office structure, being capital expenditure on leased premises, should be treated as a separate block of assets and the loss should be allowed under Section 32(1)(iii). The Tribunal, however, held that both the buildings owned by the assessee and the Gurgaon office structure fell within the same block of assets as they were used for office purposes and had the same rate of depreciation. The Tribunal concluded that the shortfall should be adjusted against the aggregate WDV of the block of assets and not allowed as a separate deduction.

Conclusion:

The Tribunal upheld the AO's decision, confirming that the Gurgaon office structure and the buildings owned by the assessee constituted the same block of assets. The shortfall between the WDV of the Gurgaon office structure and the amount realized on its transfer was to be adjusted against the aggregate WDV of the block of assets. The appeal filed by the assessee was dismissed.