2014 (7) TMI 771 - HC - Income Tax

Written down value of block assets reduction of receipt from insurance company as to the damages u/s 43(6)(c) - block assets (WDV), valued at ₹ 68,06,562/- were destroyed in a fire accident - the insurer paid a sum of ₹ 1,54,99,051/- They, however, deducted only a sum of ₹ 68,06,562/- in the process of working out the WDV, and accordingly, claimed deprecation, in accordance with the relevant provisions - CIT(A) accepted the contention of the assessee - Tribunal took the view, that the reduction in the WDV of the block assets must be equivalent to the value of the newly acquired item, being ₹ 1,38,03,407/- Held that - The appellate authority took the correct view of the matter in permitting reduction in WDV only to the extent of ₹ 68,06,652/- representing the value of the deduction - Tribunal made an attempt to increase the amount to be deducted, corresponding to the item of machinery that was acquired at the relevant point of time - obviously, the exercise was referable to the last part of clause (B) of special clause (c) of Section 43 (6) of the Act - The expression, reduction does not exceed the WDV as so increased, appears to have been taken into account - It is nobody s case that the reduction would offset the value in the increase of the WDV of the block assets - That occurred on account of acquiring of new items there was no basis in the approach of the Tribunal Decided in favor of assessee.

Summary

Issues Involved:
1. Interpretation of Section 43(6)(c)(i)(B) of the Income Tax Act, 1961 regarding the adjustment of money payable in respect of insurance against destroyed assets.
2. Determination of the correct Written Down Value (WDV) for block assets when assets are destroyed and insurance claims are received.

Detailed Analysis:

Issue 1: Interpretation of Section 43(6)(c)(i)(B) of the Income Tax Act, 1961

The Finance Act, 1998 introduced significant changes to the Income Tax Act, particularly in the regime of depreciations by introducing the concept of "block assets." As per Section 2(11) of the Income Tax Act, 1961, block assets are defined as a pool of tangible and intangible assets grouped together based on the same rate of depreciation. Section 43(6) of the Act provides the procedure to work out the Written Down Value (WDV) for these block assets.

The applicant submitted its returns for the assessment year 1988-89, stating that assets valued at Rs. 68,06,562/- were destroyed in a fire accident and that the insurer paid Rs. 1,54,99,051/- under the Reinstatement Value insurance policies. The applicant deducted only Rs. 68,06,562/- from the WDV, claiming depreciation accordingly. The Assessing Authority, however, argued that the entire insurance amount received should be deducted from the WDV. The appellate authority restricted the deduction to Rs. 68,06,562/-, but the Tribunal later accepted the Assessing Authority's view.

The Tribunal framed the following questions for the High Court:
1. Whether the Tribunal was correct in restricting the adjustment of insurance money to the cost of plant and machinery acquired during the previous year instead of the whole amount payable?
2. Whether the Tribunal was correct in holding that the insurance receipt should be reduced from the block to the extent of additions made during the previous year?

Issue 2: Determination of the Correct WDV for Block Assets

The applicant argued that the scheme introduced through the Finance Act, 1998, is self-contained and that the identity of individual items within block assets should be retained when determining the WDV. The applicant contended that only the value of the destroyed items should be reduced from the WDV, irrespective of the insurance amount received.

The Income Tax Department argued that the concept of block assets was introduced to group assets with identical depreciation rates and that both the value of destroyed items and the insurance amount received should be deducted to arrive at the correct WDV.

The High Court noted that the Finance Act, 1998, introduced a new legal regime for depreciation, grouping tangible and intangible assets into blocks. For the assessment year 1988-89, the identity of items within block assets was maintained, while for subsequent years, it was blurred. Section 43(6)(c)(i) specifies that the WDV should be adjusted by the cost of newly acquired assets and reduced by the value of sold or destroyed assets, but not exceeding the WDV increased by new additions.

The High Court observed that the value of the destroyed items was Rs. 68,06,562/- and that the insurance amount received was significantly higher. However, the law requires only the book value of destroyed items to be reduced from the WDV, not the insurance amount. The High Court emphasized that the assessing authority cannot indirectly apply omitted provisions of Section 41(2) of the Act to tax the differential amount.

The High Court concluded that the appellate authority correctly permitted the reduction in WDV only to the extent of Rs. 68,06,562/-. The Tribunal's attempt to increase the deduction amount was based on a misinterpretation of the law.

Conclusion:

The High Court answered both questions in the negative, upholding the appellate authority's order. The reduction in WDV should be limited to the book value of the destroyed items, and the insurance amount received should not influence this calculation. The Reference Case was answered accordingly, with no order as to costs.