2019 (4) TMI 90 - AT - Income Tax

Disallowance of depreciation rejecting concept of Block of Asset - existence of individual asset in block of assets - use of individual assets - Some assets of a block of assets are not used in a particular year - HELD THAT - In the present case, this is not the case of the AO that some asset of building block and plant & machinery block are not existing in the respective block of assets. In respect of each of these two blocks, the AO is also allowing depreciation in respect of some assets included in these two blocks. Hence in our considered opinion, part amount of depreciation disallowed by the AO in respect of some asset in each of these two blocks is not justified and it is not as per law. Depreciation is allowable on both the blocks in full and the same cannot be reduced in the manner done by the AO. This is not the case of the AO that there is no business income of the assessee because part depreciation is allowed by the AO also. The objection of the AO is this that the assessee is engaged in illegal mining activity and for this reason, the mining license is cancelled. This is not the case of the AO that the assets in question cannot be used by the assessee in some other business. In fact, this is admitted by the AO also that part assets of these two blocks are being used for business purpose and AO himself allowed part depreciation for each of these two blocks. Some assets of a block of assets are not used in a particular year, whether for allowing depreciation, we have to ensure that each item of the block of assets was used for business purpose. In our humble opinion, this is not the requirement of law that in the block of assets concept, business use of each of the assets of the block has to be seen and examined and depreciation is to be allowed only in respect of the assets used. We note that in this case, one of the assets is not even owned by the assessee because it was sold out but still, depreciation is allowable on WDV less sale proceeds. Hence, it is clear that business use of each item of a block of assets is not necessary for allowing depreciation on the block. We therefore delete the disallowance of depreciation made by the AO by respectfully following the tribunal order rendered in the case of Swati Synthetics Ltd. vs. ITO 2009 (12) TMI 667 - ITAT MUMBAI . Since, we decide the issue in favour of the assessee

Issues Involved:
1. Jurisdiction and legality of the lower authorities' order.
2. Dispute over total income and total tax computed.
3. Disallowance of depreciation on fixed assets.
4. Assumption of permanent stoppage of business.
5. Assumption that the plant was not operational.
6. Rejection of 'Block of Asset' concept by the CIT-A.
7. Reliance on irrelevant material and ignoring relevant material.

Issue-wise Detailed Analysis:

1. Jurisdiction and Legality of the Lower Authorities' Order:
The appellant contested that the order of the lower authorities was against the law, facts, circumstances, natural justice, without jurisdiction, bad in law, and against all other known principles of law. However, the judgment does not provide a detailed analysis of this issue, focusing instead on the specific grounds of disallowance of depreciation.

2. Dispute Over Total Income and Total Tax Computed:
The appellant disputed the total income and total tax computed by the authorities. The judgment does not delve into this issue directly but addresses the underlying cause of the dispute, which is the disallowance of depreciation.

3. Disallowance of Depreciation on Fixed Assets:
The core issue was the disallowance of ?3,88,36,290/- out of the claimed depreciation of ?5,85,98,656/-. The AO noted that the assessee had not carried out any mining activity during the Financial Year 2013-14 and had income only from contract receipts for transportation and rake loading charges. The AO disallowed depreciation on the grounds that the assets were not utilized for business purposes. The assessee relied on various judgments to argue that the existence of assets in the block itself amounts to use for business purposes. The Tribunal agreed with the assessee, citing the case of Swati Synthetics Ltd. vs. ITO, which held that the use of individual assets for business purposes needs to be examined only in the first year of purchase. In subsequent years, the existence of assets in the block suffices for depreciation claims.

4. Assumption of Permanent Stoppage of Business:
The authorities assumed that the business had permanently stopped due to the cancellation of the mining license. The Tribunal found that this was not a valid reason to disallow depreciation, as the assets could still be used for other business purposes. The AO's allowance of partial depreciation indicated that the business had not completely stopped.

5. Assumption That the Plant Was Not Operational:
The AO assumed that the plant was not operational, leading to the disallowance of depreciation. The Tribunal noted that the AO had allowed depreciation on some assets within the same blocks, indicating that the plant was partially operational. Therefore, disallowing depreciation on some assets while allowing it on others within the same block was inconsistent and not justified.

6. Rejection of 'Block of Asset' Concept by the CIT-A:
The CIT-A rejected the 'Block of Asset' concept, leading to the disallowance of depreciation. The Tribunal emphasized that under the block of assets concept, the use of individual assets need not be examined every year. Once an asset is included in the block, its existence in the block suffices for depreciation claims. The Tribunal concluded that the disallowance was not as per law.

7. Reliance on Irrelevant Material and Ignoring Relevant Material:
The appellant argued that the authorities relied on irrelevant material and ignored relevant material. The Tribunal did not specifically address this issue but focused on the legal principles governing the block of assets and the conditions under which depreciation can be disallowed.

Conclusion:
The Tribunal allowed the appeal, concluding that the disallowance of depreciation was not justified. The existence of assets in the block sufficed for depreciation claims, and the partial allowance of depreciation by the AO indicated that the business had not completely stopped. The Tribunal followed the precedent set by the case of Swati Synthetics Ltd. vs. ITO and did not find it necessary to discuss other cited judgments. The appeal was allowed, and the disallowance of depreciation was deleted.

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