2019 (9) TMI 544 - AT - Income Tax

Depreciation on let out properties u/s 32 - AO rejected contentions of the assessee on the ground that once assets are let out more so where the income is shown as Income from House Property , the depreciation cannot be allowed - HELD THAT - The assessee manifested its intention of change of user from business to that of giving these properties on rent for longer period of time wherein doctrine of supervening impossibility had set in preventing business user of these properties for the purposes of business of the assessee. Similar is the case of Ansal Properties 2012 (4) TMI 469 - DELHI HIGH COURT wherein the Hon ble Delhi High Court was not seized of the matter concerning change of user of the assets by the taxpayer. Thus, so far as these two house properties which were acquired in earlier years and were let out on rent from years including year under consideration, income thereof was offered for taxation by assessee under the head Income from House Property , no depreciation can be allowed u/s 32 as there is no business user of these two properties by assessee for the entire year as well for earlier years. These two properties are not even available or ready to be used for business purposes as these are let out on rent for years and doctrine of supervening impossibility of business user has set in keeping in view long period of these properties being let out . We hold that no deprecation u/s 32 can be allowed on these two properties which were acquired in earlier years and were let out throughout the year under consideration income thereof being offered for tax under the head income from house properties, as doctrine of supervening impossibility has set in as neither these properties were used for business purposes, nor ready to be used for business nor available for business user for the purposes of business of the assessee , for the entire year under consideration. Deprecation u/s 32 under these circumstances can not be allowed on these two properties merely on the grounds that once these properties entered Block of Assets viz. Building many years back and continues to be part of Block of Asset viz. Building despite the fact that factual matrix surrounding these two properties had undergone substantial change over years which cannot be given complete go bye

Summary

Issues Involved:
1. Whether depreciation can be claimed on properties that were let out and not used for business purposes.
2. Whether properties that form part of the "Block of Assets" can be excluded for depreciation if they are not used for business purposes.
3. Determination of the Written Down Value (WDV) of properties for depreciation.
4. Whether new properties acquired and let out during the year can be claimed for depreciation if initially used for business purposes.
5. Applicability of Section 38(2) of the Income-tax Act, 1961 on properties not exclusively used for business purposes.
6. Impact of the "Block of Assets" concept on depreciation claims for properties with changed usage.

Issue-wise Detailed Analysis:

1. Depreciation on Let Out Properties:
The assessee claimed depreciation on properties let out during the year, arguing they formed part of the "Block of Assets" used for business purposes. The Assessing Officer (AO) rejected this claim, stating that properties let out and generating income under "Income from House Property" cannot be depreciated. The CIT(A) upheld this view, noting that properties not used for business purposes during the year are not eligible for depreciation.

2. "Block of Assets" and Depreciation:
The assessee contended that once assets enter the "Block of Assets," they lose individual identity, and depreciation should be allowed on the entire block. The AO and CIT(A) disagreed, emphasizing that properties not used for business purposes should be excluded from the block for depreciation calculations. The tribunal supported this view, stating that business usage is a pre-condition for depreciation under Section 32.

3. Determination of WDV:
The CIT(A) calculated the WDV of properties individually to determine depreciation. For example, a property purchased in 1990-91 had its WDV reduced over the years through allowed depreciation, resulting in a specific WDV at the end of the assessment year. The tribunal upheld these calculations, confirming that depreciation should be disallowed proportionately based on the non-business use of properties.

4. New Properties Acquired During the Year:
The assessee claimed that new properties acquired and let out during the year were initially used for business purposes as godowns. The tribunal noted this fresh claim and remitted the issue to the AO for verification. The AO was directed to reassess the claim based on evidence of business usage before the properties were let out.

5. Applicability of Section 38(2):
Section 38(2) stipulates that depreciation should be restricted to a fair proportionate part for assets not exclusively used for business purposes. The CIT(A) and tribunal applied this provision, disallowing depreciation on properties let out and not used for business purposes during the year.

6. Impact of "Block of Assets" Concept:
The tribunal clarified that the "Block of Assets" concept cannot be stretched to allow depreciation on properties not used for business purposes. It emphasized that properties let out for years, generating rental income under "Income from House Property," do not qualify for depreciation under Section 32, even if they form part of the block. The tribunal distinguished this case from others where assets, although part of the block, were temporarily non-functional but still intended for business use.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, remitting the issue of new properties' business usage to the AO for verification. It upheld the disallowance of depreciation on properties let out and not used for business purposes, aligning with the provisions of Section 32 and Section 38(2) of the Income-tax Act, 1961. The judgment emphasized the necessity of business usage for claiming depreciation, even within the "Block of Assets" framework.