2021 (9) TMI 734 - SCH - Income Tax

Depreciable asset forming part of the block of assets - restarting of business after a time gap - Depreciation based on the written down value available as on the date of ending of the previous year - HELD THAT - As building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is up to the assessment year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. How a depreciable asset forming part of the block of assets within the meaning of section 2(11) of the Income-tax Act, 1961 can cease to be part of block of assets. The description of the asset by the assessee in the balance-sheet as an investment asset in our view is meaningless and is only to avoid payment to tax on short-term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain its character as such, no matter one of two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years - instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which depreciation was allowed last. The High Court has, therefore, rightly restored the findings and addition made in the assessment order. Hence, we find no merit in this appeal and it is dismissed.

Summary

Issues: Interpretation of depreciation rules for business assets

Analysis:
The Supreme Court, comprising A. M. Khanwilkar and Sanjiv Khanna JJ., heard the appeal regarding the interpretation of depreciation rules for business assets. The case involved the High Court overturning the opinion of the Commissioner of Income-tax (Appeals) II in Appeal No. I. T. A. 57/M/00-01. The High Court's decision was based on the premise that a building acquired by the assessee in 1974 and depreciated as a business asset until 1995-96 continued to be part of the depreciable asset block, despite non-use leading to disentitlement for depreciation for two years prior to the sale. The court emphasized that as long as the building remained part of the block of assets, its character as a depreciable asset would be retained, irrespective of temporary non-use for business purposes. The High Court's reasoning was upheld by the Supreme Court, which consequently dismissed the appeal, affirming the findings and additions made in the assessment order.

In summary, the judgment clarified that the continuity of a building as a depreciable asset within the block of assets under the Income-tax Act, 1961, is not affected by temporary non-use for business purposes. The court emphasized that the characterization of the asset as an investment asset in the balance-sheet does not alter its status as a depreciable asset as long as it remains part of the block of assets. The judgment underscores the importance of the asset's usage for business purposes in determining depreciation eligibility, highlighting that resuming business use after a period of non-use would allow for continued depreciation claims based on the written down value.