2023 (7) TMI 986 - AT - Income Tax

Disallowance of depreciation u/s 32 - Plants not in operation - HELD THAT - Units are non-operating since 1996 and prior to 2003-04 all the assessment were done without any additions on account of disallowance then the principles of consistency required Revenue to have allowed the depreciation on the assets for being part to the block of assets. The BIFR directions do not override the provisions of Act. As long as the ownership of the assets continue to be with the assessee company, as for the purpose of Section 32 the claim of assessee company fulfils the following essentials. 1st the assets are capital in nature. 2nd assets are still owned by the assessee company. 3rd the depreciation was claimed on the assets forming part of the non-operating plants in the block of assets. 4th WDV at the beginning of the year was available and the assets were used for the purpose of business or profession since they were three other working units and the company as a whole were still working. It is a settled provision of law that use for a purpose of business when applied to block of assets would mean use of block of asset and not any specific building or machinery. Assets of closed units could not be segregated for purpose of allowing depreciation and depreciation has to be allowed on entire block of assets. See Bharat Aluminium company Ltd. 2009 (10) TMI 505 - DELHI HIGH COURT The Mumbai Bench in the case of Swati Synthetics Ltd. 2009 (12) TMI 667 - ITAT MUMBAI has held that as the year under consideration is not the first year of the assets. The assets of closed units still remained exist / part of the block of the assets and accordingly allowed depreciation. Thus appeals of assessee are allowed and AO is directed to allow the depreciation as claimed by the assessee on the block of assets for the relevant assessment years.

Summary

Issues Involved:
1. Disallowance of Depreciation on Non-Operating Units
2. Principles of Consistency in Allowing Depreciation
3. Applicability of Block of Assets Concept

Summary:

1. Disallowance of Depreciation on Non-Operating Units:
The primary issue concerns the disallowance of depreciation claimed by the assessee on non-operating units. The assessee argued that all assets formed a block of assets used for business purposes and should be eligible for depreciation. The Assessing Officer (AO) disallowed the depreciation, stating that the non-operating units were completely closed and not temporarily suspended, thus not used for business purposes. This decision was upheld by the Commissioner of Income Tax (Appeals) (CIT(A)), who relied on previous judgments and the fact that the non-operating units were intended for sale as per the Board for Industrial and Financial Reconstruction (BIFR) order.

2. Principles of Consistency in Allowing Depreciation:
The Tribunal noted that the Revenue did not dispute the fact that the units were non-operating since 1996 and that prior to 2003-04, all assessments were done without any disallowance of depreciation. The Tribunal emphasized the principles of consistency, stating that the Revenue should have allowed the depreciation on the assets for being part of the block of assets. The Tribunal also highlighted that the BIFR directions do not override the provisions of the Income Tax Act, and as long as the ownership of the assets continues with the assessee company, the claim for depreciation is valid.

3. Applicability of Block of Assets Concept:
The Tribunal referred to the legislative intent behind the concept of the block of assets, which does not require the use of each individual asset for allowing depreciation. The Tribunal cited the judgment of the Delhi High Court in CIT vs. Oswal Agro Mills Ltd., which held that assets of closed units could not be segregated for the purpose of allowing depreciation and that depreciation has to be allowed on the entire block of assets. The Tribunal also noted that the Mumbai Bench of the Tribunal in M/s. Swati Synthetics Ltd. had allowed depreciation on assets that remained part of the block of assets, even if the units were closed.

Conclusion:
The Tribunal decided in favor of the assessee, directing the AO to allow the depreciation as claimed on the block of assets for the relevant assessment years. The Tribunal emphasized that the ownership of the assets, their inclusion in the block of assets, and their use for business purposes, even if some units were non-operating, justified the claim for depreciation. The appeals of the assessee were allowed, and the order was pronounced on 20th July, 2023.