9911796707
TMI Blog2002 (6) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... block of assets has to be allowed as deduction even though the ponds were not used during the assessment year 1997-98 in view of the decisions of the Jabalpur and Ahmedabad Benches of ITAT in the cases of Packwell Printers v. Asstt. CIT [1996] 59 ITD 340 and Inductotherm (India) Ltd. v. Dy. CIT [2000] 73 ITD 329 and hence the Assessing Officer is not justified in disallowing the depreciation. (a) The CIT(A) ought to have seen that in view of the Circular No. 469 dated 23-9-1986 issued by the CBDT when once the value of asset forms part of the block of assets the written down value of such asset has to be reduced by monies payable in respect of any asset falling within the block which is sold, discarded, demolished or destroyed during the previous year together with the amount of the scrap value, if any. 2. As the issue involved in both these appeals is one and the same, for the purposes of convenience, they are heard together and disposed by way of this common order. 3. The brief facts of the case as gathered from the record are as follows. The assessee is a partnership firm carrying on the business of farming and trading of shrimps. During the previous year relevant to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed depreciation on this item. It is also not a case of passive use of the ponds, since the land containing the ponds have been handed back to the lessor farmers and the assessee can no longer avail of its use." 5. On appeal, the ld. CIT(A) held as follows: (Para-10, Page-7 of the CIT(A)'s Order) "I have carefully considered the various submission made by the ld. counsel and I have also perused the relevant case records. In this case 107.86 acres of land was taken on lease from various farmers for doing Shrimp farming. The lands were taken in the previous year relevant for the assessment year 1995-96. An amount of Rs. 52,59,390 is stated to have been spent in the construction of ponds and no depreciation was claimed in assessment year 1995-96 though there was export sale to the tune of Rs. 5.82 crores. The entire profit was claimed as exempt under section 80HHC. In assessment year 1996-97 depreciation on ponds has been claimed at Rs. 13,14,847 at the rate of 25% on cost of construction amounting to Rs. 52,59,390. The WDV as on 31-3-1995 was arrived at Rs. 39,44,543. In this year there was no export sale on which deduction under section 80HHC could be claimed. In the subsequent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The scope and effect of the amendment of section 32, he argued are explained in Circular No. 469 dated 23-9-1986. He took this bench through the relevant sub-clauses of section 32 and of the circular and submitted that from this circular, it is clear that as far as discarded assets are concerned, the adjustment that is required to be made under the new concept of "block of assets" with regard to buildings for the purposes of allowing depreciation is to reduce the monies receivable consequent to such discarding which in the case of this assessee is 'nil'. Based on the Board's Circular supra, the ld. counsel for the assessee Shri Koteswara Rao argued that once the value of assets forms part of the block of assets, the W.D.V. of such assets has to be reduced by monies realisable in respect of that asset on discarding, when any asset falling within that block is discarded during the previous year. Ld. counsel for the assessee submitted that once the value of the assets forms part of the block of assets, depreciation has to be allowed on the entire block irrespective of use of the assets during the assessment year. In this connection. Ld. counsel for the assessee, relied on the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can the very same block of plant and machinery 25 per cent depreciation was claimed and allowed for the assessment year 1996-97. Under these circumstances, the issue for consideration is whether the depreciation is allowable on that portion of the written down value of the block of assets represented by the value of ponds which have been handed back to the lessors of the land. The other fact that is not in dispute is the entire block consisting of this class of assets i.e. plant and machinery, has not been wiped off or eliminated during these two assessment years as the assessee had other assets in the block. 10. Before coming to the conclusion on this issue, it would be useful to reproduce for ready reference, Board Circular No. 469 dated 23-9-1986. Only the relevant portions of the Circular are extracted hereunder: "6.1 In his Budget speech for the year 1986-87, the Finance Minister had announced as under: "96. As promised in the Long-Term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation in respect of blocks of assets instead of the present system of depreciation on individual assets. Simultaneously, I propose to rationalize the rate structure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery, plant and furniture in respect of which the same percentage of depreciation is prescribed. The necessary amendments to the Income-tax Rules prescribing the percentage of depreciation in regard to various blocks of assets will be made accordingly which will be effective from 2-4-1987, i.e. for the assessment year 1988-89 and onwards. In view of these accelerated rates of depreciation, the extra shift allowance being allowed to some items of plant and machinery enumerated in appendix I to the Income tax Rules will cease to be admissible when the new rates come into force. (b) Under the existing provisions of section 32(1)(i), depreciation in the case of ocean-going ships is allowed at such percentage on the actual cost thereof as may be prescribed..........As a consequence, the provisions of section 32(1)(i) have been omitted by the Amending Act. (c) Section 32(1)(ii) provides that depreciation will be allowed as a prescribed percentage of the written down value of buildings, machinery, plant and furniture. The Amending Act has provided that in the case of any block of assets, depreciation will be allowable at a prescribed percentage of the W.D.V. thereof. (d) The provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets in the immediately preceding previous year, shall be reduced by the depreciation actually allowed in respect of the block of assets in relation to the said preceding previous year. (ii) The sum arrived at as above shall be increased by the assessee during the previous year. (iii) The sum so arrived at shall be reduced by the sale proceeds and other amounts receivable by the assessee in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous year. (6) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons: (A) The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased the actual cost of any new asset acquired, or (B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the godown in December for Rs. 9,00,000 if there is no asset left in the relevant block at the end of the year, the new provisions of section 50(2) of the Income-tax Act will apply as follows: WDV at the beginning of the year Rs. 10,00,000 Add: actual cost of new asset acquired Rs. 2,00,000 ------------- Rs. 12,00,000 Less: Sale proceeds received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.V. of the said block of assets, as per the percentage of depreciation prescribed in respect of the block of assets. Therefore, the depreciation was allowed on all the trucks of the assessee. On the same basis, the disallowance of depreciation on jeep, car, motorcycle was also deleted." Similarly, the Ahmedabad Bench of the ITAT in the case of Inductotherm (India) Ltd., as per the head note of the decision supra, held as follows: "The legislature has prescribed a different mode for allowing depreciation in respect of block of assets and henceforth a calculation of depreciation will be in a lump-sum for the entire block of depreciable assets. The theory of individual asset which prevailed before 1-4-1988 cannot be considered after the new provision of block assets came into force. If a particular machinery were owned, forming part of block of asset, is not used during the year, still depreciation is to be allowed even if assets are not used during the present year. If one single asset out of the entire block has been discarded or not put to use by the assessee for its business consideration, for that ground alone partial depreciation cannot be disallowed. The instant case was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceed the aggregate of the WDV, etc. as provided in section 50(1) nor the block of assets in question had ceased to exist as such as required under section 50(2) and, as such, there was no question of even computing capital gains in respect of sale of the leased vehicles. Again, as a result of the omission of sub-section (2) of section 41 with effect from 1-4-1988 there was no question of determining profit on the sale of the leased vehicles treating the excess of the sale price over the written down value as income chargeable under section 41(2). Thus, consequent upon the introduction of the concept of block assets, only capital gains could be computed on sale of depreciable assets as per the provisions of section 50, and under no other provisions of the Act any profit could be computed and brought to tax on the sale of the depreciable assets. In view of the facts and circumstances of the case, the provisions of sub-sections (1) and (2) of section 50 were not applicable in the case and the Assessing Officer was required only to compute the written down value of the block assets as per section 43(6)(c) referred to above. Therefore, entire exercise of the Assessing Officer to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1988 and is made applicable in cases where depreciation is claimed under clause (1) of sub-section (1) of section 32 i.e. only in cases of undertakings engaged in generation, distribution of power etc. where individual assets are considered for depreciation and not in cases where depreciation is allowed under the block concept. The binding effect of deletion of these two sub-sections in relation to block of assets has been brought into effect in a modified form by amending section 50 to the effect that where a block ceased to exist either on account of all the assets existing in the block being sold or on account of the sale value of the assets in the block exceeding the written down value of the block, then resultant excess or shortfall shall be deemed to be the short term capital gain or loss. As per clause (c) of sub-section (6) of section 43, written down value has to be computed by reducing from the opening written down value of the block of assets the monies payable in respect of any asset falling within the block which is sold, discarded or destroyed. Such a change that emerges w.e.f. 1-4-1988 consequent to the introduction of the concept of block of assets is that, in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the ld. CIT(A) has disallowed the depreciation in the appellant's case by separately computing the W.D.V. of a particular asset forming part of the block i.e. the ponds and such computation done individually to an asset is not envisaged or allowed under the new concept of block of assets. 14. The principle behind this method of allowing depreciation on a portion of the W.D.V. of assets though it is discarded, can be better appreciated if the provisions existing upto 1-4-1988 for allowing terminal depreciation are considered. If the provisions of section 32(1)(iii) as existing upto 1-4-1988 are applied to the appellant's case, then he would have been entitled to terminal depreciation to the extent of the value of the entire W.D.V. of Rs. 39,44,543 as on 1-4-1996 in the assessment year 1997-98 itself. In other words, the assessee would have been entitled to terminal depreciation on the entire opening W.D.V. of the assets discarded, as the scrap value or the value realised is only 'nil'. Thus, consequent to the replacement of the old provisions by the new provisions under which the individual identity of the assets forming part of the block, is not to be considered, the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation is not mandatory, in the case of Mahindra Mills. 16. From the above, it is clear that as long as an asset forms part of the block of assets and the block continues to exist, provisions of section 50 do not come into play and depreciation has to be allowed on that portion of the W.D.V. of the assets which have been scrapped, after reducing the scrap value from the block of assets. This view is fortified by the judgments of Jabalpur Bench of the ITAT in the case of Packwell Printers, the judgment of the Ahmedabad Bench of the ITAT in the case of Inductotherm (India) Ltd and the judgment of the Patna Bench of the ITAT in the case of Parikh Engg. & Body Bldg. Co. Ltd. Therefore, in view of the decisions and interpretation of the concept of 'block of assets' depreciation on ponds which is forming part of the block of assets has to be allowed as deduction even though these ponds were discarded and not used and not owned by it during the assessment years in question, as the assessee was not entitled to any scrap value whatsoever, consequent to discarding. 17. Coming to the case law relied upon by the ld. Departmental Representative and by the ld. CIT(A), all of them are distin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
