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TMI Blog2006 (1) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... acture colour developers but to adverse market conditions the manufacturing operations never went on stream. The Assessing Officer asked the assessee to submit its explanation regarding the functioning of this unit. It was explained to the Assessing Officer that the factory was set up with an investment of Rs. 73.81 lakhs but due to cheaper imports manufacturing was not started. It was also observed by the Assessing Officer that the plant and machinery was capitalised in the books of account and the depreciation had been claimed thereon from earlier years. It was also noted that some of the plant and machinery and other assets were sold in earlier years as well as in the current year. The Assessing Officer disallowed the depreciation of Rs. 11,27,779 on plant and machinery and equipment of the Baroda Unit as the assets had not been used for the purpose of the assessee's business. The other issue relating to disallowance of depreciation of Rs. 10,93,837 on Titan machine which was imported in 1995. The aforesaid machine was to be utilised for the purpose of slitting of colour photograph paper, jumbo rolls into smaller rolls and was to be used in the factory at Goa. However, the Goa p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e eligible for depreciation individually the assessee was entitled to get the benefit of terminal depreciation in the year of discard or sale of the asset, as the case may be, but after the change in law terminal depreciation was not available to the assessee and, therefore, if the assessee was not given depreciation on such assets that would amount to double addition. In this regard he placed reliance on the decision of the Tribunal in the case of Inductotherm (India) Ltd. v. Dy. CIT [2000] 73 ITD 329. He also put reliance on the decision of the Tribunal in the case of ITO v. Asian Steel Yard [IT Appeal No. 1888 (Bom.) of 1991 dated October 1991] and in the case of Vijay & Maheshwari v. Asstt. CIT [IT Appeal No. 1725 (Bom.) of 1994 dated 21-9-1994]. In the first case of M/s. Inductotherm cited supra it was held that if one single asset out of the entire block had been discarded or not put to use by the assessee for its business consideration, on that ground alone partial depreciation could not be disallowed. In the other two cases the Tribunal held that the depreciation of motor car for personal use could not be disallowed by picking up the motor car out of the block of assets. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions made by both the sides, material on record; the orders of the authorities below and also the applicable legal provisions. 6.1 The main trust of the assessee's contention is that once an asset is entered into a Block of Assets and depreciation is claimed thereon, then, subsequently even if such asset is not used in the business of the assessee, the assessee remains entitled for depreciation thereon because the asset, as such, looses its individuality on becoming a part of Block of Assets. In this background, the legal provisions are to be analyzed in detail. The depreciation is reduction in usable value of fixed assets due to wear and tear, efflux of time and obsolence. Depreciation can also be viewed as a method of amortization of costs of the assets employed in the business. Under the Income-tax Laws, the assessee has no choice in the matter of percentage on which an asset can be depreciated as rates prescribed by the law are required to be adopted. With effect from assessment year 1988-89 depreciation is not to be claimed on individual asset basis but the same is computed by aggregating assets into Block of Assets on the basis of classification and percentage of depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for use in case of break down of the main machine but still it could qualify for depreciation because the purpose of such standby machine is to use the same in situation of break down only and so long there is no break down of the main machinery, it cannot be said that the standby machine has not been used. Similarly, Fire Extinguisher also qualify for depreciation but the machines which are necessarily required to be used cannot be eligible for depreciation merely because such machines were installed and were ready to use but not actually used. 6.4 The assessee has also relied on the decision of the Tribunal in the cases where it has been held that no disallowance could be in respect of the depreciation for personal use under section 38(2) of the Act after incorporation of the concept of the block of assets. The provisions of section 38(2) are applicable because had it been the intention of the Legislature, the provisions of section 38(2) would have been amended accordingly but as per the scheme of the Act, no allowance/deduction is admissible which is not related to the business of the assessee or is related to the exempted income. In this connection, we also find support from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of sections 43(6)(c ) (i) (A) and (B) stipulate the aggregation of w.d.v. of the assets falling within a block of assets in respect of the previous year relevant to the assessment year commencing on 1-4-1988 and then adjusting the same w.d.v. by increase by the actual cost of any asset, falling within that block, acquired during the previous year and then also reducing from w.d.v. so arrived at the moneys payable in respect of any asset, falling within the block, which is sold or discarded or demolished during the previous year, provided the amount of such reduction does not exceed the w.d.v. as is increased, similarly, under item (ii) of sub-section ( c) of section 43(6), the w.d.v. of the block of assets in the immediately preceding previous year relevant to the assessment year 1989-90 is to be reduced by the depreciation actually allowed in respect of that block of assets during the preceding previous year and is to be further adjusted by increase or reduction, mentioned above. Thus the w.d.v. of all the assets within a block of assets is to be taken as on the 1st day of previous year and then adjusted w.r.t. the actual cost of acquisition or value of disposal of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of block of assets has not given a go bye to the maintenance of proper books of account with regard to the assets of the business. 6.6 Further the contention of the assessee is that in the year of discard/sale, any shortfall/loss suffered by the assessee, is not allowable as terminal depreciation, therefore, there is a material change in the methodology of allowance of depreciation and, accordingly, the assessee would be made to suffer from double disadvantage if the depreciation is not allowed in respect of the assets which are not used. We are afraid that this contention is also not valid for the reasons, firstly, it is the prerogative of the Legislature to frame laws and secondly, the terminal depreciation may not be fully allowable in the year of discard/sale of the asset but any shortfall on account of discard/sale remains part of that block provided these are other assets in that block and the assessee gets the benefit of depreciation at the specified rate of depreciation over the years till that block exists. Therefore, the terminal depreciation is merely spread over a number of years instead of allowing the same in one year. In case, all the assets of a particular block ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year and accordingly make provisions by passing necessary entries in the books of account. The assessee also clarified that in the succeeding accounting year the entry of the provision was reversed and amount of actual difference was credited or debited to the P&L account. The Assessing Officer after analyzing the methodology adopted by the assessee in this regard held that the debit of loss on the basis of rates at the year end was merely a provision which was itself reversed by the assessee at the start of next accounting year, therefore it was merely a notional gain or loss. The Assessing Officer also held that the income had to be computed according to the provisions of Income-tax Act, 1961 which provided for deduction of provision at the year end only for an ascertained liability for the purpose of computing the total income and not a mere provision for future liability which was contingent as well as unascertainable. Accordingly the Assessing Officer disallowed the provision, the net balance of the foreign exchange account amounting to Rs. 12,90,475. Aggrieved by the decision of the Assessing Officer the assessee preferred an appeal before the CIT(A) wherein the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, this ground of the assessee is rejected. 10. In ground No. D the issue is related to the disallowance of Rs. 1,18,535 on account of bad debts/advances written off. The Assessing Officer during the course of assessment proceedings asked the assessee to file the details in regard to its claim for allowance of Rs. 1,18,535 on account of bad debt/advances written off. The assessee explained that this amount was recoverable from one of the ex-employee of assessee's old unit which was closed. It was also submitted that the whereabouts of the said employee were not available. The Assessing Officer was of the opinion that as per provisions of the Income-tax Act bad debt and business losses could be allowed only if there were on trading account and in the absence of any details it could not be ascertained whether the conditions specified in the Act were fulfilled to allow the claim of the assessee, hence, Assessing Officer disallowed the claim of the assessee in this regard. The assessee, aggrieved by the decision of the Assessing Officer, preferred and appeal before the CIT(A) therein it was contended that the impugned amount was advanced in the course of employment, however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggrieved by the decision of the ld. CIT(A) in deleting the disallowance of Rs. 7,72,900 on account of Maintenance and Repairs of Building at Mumbai. 18. Briefly stated facts, relating to this ground, are that the Assessing Officer from the Auditor's Observation in Form 3-CD observed that the assessee had claimed a deduction of Rs. 15,08,242 incurred on rented premises at Kolkata and Mumbai. The Assessing Officer, after analyzing the terms and conditions of Rent Agreement with LIC for premises at Kolkata, accepted the claim of the assessee in regard to the repairs thereof, amounting to Rs. 7,35,400. However, for the expenses incurred on rented premises at Mumbai, the Assessing Officer was of the opinion that the expenditure on repairs was to be allowed under section 30(a) only if the tenant had undertaking to bear such expenses. Since the assessee did not file details regarding expenditure on repairs of the Godown or any Agreement in that regard and in respect of the repairs of the Kasturi Building at Mumbai, the assessee was only required to incur Wear and Tear Expenses, the Assessing Officer disallowed the expenditure of Rs. 7,72,900 incurred on Mumbai premises. The assessee be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nagpur High Court in the case of R.B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT [1957] 31 ITR 427 to contend that the heavy repairs after several years of Wear and Tear were covered under the terms "Current Repairs". It was also contended that genuineness of the expenses was not in doubt and even on the basis of commercial prudence nobody could have incurred the expenditure which one could have avoided. Accordingly, it was submitted that the expenditure was allowable as revenue expenditure being incurred for the purpose of business of the assessee. 21. We have considered the submissions made by both the sides, the orders of the authorities below and material on record. Admittedly, the assessee has incurred the repair expenses for its business premises situated at Kolkata and Mumbai. The Assessing Officer allowed the expenses for Kolkata premises on the basis of the Terms and Conditions of the Lease Agreement relating to that premises. However, he disallowed the expenses in connection with the repairs of the premises at Mumbai on the ground that there was no such obligation on the part of the assessee to bear such kind of expenses and also the expenses were of capital nature. On ..... 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