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TMI Blog2009 (12) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... ing WDV by the actual cost of any asset falling within that block, acquired during the previous year. Once an asset is included in the block of assets it s remained in block for its entire life. The end of asset, i.e., to go out from block is only in accordance with the provisions. In the case under consideration, the admitted facts are that the division of Surat had been closed but the block of assets of the closed unit, (the division of Surat) along with other assets of the block were used for the purpose of business in earlier years. The year under consideration is not the first year of the assets acquired. The assets of closed unit still remained exist/part of the block of assets. The assets did not fall under any of the above exceptional three conditions. The said block of assets was used for the purpose of business during the year. Under the circumstances, the assets of the said closed unit amounts to use for the purpose of business in the year under consideration, we are, therefore, of the considered view that the assessee is entitled for depreciation. We, accordingly, allow the claim of the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... .). Natco Exports v. Dy. CIT [2003] 86 ITD 445 (Hyd.). Asstt. CIT v. SRF Ltd. [2008] 21 SOT 122 (Delhi). Goetze (India) Ltd. v. Dy. CIT [2008] 25 SOT 171 (Delhi). 5. The learned DR on the other hand relied upon the order of CIT(A) and submitted that the words 'intensity of use', etc., mentioned in the Circular No. 469 (supra) means there must be some use that does not mean that assets not to use at all are eligible for depreciation. The learned DR further submitted that section 43(6) provides methodology of calculation of depreciation whereas the basic requirement of section 32 is that the asset must be used for the purpose of business. The learned DR submitted that while interpreting the revenue statutes require rational construction to achieve the intention of the legislation. Strictly literal construction leads to absurd results, which is not intended to be subserved by the object of the legislation. The learned DR submitted that the Legislature was never intended if the assets are not used for the purpose of business, deprecia- tion is allowable. The learned DR relied upon the following decisions for his contentions :-- 5.1 CIT v. J.H. Gotla [1985] 156 ITR 323 wherein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the Assessing Officer has accepted the short-term capital gain in assessment year 2006-07, it means, the Assessing Officer has accepted the allowance of depreciation in earlier years also. The learned AR submitted that the issue is squarely covered by the decision of ITAT in [IT Appeal No. 822 (Mum.) of 2005] for assessment year 2001-02 in the case of GR Shipping Ltd. vide order, dated 17-7-2008 wherein the ITAT has considered the judgment of the Hon'ble Bombay High Court in the case of Dinesh Kumar Gulabchand Agrawal (supra) and held that the said judgment is not applicable to the facts of the case as in the present case, the assessee has already used the asset for the purpose of business. The asset has already entered the block of assets. Whereas in Dinesh Kumar Gulabchand Agrawal's case (supra), the asset in question was not at all put to use. The learned AR submitted that the revenue filed appeal against the order of the ITAT in the case of GR Shipping Ltd. (supra ) before the Hon'ble jurisdictional High Court vide Income-tax Appeal No. 598 of 2001, which has been dismissed by Hon'ble jurisdictional High Court following their earlier judgments, namely, Whittle Anderso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. We will try to resolve the issue under consideration by applying the above rule of interpretation. The judgment of Hon'ble jurisdictional High Court in the case of Dinesh Kumar Gulabchand Agrawal (supra) cited by the learned DR has been distinguished by the ITAT in the case of GR Shipping Ltd. ( supra) observing that in that case asset in question was not at all put to use. The issue in the case under consideration before us is whether under the facts and circumstances of the case, the assessee entitles to depreciation on the assets of closed unit. The assessee was carrying on two businesses having one division at Dombivili and the other at Surat. Division at Surat was meant for yarn texturising in the name and style of M/s. Swati Polyester and division at Dombivili carried on the business of dyeing by the name of Swati Dyeing. The division of Surat had been closed. The assets pertain to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for the purpose of earning his profit will have to be considered and allowance will have to be made for wear and tear. This is what is notionally understood as depreciation. The allowable depreciation amount is a capital loss to the depreciable assets which must be replaced first to give a true or correct picture as otherwise there is bound to be a distorted picture in the profit and loss account. The depreciation amount is to be treated as a charge on the profits. The principal factors responsible for, reduction in value of a capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear; (ii) unusual damage; (iii) inadequacy; and (iv) obsolescence. These factors include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time. 7.2 Now we come to relevant statutory provisions of the Act which are as under :-- 7.2.1 Section 32 deals with depreciation which reads as under :-- "Depreciation 32. (1) [In respect of depreciation of-- (i)buildings, machinery, plant or furniture, being tangible assets; (ii)know-how, patents, copyright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellip;…………. (D)…………………. [(iii)in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof: Provided that such deficiency is actually written off in the books of the assessee.] Explanation.--For the purposes of this clause,-- (1) "moneys payable" in respect of any building, machinery, plant or furniture includes-- (a)any insurance, salvage or compensation moneys payable in respect thereof; (b)where the building, machinery, plant or furniture is sold, the price for which it is sold,. . . . (2) "sold" includes a. . . ." (iv) [***] (v) [***] (vi) [***] (1A) [***] [(2) ………………… 7.2.2 The depreciation allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y block of assets,-- (i )in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,-- ( A)by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and ( B)by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (ii )in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i)." 7.5 "Used for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be. 7.6.2.2 The next step to be taken is to allocate the asset to the respective block. As per the definition, "block of assets" as provided in section 2(11 ) of the Act, it is to be grouped in assets, which falls within a class of assets, being building, machinery, plant or furniture in respect of which same percentage of depreciation is prescribed. According to the clause (ii) of section 43(6)(c ), the opening written down value as on the first day of relevant previous year shall be increased by the actual cost of any asset falling within that block which is acquired by the assessee during the previous year. 7.7 Sold, discarded, demolished or destroyed of asset 7.7.1 Sale, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their Circular (Circular No. 469, dated 23-9-1986 reported in 162 ITR Statutes page 21) by giving examples which are as under :-- 7.7.2 The following examples illustrate as to how the amended provisions relating to allowance of depreciation will be applied :-- "Example I - Suppose a company "X" has financial year as its accounting year and has three items of plant and machinery in respect of which the prescribed percentage of depreciation for the assessment year 1987-88 is the general rate of fifteen per cent. Further that for the assessment year 1987-88, the written down value of these items of plant and machinery before allowing depreciation for that year was as follows :-- Rs. Item 1 1,50,000 Item 2 2,00,000 Item 3 3,00,000 Total 6,50,000 The depreciation that will be allowable in respect of these items for the assessment year 1987-88 as also the written down value of these items at the beginning of the assessment year 1988-89 will be as follows :-- Depreciation WDV at the beginning of the assessment year 1988-89 Rs. Rs. Item 1 22,500.00 1,27,500.00 Item 2 30,000.00 1,70,000.00 Item 3 45,000.00 2,55,000.00 Aggregate WDV at the beginn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision of section 38(2) is not applicable. The above section has been examined by the ITAT Special Bench, Chandigarh in the case of Gulati Saree Centre ( supra). The following question was referred for the opinion of the Special Bench :-- "Whether, after the introduction of the concept of block of assets an individual item in a block of assets loses its identity and the depreciation has to be allowed on the total block without considering whether an individual item comprised in the block has been used for business purposes or not whether fully or partly?" 7.8.3 The Division Bench happened to refer the aforesaid question to the ITAT Special Bench, Chandigarh because the learned counsel for the assessee had placed reliance on the decision of the Jabalpur Bench of the Tribunal in the case of Packwell Printers (supra) for the proposition that after the amendment in section 32 with effect from 1-4-1988 an individual asset loses its identity and for allowing depreciation the entire block has to be considered. On the other hand, the case of the revenue was that such an interpretation would negate the provisions of section 38(2) of the Income-tax Act, 1961 (for short 'th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred wholly or exclusively in connection with such transfer or transfers; (ii)the written down value of the block of assets at the beginning of the previous year; and (iii)the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be short-term capital gains. (B)The newly substituted section 50(2) of the Income-tax Act deals with the cases where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year. In such a case, the cost of acquisition of the block of assets shall be the written down value of the block at the beginning of the previous year as increased by the actual cost of any asset falling within that block acquired by the assessee during the previous year. The income from such transfer or transfers shall be deemed to be short-term capital gains. 7.9.2 The applicability of provision of section 50 of the Act can be explained by simple example which is as under :-- (i)At the commencement of a previous year the block of assets consists of three items, X, Y and Z, their written down value at the commencement of the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort-term capital gains/loss. 7.10 Other relevant amendments 7.10.1 The existing provisions of sub-sections (2) and (2A) of section 41 of the Income-tax Act and the Explanation thereunder relating to balancing charge in respect of discarded assets have been omitted. The existing sub-sections (1) and (2) of section 34 of the Income-tax Act provide that the depreciation shall be allowed only if the prescribed particulars for the purposes of clauses (i) and (ii) of section 32(1) of the Income-tax Act have been furnished in respect of the depreciable assets. Further, that the aggregate of all deductions in respect of depreciation shall not exceed the actual cost to the assessee in respect of such assets. By the Amending Act, these sub-sections have been deleted in view of the switch over to the system of allowing depreciation on blocks of assets. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On reference Hon'ble Bombay High Court held that the word 'used' in section 10(2)(vi) of 1922 Act denotes actual user, and not merely being capable of being used. But that does not dispose of the question whether, when machinery is kept ready for use at any moment in a particular factory under an express contract from which taxable profits are earned, the machinery can be said to be used for the purposes of the business which earns the profits, although it is not actually worked. The business from which the profits were derived was that of ginning factories, and the contribution of the assessee to that business was the obligation to keep his machinery ready for actual use at any moment. It was further held that The word 'used' in section 10(2)(vi) of 1922 Act may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season. The ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and in the case, the profits of the assessee during the year under assessment could not have been earned except by maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond proviso was inapplicable because the trucks were sold on the very first day of the previous year and, therefore, could not be said to have been used during the previous year for the purposes of the business within the meaning of section 10(2)(iv), (v ) and (vi). The Tribunal held that the mere fact that the trucks were sold on the first day did not necessarily mean that they were not kept available for use on that day and that "used" within the meaning of section 10(2)(iv), ( v) and (vi) includes passive use also. On reference Hon'ble Allahabad High Court held that an article which was in use at a particular time does not require that it was actively employed during the time in producing the result for which it was meant. Once it is accepted that an article can be said to be in use in the interval between its two active users, the problem can be solved without any difficulty. The finding that an article was in use in the interval is not based upon its being put to active use at the end of the interval, but upon its availability for active use whenever required during the interval. Whether it was in use during the interval does not depend upon what happens to it at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness which is actually carried on and the profits of which are assessable under the Act. It is further held that the word 'used' has been read in some of the pool cases in a wide sense so as to include a passive as well as active user." 7.12 To examine the issue under consideration it is also necessary to consider the principle of commercial expediency. That what the Income-tax Act purport to tax is business profits, and business profits are the true profits of a business as ascertained according to commercial principles. It is the duty of everyone who has anything to do with taxing business-people to understand what the principles of commercial expediency are. Unless one understands these principles it is difficult to make a proper assessment on a business or on a businessman. 7.12.1 The block concept of depreciation was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988 .The Board issued a circular (Circular No. 469, dated 23-9-1986 reported in 162 ITR Statutes page 21). The purpose/object of the scheme of depreciation on block of assets which has been clarified by the Finance Minister in his Budget Speech which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture." 7.13 From above discussions we noticed that the concept of allowing depreciation on block of assets has been introduced in the statutes with certain objects. The calculation of depreciation in respect of each capital asset separately requires elaborate book keeping and process of checking by the Assessing Officer is time consuming. The practice of granting terminal allowance for taxing the balancing charge under the Income-tax necessitate the keeping of records and depreciation already availed by each asset eligible for depreciation necessitated simply the system of allowing depreciation of block of assets have been introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 1-4-1988 to give effect to this new system regarding depreciation balancing charge and capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and in the case, the profits of the assessee during the year under assessment could not have been earned except by maintaining his factory in good working order, and that involves the user of the factory and the machinery. Recently after introducing the block concept of depreciation, Hon'ble jurisdictional High Court dismissed the appeal of revenue vide their judgment dated 28-7-2009 for want of substantial question of law appeal filed by the revenue against the order of the ITAT Mumbai, in the case of GR Shipping Ltd. (supra). The ITAT held that depreciation on (Ship) Barge which included in block of asset, therefore, depreciation is allowable even though said Barge was not used for the purpose of business during the financial year. The Hon'ble jurisdictional High Court in the said case of GR Shippling Ltd. against the revenue appeal, in Income-tax Appeal No. 598 of 2009, vide order, dated 28-7-2009, held as under :-- "1. Heard learned counsel for the parties. 2. The question sought to be raised in this appeal is based on the ground of non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be. When an asset purchased is satisfied the above condition in the year of purchase that asset will be included in the respective block of asset. Depreciation for that year will be calculated on written down value in accordance with section 43(6) of the Act by the increase opening WDV by the actual cost of any asset falling within that block, acquired during the previous year. Once an asset is included in the block of assets it's remained in block for its entire life. The end of asset, i.e., to go out from block is only in accordance with the provisions of the Act. There are following three situations provided in the statutes when an individual asset of the block goes out of block :-- "(1) an asset is sold or discarded or demolished or destroyed during that previous year as provided in sections 43(6)( c)(i)( b) and 32(1)(iii ) of the Act. (2) An Asset not exclusively used for the purposes of the business or profession but used other than business purposes as provided in section 38(2) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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