[CIT v. Oswal Agro Mills Ltd., 197 Taxman 25 (Del.); 238 CTR 113 (Del.)]
For the A.Y. 1998-99, the assessee claimed depreciation on its various assets which included the claim of depreciation in respect of a closed unit at Bhopal. The assessee claimed that the depreciation was to be allowed on the assets of the closed units also as the assets of that unit remained part of the block of assets and were ready for passive use, which was as good as real use. The Assessing Officer, however, disallowed the claim for depreciation on the assets of the closed unit. The Tribunal allowed the assessee’s claim on two grounds, viz., (1) there was a passive user of the assets at Bhopal unit, which would be treated as ‘used for the purpose of business’, and (2) as it was a case of depreciation on block of assets, the assets of Bhopal unit could not be segregated for the purpose of allowing depreciation and depreciation had to be allowed on entire block of assets.
On appeal by the Revenue, the Delhi High Court held as under:
Whether the assets of the closed unit can be treated as ‘used’
(i) By catena of judgments, it stands settled that the assessee should have used the asset for the whole of assessment year in question to claim full depreciation. Passive user of the asset is also recognised as ‘user for purpose of business’. This passive user is interpreted to mean that the asset is kept ready for use. If this condition is satisfied, even when it is not used for certain reason in the concerned assessment year, the assessee would not be denied the depreciation.
(ii) In the instant case, the entire Bhopal unit came to a standstill and there was a complete halt in its functioning from the A.Y. 1997-98. In that year, the Assessing Officer still allowed the depreciation treating it to be a ‘passive user’. However, when it was found that even in subsequent year, the Bhopal unit remained non-functional, the Assessing Officer(s) disallowed the depreciation. Instant appeals related to the A.Y. 1998-99. In the process six years passed, but there was no sign of that unit becoming functional. The ‘passive user’, in those circumstances, could not be extended to absurd limits. Otherwise, the words ‘used for the purpose of business’ will lose their total sanctity. It cannot be the intention of the Legislature that the word ‘used’ when it is to be interpreted in a wider sense to mean ‘ready to use’, the same is stretched to the limits of non-user for number of year.
(iii) Thus, one should proceed on the basis that particular assets, viz., assets of Bhopal unit were not ‘used for the purpose of business’ in the concerned assessment year.
Depreciation on block of assets
(iv) The position concerning the manner in which the depreciation is to be allowed, has gone a sea change after the amendment of section 32 by the Taxation Laws (Amendment) Act, 1986. As per amended section 32, deduction is to be allowed — ‘In the case of any block of assets at such percentage on the writtendown value thereof as may be prescribed’. Thus, the depreciation is allowed on block of assets, and the Revenue cannot segregate a particular asset therefrom on the ground that it was not put to use.
(v) With the aforesaid amendment, the depreciation is now to be allowed on the written-down value of the ‘block of assets’ at such percentage as may be prescribed. With this amendment, individual assets have lost their identity and concept of ‘block of assets’ has been introduced, which is relevant for calculating the depreciation. It would be of benefit to take note of the Circular issued by the Revenue itself explaining the purpose behind the amended provision. The same is contained in the CBDT Circular No. 469, dated 23-9-1986, wherein the rationale behind the aforesaid amendment is described.
(vi) It becomes manifest from the reading of the aforesaid Circular that the Legislature felt that keeping the details with regard to each and every depreciable asset was time-consuming for both the assessee and the Assessing Officer. Therefore, it amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of assets falling within the same class of assets.
(vii) Another significant and contemporaneous development, which needs to be noticed, is that the Legislature has also deleted the provision for allowing terminal depreciation in respect of each asset, which was previously allowable u/s.32(1)(iii) and also taxing of balancing charge u/s.41(2) in the year of sale. Instead of these two provisions, now whatever is the sale proceed of sale of any depreciable asset, it has to be reduced from the block of assets. This amendment was made because now the assessees are not required to maintain particulars of each asset separately and in the absence of such particulars, it cannot be ascertained whether on sale of any asset, there is any profit liable to be taxed u/s.41(2) or terminal loss allowable u/s.32(1)(iii). This amendment also strengthens the claim that now only detail for ‘block of assets’ has to be maintained and not separately for each asset.
(viii) Having regard to this legislative intent contained in the aforesaid amendment, it was difficult to accept the submission of the Revenue that for allowing the depreciation, user of each and every asset was essential even when a particular asset formed part of ‘Block of assets’. Acceptance of this contention would mean that the assessee was to be directed to maintain the details of each asset separately and that would frustrate the very purpose for which the amendment was brought about. The Revenue is not put to any loss by adopting such method and allowing depreciation on a particular asset, forming part of the ‘block of assets’ even when that particular asset is not used in the relevant assessment year. Whenever such an asset is sold, it would result in short-term capital gain, which would be exigible to tax and for that reason, there is no loss to Revenue either.
(ix) Thus, though the reasoning of the Tribunal contained in the impugned judgment could not be agreed with, the conclusion of the Tribunal based on the ‘block of assets’ was to be upheld.”
