Once the asset merges in block of assets is entitled to get depreciation till the block of asset equals to zero or company is closed

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: A: NEW DELHI

BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER

AND

SHRI T.S. KAPOOR, ACCOUNTANT MEMBER

ITA No.4892/Del/2010

Assessment Year : 2007-08

ITO,

Ward 2 (4), Room No.301, 3rd

Floor,

CR Building, IP Estate,

New Delhi.

(Appellant)

Vs.

Bhandari Engineers & Builders

(P) Ltd.,

91, Bhandari House,

Nehru Place,

New Delhi.

PAN: AAACB1043K

(Respondent)

Assessee by: Shri Niren Gupta, CA

Revenue by: Shri Ram Bilash Meena, Sr.DR

ORDER

PER A.D. JAIN, JUDICIAL MEMBER

This is an appeal filed by the department for Assessment Year 2007-08 against the order dated 30.08.2010 passed by the CIT (A)-V, New Delhi, taking the following sole effective ground:-

“The Ld. CIT (A) has erred on facts and in law in deleting addition of Rs.8,95,351/- made on account of depreciation ignoring that:

a) the machinery was not put to use during the whole year under consideration.

b) Reliance is placed on the decisions in Unitech Products Ltd. vs. ITO [2008] 22 SOT 430 (Mum); and CIT vs. Bharat Aluminium Co. Ltd. [2010] 187 Taxman 111, wherein it is held that depreciation is allowed only if the asset is used for the purpose of business or profession at least for some time during (not necessarily throughout) the previous year.”

2. The assessee claimed depreciation of ` 8,95,351/-, on machinery, as under:-

3. It was contended that during the year, the assessee had no contract receipts; that the assessee was involved in arbitration/legal proceedings to recover its dues/claims from NBC, DS Construction, YOU One Maria in respect of contracts executed in earlier years; that the detailed dues as per the assessee’s balance sheet were as follows:-

4. The assessee further contended before the Assessing Officer that it was also to secure contract in Saudi Arabia for approximately ` 300 crores and had also given a bank guarantee of ` 15 crores in furtherance thereof, showing that the assessee was carrying on business activities during the year.

5. The Assessing Officer, however, disallowed the claim of depreciation made by the assessee, placing reliance on the provisions of Section 32 (1) of the IT Act, contending that as per the said provision, depreciation could be allowed on machinery used for the purpose of business or profession and that the claim of depreciation could not be allowed in the absence of any manufacturing activity carried on by the assessee.

6. By virtue of the impugned order, the Ld. CIT (A) deleted the addition made by the Assessing Officer, bringing the department before us.

7. The Ld. DR has contended, challenging the impugned order, that the Ld. CIT (A) has erred in deleting the addition made on account of depreciation; that while doing so, the Ld. CIT (A) has failed to appreciate that the assessee did not put its machinery to use during the whole year, thereby disentitling itself to the claim of depreciation, as per the provisions of Section 32 (1) of the IT Act, which requires depreciation to be allowed only on machinery put to use during the year. The ld. DR has placed reliance on “Unitex Products Ltd. vs. ITO” 22 SOT 429 (Mum) and “CIT vs. Bharat Aluminium Co.” 187 Taxman 111 (Del).

8. The ld. counsel for the assessee, on the other hand, has placed strong reliance on the impugned order, submitted that during the year, though admittedly, no manufacturing activity was carried out by the assessee, the assessee was involved in arbitration/legal proceedings to recover its dues/claims, as above and, as such, the assets like office equipment, air conditioners, furniture and fixtures and computers were put to use for the business purposes of the assessee; that user is necessary in the year of purchase or installation, when the depreciation is first claimed and, thereafter, the asset gets merged in the block of assets; that depreciation even on non-existent assets like assets destroyed/stolen, discarded/demolished, where there is no sale value of the asset, or the sale value of the asset is less than its WDV, is allowable under the Act; that in the subsequent years, it is the use of the block of assets, rather than the new asset, which becomes the yardstick for grant of depreciation, as held in “Bharat Aluminium Co.” (supra); that in the present case, the assessee had used some of the assets in Block I of assets consisting of plant and machinery, office equipment, air conditioners, etc., entitling it to depreciation on the entire block; that Blocks II and III, consisting of computers and furniture and fixtures were used for day-to-day activities; that the Ld. CIT (A) has correctly deleted the addition wrongly made and in doing so, he has duly taken into consideration all these facts; and that as such, there is no merit in the appeal filed by the department and the same be dismissed.

9. We have heard the parties and have perused the material available on record. Admittedly, no manufacturing activity was carried out by the assessee during the year. The assessee was involved in arbitration/legal proceedings, as above, for recovery of arrears due from its clients/contractors. Undisputedly, the assets on which the depreciation has been claimed stand merged in the block of assets. The assets like office equipment, air conditioners, furniture and fixtures and computers were put to use for the business purposes of the assessee. As such, the assessee has rightly been held entitled to depreciation on the entire blocks. In “Bharat Aluminium Co.” (supra), it has been held, inter alia, that once the various assets are kept together and become a block of assets, for the purpose of depreciation, it is one asset; that the new assets lose their identity once they become an inseparable part of the block of assets and it cannot be said that unless a particular asset is used for the purpose of business, depreciation is not to be allowed; that the expression ‘used for the purpose of business’ in Section 32 (1) of the Act, when applied to a block of assets, would mean the use of the ‘block of assets’ and not any specific building, machinery, plant or furniture in the said block of assets. ”Bharat Aluminium Co.” (supra), therefore, is in favour of the assessee, rather than in favour of the department, though the

department seeks to place reliance thereon. Therein, it has been held, no doubt, that depreciation is allowable only if the asset is used for the purpose of business at least for some time during the year. Here, however, it is seen that the assets were used during the year for the business purposes of the assessee. “Unitex Products Ltd.” (supra) is also to the same effect. Therein, it was held that once an asset was part of a block of assets, and depreciation was granted on that block, it cannot be denied in the subsequent year on the ground that one of the assets was not used by the assessee in some of the years; and that user of assets has to apply upon the block as a whole, instead of upon a new asset. As to how this position runs counter to the claim of the assessee has not been made out on behalf of the department. It rather goes in favour of the assessee and not in favour of the department.

10. The Ld. CIT (A) while deleting the addition, it is seen, has observed as follows:-

“11. I have perused the A.O.’s order, written submissions of the ARs and their arguments carefully. Though there is no business receipt of the assessee during this A.Y., there is business activities carried on by him for recovery of arrears due from other clients/contractors. Depreciation is such a thing; it has to be allowed to assessee for purchase or replacement of a new asset of similar nature after certain life span of the equipment, as decided by I.T. Rules. Once the asset merges in block of assets, the assessee is entitled to get depreciation till the block of asset equals to zero or company is closed, which is earlier. If company is closed, then short term capital gain can only be charged to remaining part of depreciation left. The Hon’ble jurisdictional H.C is very clear on treatment of depreciation in the case of BALCO as cited above. The AR’s example on sale of Car is also very clear on treatment of depreciation. If the assessee maintains books of accounts on mercantile basis, and there is no sales receipt, still the assessee is entitled to depreciation. The addition made by A.O. of Rs.8,95,351/- is hereby deleted.”

11. The Ld. CIT (A) has placed reliance on “Bharat Aluminium Co.” (supra) while deleting the addition.

12. In view of the preceding discussion, we do not find any error whatsoever in the order of the Ld. CIT (A) and the same is hereby confirmed.

13. Accordingly, finding no merit in the grievance sought to be raised by the department by way of ground of appeal taken, the same is hereby rejected.

14. In the result, the appeal filed by the department is dismissed.

The order pronounced in the open court on 26.10.2012.

Sd/- Sd/-

[T.S. KAPOOR] [A.D. JAIN]

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated, 26.10.2012.

dk

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT

TRUE COPY

By Order,

Deputy Registrar,

ITAT, Delhi Benches