1. These appeals by the assessees for assessment year 1989-90 raise identical issues, were argued together and are disposed of by a combined order for the sake of convenience.
7. As regards the remaining ground in this appeal and the only ground in the case of M/s. Bharat Ropeways, Shri Khanna has raised an interesting issue. It was submitted that from assessment year 1989-90, the scheme of the Income-tax Act with regard to allowance of depreciation has undergone a radical transformation. It was submitted that now the depreciation has to be allowed not in respect of each and every asset but in respect of block of assets. It was submitted that once an asset enters the block of assets, it loses its identity and merges into the block of assets. It was, therefore, submitted that under the new dispensation, there cannot be any separate assets which may be said to have been used partly for business purposes and partly for non-business purposes. It was submitted that section 41(2) of the Income-tax Act had since been deleted, section 43(6) defining "written down value" had been amended and a new section 50 of the Act had been brought on the statute book to deal with the cases of deemed short-terms capital gains or loss. It was therefore, submitted that section 38(2), which had been pressed into services by the ld. CIT(A), was no longer applicable in the new scheme of things and hence no proportion of the depreciation could be disallowed on the ground that the car was being used for non-business or personal purposes of the partners. It was, therefore, vehemently argued that the disallowances of Rs. 6,980 and Rs. 12,762 upheld by the first appellate authority in the two cases under consideration be deleted.
8. The ld. D.R. strongly supported the impugned orders and submitted that even under the new scheme of things regarding computation of depreciation allowance, etc., the provisions of section 38(2) still were part of the statute and had not been done away with. It was, therefore, submitted that since it was an undisputed fact that cars in both the cases were being used for personal purposes by the partners, a fair proportion of depreciation had been correctly disallowed by the lower authorities.
9. We have carefully considered the submissions of both the sides.
Under the scheme of allowance of depreciation calculation of deemed short-term capital gains/loss, amended definition of written down value, etc., were introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1-4-1988. The object of the amendment was to implement certain proposals included in the Long Terms Fiscal Policy, the Budget Speech for 1986-87 and certain amendments made by the Finance Minister in the Lok Sabha on 5th May, 1986. This is clear from the Explanatory Notes to the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 as contained in Circular No. 469 dated 23-9-1986. In his budget speech for the year 1986-87, the Finance Minister had announced to introduce a system of allowing depreciation in respect of block of assets instead of the present system of depreciation on individual assets. As mentioned by the Economic Administration Reforms Commission, the existing system in this regard requires the calculations of depreciation in respect of each capital asset separately and not in respect of block of assets, which requires elaborate book-keeping and the process of checking by the Assessing Officer was time consuming. In order to simplify the existing cumbersome provisions, the amended Act was introduced which brought into being a system of allowing depreciation on block of assets.
Section 2(11) of the Income-tax Act was introduced to define "block of assets" to mean a group of assets falling within a class of assets being buildings, machinery, plant and furniture in respect of which the same percentage of depreciation is prescribed.
10. From the above, it is clear that the purpose of amending the existing provisions with regard to depreciation allowance was to simplify the procedure. Block of assets was sub-divided into four classes, namely, buildings, furniture and fitting, machinery and plant and ships. In each class, however, there were sub-classes, for instances, buildings had four sub-classes, furniture and fittings had two sub-classes, machinery and plant had broadly speaking, four sub-classes being classes 1, (1A), 2 and 3. Different rates for the block of assets have been prescribed in the table of rates given in Appendix I under rule 5 of the Income-tax Rules, 1962. For instance, machinery and plant has four broad rates of 25%, 20%, 40% and 100%.
This means that even within the block, different identities have been kept in respect of different items but it has certainly simplified the matters and the heads are broad enough to accommodate many items under one head. This, however, does not mean that the identity of the assets entering the block of assets has been lost altogether or all assets have been merged in the block of assets. For instance, if machinery and plant consisting of four different items, as mentioned in the depreciation table, then the block of assets has to be kept in respect of each such item which is still an improvement on the existing system of allowing depreciation in respect of each and every asset. Section 32(1) has a proviso according to which any assets falling within a block of assets acquired by the assessee during the previous year and put to use for the purposes of business or profession for a period of less than 180 days in that previous year qualities for 50% of the depreciation allowances. This shows that even within the broad heads, information has to be given in respect of the assets used for less than 180 days and 180 days and above. The purpose of mentioning these details is to show that the law has attempted simplification of the provisions relating to depreciation allowances but that does not mean that the provisions of section 38(2) have been done away with or have ceased to exist. Section 38(2) continues to be the part of the statute book and the principle contained in that section is that if an asset being building, machinery, plant or furniture is not exclusively used for the purposes of business or profession, then depreciation allowance shall be restricted to a fair proportionate part thereof having regard to the user of such building, machinery, plant or furniture for the purposes of business or profession. All that it means is that a further sub-head shall have to be kept even in the block of assets if it is found that any building, machinery, plant or furniture is not exclusively used for the purposes of business or profession. Shri Khanna tried to explain that once an asset enters the block of assets, then it cannot be said whether that asset was exclusively used for business purposes or partly used for business purposes. In our opinion, this is not a correct reading of the law as it stands. The provisions contained in section 38(2) deals with a different situation which has nothing to do with the simplification of depreciation rates. In our considered opinion, in spite of the fact that depreciation is allowable in respect of block of assets, it is very much possible to compute the disallowance in suitable cases of a fair proportion of depreciation as visualised by section 38(2) of the Act. The exercise may be time consuming or difficult but it cannot be said that in the changed scheme of things, disallowances under section 38(2) of the Act is not capable of computation. Difficulties apart, the disallowance under section 38(2) is certainly capable of computation.
11. It is not denied that the cars in both the cases under consideration were used for personal purposes of the partners as well.
The ld. counsel for the assessee has also not addressed any arguments with regard to the disallowance being unreasonable or excessive. The only thrust of his arguments has been that because of the amended provisions of law with regard to the allowance of depreciation, section 38(2) of the Act has no application. This, in our view, is not the correct position of law. For the reasons mentioned above, we hold that the ld. CIT(A) was justified in disallowing a fair proportion of the depreciation in terms of section 38(2) of the Act.
12. In the result, while Income-tax Appeal No. 435/Chandi./91 is partly allowed, Income-tax Appeal No. 436/Chandi./91 is dismissed.