1. The appeal has been filed by the assessee against the order passed by the CIT(A) for the asst. yr. 1990-91. The first ground of appeal is with regard to disallowance of depreciation of Rs. 42,962 on the value of tools and equipments discarded by the assessee.
2. While framing the assessment under s. 143(3) of the Act, the AO has passed the following order : "The assessee-company has debited in its P&L a/c amount of Rs. 1,28,885 as value of fixed assets discarded. Since the assets discarded were of capital nature and such expenses are not allowable under the IT Act. Therefore, the amount of Rs. 1,28,885 will be added to the income of the assessee. The depreciation on such discarded assets will not be allowed amounting to Rs. 42,962." 3. The grievance of the assessee is with regard to refusal of the depreciation on the assets discarded by it. The CIT(A) upheld the finding holding that although it was a part of block of assets but it is treated as discarded and not brought into use throughout the year.
4. Shri S. N. Soparkar, learned counsel on behalf of the assessee has submitted that the authorities below failed to take into consideration the provision of the depreciation to be allowed on the block of assets and not upon individual assets. It was submitted that w.e.f. 1st April, 1988, depreciation is to be allowed from the block of assets under s.
32(1)(ii) of the Act on the written down value of the block assets.
Sec. 43(6)(c) has provided the definition of written down value in the case of block assets. Therefore, depreciation of a part of a block asset neither can be allowed nor can be disallowed. It has to be allowed on the entire block of assets. It was further submitted that the first appellate authority was wrong in upholding the order of the AO on the ground that the particular asset was not used throughout the year. It was submitted that admittedly that particular asset was being used prior to the present assessment year. Therefore, only because it was not used during the present assessment year, depreciation cannot be disallowed on that ground. In support of his contention, reliance was placed on the decision of Tribunal, Patna Bench in the case of Parikh Engg. & Body Bldg. Co. Ltd. vs. Asstt. CIT (1999) 64 TTJ (Pat) 408 : (1999) 69 ITD 207 (Pat).
5. The learned Departmental Representative, on the other hand, supported the orders passed by the authorities below and submitted that unless and until the particular asset is used for the purpose of business or profession, depreciation cannot be allowed in respect of that plant, machinery, etc. It is the primary requirement for allowing depreciation under s. 31(1) of the Act.
6. We have heard both the sides and perused the materials on record. It is not in dispute that w.e.f. 1st April, 1988 there has been a change of system for the purpose of allowing depreciation which is to be allowed on block assets and not on individual assets. In this connection, the provision of s. 32(1)(ii) as substituted w.e.f. 1st April, 1988, is as follows : "32(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of s. 34, be allowed.
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed." 7. The definition of block assets has been provided in s. 2(11) of the Act according to which 'block of assets' means a group of assets falling within a class of assets, being buildings, machinery, plant or furniture in respect of which the same percentage of depreciation is prescribed. Therefore, the depreciation has to be allowed on the written down value of block assets. Sec. 43(6)(c) is to be considered for the purpose of WDV of block assets which is as follows : (i) in respect of any previous year relevant to the assessment year commencing on the 1st 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 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)." 8. In this connection, CBDT Circular No. 469 dt. 23rd September, 1986 may be considered which is available at p. 1043 of Chaturvedi & Pithisaria's Income-tax Law, Fourth Edn., Vol. 1 where the relevant position of Budget Speech of Finance Minister has been mentioned which is as follows : "As promised in the long-term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation in respect of blocks of assets instead of the present system of depreciation on individual assets." 9. Further the report of the Economic Administration Reforms Commission has also been mentioned in the said Circular which is as follows : "The existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the AO is time-consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc. the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per s. 32(1)(iii) or taxing the balancing charge as per s. 41(2) of the IT Act necessitate the keeping of records of depreciation already availed of by each asset 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." 10. From the aforesaid circumstances, we find that the legislature has prescribed a different mode for allowing depreciation in respect of block of assets and hence-forth a calculation of depreciation will be in a lump sum for the entire block of depreciable assets. The theory of individual asset which prevailed before 1st April, 1988 cannot be considered after the new provision of block assets came into force. If a particular machinery were owned forming part of block asset is not used during the year, still depreciation is to be allowed even if assets are not used during the present year. After reading provision of block asset, we have to consider whether the block of assets were used or not during the present assessment year for the purpose of allowing depreciation. If one single asset out of the entire block has been discarded or not put to use by the assessee for its business consideration for that ground alone partial depreciation cannot be disallowed. Similar view has been taken in the case of Packwell Printers vs. Asstt. CIT (1996) 59 ITD 340 (Jab). The decision of Patna Bench of the Tribunal, (supra), relied upon by the learned counsel on behalf of the assessee supports similar view. It is not a case where the assessee has sold the particular asset at a consideration which can be reduced for the purpose of computing WDV of block of assets as provided in s. 43(6)(c) of the IT Act.
11. In the present case, according to the assessee, it has discarded a particular asset during the present year meaning thereby that particular asset was not put to use during the present year. It is true that under s. 43(6)(c) of the Act, it has been provided to reduce the amount of depreciation by 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. Unless and until scrap value of the machinery which has been discarded, demolished or destroyed during the previous year is ascertained the same cannot be reduced for the purpose of computing depreciation. In the present case, the machinery in question was only scraped during the year that means it has not been used during the previous year. The scrap value of the same has not been ascertained as yet which will be possible only after selling the same.
Therefore, nothing can be reduced at present from the written down value of the block assets.
12. Considering the aforesaid circumstances, we direct the AO to allow depreciation as claimed by the assessee. This ground of appeal is allowable.