Full Judgment
2. The order is against the provisions of the Act and the appellant denies his liability to tax as determined and computed by the learned AO and the manner in which it has been so determined or computed. The learned CIT(A) has erred in law in upholding the legal validity of the impugned order, whether in specific terms or by implication.
3. The learned AO has erred in law and on the facts and circumstances of the case in making additions of Rs. 1,01,400 on account of disallowance of depreciation and the learned CIT(A) has erred in law and on facts in sustaining the impugned addition in total.
4. The appellant craves leave to and permission of the Hon'ble Tribunal to add to or alter any of the grounds of appeal at any time upto the final decision of the appeal.
5. The appellant craves leave and sanction of the Hon'ble Tribunal to file additional evidence, if so required for proper prosecution of the case, based on facts and circumstances, which has not been or could not be adduced or filed before lower authorities either because proper and sufficient opportunity was not provided or because it was not solicited or its need was not appreciated.
2. Rival contentions have been heard and record perused. During the course of scrutiny assessment, the AO found that the depreciation was shown to the extent of Rs. 89,108 as per the depreciation schedule whereas as per the P&L a/c, the depreciation amount was shown at Rs. 1,90,568. This depreciation was in respect of two cars. The AO further found that first car was bought in the month of May, 2001 on loan from Kotak Mohindra Bank for Rs. 5,90,000. Later on due to non-payment of instalments, the Kotak Mohindra Bank has confiscated the car in the month of September, 2001 for consideration of Rs. 5,90,000 which was shown as sale in the depreciation schedule. The learned Authorised Representative submitted that depreciation has been calculated on both the cars and was claimed in the P&L a/c. The AO observed that as per provisions of Section 32, no depreciation is allowable on the car which was sold during the year. Thus, assessee's claim for depreciation amounting to Rs. 1,01,400 was declined by the AO which was attributable to the car confiscated during the year. By the impugned order, the CIT(A) confirmed the action of the AO.3. Aggrieved by the order of the CIT(A), the assessee is now in appeal before us. It was argued by the learned Authorised Representative that the motorcar alleged to be taken back by the financier, was actually used by the assessee, therefore, the assessee was eligible for claim of depreciation. He relied on the decision reported at in the case of Oil & Natural Gas Commission v. Addl. CIT (1999) 64 TTJ(Del) 606, Tribunal Delhi Bench, in support of the proposition that taking of the car by the finance company does not amount to sale within the ambit of Section 43(6)(c) of the Act, therefore, the amount of the car taken over by the finance company cannot be reduced from the WDV for the computation of depreciation on block of assets. He further contended that even after amendment in the provisions of Section 32(1), the concept of balancing charge under Section 41(2) and charging of excess sales realization as business income under Section 50, as short-term capital gain has not been given a go by. The change from business income to short-term capital gains in Section 50 makes depreciation allowance mandatory so that even if a depreciable asset is sold after use within the same year, the depreciation has to be allowed first and then only provisions of Section 50 would be applied.
4. On the other hand, learned Departmental Representative relied on the order of the lower authorities.
5. We have considered the rival contentions, carefully gone through the relevant provisions of the IT Act, 1961 with regard to claim of depreciation and also deliberated on the case laws referred to by the learned Authorised Representative during the course of hearing before us. From the record, we found that during the year under consideration, the assessee has bought two motorcars first in May, 2001 for Rs. 5,90,000, it was financed by Kotak Mohindra Bank. Subsequently, due to non-payment of instalment, Kotak Mohindra Bank has confiscated the car in the month of September, 2001. This car was stated to be sold through the financier on 28th Dec, 2001 for Rs. 4,85,775. The assessee bought a second car on 28th Dec, 2001 for Rs. 8,30,500. In the depreciation schedule, the assessee has claimed depreciation on the new car which remained its asset as at the end of the year. However, in the P&L a/c, the assessee has claimed depreciation not only on the new car bought on 28th Dec, 2001, but also on the old car which was sold during the year and did not remain in its block of assets as at the end of the financial year. The AO allowed the claim of depreciation on the cost of new car only. However, the claim of depreciation on the balance in block of assets as on 31st March, 2002 was not computed which require the addition of new assets acquired during the year and reduction of money payable in respect of any assets falling within that block. The Taxation Laws (Amendment) Act, 1986, had changed thoroughly the system of allowing depreciation w.e.f. 1st April, 1988. By these provisions, the concept of block of assets brought into statute book for the purpose of allowing depreciation. The relevant provision as it stood after the amendment that is applicable to the year under consideration reads as under: 32. (1) In respect of depreciation of building, 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 Section 34, be allowed.
(ii) in the case of any block of assets, such percentage on the WDV thereof as may be prescribed: Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purpose of his business or profession: From the above, it is clear that depreciation is to be allowed on the WDV of the block of assets at such percentage as may be prescribed.
block of assets' means a group of assets falling within a class of assets, being building, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed.
Section 43(6) provides definition of WDV Clause (c) of Section 43(6) reads as under: (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 WDV 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).
6. Thus, the WDV of any block of assets shall be the aggregate of the WDV of all the assets falling within that block of assets at the beginning of the previous year. From this, the adjustment has to be made for the increase or reduction in the block of assets during the year under consideration. The deduction from the block of assets has to be made in respect of any asset sold, discarded or demolished or destroyed during the previous year.
7. Prior to the amendment of Section 32(1) of the Act, the old 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 bookkeeping and the process of checking by the AO was 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 Section 32(l)(iii) or taxing the balancing charges as per Section 41(2) of the IT Act necessitated 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, building, machinery, plant and furniture.
8. Moreover, the legislature has deleted the provision for allowing terminal depreciation in respect of each asset, which was previously allowable under Section 32(l)(iii) and also taxing of balancing charge under Section 41(2) in the year of sale. Instead of these two provisions, now whatever is the sale proceeds 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 particular, it cannot be ascertained whether on sale of any asset, there was any profit liable to be taxed under Section 41(2) or terminal loss allowable under Section 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. Thus the claim of learned Authorised Representative for allowing loss on sale of first car is also not sustainable, and the assessee is only eligible to reduce the amount realized in respect of such block of assets, out of such block. In the instant case, admitted position is that the assessee had sold the first car through financier. However on the plea of same having used in business before sale the assessee has claimed depreciation. Instead of computing depreciation of the balance lying in the block of assets as at the end of the year, after reducing the value realized on the first car as per provisions of Section 43(6)(c), the AO has declined claim on first car as a whole which is not correct. The learned Authorised Representative has also taken a plea that taking of car by financier does not amount to transfer therefore depreciation should be allowed on the first car also, for which he placed reliance on the decision in case of ONGC (supra). We found that in this case, undertaking of assessee (ONGC) came to be transferred and vested in the statutory corporation w.e.f. 1st Feb., 1994 under the Oil & Natural Gas Commission (Transfer of Undertaking & Repeal) Act, 1993. This was not treated by the Tribunal as a transaction of sale, on the plea that there was no "transfer" by way of exchange, corporation has not transferred anything in favour of ONGC hence the transfer and vesting of assets did not come within the expression "sold" used in Section 43(6)(c) of the Act. However, the facts of the case before us are entirely distinguishable and the assessee himself in the depreciation schedule shown the value at which old car was sold through financier.
Thus, the case law referred by the learned Authorised Representative is of no help to the assessee for coming to the conclusion that sale price of car sold/taken away by financier and which did not form (part) of the block of assets as at the end of the year, was eligible for claim of depreciation.
9. In the instant case, while disallowing the claim of depreciation on first car, the AO has not arrived at the WDV of the block of assets as per provisions of Section 43(6)(c) and outrightly declined the claim on the cost of first car, which is not correct. In the interest of justice and fair play, we restore the matter back to the file of the AO for arriving at WDV of block of assets keeping in view the provisions of Section 43(6)(c) of the Act and recompute the claim of depreciation as per amended provisions of Section 32(1) of the Act, as discussed hereinabove.
10. In the result, the appeal of the assessee is allowed in part for statistical purposes.