ORDER
J. Sudhakar Reddy, A.M.
These are appeals filed by the assessee against the order of the Commissioner (Appeals) I, Hyderabad dated 19-10-2001 for the assessment years 1997-98 and 1998-99 respectively, raising the following grounds of appeal.
(a) The Commissioner (Appeals) erred in sustaining the disallowance of depreciation of Rs. 9,86,136 made by the assessing officer without appreciating the submissions made by the appellant.
(b) The Commissioner (Appeals) ought to have seen that when once the value of asset forms part of block of assets, depreciation is to be allowed on the entire block irrespective of user of any item falling within the block during the assessment year and hence depreciation cannot be disallowed on ponds stating that they were not used by the appellant during the assessment years 1997-98 and 1998-99.
(c) The Commissioner (Appeals) ought to have seen that the depreciation on ponds which is forming part of block of assets has to be allowed as deduction even though the ponds were not used during the assessment year 1997-98 in view of the decisions of the Jabalpur and Ahmedabad Benches of the Tribunal (hereinafter referred to as the “Tribunal”) in the cases of Packwell Printers v. Asstt. CIT (1996) 59 ITD 340 (Jab-Trib) and Inductotherm (India) Ltd. v. Dy. CIT (2000) 73 ITD 329(Ahd-Trib) and hence the assessing officer is not justified in disallowing the depreciation,
(d) The Commissioner (Appeals) ought to have seen that in view of the Circular No. 469 dated 23-9-1986 issued by the Central Board of Direct Taxes when once the value of asset forms part of the block of assets the written down value of such asset has to be reduced by monies payable in respect of any asset falling within the block which is sold, discarded, demolished or destroyed during the previous year together with the amount of the scrap value, if any.
2. As the issue involved in both these appeals is one and the same, for the purposes of convenience, they are heard together and disposed by way of this common order.
3. The brief facts of the case as gathered from the record are as follows. The assessee is a partnership firm carrying on the business of farming and trading of shrimps. During the previous year relevant to the assessment year 1995-96, this partnership firm took 107.86 acres of land from various persons on lease and constructed ponds for shrimp farming on these leased lands. As on 31-3-1995, the assessee had incurred an amount of Rs. 52,59,930 for construction of the ponds. For the assessment year 1996-97, the assessee had treated the cost of these ponds as plant and claimed depreciation @ 25 per cent. The assessee claimed an amount of Rs. 13,14,857 as depreciation on the ponds for the assessment year 1996-97 and the assessing officer has allowed the claim so put forth by the assessee and completed the assessment under section 143(3). During the previous year relevant to the assessment year 1997-98, the assessee had given back the leased land of 107.86 acres to the farmers. Thus, the ponds constructed on these lands were discarded by the assessee and no consideration whatsoever for the same were received. The assessee continued to claim depreciation on the ponds so surrendered along with the land to the farmer, consequent on termination of lease, for the assessment years 1997-98 and 1998-99, though he has written off the same in its books of account, on the ground that the cost of these ponds formed part of block assets of plant and machinery on which depreciation @ 25 per cent has already been allowed and that the block of assets under the new concept of the Income Tax Act, 1961 continues especially in view of the fact that the block contained other assets such as vehicles, machinery, electricity installations and TV Set.
4. The assessing officer disallowed the claim of depreciation on ponds observing that “assessee firm has taken 107.86 acres of land from farmers on lease on which it has dug ponds for Shrimp farming. In June, 1994, i.e., during the financial year 1996-97 (i.e., the previous year relevant to the assessment year 1997-98), the assessee has given back the 107,86 acres of land taken from farmers. The W.D.V. of these ponds as on 31-3-1996 was Rs. 39.44 lakhs. As a result, no ponds remained in possession of the assessee. Subsequently, 50.71 acres of land with ponds were taken on lease, but no addition to the ponds is seen from the Depreciation Schedule. It is, therefore, obvious that the Plant and Machinery of Rs. 39.44 lakhs being the “ponds” of the assessee are neither owned by the assessee nor used by it after June, 1994. Therefore, the assessee cannot be allowed depreciation on this item. It is also not a case of passive use of the ponds, since the land containing the ponds have been handed back to the lessor farmers and the assessee can no longer avail of its use,”
5. On appeal, the learned Commissioner (Appeals) held as follows : (Para-10, Page-7 of the Commissioner (Appeals)s Order)
“I have carefully considered the various submission made by the learned counsel and I have also perused the relevant case records. In this case 107.86 acres of land was taken on lease from various farmers for doing Shrimp farming. The lands were taken in the previous year relevant for the assessment year 1995-96. An amount of Rs. 52,59,390 is stated to have been spent in the construction of ponds and no depreciation was claimed in assessment year 1995-96 though there was export sale to the tune of Rs. 5.82 crores. The entire profit.was claimed as exempt under section 80HHC. In assessment year 1996-97 depreciation on ponds has been claimed at Rs. 13,14,847 at the rate of 25 per cent on cost of construction amounting to Rs. 52,59,390. The WDV as on 31-3-1995 was arrived at Rs. 39,44,543. In this year there was no export sale on which deduction under section 80HHC could be claimed. In the subsequent assessment year 1996-97 the entire land admeasuring 107.86 acres was returned to the farmers along with the ponds. There is no denial of the fact that the ponds were not used for Shrimp Farming. On the other hand, fresh ponds admeasuring 50.7 acres were taken on lease at Ganapavaran village on which no depreciation was claimed. In assessment year 1998-99 the expenditure incurred on ponds construction amounting to Rs. 31,55,634 though written off in the books was offered for taxation as evident from computation of income filed along with the return. From the conduct of the appellant it is clear that it has claimed depreciation on ponds in the year in which there was a taxable income. This was obviously with a view to reduce the tax liability. The Boards Circular and the decisions of the Tribunals relied upon by the counsel are also not applicable to the facts and circumstances of the case. In this case, the entire land along with ponds has been returned without any consideration. The appellant had admitted that the ponds were riot used for Shrimp farming. The entire ponds forming block of assets was returned without taking any consideration. The Calcutta High Court in CIT v. Oriental Coal Co. Ltd. (1994) 206 ITR 682 (Cal) has clearly held that where the plant and machinery has not been actually used for the purpose of the business for a single day during that year, no depreciation can be allowed on such plant and machinery. Similar view has been taken by the jurisdictional High Court of Andhra Pradesh in the case of Hyderabad Construction Co. Ltd. v. CIT (1981) 121 ITR 81(AP) and Bombay High Court in the case of Hindustan Chemical Works Ltd. v. CIT (1980) 124 ITR 561 (Bom). In view of this I hold that the depreciation on ponds has been rightly denied by the assessing officer in both the assessment years.”
Aggrieved of this order of the Commissioner (Appeals), the assessee is in appeal before us.
6. Learned counsel for the assessee submitted that the ponds were in the nature of plant on which depreciation is allowable as general plant and machinery. He submitted that the assessing officer allowed the claim or depreciation on ponds for assessment years 1995-96 and 1996-97. He argued that the Taxation Laws (Amendment) Act had changed the method of allowing depreciation with effect from 1-4-1988 and the concept of “block of assets” was introduced with effect from 1-4-1986 for the purposes of allowing depreciation on assets. The scope and effect of the amendment of section 32, he argued are explained in Circular No. 469 dated 23-9-1986. He took this bench through the relevant sub-clauses of section 32 and of the circular and submitted that from this circular, it is clear that as far as discarded assets are concerned, the adjustment that is required to be made under the new concept of “block of assets” with regard to buildings for the purposes of allowing depreciation is to reduce the monies receivable consequent to such discarding which in the case of this assessee is nil. Based on the Boards Circular supra, the learned counsel for the assessee Shri Koteswara Rao argued that once the value of assets forms part of the block of assets, the W.D.V. of such assets has to be reduced by monies realisable in respect of that asset on discarding, when any asset falling within that block is discarded during the previous year. Learned counsel for the assessee submitted that once the value of the assets forms part of the block of assets, depreciation has to be allowed on the entire block irrespective of use of the assets during the assessment year. In this connection. Learned counsel for the assessee, relied on the judgment of the Jabalpur Bench of the Tribunal in the case of Packwell Printers (supra). He further relied on the judgment of the Ahmedabad Bench of the Tribunal in the case of Inductotherm (India) Ltd. (supra).
7. Learned Departmental Representative Sri Debjyothidas strongly controverted the arguments of the learned counsel for the assessee and submitted that when the asset itself was not in existence with the assessee, no depreciation can be allowed as neither ownership nor user of the same is existing. He strongly relied on the orders of the assessing officer as well as of the Commissioner (Appeals) and argued that as the assessee had admitted that the ponds were not used for Shrimp farming and as the entire ponds farming block of assets were returned without taking any consideration the judgment of the Honble Calcutta High Court in CIT v. Oriental Coal Co. Ltd. (1994) 206 ITR 682 (Cal) is clearly applicable to the facts of the case and no depreciation can be allowed. He further relied on the jurisdictional High Courts judgment reported in 121 ITR 81 as well as the judgment of the Honble Bombay High Court reported in Hindustan Chemical Works Ltd. v. CIT (1980) 124 ITR 561 (Bom) and the Madras High Courts judgment reported in East Asiatic Co. (India) (P) Ltd. v. CIT (1986) 161 ITR 135 (Mad).
8. Replying to the arguments of the learned Departmental Representative, learned counsel for the assessee submitted that all the case law relied upon by the revenue were prior to the introduction of the concept of Nock of assets”, i.e., the law applicable prior to assessment year 1989-90 and as such not applicable to the facts of the case before us. He once again submitted that there is drastic change by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 and that the new concept was not properly understood and applied by the revenue authorities.
9. Heard both sides. Read all the papers on record, the orders of the revenue authorities and the case law cited. The issue in dispute for these two assessment years is in respect of the claim for depreciation on that portion of the written down value of the block of assets represented by the value of ponds which were admitted discarded for ‘nil consideration. The facts that are not in dispute is the cost of these ponds formed part of the block of assets of the plant and machinery along with the other items of assets such as vehicles, machinery, etc., as on 31-3-1996. The other fact that is not in dispute is that on the very same block of plant and machinery 25 per cent depreciation was claimed and allowed for the assessment year 1996-97. Under these circumstances, the issue for consideration is whether the depreciation is allowable on that portion of the written down value of the block of assets represented by the value of ponds which have been handed back to the lessors of the land. The other fact that is not in dispute is the entire block consisting of this class of assets, i.e., plant and machinery, has not been wiped off or eliminated during these two assessment years as the assessee had other assets in the block.
10. Before coming to the conclusion on this issue, it would be useful to reproduce for ready reference, Board Circular No. 469 dated 23-9-1986, reported in (1986) 162 ITR 21 (St). Only the relevant portions of the circular are extracted hereunder :
“6.1 In his Budget speech for the year 1986-87, the Finance Minister had announced as under..
“96. 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. Simultaneously, I propose to rationalize the rate structure by reducing the number of rates as also by providing for depreciation at higher rates so as to ensure that more than 80 per cent of the cost of the plant and machinery is written off in a period of 4 years or less. This will render replacement easier and help modernization. Apart from those items which are eligible for 100 per cent depreciation in the initial year itself, there are at present different rates for plant and machinery. I propose to have only to rates of depreciation at 33-1/3 per cent and 50 per cent. Plant and machinery used as anti-pollution devices and those using indigenous know-how are proposed to be placed in a block carrying the higher rate of depreciation of 50 per cent. Buildings meant for low-paid employees of industrial undertakings will be entitled to depreciation at 20 per cent. As against the general rate of 5 per cent for residential buildings and 10 per cent for non-residential buildings.”
6.2 Pursuant to the above announcement, amendments have been made to sections 2, 32, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59 and 155 of the Income Tax Act.
6.3 As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), 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 bookkeeping and the process of checking by the assessing officer 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 section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income Tax 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.
6.4 (a) A Nock of assets” as defined in new clause (11) inserted in section 2 of the Income Tax Act means 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. The necessary amendments to the Income Tax Rules prescribing the percentage of depreciation in regard to various blocks of assets will be made accordingly which will be effective from 2-4-1987, i.e., for the assessment year 1988-89 and onwards. In view of these accelerated rates of depreciation, the extra shift allowance being allowed to some items of plant and machinery enumerated in appendix I to the Income Tax Rules will cease to be admissible when the new rates come into force.
(b) Under the existing provisions of section 32(1)(i), depreciation in the case of ocean-going ships is allowed at such percentage on the actual cost thereof as may be prescribed . As a consequence, the provisions of section 32(1)(i) have been omitted by the Amending Act.
(c) section 32(1)(ii) provides that depreciation will be allowed as a prescribed percentage of the written down value of buildings, machinery, plant and furniture. The Amending Act has provided that in the case of any block of assets, depreciation will be allowable at a prescribed percentage of the W.D.V. thereof.
(d) The provisions of clause (iia) in sub-section (1) of section 32 had been inserted by the Finance (No. 2) Act, 1980 to provide for additional depreciation in respect of new plant or machinery installed before 1-4-1985 in certain cases. These provisions have lost their relevance as they were applicable for the limited period of the Sixth Five Year Plan. Hence, they have been omitted by the Amending Act.
(e) The objective underlying the terminal adjustment is to ensure that the total depreciation relation to any particular item of asset is limited to 100 per cent. . . Under the new system, the moneys payable in respect of assets sold, discarded, demolished or destroyed will be reduced from the WDV of the block.
(f) ……….
(g) ……….
(h) section 32(1A) of the Income Tax Act provides for depreciation allowance in respect of any addition, renovation or extension of or improvement to a building which an assessee does not own but in respect of which he holds a lease or other right of occupancy. As a result of the switch over to the block concept, this provision has been omitted. By the newly inserted Explanation 1 after the second proviso to section 32(1)(iii) of the Income Tax Act, it has been provided that depreciation will be allowed in respect of such a structure or work as if it is a building owned by the assessee.
(i) … Further, that the aggregate of all deductions in respect of depreciation shall not exceed the actual cost to the assessee in respect of such assets. By the Amending Act, these sub-sections have been deleted in view of the switchover to the system of allowing depreciation on blocks of assets.
(j) … Further, the existing Explanation below section 41(4) of the Income Tax Act has been substituted by another Explanation defining the expressions “moneys payable” and “sold”. The former shall include any insurance, salvage or compensation moneys payable in respect of a discarded asset. The latter expression shall include a transfer by way of exchange or a compulsory acquisition under any law but it will not include a transfer of an asset by the amalgamating company to the amalgamated company in a scheme of amalgamation.
(k) The written down value of any asset in relation to the assessment year 1989-90 and any subsequent assessment year shall be worked out as under in accordance with the newly inserted section 43(6) :
(i) The written down value of the block of assets in the immediately preceding previous year, shall be reduced by the depreciation actually allowed in respect of the block of assets in relation to the said preceding previous year.
(ii) The sum arrived at as above shall be increased by the assessee during the previous year.
(iii) The sum so arrived at shall be reduced by the sale proceeds and other amounts receivable by the assessee in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous year.
(6) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons
(A) The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased the actual cost of any new asset acquired, or
(B) All the assets in the relevant block may be transferred during the year.
Section 50 of the Income Tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act to take care of both the above situations. The particulars of these provisions, overriding section on 2(42A) of the Income Tax Act are as under :
(A) The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the following amounts, namely:
(i) expenditure incurred wholly or exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year.
Such excess shall be deemed to be short term capital gains.
(B) The newly substituted section 50(2) of the Income Tax Act deals with the cases where any block of assets ceased to exist for the reason that all the assets in that block are transferred during the previous year. In such a case, the cost of acquisition of the block of assets shall be written down value of the block at the beginning of the previous year as increased by the actual cost of any asset falling within that block acquired by the assessee during the previous year. The income from such transfer or transfers shall be deemed to be short-term capital gains.
(C) Amendments of a consequential nature have been made to clause (1) to the Explanation to section 32A(2), clauses (iv) and (v) of section 35(2), clause (c) of section 35(2B), section 38(2), section 55(1), section 57(ii), sub-sections (2) and (3) and the Explanation to section 59 and the Explanation to section 155(4A) of the Income Tax Act.
The following example illustrates as to how the amended provisions relating to allowance of depreciation will be applied :
Example III : Suppose that in the case of the company ‘Y’ having financial year 1988-89 as the previous year relevant to the assessment year 1989-90, the WDV of a block of assets consisting of factory buildings is Rs. 10,00,000 at the beginning of the financial year 1988-89, (i.e., WDV for the financial year 1987-88 less depreciation allowed in respect of the said financial year), this company acquires a godown in May, 1988, for Rs. 2,00,000 and then sells the factory building and the godown in December for Rs. 9,00,000 if there is no asset left in the relevant block at the end of the year, the new provisions of section 50(2) of the Income Tax Act will apply as follows :
WDV at the beginning of the year
Rs. 10,00,000
Add actual cost of new asset acquired
Rs. 2,00,000
Rs. 12,00,000
Less : Sate proceeds received in respect of all the
Assets from that block sold during the year
Rs. 9,00,000
Loss deemed to be short-term capital loss under
section 50(2)
Rs. 3,00,000
11. The Jabalpur Bench of the Tribunal in the case of Packwell Printers (supra), held as follows : (vide head note of the reported decision)
“The legislature felt that keeping the details with regard to each and every depreciable assets was time consuming both for the assessee and the assessing officer. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual assets. The block of assets has also been defined to include the group of assets falling with the same class of assets. Hence, after the amendment with effect from 1-4-1988, the individual assets has lost its identity and for the purpose of allowing of depreciation, only the block of assets has to be considered. If a block of assets is owned by the assessee and used for the purpose of business, depreciation will be allowed. Therefore, the test of user has to be applied upon the block as a whole instead of upon an individual asset.
In the instant case when the two trucks out of the three in the block were used for the purpose of business, the depreciation had to be allowed on the W.D.V. of the said block of assets, as per the percentage of depreciation prescribed in respect of the block of assets. Therefore, the depreciation was allowed on all the trucks of the assessee. On the same basis, the disallowance of depreciation on jeep, car, motorcycle was also deleted.”
Similarly, the Ahmedabad Bench of the Tribunal in the case of Inductotherm (India) Ltd. (supra), as per the head note of the decision supra, held as follows:
“The legislature has prescribed a different mode for allowing depreciation in respect of block of assets and henceforth 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 1-4-1988 cannot be considered after the new provision of block assets came into force. If a particular machinery were owned, forming part of block of asset, is not used during the year, still depreciation is to be allowed even if assets are not used during the present year.
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.
The instant case was not a case where the assessee had sold the particular asset at a consideration which could be reduced for the purpose of computing WDV of block assets as provided in section 43(6)(c). The assessee had discarded a particular asset during year in question, meaning thereby that particular asset was not put to use during the year.
It is true that under section 43(6)(c), 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 instant case, the machinery in question was only scrapped during the year, that meant it had not been used during the previous year. The scrap value of the same had not been ascertained as yet which would be possible only after selling the same. Therefore, nothing could be reduced at present from the written down value of the block assets.”
The Patna Bench of the Tribunal in the case of Parikh Engg. & Body Bldg. Co. Ltd. v. Asstt. CIT (1999) 69 ITD 207 (Pat-Trib), vide head note of its decision, held as under :
“The assessing officer was not justified in estimating higher profit on sale of the leased vehicles. There was no basis and there was no material on record to warrant and support the assessing officers estimates. His estimates were based on conjecture and surmises. Again there was no legal validity about the assessing officers estimates of the higher sale price and profit of the leased vehicles. Section 52 had been omitted by the Finance Act, 1987 with effect from 1-4-1988. Thus, the assessing officer had no power to estimate higher sale price. The sale price of the leased vehicles had to be deducted from the written down value and there was no question of computing profit on the sale of the leased vehicles. The question of determining even the capital gains on sale of leased vehicles would have arisen only if the block of assets in question had ceased to exist as a whole.
In the present case neither section 50(1) nor section 50(2) was applicable. The full value of the consideration on sale of the leased vehicles did not exceed the aggregate of the WDV, etc., as provided in section 50(1) nor the block of assets in question had ceased to exist as such as required under section 50(2) and, as such, there was no question of even computing capital gains in respect of sale of the leased vehicles.
Again, as a result of the omission of sub-section (2) of section 41 with effect from 1-4-1988 there was no question of determining profit on the sale of the leased vehicles treating the excess of the sale price over the written down value as income chargeable under section 41(2).
Thus, consequent upon the introduction of the concept of block assets, only capital gains could be computed on sale of depreciable assets as per the provisions of section 50, and under no other provisions of the Act any profit could be computed and brought to tax on the sale of the depreciable assets. in view of the facts and circumstances of the case, the provisions of sub-sections (1) and (2) of section 50 were not applicable in the case and the assessing officer was required only to compute the written down value of the block assets as per section 43(6)(c) referred to above.
Therefore, entire exercise of the assessing officer to compute the profit on the sale of these vehicles and making the impugned addition to the total income was unwarranted and unjustified. Accordingly, the additions in both the assessment years were deleted.”
From a careful reading of all these material, it is clear that in so far as discarded assets are concerned, as is the case of the appellant, the adjustment, i.e., required to be made under the concept of “block of assets” for the purposes of allowing depreciation is to reduce the monies receivable consequent to such discarding from the block. In the case of the assessee, as no money whatsoever was payable to him on handing over the ponds constructed on leased land to the owners of land, there can be no amount whatsoever that can be reduced from the block of assets. Hence, the block continues at its written down value. Once an asset has been included in the block, it loses its individual identity and what we are concerned is only the WDV of the block and nothing else. The assessee, in our considered opinion has rightly not claimed revenue loss for assets surrendered, nor short-term capital loss under section 50(2). The claim of the assessee is in accordance with the intention of the scheme of depreciation consequent to the introduction of block of assets concept and this is clear from the circular of the Board supra.
12. Even otherwise, a comparison between the provisions for allowance of depreciation and terminal depreciation that existed upto 1-4-1988 and the provisions for allowance of depreciation and those relevant to short-term capital gains/loss as applicable from 1-4-1988 would clarify the issue further. For this, reference can be made to paragraphs 6.4(e) of the Board Circular supra, wherein it is explained that as per the provisions of section 32(1)(iii) as existing upto 1-4-1988, the terminal depreciation was to be granted in respect of any asset, i.e., sold, destroyed or discarded, etc., to the extent of difference between the written down value of the asset and its sale through scrap value. With the concept of introduction of block assets, this sub-section 32(1)(iii) has been deleted. Similarly sub-section 41(2) providing for subjecting to tax the excess of scrap/sale value, over the written down value has been deleted with effect from 1-4-1988. It can be also observed that these two sub-sections, i.e., 32(1)(iii) and 41(2) have been reintroduced again with effect from 1-4-1988 and is made applicable in cases where depreciation is claimed under clause (1) of sub-section (i) of section 32, i.e., only in cases of undertakings engaged in generation, distribution of power, etc., where individual assets are considered for depreciation and not in cases where depreciation is allowed under the block concept. The binding effect of deletion of these two sub-sections in relation to block of assets has been brought into effect in a modified form by amending section 50 to the effect that where a block ceased to exist either on account of all the assets existing in the block being sold or on account of the sale value of the assets in the block exceeding the written down value of the block, then resultant excess or shortfall shall be deemed to be the short term capital gain or loss. As per clause (c) of sub-section (6) of section 43, written down value has to be computed by reducing from the opening written down value of the block of assets the monies payable in respect of any asset falling within the block which is sold, discarded or destroyed. Such a change that emerges with effect from 1-4-1988 consequent to the introduction of the concept of block of assets is that, in case any asset is sold or discarded, the only adjustment that is permitted to be made is to reduce the sale, scrap value from the block. Disallowance of the depreciation on that portion of the WDV of the block represented by the value of the asset sold/discarded on the ground that there remains a certain value in the block in respect of such discarded or sold asset, consequent to the adjustments made as reckoned or considering separately individual value of the asset discarded is not permissible.
13. For easy appreciation of the new concept, let us consider the following example. If a block of assets consists of 2 assets, one of the value of Rs. 1 lakh and the other of the value of Rs. 50,000 and depreciation is being granted on the same, say at 25% and if the depreciation granted during the previous year is Rs. 37,500, then the W.D.V. at the end of the year is Rs. 1,12,500. Now,if the asset of the value of Rs. 1 lakh is sold or discarded and the amount realised on the same is Rs. 10,000, then the depreciation is to be granted on the block represented by the WDV of Rs. 1, 12,500-Rs. 10,000 is Rs. 1,02,500 which comprises of the remaining individual asset of original value of Rs. 50,000 and WDV of Rs. 37,500 only. In this example, the depreciation is to be allowed even on the value of Rs. 65,000, which represents the deficit of sale value of the first asset over its written down value though the asset has been sold. In the same manner, in the case on hand depreciation is to be allowed on that value of discarded asset represented by the excess of its written down value over the scrap value when the block continues to exist. Similarly, if the asset of Rs. 1 lakh original value is sold at Rs. 90,000 against the W.D.V. of Rs. 75,000 then the depreciation is allowed on the second asset on a W.D.V. of Rs. 22,500 only though on the break-up its W.D.V. is Rs. 37,500. Such break-up is not permitted in a block system of depreciation. In view of this, it is held that once an asset forms part of the block, it loses its identity and the question of assigning any value to the particular asset forming part of the block does not arise and consequently, depreciation cannot be disallowed on that part of the block on the ground that, a particular asset forming part of the block has been discarded or not owned or used by the assessee. In this case, the assessing officer as well as the learned Commissioner (Appeals) has disallowed the depreciation in the appellants case by separately computing the W.D.V. of a particular asset forming part of the block, i.e., the ponds and such computation done individually to an asset is not envisaged or allowed under the new concept of block of assets.
14. The principle behind this method of allowing depreciation on a portion of the W.D.V. of assets though it is discarded, can be better appreciated if the provisions existing upto 1-4-1988 for allowing terminal depreciation are considered. If the provisions of section 32(1)(iii) as existing upto 1-4-1988 are applied to the appellants case, then he would have been entitled to terminal depreciation to the extent of the value of the entire W.D.V. of Rs. 39,44,543 as on 1-4-1996 in the assessment year 1997-98 itself. In other words, the assessee would have been entitled to terminal depreciation on the entire opening W.D.V. of the assets discarded, as the scrap value or the value realised is only nil. Thus, consequent to the replacement of the old provisions by the new provisions under which the individual identity of the assets forming part of the block, is not to be considered, the assessee would only be entitled to depreciation even in respect of those discarded assets and not to terminal depreciation as was the case earlier. Though it appears that the assessee is being granted depreciation in respect of assets that have been discarded under the block, in effect, the assessee is granted only terminal depreciation over a period of time. The distinction between the procedure of granting depreciation allowance and the terminal depreciation in case of assets scrapped, would also be clear from the present provisions of section 32(1)(iii), which have been introduced with effect from 1-4-1988, providing for terminal depreciation in case of asset belonging to business of power generation. In this class of assets, i.e., assets belonging to power generation, individual identity of the asset is retained as was the case prior to the introduction of the concept of “block of assets.” In respect of such assets, in case an asset is sold or discarded or scrapped, the difference between the original cost or the W.D.V. and the scrap value or sale value has to be allowed as deduction in cases of shortfall. Similarly, in case of a surplus it is taxed under the re-introduced section 41(2) as balancing charge. As already stated, these two sections have not been made applicable to block of assets classified as clause (ii) under section 32(1).
15. As to the question of ownership vis-a-vis allowance of depreciation, section 32(1A) of the Income Tax Act, 1961 as it originally existed prior to the introduction of the concept of “block of assets” provided for depreciation allowance in respect of any addition, renovation, extension of or improvement to a building which the assessee does not own but in respect of which he holds lease or other right of occupancy. After the introduction of the concept of “block of assets” this provision has been omitted and Explanation 1 after the second proviso to section 32(1)(iii) has been inserted, which also provides for depreciation in situations above by deeming that the building is owned by the assessee. Hence, the revenue had allowed depreciation on the ponds constructed on the leased lands in earlier years on the same principle. The decision cannot be otherwise now. The fact that the assessee has not claimed depreciation for a particular year does not affect our decision in this case as the Honourable Supreme Court has held that claim for depreciation is not mandatory, in the case of Mahindra Mills.
16. From the above, it is clear that as long as an asset forms part of the block of assets and the block continues to exist, provisions of section 50 do not come into play and depreciation has to be allowed on that portion of the W.D.V. of the assets which have been scrapped, after reducing the scrap value from the block of assets. This view is fortified by the judgments of Jabalpur Bench of the Tribunal in the case of Packwell Printers, (supra) the judgment of the Ahmedabad Bench of the Tribunal in the case of Inductotherm (India) Ltd. (supra) and the judgment of the Patna Bench of the Tribunal in the case of Parikh Engg. & Body Bldg. Co. Ltd. (supra). Therefore, in view of the decisions and interpretation of the concept of block of assets” depreciation on ponds which is forming part of the block of assets has to be allowed as deduction even though these ponds were discarded and not used and not owned by it during the assessment years in question, as the assessee was not entitled to any scrap value whatsoever, consequent to discarding.
17. Coming to the case law relied upon by the learned Departmental Representative and by the learned Commissioner (Appeals), all of them are distinguishable, as all these cases dealt with grant of depreciation for assessment years before the introduction of the concept of depreciation on “block assets.” Thus, we uphold the claim of the assessee for depreciation for both the assessment years and set aside the order of the learned Commissioner (Appeals).
18. In the result, appeals of the assessee are allowed.