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Subject: QA Test 1
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Date: April 21, 2021
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QA Test 1

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The concept of “block of assets” was introduced with effect from 01.04.1988. To understand the concept, lets look at the statutory provisions.

Provisions of the Income-tax Act:

Section 32 (1) reads as follows:

“32. (1) In respect of depreciation of –

(i) building, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial right of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned wholly or partly, by the assesses and used for the purposes of the business or profession, the following deductions shall be allowed-

……..

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.”

Section 43 reads as follows:

“(6) “written down value” means:

……………

c) in the case of any block of assets.-

(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;

(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 such reduction does not exceed the written down value as so increased.”

The term “block of assets” is defined in Section 2(11) as under:

“2(11) “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.”

Prior to the introduction of new concept of block of assets with effect from 01.04.1988, depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block of assets and allowability of depreciation on such a block.

The rationale behind such a provision is contained in Circular No. 469 dated 23.09.1986 issued by the Central Board of Direct Taxes (CBDT). After referring to the Budget Speech of the Finance Minister wherein reference was made to the proposal to introduce a system of allowing depreciation in respect of block of assets instead of the present system of depredation on individual assets, at paragraph 6.3 the Board stated as follows:

“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 book-keeping 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 disaggregate 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, building, machinery, plant and machinery.”

Judgements on the issue:

The aforesaid legal position has been examined in great detail in two important judgements. In CIT vs. Bharat Aluminium the Delhi High Court held that the rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT’s Circular dated 23.09.1988 is that once the various assets are clubbed together and become ‘block asset’ within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. It was held that individual assets lose their identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned.

The Court further held that the fusion of various assets into the block asset gets disturbed only when the eventuality contained in clause (iii) of s. 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the ‘block asset’.

As regards the concept of “user” the Court held that though as per s. 32(1) the asset is to be owned and “used” for the purpose of business or profession, the expression “used for the purpose of business” when applied to block asset would mean use of block asset and not any specific items in the said block as individual assets have lost their identity after becoming inseparable part of the block asset.

The same view was reiterated on independent reasoning by the Bombay Bench of the Tribunal in Swati Synthetics vs. ITO. In that case, the factory was shut for more than 2 years and the question arose whether depreciation was allowable. The Tribunal reiterated the point that the “use” of an individual asset can be examined only in the first year when the asset is purchased. In subsequent years the use of block of assets is to be examined. The existence of an individual asset in block of asset itself amounts to use for the purpose of business.

The same view has been taken in several other judgements:

Likewise, in G. R. Shipping, the assessee’s barge sank to the bottom of the ocean and obviously could not be “used”. Nevertheless, the Bombay High Court upheld the Tribunal’s order that as the barge was a part of the block of assets, depreciation was admissible. The view of the Tribunal that after the insertion of the concept of “block of assets” by the T. L. (A) Act, 1988 w.e.f 1.4.1988 individual assets had lost their identity and only the “block of assets” had to be considered and that the test of “user” had to be applied upon the block of assets as a whole and not on individual assets was approved.

1. Packwell Printers Vs. ACIT [1996] 59 ITD 390 [Jab.]
2. DCIT Vs. Finolex Cables Ltd. [2008] 114 TTJ (Pune) 785
3. Unitex Products Ltd. V. ITO [2008] 22 SOT 429 (Mum.)
4. Nathani Steels Ltd., V. DcIT [1996] 57 ITD 584 (Bom.)
5. South Eastern Coalfields ltd. V. JCIT [2003] 260 ITR (AT) 1 (Nag.)
6. Inductothern (India) ltd. V. DCIT, [2003] 73 ITD 329 (Ahd.)
7. Natco Exports V. DCIT [2003] 86 ITD 445 (Hyd).
8. ACIT V. SRF Ltd. [2008] 21 SOT (Del.) 122
9. Goetx (India) Ltd. V. DCIT, [2008] 25 SOT 171 (Del.)

Conclusion:

Accordingly, so long as the “block of assets” continues to be used, the user of the individual assets that make up the block cannot be seen. The assets of the closed factory are a part of the “block” and as the block continues to be used, depreciation even on the assets of the closed factory is eligible.



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