Assets installed in a discontinued business are too eligible for depreciation

The Hon’ble Bombay High Court in the case of Commissioner of Income Tax¬ (Appellant) vs. Sonic Biochem Extractions Pvt. Ltd. (respondent) being ITA No. 2088 of 2013 relating to the assessment year 2005-06 has held that assets installed in a discontinued business are too eligible for depreciation.

The date of judgment:

The judgment was pronounced by a bench comprising of M. S. Sanklecha J, G. S. Kulkarni J, on November 17, 2015 and the same was published on November 27, 2015.

Pleaders engaged:

Mrs. S. V. Bharucha appeared on behalf of the Appellant and Mr. K. Shivram, Sr. Counsel along with Mr. Rahul Hakani appeared on behalf of the Respondent.

Issues which arose for consideration:

The appellant raised the following issues of law for consideration before the Hon’ble High Court:

(1) Whether in the circumstances of the case the Tribunal was justified in holding that the assessee is eligible to claim depreciation for plant and machinery of a business that has been discontinued without considering the fact that the essence for claiming depreciation under section 32 of the Act is the use of asset for business purpose of the assessee?
(2) Whether on the facts of the case the Tribunal was justified in holding the plant and machinery of discontinued business which shall not be revived, in a block of asset is eligible for claim of depreciation?
(3) Whether on the facts of the case the Tribunal was justified in setting aside the assessee’s claim towards loss to the file of the Assessing Officer without considering the fact that the loss was connected with the fixed asset?
(4) Whether on the facts and circumstances of the case the Tribunal was justified in upholding the method of the assessee to de-value the closing stock¬ without considering the fact that it was contrary to the provisions of section 145 A of the Act?

Circumstances of the case:

The appeal was preferred by the Revenue under Section 260A of the Income Tax Act, 1961 against the order dated 20.03.2013 passed by the Income Tax Appellate Tribunal relating to the Assessment Year 2005-06.

The assessee had claimed depreciation amounting to Rs.16.96 lacs towards its machinery which was discontinued during the assessment year. This was claimed on the block of assets on the written down value including the said machinery.

The Assessing Officer disallowed the claim of depreciation due to the reason that one of the two requirements of ownership under Section 32(1) (ii) of the Act was not satisfied.

The assessee filed an appeal before the first appellate authority. The Commissioner of Income Tax (Appeals) held that in the absence of the use of such machinery of refining edible oil, the respondent was not entitled to depreciation.
As such, the order of the Assessing Officer was upheld to the extent of disallowing the depreciation of Rs.16.96 lacs.

On further appeal before the Tribunal against the impugned order, it was held that the refining machinery was a part of the block of assets of plant and depreciation cannot be granted to the entire block of assets if an individual item therein has not been used during the assessment year.

In support of the impugned order reliance was placed upon the decision of DCIT vs. Boskalis Dredging India (P) Ltd. 53 SOT 17 (Mum) wherein it was held that if the concept of block of assets was brought into effect, then for the aggregate of written down value of all the assets in the block along with additions made to the assets, depreciation is allowable.

The individual asset looses its identity for depreciation and the user test should be satisfied when the purchased machinery becomes a part of the block of assets.
In view of the circumstances, the appeal filed by the respondent was allowed and the disallowance of depreciation was deleted.

Arguments of the parties:

Mrs. Bharucha learned Counsel for the revenue contended that the issue was identical to that which arose before the Tribunal in the case of Boskalis Dredging India (supra) where also the concerned machinery was a part of the block of assets and was not in use.

It was stated that the Revenue has accepted the decision of the case of Boskalis Dredging India in which the impugned order has been followed.

No feature in the present case had been stated which would ask for a different view.
The Tribunal in its order placed reliance upon the decision in G. R. Shipping Ltd. being Income Tax Appeal No. 598 of 2009 which was dismissed on 20.07.2008 upholding the view of the Tribunal on similar issue.

It was held that the Assessing Officer had disallowed the loss claimed being attributable to fixed assets i.e. plant and machinery. Therefore the loss was not revenue in nature.

In appeal, the Commissioner of Income Tax (Appeals) did not controvert the observations of the Assessing Officer.

On further appeal the Tribunal by the impugned order accepted the respondent’s stand that the loss was revenue in nature as the amount claimed was not granted by the Insurance Company for repair of Plant & Machinery.

This expense as repairs was allowable as revenue under Sections 30 and 31 of the Act. In the circumstances, the order of the Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and restored the issue to the file of the Assessing Officer to examine whether the expenses claimed was incurred for repairs of Plant and Machinery destroyed by Fire.

The judgment:

In view of the circumstances and in the facts and in the findings of the Tribunal, it was held that the appeal did not raise a substantial question of law. Thus the appeal was not entertained and accordingly the same was dismissed.