One of my units has been shut for years. The Assessing Officer has pulled the assets of that unit out of the block and disallowed the depreciation on them. Can he?
No. The Delhi High Court held that after the 1988 amendment depreciation is allowed on the written down value of the block of assets, individual assets have lost their identity, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use. The Revenue's appeals were dismissed even though the unit concerned had been closed for years.
Decided by the High Court (A.K. Sikri J and Suresh Kait J) on 2010-12-24, reported as ITA Nos. 161 and 617 of 2006 and 998, 1104 and 1283 of 2008 (Delhi High Court); assessment years from 1998-99. It bears on section 32, section 2(11), section 43(6) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
This is the block-of-assets answer to a user-based disallowance and it is stronger than the passive user argument because it does not depend on proving readiness for any particular asset. The Court expressly did not adopt the Tribunal's passive user reasoning; it upheld the result on the block. The practical consequences run further than the disallowance in issue: because individual identity is lost, a discarded or destroyed asset does not come out of the block either, and the block is reduced only by the moneys payable in respect of the asset sold, discarded, demolished or destroyed under s.43(6)(c)(i)(B). The counter-argument the Revenue runs, that the assessee should maintain asset-wise details so that idle assets can be identified, was rejected as frustrating the very purpose of the amendment. Note the limit: the asset must have entered the block — the block argument does not create an entitlement for an asset acquired in the year and never put to use at all.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee claimed depreciation of about Rs. 9.31 crores for AY 1998-99, of which Rs. 43,41,528 related to the assets of its Bhopal unit. That unit had been completely closed from AY 1997-98 onwards and, by the time the appeals were heard, had been non-functional for some six years with no prospect of revival. The Assessing Officer disallowed the depreciation referable to the closed unit on the ground that its assets had not been put to use; the CIT(A) confirmed the disallowance; the Tribunal reversed it, reasoning in terms of passive user. The Revenue appealed for that year and for later years.
The appeals were dismissed with no order as to costs. Although the Court did not entirely agree with the Tribunal's reasoning, it upheld the Tribunal's conclusion on the basis of the block of assets: depreciation is allowed on the block, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use (paras 29 and 34).
The Court read the amended s.32, under which the deduction in the case of any block of assets is such percentage on the written down value of the block as may be prescribed. With that amendment individual assets have lost their identity and the concept of the block has been introduced, which is what is relevant for calculating depreciation (para 30). The Court set out CBDT Circular No. 469 dated 23 September 1986 explaining the rationale of the amendment — the removal of asset-wise computation. Accepting the Revenue's contention that user of each asset must be shown would mean directing the assessee to maintain the details of each asset separately, and that would frustrate the very purpose for which the amendment was brought about (para 33). The Court therefore declined to follow the Tribunal's passive user route and upheld the allowance on the block (para 34).
Thus, the depreciation is allowed on block of assets, and the Revenue cannot segregate a particular asset therefrom on the ground that it was not put to use.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that after the 1988 amendment depreciation is allowed on the written down value of the block of assets, individual assets have lost their identity, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use. The Revenue's appeals were dismissed even though the unit concerned had been closed for years. This was decided by the High Court (A.K. Sikri J and Suresh Kait J) and bears on section 32, section 2(11), section 43(6) of the Income Tax Act 1961. It is reported as ITA Nos. 161 and 617 of 2006 and 998, 1104 and 1283 of 2008 (Delhi High Court); assessment years from 1998-99. This is the block-of-assets answer to a user-based disallowance and it is stronger than the passive user argument because it does not depend on proving readiness for any particular asset. The Court expressly did not adopt the Tribunal's passive user reasoning; it upheld the result on the block. The practical consequences run further than the disallowance in issue: because individual identity is lost, a discarded or destroyed asset does not come out of the block either, and the block is reduced only by the moneys payable in respect of the asset sold, discarded, demolished or destroyed under s.43(6)(c)(i)(B). The counter-argument the Revenue runs, that the assessee should maintain asset-wise details so that idle assets can be identified, was rejected as frustrating the very purpose of the amendment. Note the limit: the asset must have entered the block — the block argument does not create an entitlement for an asset acquired in the year and never put to use at all. If it applies to you, the first step is this: Frame the reply on the block, not on the individual asset: identify the block, its opening written down value, additions and moneys payable, and show that depreciation was computed on the block.
The assessee claimed depreciation of about Rs. 9.31 crores for AY 1998-99, of which Rs. 43,41,528 related to the assets of its Bhopal unit. That unit had been completely closed from AY 1997-98 onwards and, by the time the appeals were heard, had been non-functional for some six years with no prospect of revival. The Assessing Officer disallowed the depreciation referable to the closed unit on the ground that its assets had not been put to use; the CIT(A) confirmed the disallowance; the Tribunal reversed it, reasoning in terms of passive user. The Revenue appealed for that year and for later years. The matter was decided on 2010-12-24 by the High Court (A.K. Sikri J and Suresh Kait J). On those facts the High Court held as follows. The appeals were dismissed with no order as to costs. Although the Court did not entirely agree with the Tribunal's reasoning, it upheld the Tribunal's conclusion on the basis of the block of assets: depreciation is allowed on the block, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use (paras 29 and 34).
The Court read the amended s.32, under which the deduction in the case of any block of assets is such percentage on the written down value of the block as may be prescribed. With that amendment individual assets have lost their identity and the concept of the block has been introduced, which is what is relevant for calculating depreciation (para 30). The Court set out CBDT Circular No. 469 dated 23 September 1986 explaining the rationale of the amendment — the removal of asset-wise computation. Accepting the Revenue's contention that user of each asset must be shown would mean directing the assessee to maintain the details of each asset separately, and that would frustrate the very purpose for which the amendment was brought about (para 33). The Court therefore declined to follow the Tribunal's passive user route and upheld the allowance on the block (para 34). In the words reproduced by the source cited on this page: "Thus, the depreciation is allowed on block of assets, and the Revenue cannot segregate a particular asset therefrom on the ground that it was not put to use." The decision followed or applied CBDT Circular No. 469 dated 23 September 1986 — relied on for the purpose of the block of assets amendment.
It was decided by the High Court on 2010-12-24 and is reported as ITA Nos. 161 and 617 of 2006 and 998, 1104 and 1283 of 2008 (Delhi High Court); assessment years from 1998-99. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 32, section 2(11), section 43(6), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed with no order as to costs. Although the Court did not entirely agree with the Tribunal's reasoning, it upheld the Tribunal's conclusion on the basis of the block of assets: depreciation is allowed on the block, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use (paras 29 and 34). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 32, section 2(11), section 43(6) of the Income Tax Act 1961, and was decided by A.K. Sikri J and Suresh Kait J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Refuse the invitation to produce asset-wise user evidence for assets inside an existing block, and cite the reasoning that requiring it would frustrate the purpose of the amendment. Keep the passive user argument in reserve for the assets that entered the block in the year in question, where user does have to be shown. Where an asset has been discarded, do not write it out of the block: reduce the block only by the moneys payable, and check s.32(1)(iii) separately for an undertaking engaged in generation of power that has exercised the option under Rule 5(1A). If the whole business has ceased, treat that as a different question — the block argument assumes the business continues.
Validity check could not be completed. Later treatment was not checked. The library already carries CIT v. Bharat Aluminium and CIT v. Yamaha Motor India on neighbouring aspects of the block; this entry is on the Revenue's power to segregate an asset from an existing block for non-user, which those entries do not cover. Nothing in the block scheme has been amended in a way that touches this reasoning, save that goodwill was removed from s.2(11) by the Finance Act 2021 from AY 2021-22. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment is reported on indiankanoon under the title 'Commisioner Of Income Tax vs M/S. Oswal Agro Mills Ltd.'; the signature block prints the second judge's name as 'SURESH KATI', which is an OCR error for Suresh Kait. Paragraphs 29, 30 and 34 were re-read verbatim through /docfragment/. Paragraph 33, quoted in the first pass, was not re-read and is therefore paraphrased rather than quoted here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with no order as to costs. Although the Court did not entirely agree with the Tribunal's reasoning, it upheld the Tribunal's conclusion on the basis of the block of assets: depreciation is allowed on the block, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use (paras 29 and 34).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We treated a building's full cost as application of income. Can we also claim depreciation on it?
Can I claim depreciation on the goodwill that arose when I took over another company on amalgamation?
One machine in my block of assets was not used this year. Can the AO deny depreciation on it?
I discarded machinery this year and did not use it. Can I still claim depreciation on it?