Once depreciation is claimed, asset cannot move out of the Block of Assets even if no depreciation was claimed for many years thereafter – High Court affirms ITAT order
ABCAUS Case Law Citation:
ABCAUS 2102 (2017) (10) HC
Brief Facts of the Case:
The appellant assessee had sold a fixed assets earning profits thereon which was treated by it as long term capital gain and claimed deduction u/s 48(2) of the Income Tax Act, 1961 (`the Act’). However the Assessing Officer (AO) noted that the asset was sold after fourteen years of its purchase and assessee had not only claimed depreciation on the asset for six assessment years (1980-81 to 1985-86) but had also claimed deduction u/s 80(J) for six assessment years.
According to the assessee, Section 50 of the Act was not applicable as the asset sold was not forming part of `Block of Assets’ for the reason that it was lying unused since last six years from 1986-87 to 1991-92 and no depreciation was claimed thereon whereas the concept of “block of asset” was introduced with effect from AY 1988-89. According to the assessee since no depreciation was claimed, the asset was sold as personal asset and thus provisions of section 50 were not applicable.
However, the AO was of the view that the gain arising on the sale of asset was not long term capital gain but short term capital gain under Section 50 of the Act.
Commissioner of Income Tax (Appeals) and thereafter the Tribunal (ITAT) also concurred with the view of the assessing officer.
The Tribunal observed that once the depreciation has been granted but subsequently no business operations were carried on the assets , that does not mean that it ceased to be a business asset.
The Substantial Questions of Law framed/urged for determination:
1. Whether, the Tribunal was right in law in holding that even when as asset for many years has ceased to be used for the purpose of the business, it still forms part of the `Block of Assets’ only because at some point of time in the past, it was used for the purpose of the business ?
2. Whether, the Tribunal was right in law in holding that an asset cannot move out of the `Block of Assets’, if depreciation was allowed to the asset some time in the past, even though depreciation was claimed or many years thereafter ?
3. Whether, the Tribunal was right in law in holding that even in a case where there is evidence to prove that an industrial gala which was once used for business is not used for business for many years, the gain on sale thereof will attract the provisions of section 50 and will consequently be short term capital gain ?”
Observations made by the High Court:
The Hon’ble High Court opined that the definition of the term `block of assets’ as appearing in section 2(11) of the Act means a group of assets falling within the class of assets and comprising both – tangible and intangible assets, in respect of which same percentage of depreciation is prescribed. Section 32 of the Act which provides for claiming depreciation, enables an assessee to claim it and in the case of any block of assets, on such percentage of written down value thereof, as may be prescribed.
The Hon’ble High Court concurred with the view taken by the ITAT that an asset cannot move out of the block of assets once depreciation is allowed on that particular asset. Once the depreciation has been granted and even if business operations were not carried out on the asset , merely at the convenience of the assessee, it does not cease to be a business asset.
Referring to the judgment of the Hon’ble Kerala High Court, the Hon’ble High Court opined that the the Kerala High Court rightly understood this concept and in the backdrop of the facts which were more or less identical. Section 50 has to be understood with reference to the general scheme of assessment on sale of capital assets. The Kerala High Court referred to the fact that the assets covered by Section 50 are depreciable assets forming part of block of assets, as defined in Section 2(11) of the I.T.Act. The components of Section 50 have also been, with respect, rightly understood in that decision. The Kerala High Court on reading of these provisions took the view that once the building was acquired by the assessee and in respect of which depreciation was allowed to it as a business asset, no matter the nonuser disentitles the assessee for depreciation for two years prior to the date of sale, still, this asset does not cease to be a part of block of assets. The character of such asset is not lost.
All the three questions proposed by the assessee were answered in favour of the Revenue and against the assessee.