Once depreciation is claimed, asset cannot move out of the Block of Assets – High Court affirms

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

 Block of Assets

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.  

Block of Assets

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