Modern Threads (India) Ltd, A v. Dy.commissioner Of Income Tax, Circle 6, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 150 / 2010 Modern Threads (India) Ltd, A-4, Vijay Path, Tilak Nagar, Jaipur through its Company Secretary Sh. B.L. Saini S/o Shri H.S. Saini aged 43 years. ----Appellant Versus Dy.Commissioner Of Income Tax, Circle 6, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar with Ms. Archana For Respondent(s) : Mr. R.B. Mathur with Mr. K.D. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHOrder 28/08/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the department. 2.This Court while admitting the matter framed the following substantial question of law:- “Once an asset forms part of the Block ofAsset, which is eligible for depreciation u/s 32of the Act, whether the depreciation deservesto be computed and allowed with reference tothe Written Down Value of such Block of Assetas defined u/s 43(6) of the Act,notwithstanding the actual use of individualasset forming part of block of asset.?” 3.Counsel for the appellant Mr. Jhanwar has taken us to theorder of the CIT(A) which reads as under:- “2. Whether assessing officer was justified indisallowing depreciation claim in respect ofthread division. 2.1. On perusal of para 2 of the assessmentorder it is seen that considering closure of threaddivision an opportunity was given proposingdisallowance of depreciation claim in respect ofthread division and after considering theexplanation furnished the A.O has relied uponCalcutta High Court judgment in the case of CITvs. Oriental Coal Co. Ltd. 206 ITR 682 andRajasthan High Court judgment in the case of CITvs. Udaipur Mineral Development Syndicate Pvt.Ltd. 269 ITR 263 and disallowed suchdepreciation claim in respect of thread division atRs. 5,92,76,974/- 2.2. Challenging the said view of assessingofficer Shri Garg in his submission has arguedthat the appellant company was not able tooperate the thread division on account of sealingthe appellant’s suit by Rajasthan State ElectricityBoard as well as on account of strike by theemployees. He had relied upon Madras HighCourt judgment in the case of CIT vs. VayitihiPlantation Ltd. 128 ITR 625 and another MadrasHigh Court judgment in the case of CIT vs. HeeraFinancial Services Ltd. 298 ITR 245 in which itwas held that where the plant was kept ready foruse but could not be used on account of forcedidleness due to strike then the assessee eventhough a passive user was deemed to be anactive user within the meaning of word “use” andit was entitled for depreciation claim u/s 32 ofI.T. Act. By distinguishing the Rajasthan HighCourt judgment in the case of CIT vs. UdaipurMineral Development Syndicate it was arguedthat in that case the business remained closedbut in the present case the another unit of theappellant was working and the business as suchwas not closed. 2.3. I have considered the case and argumentstaken by Sh. Garg quite carefully. It is seen thatconsidering Madras High Court judgment in thecase of CIT vs Heera Financial Services Ltd. 298ITR 247 it is clear that the machineries were keptunder forced idleness and therefore, theappellant though a passive user, was deemed tobe an active user within the meaning of word“used” and is entitled for depreciation claim u/s35 of I.T. Act. In the present case due to strikeby the employees and sealing by RSEB, thoughthe machineries were ready for use but it waskept in the forced idleness. Further, in the case of 2.3. I have considered the case and argumentstaken by Sh. Garg quite carefully. It is seen thatconsidering Madras High Court judgment in thecase of CIT vs Heera Financial Services Ltd. 298ITR 247 it is clear that the machineries were keptunder forced idleness and therefore, theappellant though a passive user, was deemed tobe an active user within the meaning of word“used” and is entitled for depreciation claim u/s35 of I.T. Act. In the present case due to strikeby the employees and sealing by RSEB, thoughthe machineries were ready for use but it waskept in the forced idleness. Further, in the case of Udaipur Mineral Development Syndicate whichhas been relied upon by A.O. the business of theappellant remained closed while in this case onlyone unit remained closed and remaining businesswas continuing and therefore, the facts are notidentical. In any case after insertion ofdepreciation provisions on the block valueconcept as a whole for the appellant there wasno question of partial disallowance ofdepreciation claim. In any case, this unit did notfunction w.e.f. 15.10.2001 but the assessingofficer in A.Y. 2002-03 has also not disallowedthe depreciation claim on thread division in theassessment order passed u/s 143(3) of I.T. Actdated 24.2.2005. With this discussion, in myconsidered view the appellant was entitled for thedepreciation claim on thread division and A.O. isdirected to allow the same.” 4.He contended that the Tribunal while considering thematter has seriously committed an error in relying the judgmentof this Court in case of Udaipur Mineral Development SyndicatePvt. Ltd. 269 ITR 263 wherein while considering the issue, thecourt held it prior to the amendment where block value is there.However, he has relied upon the decision of this Court in thecase of Commissioner of Income Tax vs. Udaipur Distillery Co.Ltd. reported in [2004] 268 ITR 446 (Raj.) wherein whileconsidering the question after the amendment, this court has observed as under:- “12. The AO has disallowed the claim amountingto Rs. 28,617 by holding that the fast fooddivision of the assessee at Delhi and Mumbaithrough three restaurants, two at Delhi and oneat Mumbai, has been closed since the asst. yr.1988-89 and, therefore, assessee's claim todepreciation pertaining to research anddevelopment assets cannot be allowed in view ofprovisions of Section 32 which require that theassets on which depreciation is claimed must beused in a live business during the accountingperiod relevant to the assessment" year inquestion. However, the assessee has raised two-to Rs. 28,617 by holding that the fast fooddivision of the assessee at Delhi and Mumbaithrough three restaurants, two at Delhi and oneat Mumbai, has been closed since the asst. yr.1988-89 and, therefore, assessee's claim todepreciation pertaining to research anddevelopment assets cannot be allowed in view ofprovisions of Section 32 which require that theassets on which depreciation is claimed must beused in a live business during the accountingperiod relevant to the assessment" year inquestion. However, the assessee has raised two- fold contentions for sustaining his claim. Firstly, itis submitted that R&D assets did not relate solelyto the fast food division of the company but alsorelates to the manufacture and sale of liquor. R &D division was also rendering services for itsliquor business and the liquor business has notbeen closed at any stage. Therefore, the factualfoundation on the basis of which AO hasdisallowed theclaim did not exist.13. Secondly, it was contended that sinceamendment of Section 32 w.e.f. 1st April, 1988,scheme of depreciation has gone radical changevide' Taxation Laws (Amendment andMiscellaneous Provisions) Act, 1986. Block assetsof business has been succinctly defined underSection 2(11) of the Act of 1961. Now under thescheme of depreciation the claim of depreciationis allowed on block assets. It cannot be deniedthat assets for R&D division of the assessee'sbusiness forms part of block assets foraccounting period relevant to the assessmentyear in question. R&D division of the assessee-company as such was not closed. Therefore, italso cannot be said that assets in question werenot used in the business of assessee, Therefore,the assessee is entitled to deduction on accountof depreciation on assets of R&D division as partofblockassets.14. The learned counsel for the Revenue, on theother hand urged that Section 32(1) providesthat before an asset can be construed as part ofblock assets for computation of depreciation itmust be an asset which has been put to use forthe purpose of assessee's business during therelevant accounting period. If an asset has not atall been used for the purpose of assessee'sbusiness during the relevant accounting period, italso cannot form part of block assets on whichpercentage depreciation has to be given whilecomputingthetotaltaxableincome.15. Apparently, the aforesaid question raises asubstantial question as to the interpretation ofSection 32 as amended by the Act of 1986 andwas in force during the relevant assessment year.16. However, we are of the opinion that in viewof the findings of fact recorded by the learnedTribunal in this regard, this question really doesnot arise for consideration to affect the finaldecision. Apparently, as per facts not in dispute,the R&D division, of which the assets wereformed part, was not closed albeit it was confinedin its activities to the other business of theassessee than fast food. Once this is found theassets relating to R&D cannot be excluded because part of the assessee's business is closedto which also the R&D division might berendering its services. It may not have been usedfor the business relating to the fast food division.It is not the requirement of Section 32 that thedepreciation claim in respect of any asset has tobe allowed if it continues to be used for all thepurpose which was being used earlier. In view ofthe findings of fact recorded in favour of theassessee that the R&D division was alive and allbusiness of the assessee were not closed,depreciation ought to have been allowed asdeduction as part of block assets of R&D division.There is no other ground to disallow that claim.We accordingly hold that the Tribunal was right inallowing the depreciation on R&D division onassessee.” 5.The same view is also taken in the case of Commissioner ofIncome Tax, Alwar. vs. Gillette India Ltd. in Tax Appeal No.349/2011 decided on 23[rd] May, 2017 wherein it has been held asunder:- “5.In so far as issue No.(iii) is concerned,the Tribunal relying upon the decision ofDelhi High Court in the case of CIT vs.Bharat Aluminum Company Ltd. 187Taxman 111, 124(Del.) and in the caseof CIT vs. Yamaha Motors India Pvt.Ltd. 226 CTR 304 and the Gujarat HighCourt in the case of CIT vs. Sonal GumIndustires 322 ITR 542 in para 52 to 56has held as under: 5.The same view is also taken in the case of Commissioner ofIncome Tax, Alwar. vs. Gillette India Ltd. in Tax Appeal No.349/2011 decided on 23[rd] May, 2017 wherein it has been held asunder:- “5.In so far as issue No.(iii) is concerned,the Tribunal relying upon the decision ofDelhi High Court in the case of CIT vs.Bharat Aluminum Company Ltd. 187Taxman 111, 124(Del.) and in the caseof CIT vs. Yamaha Motors India Pvt.Ltd. 226 CTR 304 and the Gujarat HighCourt in the case of CIT vs. Sonal GumIndustires 322 ITR 542 in para 52 to 56has held as under: “52. We have heard the rival submissionand considered them carefully. Afterconsidering the relevant material along withwritten submission and various case laws,we find that the assessee deserves tosucceed. It is a fact on record that M/sDuracellbatteriesIndiaLimitedamalgamated with the assessee company inA.Y. 2000-01. On amalgamation its plant &Machinery was included in the block of theplant & Machinery of the assessee company.This block was used for the purpose of thebusiness in A.Y.2000-01 & 2001-02. In A.Y.2002-03 the assessee did not fulfill thecondition laid down u/s 72A and thereforethe unabsorbed losses and depreciation of the amalgamating company M/s Duracellbatteries India Limited which was set off inA.Y. 2000-01 and 2001-02 was withdrawnand offered in income in A.Y. 2002-03.However the fact remain is that plant &Machinery of Duracell battery India Limitedmerged in the block of assets of theassessee company on its amalgamation andon such block depreciation for A.Y. 2000-01& 2001-02 was allowed under the blockconcept of depreciation once an asset hasformed part of the block it can’t be reducedexcept by monies payable in respect of anyassets falling in that block which is sold ordiscarded or demolished or destroyed asper section 43(6) of the Income tax Act.The Money becomes payable in A.Y.2004-05when such plant & Machinery were sold forRs.29,98,65,810/- in A.Y. 2004-05 andRs.1,26,23,967/- in A.Y. 2005-06 whensuch amount was reduced from the block ofplant & machinery. The example given byLd. AR in his written note amply illustratethe mechanism of allowance of depreciationu/s 32 after the block concept of asset.Therefore, the notional disallowance ofdepreciation in respect of plant &machinery of Duracell batteries whichformed part of the block of assets of theassessee is not permitted in law. 53. The Delhi High court of CIT V/s. BharatAluminium Company Ltd. 187 Taxman 111,124 (Del.) held that though as per section32(1), in order to get entitled to claimdepreciation, asset is to be owned by theassessee and it is also be used for thepurpose of business and profession but thisexpression when applied to block of assetsand not any specific building, machinery,plant or furniture in said block of assets asindividual assets loose their identity afterbecoming inseparable part of block of assets. 54. The Gujarat High Court in case of CITV/s. Sonal Gum Industries 322 ITR 542 heldthat in relation to block of assets it is notpossible to segregate items falling with in theblock for the purpose of grantingdepreciation or restricting the claim thereof.Once it was found that the assets were usedfor the prupose of business, it was notnecessary that all the items falling within plant and machinery have to besimultaneously used for being entitled todepreciation. 54. The Gujarat High Court in case of CITV/s. Sonal Gum Industries 322 ITR 542 heldthat in relation to block of assets it is notpossible to segregate items falling with in theblock for the purpose of grantingdepreciation or restricting the claim thereof.Once it was found that the assets were usedfor the prupose of business, it was notnecessary that all the items falling within plant and machinery have to besimultaneously used for being entitled todepreciation. 55. The Delhi High Court in case of CIT V/s.Yamaha Motors India Pvt. Ltd. 226 CTR 304held that Expression “Used for the purpose ofbusiness” in section 32 has to be readharmoniouslywiththeexpression“Discarded” occurring in Clause III of subsection (1) thereof. On harmonious readingof these expressions, “Used for the purposeof business” only means that assessee hasused the machinery for the purpose ofbusiness in earlier years. Therefore oncedepreciation was allowed on block of assetsin previous year actual user of machinery isnot required with respect to the discardedmachinery and the condition for eligibility ofdepreciation that machinery is used for thepurpose of business would mean thatdiscarded machine is used for the purpose ofbusiness in the earlier years for whichdepreciation is allowed. 56. Mumbai ITAT in case of M/s. Swatisynthetics Lts. V/s. ITO 2010 TIOI. 78 heldthat depreciation is allowable on the entireblock even if some of the assets of theblock have not been used. The use of theindividual asset for the purpose of businesscan be examined only in the first year whenthe asset is purchased. In subsequent yearsuse of block of assets is to be examined.Existence of individual assets in the block ofassets itself amounts to use for the purposeof business.” 5.1In view of the decisions of two HighCourts and one decision of the Tribunal, theTribunal has not committed any error andwe affirm the view taken by the Tribunaland also the view taken by the Delhi HighCourt and Gujarat High Court.” 6.Counsel for the respondent has also relied upon thedecision of Bombay High Court in the case of DineshkumarGulabchand Agarwal vs. Commissioner of Income Tax & Anr.reported in 267 ITR 768 and Karnataka High Court in the case of Deputy Commissioner of Income Tax vs. Yellamma DasappaHospital reported in 290 ITR 353. 7.Taking into consideration the two judgments of this Court,we are of the considered opinion that the finding record by theCIT(A) is required to be restored and that of the Tribunal whichrequired to be reversed. 8.Hence, the issue is required to be answered in favour ofthe assessee against the department. 9.The appeal stands allowed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. A.Sharma/138