ITAT, HYDERABAD BENCH ‘B’ Allowability of deduction under section 80-IB of IT Act, 1961 to a manufacturer and trader of wheat products

Availability of depreciation under section 32(1)(iii) of IT Act, 1961 to a manufacturer of pistons

Terminal allowance as allowed under clause (iii) of section 32(1) is available only to power generating units and not to other assessees like the one in question.

ITAT, HYDERABAD BENCH ‘B’, HYDERABAD

DCIT

v.

SAMKRG Pistons & Rings Ltd.

ITA No. 304/Hyd/2006

January 23, 2009

RELEVANT EXTRACTS:

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8. Everything revolves around clause (iii) of section 32(1). The said clause provides that in case any of the assets specified therein on which depreciation is claimed and allowed under clause (i), is sold, discarded, demolished, and if the monies payable fall short of the w.d.v, such shortfall will be allowed as deduction provided the same is written off in the books of account. The dispute is as to which is the clause (i) which is referred in clause (iii). According to the learned counsel for the assessee, it is the first clause (i) which is referred to whereas according to the learned Departmental Representative it is second clause (i) in sub-section (1) of section 32. We are not in a position to agree with the view of the learned counsel for-{pie reasons that follow. Clause (iii) opens with the sentence "in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) ..". It can be seen that clause (i) qualifies the expression " in respect of which depreciation is claimed and allowed " Now deductions in respect of depreciation are allowed only under the subsequent set of clauses viz., clauses (i) to (iii). The first set of clauses specifies only the assets on which depreciation is allowable. But the quantum of depreciation to be allowed is specified in the second set of clauses and it is the quantum of depreciation which is material under clause (iii). Therefore, the reference to clause (i) in clause (iii) has to be understood as reference to the second clause (i). Further, power-generation and distribution units are granted depreciation on straight line basis on individual assets as per the second clause (i). Units other than power generating units are granted depreciation w.d.v. basis on block of assets. "Block of assets" is defined in section 2(11) to mean a group of assets falling within a class of as sets in respect of which the same percentage of depreciation is prescribed. Coming to clause (iii), it talks of depreciation claimed and allowed on individual assets and not on block of assets. This obviously implies that clause (iii) is applicable only in a situation where the asset individually claiming depreciation is sold, discarded etc. This is so only in the case of power generating units and not in other units. Coming to section 50, it provides that where an asset forming part of a block of assets is transferred and the consideration received exceeds the aggregate of certain amounts specified therein, the excess lias to be deemed to be short-term capital gain. It provides that even if one asset forming part of the block is transferred and the consideration received exceeds the w.d.v. of the entire block, the entire excess shall be treated as short-term capital gain. In other words, the concept of block of assets is not ignored in section 50 as argued by the learned counsel. Section 50, of course, contemplates a situation where the consideration is higher than the w.d.v. The question that may be posed is as to what happens where the consideration is lesser than the w.d.v. The learned counsel's argument obviously is that the short-fall is to be allowed as deduction under section 32(1) (iii) of the Act. However, that is not so. Clause (c) of section 43(6) gives the meaning of "written down value". It, inter alia, provides for the adjustment of the w.d.v. at the beginning of the previous year by the reduction of monies payable in respect of any asset falling within that block, which is sold, discarded etc. Now we come back to section 32(1) and refer to the second clause (ii) therein. It provides for depreciation in the case of block of assets at the prescribed percentage on the written down value. The written down value here has to mean as defined in section 43(6) of the Act. Thus, if the interpretation of the learned counsel is to be accepted, then the w.d.v. on which the assessee can claim depreciation in subsequent years will not be as mandated in section 43(6). In other words, where the net realizable value of an asset is lesser than the carrying cost of the asset, the realizable value is merely to be reduced from the opening w.d.v. The difference or the short-fall is not allowed as deduction, though the excess is to be taxed as capital gain u/s 50 of the Act. Hence, there is no force in the argument of the learned counsel that for the purpose of section 32(1) (iii), the concept of block of assets has to be ignored. Circular 772 issued by the Board also clarify the statutory provision to the effect that terminal allowance is allowed only in case of power generating and distributing units. We are unable to discern the reference to the amalgamation of banking companies in clause (2) of the Explanation to section 32(1) (iii). But it does not necessarily mean that it supports the case of the assessee. The general scheme of the Act is that after the introduction of the concept of block of assets and the introduction of section 50 w.e.f. 1-4-1988, terminal allowance is not allowed except in case of power generating and distributing units.

9. There is another aspect to the issue. It is not the assessee's case that it is entitled to depreciation on the basis of straight line method. Clause (i) specifically permits power generating units to claim depreciation on straight line basis on individual assets. This is the reason that in clause (iii) individual assets have been mentioned and then a reference is made to the depreciation claimed and allowed under clause, (i). Further, it may be noted that the so-called clause (ii) in the beginning of section 32(1) was inserted by the Finance (No.2) Act, 1998 w.e.f. 1-4-1999 to provide for depreciation on intangible assets. While adding this portion in section 32(1), the amendment was made not by stating that clause (ii) is being inserted but by stating that for the opening portion beginning with the words "in respect of , the following shall be substituted with effect from the 1st day of April, 1999." Then, the specification of tangible and intangible assets followed. On the other hand, whenever there has been an amendment in any of the clauses from (i) to (iii) in the later portion of section 32(1), such amendments have been made by referring to those clauses as clauses only. The point we are trying to drive home is that clauses (i), (ii), (iia) and (iii) appearing in the subsequent part of section 32(1) are the ones which are referred to as clauses and not the opening portion of section 32(1) in which tangible and intangible assets are specified. Thus, from the entire scheme of the Act as regards grant of depreciation as well as the scheme of drafting the legislation point only to the fact that clause (i) mentioned in clause (iii) refers to the second clause (i) only. Therefore, terminal allowance as allowed under clause (iii) is available only to power generating units and not to other assessees like the one before us. Accordingly, we disallow the claim of the assessee. Even the extent to which the CIT (A) has allowed deduction cannot be allowed and the same is withdrawn thereby allowing the ground raised by the revenue.



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