High Court Of Andhra Pradesh
CIT Vs. Priyadarshini Spinning Mills Ltd.
Assessment Year 1988-89
L. Narasimha Reddy And T. Sunil Chowdary, JJ.
Reference Case No. 82 Of 1999
June 12, 2014
L. Narasimha Reddy, J. – The Finance Act, 1998, brought about substantial changes in the Income-tax Act, particularly, in the regime of depreciations. Till then, depreciations used to be allowed on individual assets, held by an assessee, whether an individual or an industry or a business undertaking. Through the amendment, the concept of block assets was introduced. The expression “block assets” is defined under clause (11) of section 2 of the Income-tax Act, 1961, (for short “the Act”) as, pool of tangible assets such as buildings, machinery, plant or furniture on the one hand and intangible assets such as patents, copyrights, trade marks, licences, franchises, etc., on the other hand. One condition for grouping such items together, is that the rate of depreciation must be same for the items to be included in each block. Section 43(6) of the Act provided for working out of written down value (WDV) as a step in the process of determining the allowable depreciation. The procedure to workout the written down value in respect of block assets is prescribed under clause (c) therein.
2. The applicant submitted its returns for the assessment year 1988-89. It was mentioned that certain items, which formed part of a block assets, valued at Rs. 68,06,562 were destroyed in a fire accident. It was also stated that the applicant has taken out reinstatement value insurance policies and accepting the claim submitted thereunder, the insurer paid a sum of Rs. 1,54,99,051. They, however, deducted only a sum of Rs. 68,06,562 in the process of working out the written down value, and, accordingly, claimed deprecation, in accordance with the relevant provisions. The assessing authority, however, passed an order, dated March 20, 1991, stating that irrespective of the written down value of the destroyed items, the amount that is received on the basis of the insurance claim must be taken into account and deducted. Not satisfied with that order, the applicant filed an appeal before the appellate authority. Through its order, dated November 23, 1993, the appellate authority accepted the contention of the applicant and restricted the deduction from the written down value only to the extent of Rs. 68,06,562. Assailing the order of the appellate authority the Department filed an appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The applicant also filed an appeal, canvassing certain aspects.
3. The Tribunal passed a common order, dated July 12, 1996, accepting the contention of the Department and repelling the one urged by the applicant. Thereupon, the applicant filed an application under section 256(1) of the Act with a request to refer the relevant questions to this court for answer. After hearing both the parties, the Tribunal framed the following questions and referred the same to this court :
At the request of the Revenue
“1.In the facts and in the circumstances of the case and while applying the provisions of section 43(6)(c)(i)(B) of the Income-tax Act, 1961, for the purpose of arriving at the written down value of the block of assets, whether the Tribunal was correct in law to restrict the adjustment of the moneys payable in respect of insurance against the plant and machinery destroyed in the fire accident, to the cost of plant and machinery acquired during the previous year instead of the whole of such moneys payable ?”
At the request of the assessee
“2.Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that under the provisions of section 43(6)(c) of the Income-tax Act, 1961, the receipt from the insurance company towards claim against damage to building, plant and machinery was to be reduced from the block to the extent of additions made to the block of plant and machinery during the previous year in question ?”
4. Sri S. Ravi, learned senior counsel for the applicant, submits that the scheme introduced through the Finance Act, 1998, is almost, a self-contained code and every aspect was dealt with in detail but the Tribunal did not take the same into account. He contends that though the concept of block assets was introduced, Parliament provided for retention of the identity of the respective items forming part of the block assets, in the process of arriving at the written down value and the disposal of individual items through sale or damage or through restriction needs to be taken into account, under section 43(6)(c)(i) of the Act. He submits that once the value of the items that were destroyed in a fire accident was available with the Department, the only course open to them was to reduce the written down value to that extent and nothing more. Learned counsel further submits that the question as to how much amount was recovered either from the insurance company or towards scrap value, is totally outside the consideration of an assessing authority except in the limited context of ensuing that the reduction shall not exceed the written down value, which is increased on account of the addition of new items in the concerned assessment year. He contends that the view taken by the appellate authority accords with the provisions of the Act and the Tribunal was not justified in reversing it. Ultimately, it is urged that both the questions deserve to be answered in the negative.
5. Sri S. R. Ashok, learned senior counsel for the Income-tax Department, on the other hand, submits that the concept of block assets was introduced with a view to ensure that the assets for which the identical depreciation value is provided are put together, and just as the value of the items destroyed in a fire accident must be reduced, the amount recovered in that context, particularly, from the insurance company must be deleted in the process of arriving at the correct written down value. He further submits that a note of caution added under sub-clause (B) of section 43(6)(i) needs to be taken note of and it clearly prohibits any reduction in the written down value which emerges after the addition of the value of a newly added item. He submits that the Tribunal has taken the correct view of the matter and the reference itself was unwarranted.
6. Almost a new legal regime that was brought into existence through the Finance Act, 1998, and it constitutes the subject matter of this reference. As observed earlier, in the context of depreciation under section 32 of the Act, the value of the individual items were to be considered. Recognizing the vast range of items that are acquired and purchased by the industries, particularly, when the assessee is indulged in versatile activities, Parliament decided to group all the tangible assets on one hand, and intangible ones, on the other, into blocks. Within this, broad categories, sub-grouping of items, on which the same rate of depreciation is allowed, is required to be done, under the relevant provisions of law.
7. The block assets of the applicant comprised buildings, plant, machinery and the like, as defined under section 2(11) of the Act. It is not in dispute that in a major fire accident that took place in the premises of the factory, certain items, which formed part of the block assets were destroyed. The book value of the items so destroyed was arrived at Rs. 68,06,562. The applicant had an insurance policy in respect of the items that were destroyed in the fire accident. Obviously, by taking into account the current market value, a sum of Rs. 1,54,99,051 was paid by the insurer.
8. In the assessment year 1988-89, the return was in conformity with the provisions of the Act and the details of the block items, the value of the items that were destroyed in the fire accident and the amount that was received in the insurance claim were furnished. It is also necessary to note that an item of machinery costing Rs. 1,38,03,407 was added to the block of assets, in that assessment year. The assessing authority took the view that once the applicant got a sum of Rs. 1,54,99,051 under an insurance claim, that amount must be deducted from the value of the block assets, whatever be the value of the assets that were destroyed in the fire accident. The appellate authority took the view that irrespective of the amount, which the assessee may get either as scrap value or otherwise for any destroyed item, the deduction from the written down value can be only of the value of the concerned items.
9. In the appeals preferred by the assessee as well as the Department, the Tribunal took the view, that the reduction in the written down value of the block assets must be equivalent to the value of the newly acquired item, being Rs. 1,38,03,407.
10. The concept of extending the benefit of depreciation on various items, is almost as old as the income-tax law. Except for small variation as to the procedure or the extent of benefit, it is in vogue for the past several decades. If an item of machinery or a vehicle or other asset is acquired by an assessee, depreciation up to the permissible limit is allowed. While in some cases it is a one-time event, in others it is a graduated one. From the point of view of the income-tax, the book value gets reduced to the extent of depreciation. Instances are not lacking, where the actual reduction in the market value of the asset is the same as the depreciation permitted under the law at the relevant point of time. In certain cases, depending upon the nature of the item and the surrounding circumstances, there may be appreciation also.
11. Before it stood omitted, sub-section (2) of section 41 of the Act used to take care of such situation. Under this, if an assessee gets advantage over and above the book value of an item of asset, the differential amount was liable to tax at the stipulated rate. That concept is not in vogue now.
12. Though the blocking of items is provided for under the Act, distinction as to the working out of the written down value is maintained for the assessment year 1988-89 on the one hand and for the subsequent years, on the other. For the assessment year 1988-89, the identity of the items, which constitute the block of assets, is maintained whereas in subsequent assessment years, it is blurred. This is evident from clause (c) of section 43(6) of the Act, which reads as under :
“43. (6)(c) in the case of any block of assets,—
(i)in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets, at the beginning of the previous year and adjusted,—
(A)by the increase by the actual cost of any asset falling within that block, acquired during the previous year ;
(B)by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased ; and
(C)in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced-
(a)by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988 ; and
(b)by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value ;
(ii)in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).”
13. While sub-clause (i) of section 43(6)(c) deals with the procedure to be adopted for the financial year 1988-89, sub-clause (ii) deals with the subsequent financial years. A perusal of clause (i) discloses that if any item of asset, forming part of the block, is acquired during the previous year meaning thereby that the very assessment year, the cost thereof must be added to the written down value. Similarly, if any item which formed part of block of assets, was sold or was destroyed during that very period, the amount, equivalent its value must be reduced. The only rider is that the reduction should not result in the setting off the increase in the written down value on account of the addition of the value of an item, that is acquired during that year.
14. There is no dispute that the value of the items that were destroyed in the fire accident was Rs. 68,06,562. Clause (B) extracted above indicates that irrespective of the value, which the assessee may recover as a consideration of sale or the scrap value, in the event of destruction, its value, meaning thereby, the one which is already indicated in the books of account, must be reduced. It hardly becomes the concern of the assessing authority as to how much the assessee gets as a consequence of the transfer or destruction of the item. Parliament did not want to leave this aspect to be in the helm of speculation.
15. The amount, which the applicant got under the insurance claim is no doubt, phenomenal, compared to the book value of the destroyed goods. The differential amount would certainly have become subject matter of exercise referable to sub-section (2) of section 41 of the Act, had that provision been on the statute. Once that provision has been omitted, the assessing authority cannot be permitted to repeat the exercise thereunder, in the process of working out the written down value, under section 43(6)(c). It is well established that what is not permissible to be done directly under law, cannot be permitted to be done indirectly. Another concept is that where law requires particular thing to be done in a particular manner it should be done in that manner or not at all Gujarat Electricity Board v. Giridharlal Motilal AIR 1969 SC 267.
16. The appellate authority took the correct view of the matter in permitting the reduction in the written down value only to the extent of Rs. 68,06,652 representing the value of the deduction. It needs to be kept in mind that the figure Rs. 68,06,562 is not something which was furnished by the applicant, as per its wish or fancy. It is usual or fancy, it was reflected in the account books and assessments, and it is the result of allowing of the depreciation over the years, for those items.
17. The Tribunal made an attempt to increase the amount to be deducted ; corresponding to the item of machinery that was acquired at the relevant point of time. Obviously, the exercise was referable to the last part of sub-clause (B) of clause (c) of section 43(6) of the Act. The expression “reduction” does not exceed the written down value as so increased, appears to have been taken into account. What becomes relevant, however, is that the entire process of scaling down the written down value on account of the sale or destruction of certain items, should not be permitted the offset increase on account of the addition of the new items. It is nobodys case that the reduction to the extent of Rs. 68,06,652 would offset the value in the increase of the written down value of the block assets. That occurred on account of acquiring of new items. Viewed from any angle, we do not find any basis in the approach of the Tribunal.
18. We, accordingly, answer both the questions in the negative. As a result, the order passed by the Commissioner of Income-tax (Appeals), i.e., the appellate authority, shall hold good.
19. The reference case is answered, accordingly. There shall be no order as to costs. Miscellaneous petitions, if any, shall stand closed.
[Citation : 366 ITR 563]