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Background
In the case of Anand & Anand1 (“the Assessee”), the Delhi Bench of the Income-tax Appellate Tribunal (“the Tribunal”) has disallowed the assessee’s claim for short-term capital loss (“STCL”). The STCL was computed considering the individual written down value (“WDV”) of the capital expenditure incurred on leased premises which formed part of the block of assets
‘building’. The block comprised expenses on owned and leased premises.
The Tribunal confirmed the orders passed by the Commissioner of Income-tax (Appeals) (“CIT(A)”) and the Assessing Officer (‘AO’).
Facts
• The assessee, a firm of advocates, had owned premises in New Delhi and Mumbai. In the financial year 2000-2001, the assessee had taken additional
1Anand & Anand v. ACIT [2009] 33 SOT 148 (Delhi)
premises in Gurgaon on lease for its official purposes.
• The assessee incurred substantial expenditure on the leased premises at Gurgaon. The assessee also incurred capital expenditure on acquiring new furniture, office equipment and computers, etc.
• The expenditure incurred towards improvement and additions to the leased structure was capitalised in the books of account as “Gurgaon office structure”.
The capital expenditure incurred towards acquiring new furniture, office equipment and computers were simultaneously capitalised by aggregating the same with existing assets.
• In the books of account, the assessee categorised the block of “building” in two parts, that is, (i) the building of which the assessee was the owner, and, (ii) the premises, which was acquired on lease capitalised as “Gurgaon office structure”.
Sanctity of Block of assets upheld – independent ‘group of assets' not permissible under a given ‘class of assets’
Tax & Regulatory Services
News Alert*
8 January, 2010
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• The assessee claimed depreciation at the same rate of 10 per cent in respect of the owned buildings and the leased premises.
• The AO allowed the depreciation. The depreciation on leased building was claimed in respect of the expenditure of capital nature incurred by the assessee by way of improvement and addition to the leased premises in light of the provisions contained in Explanation1 to sub-section (1) of section 32 of the Income-tax Act, 1961 (“the Act”), which provide that capital expenditure on a building not owned by the assessee but taken on lease is to be treated as the building owned by the assessee entitling the assessee to claim depreciation thereupon as owner.
• In the previous year relevant to the assessment year 2004-05, the assessee handed over the possession of the leased premises to the landlord together with all the additions or alterations made thereto by the assessee by way of capital expenditure incurred thereupon.
• The assessee adjusted the amount received towards the capitalised value of the leased premises against the opening WDV of the same and wrote-off the balance amount in its accounts as ‘assets written off' and claimed short-term capital loss to that extent.
• The AO disallowed the assessee's claim of STCL and allowed depreciation at 10%
on the WDV of the block of ‘buildings’ after adjusting the amount received against the transfer of the leased premises.
Issue
Whether, within a ‘class of assets', there can be independent ‘group of assets' identifiable by their nature and use, having the same rate of depreciation and each such group being a separate block of asset in the said class of assets? If yes, can STCL be claimed on transfer / sale of such asset?
Assessee’s contentions
• The block of assets falling within a same class of assets, being leased premises
‘Gurgaon office structure‘ and ’buildings‘ owned by the assessee are to be treated as separate and independent block of assets.
• In the Schedule of fixed assets, the leased premises ’Gurgaon office structure‘ has been treated as an independent block of asset and depreciation on it has also been accordingly allowed by the AO. As such, on surrender of the said premises to the landlord, this block ceases to exist and hence the claim of STCL in its respect, ought to be allowed in accordance with the provisions of section 50(2) of the Act.
The assessee had raised an additional ground raised before the Tribunal in relation to loss incurred on transfer of ‘Gurgaon office structure’ which could be allowed as business deduction under section 32(1)(iii) of the Act.
Revenue’s contentions
• The contention of the appellant that Gurgaon office structure comprises a distinct block of assets on its own that had ceased to exist, is not acceptable for the simple reason that no separate block by the name ‘office structure’ has been prescribed. It has to be a part of one of the blocks as defined under section 2(11) and listed in Part A(I) of Appendix I under Rule 5 of the Income-tax Rules,1962.
• Section 2(11) of the Act defines block of assets as a group of assets falling within a class of assets comprising tangible and intangible assets in respect of which the same percentage of depreciation is prescribed. Thus, the acid test for an asset to fall in a block of assets is the rate of depreciation allowable as per the Income-tax Rules, 1962 and not whether it is acquired on ownership basis or leasehold basis. Accordingly, the buildings owned by the assessee and the additions made to the leased premises by the assessee cannot be categorised into separate block of assets.
• Even after the transfer of the ‘Gurgaon office structure’ by the assessee, the same class of asset under the head ‘Building' continues to exist in the Schedule of fixed assets.
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• Accordingly, since the block of assets under the head ’building’ has not ceased to exist, the provisions of section 50(2) of the Act are not applicable, and hence, the assessee’s claim of STCL is not tenable.
The Tribunal’s ruling
• The Tribunal confirmed the revenue’s stand that for the purpose of identifying the class of assets comprising different assets of similar nature, the way or manner through or by which the assessee has been considered to be owner thereof is not material, but what is material is the nature and class of asset.
• The Tribunal also observed that there is no conflict between the clarification given under Note 3 of Appendix-I and the definition of block of asset given under section 2(11) read with Explanations 1 and 2 of section 32(1) of the Act. As such, the assessee’s interpretation for treatment as distinct and different from same class of assets is misconceived.
• The Tribunal held that the assessee cannot be allowed to give one treatment to the work or structure done in or in relation to the leased building for claim of depreciation and another for determining nature of ‘block of assets' and WDV thereof. There is no difference between leased or owned premises as to their class as both were used for office purposes in the course of a profession carried on by the assessee and depreciation has been allowed in respect of both the buildings at the same percentage of 10%.
• The Tribunal confirmed the AO’s stand of disallowing the assessee's claim of STCL and also held that loss incurred by the assessee on transfer of ‘Gurgaon office structure’ cannot be allowed as business deduction under section 32(1)(iii) of the Act.
• The Tribunal also affirmed the computation of depreciation on the opening WDV of block of assets described as Block “A” comprising both building owned by assessee as well as Gurgaon office structure, as adjusted by the additions and reductions provided in section 43(6)(c).
Conclusion
This ruling by the Delhi Tribunal upholds the overall sanctity of the concept of block of assets, i.e. commingled / bundled values cannot be unbundled, and reiterates the established principle that an individual asset loses its identity once it forms part of a ‘block of assets’.
The principle laid down by this ruling could be applied to claim depreciation in cases where the majority of underlying assets of a block are discarded or scrapped during the financial year; however, the block continues to exist as on the last day of the financial year.
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