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Depreciation u/s 32 cannot be allowed on properties which were let out & which are not usable for business purposes: ITAT

2019-TIOL-1441-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘E’ MUMBAI

ITA No.703/Mum/2018
Assessment Year: 2013-14

M/s EMCO DYESTUFF PVT LTD
UNIT NO 304, WESTERN EDGE, W E HIGHWAY
DATTAPADA ROAD, BORIVALI EAST, MUMBAI-400066
PAN NO: AAACE1167D

Vs

DEPUTY COMMISSIONER OF INCOME TAX 12(2)(1)
5TH FLOOR, EARNEST HOUSE, NARIMAN POINT
MUMBAI-400021

Pawan Singh, JM & Ramit Kochar, AM

Date of Hearing: April 10, 2019
Date of Decision: July 04, 2019

Appellant Rep by: Shri Snehal R Shah
Respondent Rep by: 
Shri V K Chaturvedi, DR

Income Tax – Section 32.

Keywords – Doctrine of supervening impossibility – Depreciation – Block of Assets – Use of properties.

THE assessee company was engaged in the business of trading in chemicals & dyes. The assessee had shown income from house property in respect of office premises which were let out during the year. The assessee had also claimed depreciation on these premises which had been let out during the year. The AO asked assessee to explain as to how depreciation could be allowed on let out properties. The assessee submitted details of properties and the purpose of acquisition of all these properties were shown to be for self use for the purposes of business of the assessee. The assessee explained before AO that properties were acquired for business of the assessee and form part of the business assets and rightly taken into ‘Block of Assets’-Building to claim depreciation under the Act. It was submitted that moment the assets enters into ‘Block of Assets’, it loses individual identification and deprecation was claimed on closing balance in the ‘Block of Assets’ which should be allowed. The AO rejected contentions of the assessee on the ground that once assets were let out more so where the income was shown as ‘Income from House Property’, the depreciation could not be allowed. The AO observed that standard deduction of 30% was allowed towards maintenance as statutory deduction and hence depreciation could not be allowed on these let out properties. The AO observed that assessee was required to reduce value of such let out properties from ‘Block of Assets’ before claiming depreciation because as per AO, depreciation could be allowed only on assets which were used for business purposes. The AO disallowed depreciation to the tune of Rs. 11,48,658/- being 10% of the value of let out property and added the same to income of the assessee. On appeal, CIT(A) upheld the order of AO.

On appeal, Tribunal held that,

Whether depreciation u/s 32 can be allowed on properties which are let out throughout the year and income thereof is offered for tax under the head income from house properties and neither these properties are ready to be used for business nor available for business user – NO : ITAT

++ in the case of Oswal Agro, the tax-payer was in business and its Bhopal unit was lying closed for several years but since the asset formed part of Block of Asset, Delhi High Court held deprecation u/s 32 shall be allowed keeping in view new scheme of taxation wherein concept of Block of Assets as defined u/s 2(11) is introduced by Finance(No. 2) Act, 1998 w.e.f. 01.04.1999. In the case of Oswal Agro, the question before the Court was not that the user of the asset changed from being for the purposes of the business of taxpayer to that of letting out on rent, income of which is chargeable to tax under the head ‘Income from House Property’. The Bhopal unit albeit was lying closed for several years was infact continued to be business asset of the assessee. Similar, is the case of G.R.Shipping Limited relied upon by assessee. In this case of G.R.Shipping Limited, one Barge named Jay-II could not be used by taxpayer for its business owing to accident nor it was sent for repairs, the tribunal allowed depreciation as it form part of Block of Asset. The Barge was later sold by the tax-payer. The order of tribunal was upheld by Bombay high Court in the case of CIT v. G.R.Shipping Limited, – 2009-TIOL-539-HC-MUM-IT vide judgment dated 28.07.2009. The fact remains that said Barge Jay II never ceased to be business asset of the tax-payer. In the instant case, the two house properties may at some point of time several years ago was used for business of the assessee but for last several years, these properties were let out income thereof offered for tax under the head ‘Income from House Properties’. The assessee manifested its intention of change of user from business to that of giving these properties on rent for longer period of time wherein doctrine of supervening impossibility had set in preventing business user of these properties for the purposes of business of the assessee. Similar is the case of Ansal Properties, wherein the Delhi High Court was not seized of the matter concerning change of user of the assets by the taxpayer. Thus, so far as these two house properties which were acquired in earlier years and were let out on rent from years including year under consideration, income thereof was offered for taxation by assessee under the head ‘Income from House Property’, no depreciation can be allowed u/s 32 as there is no business user of these two properties by assesse for the entire year as well for earlier years. These two properties are not even available or ready to be used for business purposes as these are let out on rent for years and doctrine of supervening impossibility of business user has set in keeping in view long period of these properties being let out. Under these circumstances, it was hold that no deprecation u/s 32 of the 1961 Act can be allowed on these two properties which were acquired in earlier years and were let out throughout the year under consideration income thereof being offered for tax under the head income from house properties, as doctrine of supervening impossibility has set in as neither these properties were used for business purposes, nor ready to be used for business nor available for business user for the purposes of business of the assessee, for the entire year under consideration. Thus, deprecation u/s 32 of the 1961 Act under these circumstances can not be allowed on these two properties merely on the grounds that once these properties entered Block of Assets viz. Building many years back and continues to be part of Block of Asset viz. Building despite the fact that factual matrix surrounding these two properties had undergone substantial change over years which cannot be given complete go bye. We order accordingly.

Assessee’s appeal partly allowed

ORDER

Per: Ramit Kochar:

This appeal, filed by assessee, being ITA No. 703/Mum/2018, is directed against appellate order dated 16.10.2017, passed by learned Commissioner of Income Tax (Appeals)-20, Mumbai (hereinafter called “the CIT(A)”) in appeal number CIT(A)-20/DCIT-12(2)(1)/IT-10040/16-17 for assessment year 2013-14, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 11.03.2016 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2013-14.

2. The grounds of appeal raised by assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

“1. The learned CIT(A) Confirmed AO’s contention, & Calculated Depreciation on property given on rent separately by removing from the block of asset property given on rent and confirmed addition of Rs. 9,79,042/-

2. The learned CIT(A) and AO grossly erred in ignoring the submissions made by the Appellant in this regard.

3. Without prejudice considering above logic The learned CIT(A) did not allowed depreciation on Office premises added during the Assessment year at its cost of acquisition.

4. The Appellant craves leave to add, alter, amend all or any of the grounds in appeal.”

3. The assessee is engaged in the business of trading in chemicals & dyes, intermediate & commission agents. The assessee has shown income from house property in respect of office premises which were let out during the year. The assessee had also claimed depreciation on these premises which had been let out during the year. The AO asked assessee to explain as to how depreciation can be allowed on let out properties. The assessee submitted details of properties held by it on 31.03.2013 and the purpose of acquisition of all these properties were shown to be for self use for the purposes of business of the assessee. The assessee explained before AO that said properties were acquired for business of the assessee and form part of the business assets and rightly taken into ‘Block of Assets’-Building to claim depreciation under the 1961 Act. It was submitted that moment the assets enters into ‘Block of Assets’, it loses individual identification and deprecation is claimed on closing balance in the ‘Block of Assets’ which should be allowed.

3.2 The AO rejected contentions of the assessee on the ground that once assets are let out more so where the income is shown as ‘Income from House Property’, the depreciation cannot be allowed. The AO observed that standard deduction of 30% is allowed towards maintenance as statutory deduction and hence depreciation cannot be allowed on these let out properties. The AO observed that assessee was required to reduce value of such let out properties from ‘Block of Assets’ before claiming depreciation because as per AO, depreciation can be allowed only on assets which are used for business purposes. The AO observed that the value of such let out property works out to be Rs.1,14,86,576/- and hence total value of the property considered in the ‘Block of Assets’ was required to be reduced by this amount before calculating depreciation. The AO disallowed depreciation to the tune of Rs. 11,48,658/- being 10% of the value of let out property and added the same to income of the assessee, vide assessment order dated 11.03.2016 passed by the AO u/s 143(3) of the 1961 Act.

4 Being aggrieved by an assessment framed by AO u/s 143(3) of the 1961 Act, the assessee carried the matter in appeal before learned CIT(A) and submitted that these let out properties had been used by assessee for its business purposes in earlier years. It was submitted that these properties formed part of ‘Block of Assets’ on which depreciation was claimed and allowed by Revenue in earlier years. The assessee submitted that as per provisions of the 1961 Act, it is not allowed to segregate assets on which depreciation has been claimed and allowed on ‘Block of Assets’.

4.2 The learned CIT(A) rejected contentions of the assessee and observed that these let out properties were not used for purposes of business of the assessee at all during year under consideration. The learned CIT(A) referred to provisions of clause (ii) to Section 32(1) r.w.s. 38(2) of the 1961 Act and observed that the assessee is not entitled to depreciation on premises let out although part relief was granted by learned CIT(A) on computational aspects, vide appellate order dated 16.10.2017, by holding as under:-

“6.1 I have considered the assessment order and submissions made by the authorized representative of the appellant. The contention of the appellant that once an asset in included in a block of assets, depreciation on the asset cannot be disallowed on the asset even if it is not used for the appellant’s business is not acceptable. A following example will illustrate this point.

Suppose, an individual has a large number of cars which are used for its business. Suppose, the individual purchases a car on the last day of a previous year and use it for his business for a day, i.e., for the last day of the previous year. For the purpose of the I.T. Act, the individual includes value of the car is in the WDV of the block of assets and claims depreciation on the entire WDV of the block which is allowed for that assessment year (the ‘First Assessment Year’). Now, if from the first day of the next P.Y., the individual use it purely and only for his personal work, will depreciation be allowable in respect of the car for the second assessment year? The answer, in my view, is clearly ‘no’.

6.2 It is not disputed that the premises which were let out were not used for the purpose of business at all. Therefore, as per the provisions of section 38(2), the deduction under clause (ii) of sec. 32(1) should be restricted to a fair proportionate part thereof which the AO may determine, having regard to the use of such building for the purposes of business. The relevant portions of the provisions of sec. 38(2) are reproduced below:

“where any building…….. is not exclusively used for the purposes of business or profession, the deduction under…….. clause (ii) of sub section (1) of Section 32 shall be restricted to fair proportionate part thereof which the Assessing Officer may determine having regard to the user of such building…………. for the purposes of business of profession. “

6.3 In view of the above, the appellant is not entitled to depreciation on the premises let out. The only problem that arises is that the WDV of the individual buildings are not be readily available since these assets form part of a block. However, from the available information, it is possible to work out the WDV of the premises let out. The relevant details of the premises furnished by the appellant are given in the Table below:

SI. No.Year of purchaseCost in Rs.Address
11990-9115,62,152201, Goradia House, 104, Kazi Sayed Street, Mumbai.
22009-1010,62,130Off No. 202, Raghuvir, SVP Road, Borivali (W), Mumbai -400 092.
32012-1359,75,970Off No. 204, V-Star Plaza, Chandravarkar Rd., Borivali (W), Mumbai – 400 092.
42012-1328,86,324Off No. 205, V-Star Plaza, Chandravarkar Rd., Borivali (W), Mumbai – 400 092.
1,14,86,576

6.4.1 The Building at serial No. 1 of the Table in para 6.3 was purchased in the P.Y. 1990-91. In the intervening 22 years, Rs. 14,08,316 out of the original cost has been allowed as depreciation. The working of depreciation allowed is given in the Table below. Therefore, WDV of that building as at 31.03.2012 works out to Rs. 1,53,836/-.

PYAmount (in Rs.) on which depreciation is a admissible for the PYDepreciation (in Rs.) allowable for the PYWDV (in Rs.) as at the end of the PY
1990-9115,62,1521,56,21514,05,937
1991-9214,05,9371,40,59412,65,343
1992-9312,65,3431,26,53411,38,809
1993-9411,38,8091,13,88110,24,928
1994-9510,24,9281,02,4939,22,435
1995-969,22,43592,2448,30,192
1996-978,30,19283,0197,47,172
1997-987,47,17274,7176,72,455
1998-996,72,45567,2466,05,210
1999-006,05,21060,5215,44,689
2000-015,44,68954,4694,90,220
2001-024,90,22049,0224,41,198
2002-034,41,19844,1203,97,078
2003-043,97,07839,7083,57,370
2004-053,57,37035,7373,21,633
2005-063,21,63332,1632,89,470
2006-072,89,47028,9472,60,523
2007-082,60,52326,0522,34,471
2008-092,34,47123,4472,11,024
2009-102,11,02421,1021,89,921
2010-111,89,92118,9921,70,929
2011-121,70,92917,0931,53,836
Total14,08,316

6.4.2 Therefore, WDV as at 31.03.2012 of the building at serial No. 1 of the Table in para 6.3 works out to Rs. 1,53,836/- ( Rs, 15,62,152/- minus Rs. 14,08,316/-).

6.5.1 The Building at serial No. 2 of the Table in para 6.3 was purchased in the P.Y. 2009-10. In the 3 intervening previous years (PY 2009-10, 2010-11 &, 2011-12), Rs. 2,87,837/- of the original cost has been allowed as depreciation. The working of depreciation allowed is given in the Table below.

PYAmount (in Rs.) on which depreciation is admissible for thePYDepreciation (in Rs.) allowable for the PYWDV (in Rs.) as at the end of the PY
2009-1010,62,1301,06,2139,55,917
2010-119,55,91795,5928,60,325
2011-128,60,32586,0337,74,293
Total2,87,837

6.5.2 Therefore, WDV as at 31.03.2012 of the building at serial No. 2 of in para 6.3 works out to Rs. 7,74,293/-

6.6 The two buildings at Sl. No. 3 & 4 of the Table in para 6.3 were purchased in the PY 2012-13. Therefore, it is clear that these two buildings were not used for the appellant’s business.

6.7 Out of the depreciation of Rs. 25,69,223/- on the block of Buildings claimed by the appellant, the depreciation attributable to the 4 premises let out is worked out in the table below:

Description of the BuildingWDV as at 01.04.2012Cost of purchase In case of assets purchased during the yearDepreciation claimed attributable to the asset
201, Goradia House, 104, Kazi Sayed Street, Mumbai.1,53,83615,384
Off No.202, Raghuvir, SVP Road, Borivali (W), Mumbai – 4000927,74,29377,429
Off No. 204, V-Star Plaza, Chandravarkar Rd., Borivali (W), Mumbai -400 092.59,75,9705,97,597
Off No. 205, V-Star Plaza, Chandravarkar Rd., Borivali (W), Mumbai -400 092.28,86,3242,88,632
TOTAL9,79,042

6.8 I, therefore, confirm disallowance of Rs. 9,79,042/- out of the total disallowance of Rs.11,48,658/-. The remaining disallowance of Rs.1,69,616/- (Rs.11,48,658/- minus Rs. 9,79,042/-)is hereby deleted. Accordingly, this ground of appeal is partly allowed.”

5. Aggrieved by an appellate order dated 16.10.2017 passed by learned CIT(A), the assessee has filed an second appeal with tribunal.

5.2 The Ld. Counsel for the assessee opened arguments before the Bench and submitted that the assessee has filed written submissions and prayers are made before the Bench to take the same on record. The written submissions along with enclosures and case laws relied upon learned counsel for assessee containing in all 54 pages are placed in file. It is submitted that additions were made by AO by disallowing depreciation on immovable properties which were let out during the year on account of non user of the properties for business purposes, to the tune of Rs. 11,48,658/- which additions were later sustained by learned CIT(A) to the tune of Rs. 9,79,042/-. It was submitted by learned counsel for the assessee that these immovable properties being ‘Building’ form part of the Block of Assets. Our attention was drawn to page no. 19 of the paper book wherein details of depreciation on ‘Buildings’ is placed. Our attention was also drawn to page no. 12 wherein details of depreciation on ‘Building’ under the provisions of The Companies Act is placed. The w.d.v. as on 31.03.2013 is Rs. 5.30 crores for office premises and Rs. 19.25 lacs for Godown(Ankleshwar). It was submitted that these office premises form part of Block of Assets and it is not possible to bifurcate this Block of Assets and depreciation is to be allowed on entire Block of Assets under the 1961 Act as individual asset’s had lost their identity. It was submitted that first immovable property was purchased by assessee in previous year 1990-1991(AY 1991-92) and there are four immovable properties in Block of Assets which were let out by assessee. The other properties in Block of Assets were not let out and it is claimed that these properties were used for business purposes. It was submitted that disallowance has been made by authorities below toward depreciation on properties which were let out by assessee on ground of non-user of these office premises for business purposes. Reliance was placed by learned counsel for assessee on the decision of Hon’ble Delhi High Court in the case of CIT v. Oswal Agro Mills Ltd. & Ors. in ITA no. 161 of 2006 & Ors. vide judgement dated 24.12.2010 (2012) 341 ITR 467(Del.) = 2011-TIOL-36-HC-DEL-IT. Reliance was also placed by learned counsel for the assessee on the judgment of Hon’ble Bombay High Court in the case of CIT v. G.R. Shipping Limited in ITA No. 598 of 2009 = 2009-TIOL-539-HC-MUM-IT, vide judgment dated 28.07.2009 which appeal arose from decision of Mumbai-tribunal in the case of G.R. Shipping Limited v. DCIT in ITA No. 822/Mum/2005 2008-TIOL-729-ITAT-MUM vide appellate order dated 17.07.2008 passed by Mumbai-tribunal. The learned counsel for the assessee has also placed reliance on the judgment of Hon’ble Delhi High Court in the case of CIT v. Ansal Properties & Infrastructure Limited in ITA No. 601/2011 and 602/2011 =2012-TIOL-332-HC-DEL-IT, vide judgment dated 19.04.2012.

5.3 The Ld. DR on the other hand submitted that there are four properties owned by the assessee which were let out by assessee on Rent during the year under consideration, two properties were purchased in earlier years and two properties were purchased during the previous year relevant to impugned assessment year. It was submitted that opening Gross Block consisted of six properties, two properties were purchased during the year and one property was sold during the year. Thus, it was submitted that in all there are seven properties in the Block of Asset – ‘Building’ as at year end after considering the properties purchased and sold during the year under consideration. It was submitted that out of these seven properties owned by assessee four properties were let out during the year under consideration, and further out of the aforesaid four properties, two properties are new properties acquired during the year under consideration while two were old properties. It was submitted that in all there are seven properties, out of which four properties were let out during the year while three properties were used for business purposes. The Ld. DR relied upon the decision of Hon’ble Gujarat High Court in the case of New India Industries Limited v. CIT reported in (1993)203 ITR 933(Guj.) and also decision of Mumbai-tribunal in the case of DCIT v. Godrej Properties & Investments Limited (2005) 93 ITD 308(Mum-trib.) = 2005-TIOL-91-ITAT-MUM. The learned DR also relied upon decision of Mumbai-tribunal in the case of Rolta Holding & Finance Corporation Limited v. DCIT reported in (2014) 49 taxmann.com 23(Mum-trib.) = 2014-TIOL-1456-ITAT-MUM and decision of Hon’ble Bombay High Court in the case of Dineshkumar Gulabchand Agrawal v. CIT reported in (2004) 267 ITR 768(Bom. HC). The learned DR would also rely on decision of Mumbai-tribunal in the case of ACIT(OSD), Range 3(3), Mumbai v. Rishiroop Polymers Private Limited reported in (2006) 105 TTJ 132(Mum-trib.). It was submitted by learned DR that assessee has brought this plea of user of two new properties for business purposes for the first time before the tribunal.

5.4 On the other hand, learned counsel for the assessee made statement before the Bench in rejoinder that assessee has put these two new properties to business usage during the year under consideration as godowns and that evidences will be produced as to usage of these two new properties for the purposes of godown of the assessee. Prayers were made by learned counsel for assessee to remit the issue to the file of the AO for denovo determination of the issue. It was submitted that decision in the case of New India Industries Limited(supra) was prior to introduction of concept of Block of Assets and hence not applicable. It was submitted that decision in the case of Rolta(supra) was in context of leasing of business centre. With respect to decision in the case of Godrej(supra), it was submitted that the taxpayer in this case declared rental income received as business income.

6. We have considered rival contentions and perused the material on record including cited case laws. We have observed that assessee is engaged in the business of trading in chemicals & dyes, intermediate & commission agents. We have observed that assessee, inter-alia, has assets being immovable properties in its ‘Block of Assets’ viz. Building, as defined u/s. 2(11) of the 1961 Act which consisted at the beginning of the previous year, six immovable properties owned by assessee. The assessee during the previous year under consideration purchased two new immovable properties while one immovable property was sold during the previous year under consideration. Thus, undisputedly, assessee owns in all seven immovable properties as at the end of the previous year under consideration before us, out of which four properties were let out by assessee income from which was offered to taxation by assessee under the head ‘Income from House Property’, while rest of the three properties were used for the purposes of business of the assessee. All these seven immovable properties owned by assessee company are separate and distinct properties identifiable individually. Out of these four immovable properties which were let out by assessee during the previous year under consideration, two immovable properties let out were new immovable properties acquired during the year under consideration while two immovable properties were acquired in earlier years. It is also observed that three remaining immovable properties which were not let out by assessee but were forming part of Block of Asset viz. Building were used by assessee for its business purposes. The dispute has arisen between rival parties as to claim of deduction of depreciation on four immovable properties which were let out by assessee on rent and income thereof was offered for taxation by assessee under the head ‘Income from House Property’. The assessee on its part had claimed depreciation on all seven immovable properties held by it, viz. three immovable properties which were used for business purposes as well for four properties which were let out on rent by the assessee during the year under consideration, on the ground that all these seven immovable properties entered ‘Block of Asset’ viz. Building and once an item of asset entered into ‘Block of Asset’ as defined u/s 2(11) read with clause (ii) to Section 32(1), then it loses its individual identity and hence depreciation is to be allowed on entire ‘Block of Asset’ irrespective of the fact that some of these separately identifiable properties falling within Block of Assets are not put to use for business purposes during the year under consideration. There is no dispute between rival parties with respect to three immovable properties falling within Block of Assets which were undisputedly been used by assessee for business purposes on which depreciation was claimed by the assessee. Thus, we will be confining our discussions to only four immovable properties which were let out on rent during the year under consideration income thereof which was offered by assessee under the head ‘Income from House Property’, on which the assessee has set up claim for allowability of depreciation u/s 32 citing justification that since they form part of Block of Assets viz. Building as defined u/s 2(11) and hence depreciation u/s 32 ought to be allowed irrespective of fact that these properties were never used for purposes of business of the assessee for the entire year under consideraion. With respect to two immovable properties acquired during the year under consideration and which were let out on rent, a fresh plea is now raised before the Bench for the first time by learned counsel for the assessee by making statement before the Bench that these two new immovable properties acquired during the previous year under consideration were in-fact used for business purposes initially by the assessee as godowns for its business purposes before being let out by assessee on rent in previous year under consideration itself. These two newly acquired immovable properties are now claimed by assessee of being put to use as business assets for godwon of the assessee for the purposes of business of the assessee before it was let out on rent and now Prayers are made to set aside and restore this matter to the file of the AO for verification of this fresh plea and accordingly then the AO can readjudicate/decide the issue on merits in accordance with law. It is pertinent to mention that if properties were acquired with an objective of letting on rent and were never used for purposes of business of the assessee, of which rental income thereof is offered for taxation under the head ‘Income from House Property, the said property will never enter into Block of Asset and no depreciation can be allowed. Reference is drawn to co-ordinate Bench decision in the case of Sonu Nigam v. ACIT reported in (2019) 105 taxmann.com 331(Mum-trib.), wherein co-ordinate Bench of Mumbai-tribunal held as under:-

“11. In the present case we find that the flats which never entered into the block of depreciable assets as income from the same were being offered under the head income from house property can by no stretch of imagination be said to be entitled for automatic entry into the block of depreciable asset. In this view of the matter, the reference to section 2(11), 43(6) & 50 by learned CIT(A) is germane and support the case of the Revenue. Section 2(11) defines block of asset as a group of asset falling within the class of asset…….. in respect of which the same percentage of depreciation is permissible. The income from ‘Namah’ building and the premises in ‘Lakhani Centrium’ was falling under the head ‘income from house property’ and hence these premises cannot be said to be falling under any asset group on which any rate of depreciation is prescribed as on such asset no depreciation is permissible.”

It is pertinent to mention here that counsels who represents assessee’s before Hon’ble Courts/Tribunal are officers of the Court/tribunal and it is expected of them that they will make responsible, true and correct statements before the Hon’ble Courts/tribunal to provide proper assistance to the Hon’ble Courts/tribunal as there statements are normally taken cognizance to arrive at decisions and any untrue, false, irresponsible and/or reckless statements made before Hon’ble Courts/tribunal by these counsels have its own repercussions as to penal consequences which may follow in consequence of making reckless, irresponsible, untrue and/or false statements before Hon’ble Courts/tribunal. Thus after hearing both the parties and keeping in view statement made by learned counsel of the assessee, we are of the considered view that this plea of the assessee of business user of these two newly acquired immovable properties for business purposes as godown for assessee’s business during the previous year under consideration before being let out on rent need verification by AO and the matter need to be set aside and restored to the file of the AO for framing of fresh de-novo assessment after considering explanations/evidences filed by the assessee during said de-novo proceedings before the AO. This is now important for assessee to demonstrate with credible, cogent and clinching evidences before the AO to prove that newly acquired immovable properties were used for business purposes of the assessee as godown during the year under consideration before being let out on rent. This is a fact finding exercise which could only be done after necessary verifications of the facts by the AO. We have also observed that Section 38(2) of the 1961 Act clearly stipulates that even in case of Block of Assets depreciation shall be restricted to a fair proportionate basis on assets having regard to the user of such asset for purposes of business or profession of the tax-payer, which are not exclusively being put to use for business and profession purposes. Income-tax statute is a self contained code in itself. Heads of Incomes are stipulated within 1961 Act and if an income falls under a particular head, computation of income has thereof to be made only in accordance with computation provisions relating to that head of income only. The assessee has declared its income from rent from letting out of house properties under the head ‘Income from House Property’ which falls under Chapter IV-C of the 1961 Act containing Section 22 to 27. The assessee will be entitled for deductions as are stipulated u/s 22 to 27 under Chapter IV-C of the 1961 Act while computing Income from House Property chargeable to tax. This chapter IV-C of the 1961 Act does not provide for depreciation on immovable properties as one of deductions from income earned by assessee from letting out of such house property. Section 32 of the 1961 Act provides for depreciation and falls under Chapter IV-D which concerns itself with computation of income from Profits or Gains from Business or Profession. Thus, there is no question of allowing any deduction as depreciation u/s 32 from rental income on letting out of these house properties for the period for which these house properties were let out and income thereof was offered for tax under the head ‘Income from House Properties’. Reference is drawn to decision of Mumbai-tribunal in the case of DCIT v. Godrej Properties & Investments Limited (2005) 93 ITD 308(Mumbai) = 2005-TIOL-91-ITAT-MUM to support above proposition. Coming back to two newly acquired properties, the assessee has raised fresh claim before the tribunal for the first time that these two newly acquired properties which were let out during the part of the previous year on rent were prior to they being let out were used by assessee as godown for assessee’s own business after its acquisition by the assessee during the previous year itself, the genuineness of such assessee’s claim as to its bonafide of business user of these properties for godown purposes requires verification by the AO. The assessee has also to demonstrate pith and substance of objectives of acquisition of these two new immovable properties, which also requires verification by AO which could also, inter-alia, be gathered by conduct of the assessee with respect to dealing with these two newly acquired properties over succeeding years. The assessee is also required to demonstrate whether these properties continued to be let out on rent in succeeding years or were used for own business purposes in later year. The AO is to consider totality of the surrounding circumstances to arrive at conclusion as to whether fresh claim set up by assessee as to user of these two immovable properties for godown purposes in previous year under consideration before being let out on rent was a genuine and bonafide claim or is a frivolous claim set up in an act of desperation. Thus, under these circumstances and in the interest of justice, we are inclined to restore the matter back to the file of the AO for framing of denovo determination of the issue on merits in accordance with law keeping in view our aforesaid directions/discussions. The assessee shall be allowed by AO to file evidences/explanations in its defence in set aside proceedings which shall be admitted by AO in the interest of justice and then adjudicated on merits in accordance with law. We clarify that all the contentions are kept open. Needless to say that proper and adequate opportunity of being heard shall be provided by AO to the assessee in set aside de-novo assessment proceedings in accordance with principles of natural justice in accordance with law. We order accordingly.

Coming to two immovable properties which were acquired in earlier years and were let out during the entire year under consideration income of which was offered for taxation by assessee under the head ‘Income from House Property’, these two properties were never used for the purposes of business of the assessee during the entire previous year relevant to impugned assessment year and one of the condition stipulated u/s 32 for grant of Depreciation on assets is its user for business purposes, which test these two house properties had failed.The claim set up by assessee is that since these two properties fall within Block of Asset viz. Building for which same percentage rate of depreciation is provided, the depreciation has to be allowed u/s 32 of the 1961 Act. It is not the contention of the assessee that these properties were let out temporarily during the year under consideration but were ready/available for being used for the purposes of business of the assessee. Moreover, once rental income from these house properties is brought to tax under the head ‘Income from other sources’ and undisputedly there is no usage of these house properties by assessee for its business, then there is no scope of claiming Depreciation on these house properties by invoking provisions of Section 32 of the 1961 Act which falls under Chapter IVD dealing with income from Profit and Gains of Business or Profession because of factual matrix of the case before us. These are altogether different and distinct properties which are separately identifiable. These two house properties were let out by assessee even in preceding year(s) and were let out throughout the year under consideration. As we have seen earlier that the 1961 Act is a self contained code in itself and incomes are to be brought to tax under different heads of income which are mutually exclusive. There is a residuary head of income also provided additionally in the 1961 Act in case the income does not fall under any of the four specified head of income. Once income falls under a particular head of income, then it is to be brought to tax under that head only and consequently income is to be computed after claiming deductions as provided under that head only. The assessee has declared its income from rent from letting out of these two house properties which were acquired in earlier years under the head ‘Income from House Property’ which falls under Chapter IV-C of the 1961 Act containing Section 22 to 27. The assessee will be entitled for deductions as are stipulated u/s 22 to 27 under Chapter IV-C of the 1961 Act while computing Income from House Property chargeable to tax. This chapter IV-C of the 1961 Act does not provide for depreciation on immovable properties as one of deductions from income earned by assessee from letting out of such house property. Section 32 of the 1961 Act provides for depreciation and falls under Chapter IV-D which concerns itself with computation of income from Profits or Gains from Business or Profession. Reference is drawn to decision of Mumbai-tribunal in the case of DCIT v. Godrej Properties & Investments Limited (2005) 93 ITD 308(Mumbai) = 2005-TIOL-91-ITAT-MUMand Rolta Holding & Finance Corporation Limited v. DCIT reported in (2015) 153 ITD 6 (Mum-trib.) = 2014-TIOL-1456-ITAT-MUM, to support above proposition. Thus, there is no question of allowing any deduction as depreciation u/s 32 from rental income on letting out of these house properties for the period for which these house properties were let out and income thereof was offered for tax under the head ‘Income from House Properties’, keeping also in view firstly that admittedly there was no business user of these properties by assessee during the entire year under consideration and secondly there was no possibility of these two properties being available/ready to be used for the purposes of the business of the assessee. The concept of Block of Assets as defined u/s 2(11) of the 1961 Act cannot be stretched to an extent wherein separate and distinct properties acquired by assessee were let out on rent for years and there is no usage of these properties for purposes of business or profession of the assessee nor there is any possibility of these properties being ready/available to be used for the purposes of business of the assessee, merely on the grounds that these properties continued to form part of Block of Asset as defined u/s 2(11). User of the asset for the purposes of business or profession of the assessee is a pre-condition for grant of depreciation u/s 32 of 1961 Act and these two properties were infact let out on rent for lengthy period of time from earlier years as emanating from records and as submitted before us by learned counsel for the assessee, income of which was offered for taxation by assessee under the head ‘Income from House Properties’. It is altogether different that some of the assets which form part of the Block of Assets may not be temporarily used for business but since they form part of the Block of Asset on which same rate of depreciation is prescribed, the depreciation stood allowed on concept of passive user but where business usage is hit by doctrine of impossibility as these properties over years continued to be let out on rent, income thereof being offered to tax under the head ‘income from house property’, the depreciation u/s 32 cannot be allowed merely because these properties continued to be part of block of assets despite being never used for business purposes uninterruptedly spread over several years. Merely because depreciation was allowed by Revenue in earlier years on these two properties despite been let out on rent for uninterruptedly for several years merely on ground that these properties fall within Block of Assets cannot be a ground to allow the same in the year under consideration unless statute permits the same. It is well settled that every year is an independent unit and merely because depreciation was allowed earlier by Revenue erroneously does not mean that the same will continued to be allowed in this year also. Allowing depreciation u/s 32 of the 1961 Act on these two let out properties which are distinct, independent and separately identifiable properties, on the grounds that they form part of Block of Asset, will lead to taking concept of Block of Asset to limits of absurdity, keeping in view peculiar factual matrix prevailing in the instant appeal and doctrine of supervening impossibility of business usage of these properties. There is admittedly no business user of these two properties by assessee for its business for the entire year under consideration as well for earlier years. The concept of Block of Asset cannot be stretched to an extent where it leads to an absurdity. Reference is drawn to observation of Lordships in the case of Oswal Agro Mills Limited(supra) wherein Lordships observed in para 21 observed in context of passive user of the assets as under:

“21. We feel that counsel for the Revenue is right in their submission. In the instant case, the entire Bhopal Unit came to a standstill and there was a complete halt in its functioning from the assessment year 1997-98. In that year, the Assessing Officer still allowed the depreciation treating it to be a ‘passive user’. However, when it was found that even in subsequent year, the Bhopal Unit remained nonfunctional, Assessing Officer(s) disallowed the depreciation. Present appeals relate to the assessment years from 1998-99. In the process six years passed till the last assessment year before us, but there was no sign of this unit becoming functional. The ‘passive user’, in these circumstances, cannot be extended to absurd limits. Other- wise, the words “used for the purpose of business” will lose their total sanctity. It cannot be the intention of the Legislature that the words ‘used’ when it is to be interpreted in a wider sense to mean, ‘ready to use’, the same is stretched to the limits of non-user for number of years.”

(Emphasis supplied by us)

The case laws relied upon by assessee are distinguishable. In the case of Oswal Agro(supra), the tax-payer was in business and its Bhopal unit was lying closed for several years but since the asset formed part of Block of Asset, Hon’ble Delhi High Court held deprecation u/s 32 shall be allowed keeping in view new scheme of taxation wherein concept of Block of Assets as defined u/s 2(11) is introduced by Finance(No. 2) Act, 1998 w.e.f. 01.04.1999. In the case of Oswal Agro(supra), the question before the Court was not that the user of the said asset changed from being for the purposes of the business of taxpayer to that of letting out on rent, income of which is chargeable to tax under the head ‘Income from House Property’. The Bhopal unit albeit was lying closed for several years was infact continued to be business asset of the assessee. Similar, is the case of G.R.Shipping Limited (supra) relied upon by assessee. In this case of G.R.Shipping Limited (supra), one Barge named Jay-II could not be used by taxpayer for its business owing to accident nor it was sent for repairs, the tribunal allowed depreciation as it form part of Block of Asset. The said Barge was later sold by the tax-payer. The said order of tribunal was upheld by Hon’ble Bombay high Court in the case of CIT v. G.R.Shipping Limited in ITA no. 598 of 2009 = 2009-TIOL-539-HC-MUM-IT vide judgment dated 28.07.2009. The fact remains that said Barge Jay II never ceased to be business asset of the tax-payer. In the instant case before us, the two house properties may at some point of time several years ago was used for business of the assessee but for last several years, these properties were let out income thereof offered for tax under the head ‘Income from House Properties’. The assessee manifested its intention of change of user from business to that of giving these properties on rent for longer period of time wherein doctrine of supervening impossibility had set in preventing business user of these properties for the purposes of business of the assessee. Similar is the case of Ansal Properties(supra), wherein the Hon’ble Delhi High Court was not seized of the matter concerning change of user of the assets by the taxpayer. Thus, so far as these two house properties which were acquired in earlier years and were let out on rent from years including year under consideration, income thereof was offered for taxation by assessee under the head ‘Income from House Property’, no depreciation can be allowed u/s 32 as there is no business user of these two properties by assesse for the entire year as well for earlier years. These two properties are not even available or ready to be used for business purposes as these are let out on rent for years and doctrine of supervening impossibility of business user has set in keeping in view long period of these properties being let out. The assessee has manifested its intentions by letting out these properties on rent for last several years that it intends not to use these properties for the purposes of its business which is writ large from the facts as emanating from records and as stated by learned counsel of the assessee before us. Under these circumstances, we hold that no deprecation u/s 32 of the 1961 Act can be allowed on these two properties which were acquired in earlier years and were let out throughout the year under consideration income thereof being offered for tax under the head income from house properties, as doctrine of supervening impossibility has set in as neither these properties were used for business purposes, nor ready to be used for business nor available for business user for the purposes of business of the assessee, for the entire year under consideration. Thus, deprecation u/s 32 of the 1961 Act under these circumstances can not be allowed on these two properties merely on the grounds that once these properties entered Block of Assets viz. Building many years back and continues to be part of Block of Asset viz. Building despite the fact that factual matrix surrounding these two properties had undergone substantial change over years which cannot be given complete go bye. We order accordingly.

7. Thus, in the result appeal of the assessee in ITA No. 703/Mum/2018 for AY 2013-14 is partly allowed for statistical purposes.

(Order pronounced in the open court on 04.07.2019)

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