The Hindu Business Line : Impact of assets discarded?

For computing depreciation under the Income-tax Act, 1961, assets of the same category are grouped together and called "block of assets". The lawmakers have even defined the term as `group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed'.

With the deactivation of Section 35A relating to amortisation of expenditure on acquisition of patent rights or copyrights and Section 35AB relating to expenditure on acquisition of knowhow - intangible assets were also included in the block of assets eligible for depreciation from the assessment year 1999-2000 onwards.

Block asset concept

The block asset concept applicable to depreciable assets could be understood from Section 50 which says all the additions to the asset have to be added first and the deletions by way of transfer during the year to be reduced subsequently, to determine whether the taxpayer is eligible for depreciation or chargeable to tax for capital gains. If the closing block value is negative, such amount is taxable as short term capital gain regardless of whether any asset remains in the block or not. If all the assets are sold out but the closing block value is positive, it is short term capital loss.

Vinyl Chemical case

In Vinyl Chemicals (India) Ltd vs Deputy CIT (2008 25 SOT 235 Mumbai) the taxpayer during the year 1995-96 discarded a machinery from regular use. In the books of account, it reduced the net realisable value of that machinery of Rs 33.32 lakh but claimed depreciation on the block of assets without making any reduction for the discarded machine.

The assessing officer (AO) found the taxpayer had sold the machinery subsequently for Rs 46.93 lakh in 1997-98 and hence reduced the sale price from the block value while completing the assessment of the year 1995-96. The event occurring after the balance-sheet date was considered for tax purposes.

The tribunal held that in two instalments the block value is to be adjusted:

when the asset is discarded, the block value has to be reduced by the net realisable value; and

on sale later, the ultimate sale price less the amount already adjusted is to be given effect in that year.

Hence it held that the block value must be reduced in the first instance by Rs 33.32 lakh for the financial year 1995-96 and the balance of excess sale realisation of Rs 13.61 lakh is to be reduced from block value in the financial year 1997-98.

The tribunal interpreted the words "moneys payable" appearing in Section 43(6) as the value for which the asset is sold or discarded. However, in this case, there was no sale of asset in the year discarding.

Ashoka Betelnut case

While rendering the decision, the tribunal referred the decision in the CIT vs Ashoka Betelnut Co (P) Ltd (2003 259 ITR 733 Madras) case to hold that the asset discarded must go to reduce the block value.

Factually, in the Ashoka Betelnut case the taxpayer demolished a building and gave the scrap - doors, windows, and so on - to a college in which one of the directors was interested. The value of such scrap was estimated for determining the terminal allowance and during the end of the year the taxpayer did not own the asset or its scrap.

However, in the Vinyl Chemical case the taxpayer discarded the asset but did not divest its ownership during the year. The taxpayer merely recognised the value of asset and gave effect in the books of account with no impact on cash flow or net worth of the enterprise.

The findings of the tribunal - that in two stages the asset discarded is to impact the block value of depreciable asset and the resultant depreciation claim is something not mandated in law - and the decision seem to be contrary to the statutory provisions.

(The author is an Erode-based chartered accountant. blfeedback@thehindu.co.in)

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