Delhi High Court
Sony India Pvt. Ltd. vs Cit on 24 January, 2017
$~59 & 60
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 24.01.2017
+ ITA 13/2012
+ ITA 14/2012
SONY INDIA PVT LTD ..... Appellant
versus
CIT ..... Respondent
Through : Sh. Nageswar Rao and Sh. Purushottam
Anand, Advocates, for appellants.
Sh. Zoheb Hossain, Sr. Standing Counsel with Sh.
Deepak Anand, Jr. Standing Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
1. The following questions of law arise for consideration in both these
cases:
"(i) Whether the Income Tax Appellate Tribunal was right in
holding that the appellant is not entitled to depreciation under
Section 32 of the Income Tax Act, 1961, in respect of the
balance written down value relating to Daru Hera unit, forming
part of the block of assets?
(ii) Whether the appellant is entitled to depreciation in
respect of the assets, which were part of the Daru Hera unit,
even if the assets had not been put to use during the assessment
year 2005-2006 and had been sold prior to the end of the
accounting year?"
2. The appellant, a wholly owned subsidiary of Sony Corporation, Japan
was engaged in the assembling and distribution of colour televisions, audio
products and high-end electronic goods, including DVDs and handycams. It
ITA 13 /2012 & 14/2012 Page 1
inter alia imported goods from its associated enterprises (AEs) and also
rendered advisory services and software development services to such AEs.
The assessee had filed transfer pricing reports which were subjected to
examination by the Transfer Pricing Officer (TPO) after which the Assessing
Officer (AO) completed the assessment. In the period covered by AY 2005-
06 (FY 2004-05), the assessee had sold its Daru Hera unit; it completely
closed down its manufacturing activity in Daru Hera plant. Its assets were
sold and transferred. The assets were part of a block of assets; the
assessee/appellant claimed `4,42,22,475/- as depreciation. The AO
disallowed the claim, holding that the assessee was neither owner of the
plant and machinery nor used it for the purpose of business. The assessee's
appeal to the CIT(A) was unsuccessful. The Income Tax Appellate Tribunal
(ITAT), in its decision affirmed the findings of the CIT(A) and inter alia
held as follows:
"11.5 Having considered the facts and the jurisprudence in the
matter, it may be mentioned that neither the building nor the
machinery or plant in Dharuhera unit were owned by the
assessee or used by it on account of closure of the unit and
transfer of the assets in this year. As held earlier, it has not been
established by the assessee that the business of manufacturing
and trading constituted one composite business. The aforesaid
two blocks of assets in respect of Dharuhera unit ceased to exist
on transfer of all the assets in these blocks. It is true that for the
purpose of computing the deduction of depreciation, the
assessee had prepared a consolidated statement including all
the assets of all units under respective blocks. This however
cannot be accepted as a basis that the respective blocks of
Dharuhera unit, carrying on manufacturing business, did not
stand exhausted. The facts of the case of Inductotherm (India)
Ltd. are distinguishable as some assets had been discarded but
scrap value was not ascertained. The block of assets had not
ITA 13 /2012 & 14/2012 Page 2
thus come to an end. The facts of Nathani Steels Ltd are also
distinguishable as it was a case of installation of a new unit
whose assets had not been used at all. It was not a case of
closure of one of the unit, where the assets have been used
earlier to the closure. The facts of the case of SRF Ltd. are also
distinguishable because the ·assets could not be used in a
particular year although they were used in preceding and
subsequent years and the Tribunal came to the conclusion that
the principle of passive user could be applied. In the case of
Yamaha Motor (lndia)Pvt; Ltd. the question was regarding the
year in which monies payable in respect of discarded assets
could be reduced from the block of assets and, thus, the facts
are distinguishable. Position in respect of Vinyl Chemicals
(India).Ltd. is also similar. The facts of the case of Dineshkumar
Gulabchand Aggarwal are also distinguishable in as much as
the newly acquired asset had not been actually used in the
business.
11.5 In the instant case, the question is not regarding passive
user of the· assets of the business or regarding the year in which
sale consideration or the scrap value had to be reduced from
the WDV of the blocks of buildings and machinery and plant on
Dharuhera unit. These assets were transferred by the assessee
in this year. Therefore, these assets' neither belonged to the
assessee nor used for the purpose of business of the assessee of
manufacturing goods. We have already mentioned that the
assessee has not established that this unit was only a part of
overall business of manufacturing and trading activities.
Therefore; the provisions contained in section 32 regarding
ownership, and user come into play. As the assessee is neither
the owner of the assets nor the assets have been used in the
business of the assessee, the assessee is not entitled to deduct
depreciation.
11.6 Section 50 regarding "Special provision for computation
of capital gain in 'case of depreciable assets" deals inter-alia
with a situation where any block of assets ceases to exist for the
reason that all the assets in the block have been transferred
ITA 13 /2012 & 14/2012 Page 3
during the previous year. It is provided that income received or
accruing as a result of such transfer shall be deemed to be the
capital gains arising from the transfer of short-term capital
asset. We are of the view that the case of the assessee falls
within the ambit of this sub-section because the word "income"
includes within its ambit the "loss" also. The AO is directed to
hear the assessee in this matter and compute the loss as
provided in section 50(2).
11.7 In the result, the ground is treated as partly allowed as
discussed above."
3. The assessee contends that with the introduction of the Finance Act,
1988 and the changes brought about to Section 43 as well as Section 50,
wherever an assessee maintains several capital assets which form a block,
the composite nature of the asset block and its tax treatment cannot be
dependent upon whether the whole exists or parts thereof are sold-off or
transferred. In aid of its submission, the assessee relies upon the ruling of
this Court in CIT v. Oswal Agro Mills Ltd. (2012) 341 ITR 467 (Del) and the
subsequent judgment in CIT v. Ansal Properties and Infrastructure Limited
(2012) 207 Taxmann 61 (Del). Learned counsel also relied upon the previous
ruling in CIT v. Bharat Aluminium Co. Ltd. (2010) 187 Taxmann 111 (Del).
4. Learned counsel for the respondents/Revenue resisted the appeals and
relied upon his textual interpretation of Section 32(1). He argued that once
the Daru Hera unit was sold and it seized to exist, it could not be, therefore,
said to have been owned or used by the assessee during the relevant
assessment years. Consequently, it could not claim the benefit of
depreciation. He relied upon the previous ruling of this Court in Allied
Electronics and Magnetics Ltd. v. CIT (2008) 304 ITR 160.
ITA 13 /2012 & 14/2012 Page 4
5. The relevant provisions of the Income Tax Act, 1961 are reproduced
as follows:
6. Section 2(11) defines the term "block of assets" and reads as follows:
"block of assets" means a group of assets falling within a class
of assets comprising--
(a) tangible assets, being buildings, machinery, plant or
furniture;
(b) intangible assets, being know-how, patents, copyrights,
trade-marks, licences, franchises or any other business or
commercial rights of similar nature,
in respect of which the same percentage of depreciation is
prescribed ;
7. Section 2(42A) defines capital assets as follows:
"short-term capital asset" means a capital asset held by an
assessee for not more than thirty-six months immediately
preceding the date of its transfer :
8.. Section 32(1) reads as under:
"Depreciation.
32. (1) In respect of depreciation of--
(i) buildings, machinery, plant or furniture, being tangible
assets;
(ii) know-how, patents, copyrights, trade marks, licences,
franchises or any other business or commercial rights of similar
nature, being intangible assets acquired on or after the 1st day
of April, 1998,
owned, wholly or partly, by the assessee and used for the
purposes of the business or profession, the following deductions
shall be allowed--
(i) in the case of assets of an undertaking engaged in
generation or generation and distribution of power, such
percentage on the actual cost thereof to the assessee as may be
prescribed31;
ITA 13 /2012 & 14/2012 Page 5
(ii) in the case of any block of assets, such percentage on the
written down value thereof as may be prescribed32:
XXXXXX XXXXXX XXXXXX
Provided further that where an asset referred to in clause (i) or
clause (ii) or clause (iia) 33[or the first proviso to clause (iia)],
as the case may be, is acquired by the assessee during the
previous year and is put to use for the purposes of business or
profession for a period of less than one hundred and eighty days
in that previous year, the deduction under this sub-section in
respect of such asset shall be restricted to fifty per cent of the
amount calculated at the percentage prescribed for an asset
under clause (i) or clause (ii) or clause (iia), as the case may be
:
[Provided also that where an asset referred to in clause (iia)or
the first proviso to clause (iia), as the case may be, is acquired
by the assessee during the previous year and is put to use for the
purposes of business for a period of less than one hundred and
eighty days in that previous year, and the deduction under this
sub-section in respect of such asset is restricted to fifty per cent
of the amount calculated at the percentage prescribed for an
asset under clause (iia)for that previous year, then, the
deduction for the balance fifty per cent of the amount calculated
at the percentage prescribed for such asset under clause
(iia)shall be allowed under this sub-section in the immediately
succeeding previous year in respect of such asset:]
XXXXXX XXXXXX XXXXXX
Provided also that the aggregate deduction, in respect of
depreciation of buildings, machinery, plant or furniture, being
tangible assets or know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights
of similar nature, being intangible assets allowable to the
predecessor and the successor in the case of succession referred
to in clause (xiii), clause (xiiib) and clause (xiv)of section
47 or section 170 or to the amalgamating company and the
amalgamated company in the case of amalgamation, or to the
demerged company and the resulting company in the case of
demerger, as the case may be, shall not exceed in any previous
year the deduction calculated at the prescribed rates as if the
ITA 13 /2012 & 14/2012 Page 6
succession or the amalgamation or the demerger, as the case
may be, had not taken place, and such deduction shall be
apportioned between the predecessor and the successor, or the
amalgamating company and the amalgamated company, or the
demerged company and the resulting company, as the case may
be, in the ratio of the number of days for which the assets were
used by them.
Explanation 1.--Where the business or profession of the
assessee is carried on in a building not owned by him but in
respect of which the assessee holds a lease or other right of
occupancy and any capital expenditure is incurred by the
assessee for the purposes of the business or profession on the
construction of any structure or doing of any work in or in
relation to, and by way of renovation or extension of, or
improvement to, the building, then, the provisions of this clause
shall apply as if the said structure or work is a building owned
by the assessee.
Explanation 2.--For the purposes of this sub-section "written
down value of the block of assets" shall have the same meaning
as in clause* (c) of sub-section† (6) of section 43.
Explanation 3.--For the purposes of this sub-section, the
expression "assets" shall mean--
(a) tangible assets, being buildings, machinery, plant or
furniture;
(b) intangible assets, being know-how, patents, copyrights,
trade marks, licences, franchises or any other business or
commercial rights of similar nature.
XXXXXX XXXXXX XXXXXX
Explanation 5.--For the removal of doubts, it is hereby
declared that the provisions of this sub-section shall apply
whether or not the assessee has claimed the deduction in
respect of depreciation in computing his total income;
(iia) in the case of any new machinery or plant (other than ships
and aircraft), which has been acquired and installed after the
31st day of March, 2005, by an assessee engaged in the
business of manufacture or production of any article or
thing 34[or in the business of generation or generation and
distribution] of power, a further sum equal to twenty per cent of
ITA 13 /2012 & 14/2012 Page 7
the actual cost of such machinery or plant shall be allowed as
deduction under clause (ii) :
XXXXXX XXXXXX XXXXXX
Provided [further] that no deduction shall be allowed in
respect of--
XXXXXX XXXXXX XXXXXX
(D) any machinery or plant, the whole of the actual cost of
which is allowed as a deduction (whether by way of
depreciation or otherwise) in computing the income chargeable
under the head "Profits and gains of business or profession" of
any one previous year;
(iii) in the case of any building, machinery, plant or furniture in
respect of which depreciation is claimed and allowed under
clause (i) and which is sold, discarded, demolished or destroyed
in the previous year (other than the previous year in which it is
first brought into use), the amount by which the moneys payable
in respect of such building, machinery, plant or furniture,
together with the amount of scrap value, if any, fall short of the
written down value thereof :
Provided that such deficiency is actually written off in the books
of the assessee.
XXXXXX XXXXXX XXXXXX"
9. Section 43(6)(c) reads as follows:
"Definitions of certain terms relevant to income from profits
and gains of business or profession.
43. In sections 28 to 41 and in this section, unless the context
otherwise requires--
XXXXXX XXXXXX XXXXXX
(6) "written down value" means--
XXXXXX XXXXXX XXXXXX
ITA 13 /2012 & 14/2012 Page 8
(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).
XXXXXX XXXXXX XXXXXX
Explanation 3.--Any allowance in respect of any depreciation
carried forward under sub-section (2) of section 32 shall be
deemed to be depreciation "actually allowed".
Explanation 4.--For the purposes of this clause, the expressions
ITA 13 /2012 & 14/2012 Page 9
"moneys payable" and "sold" shall have the same meanings as
in the Explanation below sub-section (4) of section 41.
XXXXXX XXXXXX XXXXXX
Explanation 6.--Where an assessee was not required to
compute his total income for the purposes of this Act for any
previous year or years preceding the previous year relevant to
the assessment year under consideration,--
(a) the actual cost of an asset shall be adjusted by the amount
attributable to the revaluation of such asset, if any, in the books
of account;
(b) the total amount of depreciation on such asset, provided in
the books of account of the assessee in respect of such previous
year or years preceding the previous year relevant to the
assessment year under consideration shall be deemed to be the
depreciation actually allowed under this Act for the purposes of
this clause; and
(c) the depreciation actually allowed under clause (b) shall be
adjusted by the amount of depreciation attributable to such
revaluation of the asset.
XXXXXX XXXXXX XXXXXX"
10. Sections 50(1) & (2) reads as follows:
"Special provision for computation of capital gains in case of
depreciable assets.
50. Notwithstanding anything contained in clause (42A) of
section 2, where the capital asset is an asset forming part of a
block of assets in respect of which depreciation has been
allowed under this Act or under the Indian Income-tax Act,
1922 (11 of 1922), the provisions of sections 48 and 49 shall be
subject to the following modifications :--
(1) where the full value of the consideration received or
accruing as a result of the transfer of the asset together with the
full value of such consideration received or accruing as a result
of the transfer of any other capital asset falling within the block
of the assets during the previous year, exceeds the aggregate of
the following amounts, namely :--
ITA 13 /2012 & 14/2012 Page 10
(i) expenditure incurred wholly and exclusively in connection
with such transfer or transfers;
(ii) the written down value of the block of assets at the
beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets
acquired during the previous year,
such excess shall be deemed to be the capital gains arising from
the transfer of short-term capital assets;
(2) where any block of assets ceases to exist as such, for the
reason that all the assets in that block are transferred during
the previous year, the cost of acquisition of the block of assets
shall be the written down value of the block of assets at the
beginning of the previous year, as increased by the actual cost
of any asset falling within that block of assets, acquired by the
assessee during the previous year and the income received or
accruing as a result of such transfer or transfers shall be
deemed to be the capital gains arising from the transfer of
short-term capital assets."
11. In Ansal Properties (supra), the facts indicated - in para 4 are that the
assessee had sold the entire plant and machinery of its paper division and
stopped and seized to carry on its business. Likewise, in Oswal (supra) too,
the assessee had claimed depreciation of its various assets, including a claim
in respect of closed unit at Bhopal. It is thus clear that in both the judgments,
the Court had occasion to deal with certain fact situations - in Ansal
Properties (supra), the facts were closely proximate to the circumstances of
this case. After discussing the relevant provisions in Ansal Properties
(supra) , the Court stated that Section 50 would apply where any block of
assets ceases to exist and stated inter alia as follows:
"18. Section 50(2) applies where any block of assets ceases to
exist. The term ―block of assets‖ therein will mean the assets
carrying same rate of depreciation fixed in the schedule. In case
the block of assets, i.e., all assets exigible to same rate of
ITA 13 /2012 & 14/2012 Page 11
depreciation in the schedule ceases to exist because of
transfer/sale, sub-section (2) to Section 50 gets initiated and is
accordingly applied. The requirement and pre-condition
stipulated is that the block of asset should cease to exist. The
block of asset should stand completely depleted and no asset
should remain in the block.
19. In the present case, there is no finding of the Assessing
Officer or the appellate authorities that the block of assets
carrying the same rate of depreciation ceased to exist or that
after adding the three elements mentioned in Section 50, there
was surplus on the full value of consideration received or
accruing as a result of transfer of plant and machinery or the
building. It is not the finding of the Assessing Officer that the
block of assets entitled to the same percentage of depreciation
ceased to exist or there was a surplus in the block of assets
carrying the same rate of depreciation. The Assessing Officer
has proceeded on the basis that the division itself constitutes a
separate and an independent block of assets. Appendix to the
Rules as noticed above, is not a unit/division specific but is rate
of depreciation specific, as all assets prescribed the same rate
of depreciation are clubbed and are a part of the same block of
assets. The view we have taken finds resonance and acceptance
in two decisions of the Delhi High Court in Commissioner of
Income Tax versus Eastman Industries Limited, 174 Taxman
344 and Commissioner of Income Tax versus Oswal Agro Mills
Limited, (2012) 341 ITR 467 (Del.)."
12. The Court thereafter took into consideration the Direct Taxes Circular
no. 469 issued on 23.09.1986. The same reads as follows:
"6.3 As mentioned by the Economic Administration Reforms
Commission (Report No. 12, para 20), the existing system in this
regard requires the calculation of depreciation in respect of
each capital asset separately and not in respect of block of
assets. This requires elaborate bookkeeping and the process of
checking by the Assessing Officer is time consuming. The
greater differentiation in rates, according to the date of
ITA 13 /2012 & 14/2012 Page 12
purchase, the type of asset, the intensity of use, etc., the more
disaggregated has to be the record-keeping. Moreover, the
practice of granting the terminal allowance as per section
32(1)(iii) or taxing the balancing charge as per section 41(2) of
the Income-tax Act necessitate the keeping of records of
depreciation already availed of by each asset eligible for
depreciation. In order to simplify the existing cumbersome
provisions, the Amending Act has introduced a system of
allowing depreciation on block of assets. This will mean the
calculation lump sum amount of depreciation for the entire
block of depreciable assets in each of the four classes of assets,
namely, buildings, machinery, plant and furniture."
13. In Oswal (supra) and Ansal Properties (supra), it was noticed that the
Parliament had deleted the provision for terminal depreciation in respect of
each asset that was previously allowed under Section 32(1)(c) and the
taxation of balancing charge under Section 41(2) in the year when the sale
was concluded. The Court noticed in Oswal (supra) as follows:
"Instead of these two provisions, now whatever is the sale
proceed of sale of any depreciable asset, it has to be reduced
from the block of assets. This amendment was made because
now the assessees are not required to maintain particulars of
each asset separately and in the absence of such particular, it
cannot be ascertained whether on sale of any asset, there was
any profit liable to be taxed under section 41(2) or terminal loss
allowable under section 32(1)(iii). This amendment also
strengthen the claim that now only detail for "block of assets"
has to be maintained and not separately for each asset.
33. Having regard to this legislative intent contained in the
aforesaid amendment, it is difficult to accept the submission of
the learned counsel for the Revenue that for allowing the
depreciation, user of each and every asset is essential even
when a particular asset forms part of "block of assets‟.
Acceptance of this contention would mean that the assessee is to
be directed to maintain the details of each asset separately and
ITA 13 /2012 & 14/2012 Page 13
that would frustrate the very purpose for which the amendment
was brought about. It is also essential to point out that the
Revenue is not put to any loss by adopting such method and
allowing depreciation on a particular asset, forming part of the
"block of assets" even when that particular asset is not used in
the relevant assessment year. Whenever such an asset is sold, it
would result in short term capital gain, which would be exigible
to tax and for this reason, we say that there is no loss to
Revenue either.
34. The upshot of the aforesaid discussion is that though we
are not entirely agreeing with the reasoning of the Tribunal
contained in the impugned judgment, we are upholding the
conclusion of the Tribunal based on the "block of assets" as
discussed above. The consequence would be to dismiss these
appeals. However, there will be no order as to costs."
14. Rejecting the contention similar to the one advanced with respect to
interpretation of Section 32, the Division Bench in Ansal Properties (supra)
observed as follows:
"26. Learned counsel for the Revenue has relied upon Section
32 of the Act and has submitted that the effect of the said
Section should be examined while computing short term capital
gains and interpreting Section 50. It is not possible to accept the
said contention. Capital gains is chargeable to tax under
Chapter IV-E. The provisions of the said Chapter are
independent and separate. The provisions of the said chapter
relating to capital gains have to be examined and interpreted.
Only if there is a contradiction or conflict, we have to
harmoniously interpret the two provisions. Section 50
incorporates a deeming fiction and has to be given and
interpreted accordingly. Section 32 forms part of Chapter IV-D
and relates to computation of income from profession and
business. It is not the case of the Revenue that the gain on
transfer of the block of assets is taxable as business income. The
two sections operate in their own field and there is no conflict.
In these circumstances, we do not think we should refer and rely
ITA 13 /2012 & 14/2012 Page 14
upon Section 32 and accordingly compute and decide whether
short term capital gains is payable under Chapter IV-E."
15. In view of the above discussion, this Court is of the opinion that the
reliance placed upon Allied Electronics (supra) cannot be of assistance to the
Revenue. That did not take into account the changes brought about through
the amendment and appears to have been on an appreciation of Maharashtra
Minerals Corporation Ltd. v. CIT 1995 (216) ITR 575. That decision was in
the context of law prevailing in 1972-73 - obviously before the amendments
were made to the Act prior to the introduction of the concept of block assets.
15. For the foregoing reasons, both the questions of law are answered in
favor of the assessee and against the Revenue. The appeals are accordingly
allowed
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JANUARY 24, 2017/ajk
ITA 13 /2012 & 14/2012 Page 15
