1. By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal of the department.
2. This Court while admitting the matter framed the following substantial question of law:-
"Once an asset forms part of the Block of Asset, which is eligible for depreciation u/s 32 of the Act, whether the depreciation deserves to be computed and allowed with reference to the Written Down Value of such Block of Asset as defined u/s 43(6) of the Act, notwithstanding the actual use of individual asset forming part of block of asset.?"
3. Counsel for the appellant Mr. Jhanwar has taken us to the order of the CIT(A) which reads as under:-
"2. Whether assessing officer was justified in disallowing depreciation claim in respect of thread division.
2.1. On perusal of para 2 of the assessment order it is seen that considering closure of thread division an opportunity was given proposing disallowance of depreciation claim in respect of thread division and after considering the explanation furnished the A.O has relied upon Calcutta High Court judgment in the case of CIT vs. Oriental Coal Co. Ltd. 206 ITR 682 and Rajasthan High Court judgment in the case of CIT vs. Udaipur Mineral Development Syndicate Pvt. Ltd. 269 ITR 263 and disallowed such depreciation claim in respect of thread division at Rs. 5,92,76,974/-
2.2. Challenging the said view of assessing officer Shri Garg in his submission has argued that the appellant company was not able to operate the thread division on account of sealing the appellant's suit by Rajasthan State Electricity Board as well as on account of strike by the employees. He had relied upon Madras High Court judgment in the case of CIT vs. Vayitihi Plantation Ltd. 128 ITR 625 and another Madras High Court judgment in the case of CIT vs. Heera Financial Services Ltd. 298 ITR 245 in which it was held that where the plant was kept ready for use but could not be used on account of forced idleness due to strike then the assessee even though a passive user was deemed to be an active user within the meaning of word "use" and it was entitled for depreciation claim u/s 32 of I.T. Act. By distinguishing the Rajasthan High Court judgment in the case of CIT vs. Udaipur Mineral Development Syndicate it was argued that in that case the business remained closed but in the present case the another unit of the appellant was working and the business as such was not closed.
2.3. I have considered the case and arguments taken by Sh. Garg quite carefully. It is seen that considering Madras High Court judgment in the case of CIT vs Heera Financial Services Ltd. 298 ITR 247 it is clear that the machineries were kept under forced idleness and therefore, the appellant though a passive user, was deemed to be an active user within the meaning of word "used" and is entitled for depreciation claim u/s 35 of I.T. Act. In the present case due to strike by the employees and sealing by RSEB, though the machineries were ready for use but it was kept in the forced idleness. Further, in the case of Udaipur Mineral Development Syndicate which has been relied upon by A.O. the business of the appellant remained closed while in this case only one unit remained closed and remaining business was continuing and therefore, the facts are not identical. In any case after insertion of depreciation provisions on the block value concept as a whole for the appellant there was no question of partial disallowance of depreciation claim. In any case, this unit did not function w.e.f. 15.10.2001 but the assessing officer in A.Y. 2002-03 has also not disallowed the depreciation claim on thread division in the assessment order passed u/s 143(3) of I.T. Act dated 24.2.2005. With this discussion, in my considered view the appellant was entitled for the depreciation claim on thread division and A.O. is directed to allow the same."
4. He contended that the Tribunal while considering the matter has seriously committed an error in relying the judgment of this Court in case of Udaipur Mineral Development Syndicate Pvt. Ltd. 269 ITR 263 wherein while considering the issue, the court held it prior to the amendment where block value is there. However, he has relied upon the decision of this Court in the case of Commissioner of Income Tax vs. Udaipur Distillery Co. Ltd. reported in [2004] 268 ITR 446 (Raj.) wherein while considering the question after the amendment, this court has observed as under:-
"12. The AO has disallowed the claim amounting to Rs. 28,617 by holding that the fast food division of the assessee at Delhi and Mumbai through three restaurants, two at Delhi and one at Mumbai, has been closed since the asst. yr. 1988-89 and, therefore, assessee's claim to depreciation pertaining to research and development assets cannot be allowed in view of provisions of Section 32 which require that the assets on which depreciation is claimed must be used in a live business during the accounting period relevant to the assessment" year in question. However, the assessee has raised two fold contentions for sustaining his claim. Firstly, it is submitted that R&D assets did not relate solely to the fast food division of the company but also relates to the manufacture and sale of liquor. R & D division was also rendering services for its liquor business and the liquor business has not been closed at any stage. Therefore, the factual foundation on the basis of which AO has disallowed the claim did not exist.
13. Secondly, it was contended that since amendment of Section 32 w.e.f. 1st April, 1988, scheme of depreciation has gone radical change vide' Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986. Block assets of business has been succinctly defined under Section 2(11) of the Act of 1961. Now under the scheme of depreciation the claim of depreciation is allowed on block assets. It cannot be denied that assets for R&D division of the assessee's business forms part of block assets for accounting period relevant to the assessment year in question. R&D division of the assesseecompany as such was not closed. Therefore, it also cannot be said that assets in question were not used in the business of assessee, Therefore, the assessee is entitled to deduction on account of depreciation on assets of R&D division as part of block assets.
14. The learned counsel for the Revenue, on the other hand urged that Section 32(1) provides that before an asset can be construed as part of block assets for computation of depreciation it must be an asset which has been put to use for the purpose of assessee's business during the relevant accounting period. If an asset has not at all been used for the purpose of assessee's business during the relevant accounting period, it also cannot form part of block assets on which percentage depreciation has to be given while computing the total taxable income.
15. Apparently, the aforesaid question raises a substantial question as to the interpretation of Section 32 as amended by the Act of 1986 and was in force during the relevant assessment year.
16. However, we are of the opinion that in view of the findings of fact recorded by the learned Tribunal in this regard, this question really does not arise for consideration to affect the final decision. Apparently, as per facts not in dispute, the R&D division, of which the assets were formed part, was not closed albeit it was confined in its activities to the other business of the assessee than fast food. Once this is found the assets relating to R&D cannot be excluded because part of the assessee's business is closed to which also the R&D division might be rendering its services. It may not have been used for the business relating to the fast food division. It is not the requirement of Section 32 that the depreciation claim in respect of any asset has to be allowed if it continues to be used for all the purpose which was being used earlier. In view of the findings of fact recorded in favour of the assessee that the R&D division was alive and all business of the assessee were not closed, depreciation ought to have been allowed as deduction as part of block assets of R&D division. There is no other ground to disallow that claim. We accordingly hold that the Tribunal was right in allowing the depreciation on R&D division on assessee."
5. The same view is also taken in the case of Commissioner of Income Tax, Alwar. vs. Gillette India Ltd. in Tax Appeal No. 349/2011 decided on 23rd May, 2017 wherein it has been held as under:-
"5. In so far as issue No.(iii) is concerned, the Tribunal relying upon the decision of Delhi High Court in the case of CIT vs. Bharat Aluminum Company Ltd. 187 Taxman 111, 124(Del.) and in the case of CIT vs. Yamaha Motors India Pvt. Ltd. 226 CTR 304 and the Gujarat High Court in the case of CIT vs. Sonal Gum Industires 322 ITR 542 in para 52 to 56 has held as under:
"52. We have heard the rival submission and considered them carefully. After considering the relevant material along with written submission and various case laws, we find that the assessee deserves to succeed. It is a fact on record that M/s Duracell batteries India Limited amalgamated with the assessee company in A.Y. 2000-01. On amalgamation its plant & Machinery was included in the block of the plant & Machinery of the assessee company. This block was used for the purpose of the business in A.Y.2000-01 & 2001-02. In A.Y. 2002-03 the assessee did not fulfill the condition laid down u/s 72A and therefore the unabsorbed losses and depreciation of the amalgamating company M/s Duracell batteries India Limited which was set off in A.Y. 2000-01 and 2001-02 was withdrawn and offered in income in A.Y. 2002-03. However the fact remain is that plant & Machinery of Duracell battery India Limited merged in the block of assets of the assessee company on its amalgamation and on such block depreciation for A.Y. 2000-01 & 2001-02 was allowed under the block concept of depreciation once an asset has formed part of the block it can't be reduced except by monies payable in respect of any assets falling in that block which is sold or discarded or demolished or destroyed as per section 43(6) of the Income tax Act. The Money becomes payable in A.Y.2004-05 when such plant & Machinery were sold for Rs. 29,98,65,810/- in A.Y. 2004-05 and Rs. 1,26,23,967/- in A.Y. 2005-06 when such amount was reduced from the block of plant & machinery. The example given by Ld. AR in his written note amply illustrate the mechanism of allowance of depreciation u/s 32 after the block concept of asset. Therefore, the notional disallowance of depreciation in respect of plant & machinery of Duracell batteries which formed part of the block of assets of the assessee is not permitted in law.
53. The Delhi High court of CIT V/s. Bharat Aluminium Company Ltd. 187 Taxman 111, 124 (Del.) held that though as per section 32(1), in order to get entitled to claim depreciation, asset is to be owned by the assessee and it is also be used for the purpose of business and profession but this expression when applied to block of assets and not any specific building, machinery, plant or furniture in said block of assets as individual assets loose their identity after becoming inseparable part of block of assets.
54. The Gujarat High Court in case of CIT V/s. Sonal Gum Industries 322 ITR 542 held that in relation to block of assets it is not possible to segregate items falling with in the block for the purpose of granting depreciation or restricting the claim thereof. Once it was found that the assets were used for the prupose of business, it was not necessary that all the items falling within plant and machinery have to be simultaneously used for being entitled to depreciation.
55. The Delhi High Court in case of CIT V/s. Yamaha Motors India Pvt. Ltd. 226 CTR 304 held that Expression "Used for the purpose of business" in section 32 has to be read harmoniously with the expression "Discarded" occurring in Clause III of sub section (1) thereof. On harmonious reading of these expressions, "Used for the purpose of business" only means that assessee has used the machinery for the purpose of business in earlier years. Therefore once depreciation was allowed on block of assets in previous year actual user of machinery is not required with respect to the discarded machinery and the condition for eligibility of depreciation that machinery is used for the purpose of business would mean that discarded machine is used for the purpose of business in the earlier years for which depreciation is allowed.
56. Mumbai ITAT in case of M/s. Swati synthetics Lts. V/s. ITO 2010 TIOI. 78 held that depreciation is allowable on the entire block even if some of the assets of the block have not been used. The use of the individual asset for the purpose of business can be examined only in the first year when the asset is purchased. In subsequent years use of block of assets is to be examined. Existence of individual assets in the block of assets itself amounts to use for the purpose of business."
5.1 In view of the decisions of two High Courts and one decision of the Tribunal, the Tribunal has not committed any error and we affirm the view taken by the Tribunal and also the view taken by the Delhi High Court and Gujarat High Court."
6. Counsel for the respondent has also relied upon the decision of Bombay High Court in the case of Dineshkumar Gulabchand Agarwal vs. Commissioner of Income Tax & Anr. reported in 267 ITR 768 and Karnataka High Court in the case of Deputy Commissioner of Income Tax vs. Yellamma Dasappa Hospital reported in 290 ITR 353.
7. Taking into consideration the two judgments of this Court, we are of the considered opinion that the finding record by the CIT(A) is required to be restored and that of the Tribunal which required to be reversed.
8. Hence, the issue is required to be answered in favour of the assessee against the department.
9. The appeal stands allowed.