Facts of the Case

The respondent-assessee (M/s. Oswal Agro Mills Ltd. / Oswal Chemicals & Fertilizers Ltd.) claimed a depreciation amount of ₹9.31 Crores on various assets for the Assessment Year 1998-99. This claim included depreciation on its business unit located at Bhopal. The Bhopal unit had remained completely non-functional and closed down from the Assessment Year 1997-98 onwards, spanning a continuous period of roughly 5 to 6 years across the connected assessment years under appeal.

The Assessing Officer (AO) disallowed the depreciation pertaining to the Bhopal unit on the ground that the unit was locked/closed and the underlying assets were not actively used for the purposes of the business during the relevant previous years. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowances. However, the Income Tax Appellate Tribunal (ITAT) reversed the orders, ruling in favor of the assessee on the grounds that the unit was only temporarily closed, its assets formed a part of the "block of assets," and it qualified as passive user. The Revenue appealed these ITAT orders before the High Court.

Issues Involved

  1. Whether the phrase "used for the purpose of business" under Section 32 of the Income Tax Act, 1961 can be extended under the concept of 'passive user' to allow depreciation on a manufacturing unit that has remained completely non-functional and closed for consecutive years.
  2. Whether individual assets can be segregated by the Revenue to disallow depreciation once they legally form a part of a "block of assets" under the amended provisions of Section 32, Section 2(11), and Section 43(6) of the Income Tax Act, 1961.

Petitioner’s (Revenue's) Arguments

  • The Revenue contended that under Section 32 of the Income Tax Act, depreciation is permissible only upon the fulfillment of the twin statutory pre-conditions: ownership of the asset and its actual or intended usage for the business or profession.
  • It was argued that the second condition was entirely unfulfilled because the entire Bhopal unit was non-functional for over 5–6 years.
  • The Revenue submitted that the doctrine of "passive user" (or keeping assets ready for use) cannot be stretched to cases where a whole unit suffers a complete, long-term halt in operations.
  • They further argued that the introduction of the "block of assets" concept was merely a mechanism for computational simplification and could not override the foundational statutory requirement of usage mandated by Section 32.

Respondent’s (Assessee's) Arguments

  • The Assessee contended that following the landmark legislative introduction of the "block of assets" concept via the Taxation Laws (Amendment) Act, 1986 (effective April 1, 1988), the fundamental mechanism of calculating depreciation underwent a complete shift.
  • It was argued that under the amended regime, individual assets lose their standalone identity once they merge into a specific "block of assets". Consequently, the Revenue has no statutory authority to segregate a single asset from the block to test its individual usage.
  • The Assessee further pointed out that it was a fifty-year-old operating company and the closure of the Bhopal unit was a temporary period of commercial lull while efforts were being made to make the unit viable; hence, it fell under the category of "passive user".

Court Order / Findings

The Hon’ble Delhi High Court dismissed the Revenue's appeals and upheld the ultimate conclusion of the ITAT, though it modified the legal reasoning:

  1. On Passive User: The High Court agreed with the Revenue that "passive user" cannot be stretched to absurd, indefinite limits. If an entire unit remains shut down for numerous years without any operational activity, it cannot be deemed "ready for use" under Section 32, as doing so would render the statutory phrase "used for the purpose of business" superfluous.
  2. On Block of Assets: The High Court ruled heavily in favor of the Assessee on the block-assessment framework. It held that under the amended Section 32, Section 2(11), and Section 43(6), depreciation is calculated on the Written Down Value (WDV) of the entire block of assets at a lump-sum prescribed percentage. Individual assets completely lose their independent identity once entering the block.
  3. Conclusion: Because the law no longer requires or permits an asset-by-asset tracking or the maintenance of separate individual records for checking individual usage, the Revenue cannot pick out or segregate a non-utilized asset from a block to deny depreciation, provided the block itself is operational. Furthermore, any eventual sale of such asset is adjusted against the block, creating short-term capital gains tax liabilities under Section 50, thereby protecting the Revenue from any net loss.

Important Clarification

  • The Absolute Principle of 'Block of Assets': The ruling clarifies that once an individual asset becomes a component of an established "block of assets," the Revenue cannot segregate that particular asset to deny depreciation on the grounds of non-user. Individual asset identity is legally extinguished for depreciation calculations under the post-1988 Income Tax framework.

Sections Involved

  • Section 32 – Depreciation
  • Section 2(11) – Definition of "Block of Assets"
  • Section 43(6) – Definition and Computation of "Written Down Value"

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:6288-DB/AKS24122010ITA1612006.pdf

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