Xerox India Ltd. v. DCIT [ITA No. 2060/Del/2015,
dt. 5-8-2020] : 2020 TaxPub(DT) 3108 (Del-Trib)
Disallowance of depreciation on block of assets --
Converted into stock-in-trade
Facts:
Assessee in the business of renting out photocopier
machines on operating lease was capitalizing these copier machines (stock
items) under a block of assets and claiming depreciation on the same as its
owner year on year. When these machines lost their value or got returned by
customers or had to be scrapped the same was decapitalized from the block at a
nominal value and taken into stock-in-trade. These decapitalized machines
subsequently could either be --
(a) Sold as scrap
(b) Repaired and resold if in
working condition
(c) Captively used if in working
condition
(d) Let out on any other
printing contract
(e) If not in working conditions
they be dismantled and only useful parts are put to use elsewhere, i.e.,
cannibalized.
Assessee claimed depreciation on the block of assets
consistently. Subsequently when these reworked/repaired machines were sold
the same was offered to tax as well. It appears obvious that the repair cost
was claimed as expenditure on the stock-in-trade as well.
The assessing officer disallowed the depreciation citing
that once the machine is sold is lost forever thus no depreciation on the same
be claimed also the nominal value recording of the stock was incorrect. DRP
voiced views of assessing officer. This went up for adjudication to the
ITAT.
Held in favour of the assessee that they were eligible for
the depreciation under the block of assets holding that once the asset merges
into a block its identity is lost thereafter.
Editorial Note: The
possibilities as to what the assessee has of the used equipment, throws
open an interesting debate. If the department had insisted that section
45(2) would be applicable upon return of the equipment and decapitalization
whereby the assessee taking these back into stock will need to value the same
at their fair market value and then upon sale offer the difference in two fold
viz. --
1. Block asset value minus fair
market value is the net book value for depreciation thereafter.
2. Sale price of the
stock-in-trade minus fair market value is business income on actual sale.
The case would anyways be a revenue neutral one as these
were used equipment and not having a free/fair market value in the first
place logically if one were to assume the same. Having said that the split
between capital asset and stock-in-trade would have also been unwarranted in
the example/case of the assessee.
Section 28(via) with effect from 1-4-2019 where in
conversion of stock-in-trade into capital asset will be taxed as business
income with the fair value being the deemed sale price. Subsequently supposedly
when the capital asset is sold the difference between the sale
consideration minus the fair value would be taxed as capital gains.
Something exactly opposite of section 45(2) envisaged except for the fact of
timing aspect of the business income taxability here in section 28(via) the
profit is business income immediately on conversion while in section 45(2) the
business income is taxed only on actual sale of the capital asset and not on
immediate conversion of capital asset into stock-in-trade.
At what value is the asset again being recorded as a capital
asset by the assessee especially if it is refurbished/repaired and again let
out; will be an interesting question in this case? Will the department permit
the recapitalization once again as though a new asset is acquired given the
fact to make it again into a capital asset since there has been possibly
substantial refurbishment expenditure as well? Is that expenditure then capital
or of revenue in nature? These are points which have not been considered in the
verdict simply applying the earlier year decision of the assessee.
The decision also has a vexed issue on Bright Line Test
(BLT) on AMP spend in Transfer pricing where a number of decisions as to
non-applicability of BLT without manifesting AMP spend attributable to a brand
has also been debated. BLT on AMP is pending adjudication before the apex
court.