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Tax Publishers 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.

Tax Publishers

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

(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.