• If assets returned from lease, was again leased out, and it was recapitalized at nominal value at which it was decapitalised and similarly, when such assets were sold, surplus was offered for taxation then, depreciation on decapitalised assets shall be allowed.  
• If assets were written-off in books but no adjustment was made to block of assets as assets had no scrap value then, depreciation shall be allowed on block of asset without reducing value of fixed assets written off during year.

Facts:

The assessee being a company was engaged in the business of trading of xerographic equipments, printers, etc. The assessee used to lease out equipments to the customers on operating lease. These equipments were capitalized and depreciation was claimed for tax purposes.

• Assets that were returned from lease were converted into stock in trade at a nominal value of Re. 1 as these used assets were not having any readymade market for further leasing. This nominal value was reduced from block of assets. However, whenever these assets were sold, the profit was offered for taxation. In case any of these assets was again leased out, then it was recapitalised in block of asset at the nominal value at which it was decapitalised.
• Assets that were written-off in books but no adjustment was made to block of assets as there were no scrap value of such assets. Assessee used to claim depreciation on the value of block of assets without deducting the value of such fixed assets.

AO’s Action:

• Disallowed depreciation on decapitalised assets holding that such assets were not put to use for purpose of business.
• While allowing depreciation, reduced value of said fixed assets from block of assets.

Held:

Clarification regarding depreciation on leased assets:

• The Tribunal highlighted that when the assets are recapitalized at the nominal value at which they were decapitalised then, there is no effect on the taxability of the assessee. Similarly, whenever these used assets are converted into stock-in-trade and are subsequently sold and the surplus on the sale is offered for taxation, then there is no harm to the revenue.
• The Tribunal viewed the order of the High Court in assessee’s own case for assessment year 2008-09, assessee was entitled to depreciation on block of asset without reducing value of fixed assets written off during year.

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