2014 (8) TMI 567 - HC - Income Tax

Approval of depreciation granted Fixed assets taken over under Scheme of amalgamation - Whether the Tribunal was justified in approving the depreciation granted when the profits of the Indian undertaking of nonresident parent company were computed in accordance with the provisions of Rule 10 of the Income Tax Rules Held that - The income accruing or arising to any non-resident person, whether directly or indirectly, through or from any business connection in India or through or from any property in India etc., will be, for the purposes of assessment to income tax, calculated on any amount which bears the same proportion to the total profits and gains of the business of such person, as the receipts so accruing or arising, bears to the total receipts of the business - This computation has to be done in accordance with the provisions of the Income Tax Act - the U.K. Company was being assessed to income tax in India right from the AY 1960-61 in respect of profits of its Branch in India. The authorities below gravely misdirected themselves in adopting the method that they did - there is no concept of depreciation being allowed on a notional basis or that the same can be granted implicitly as held by the ITAT - The depreciation has to be actually allowed Relying upon Madeva Upendra Sinai Versus Union of India And Others 1974 (11) TMI 7 - SUPREME Court - the written down value of fixed assets of the U.K. Company had to be calculated on the basis of the actual cost less the depreciation actually allowed to the U.K. Company - The written down value could not have been arrived at on the basis that depreciation had been granted on a notional basis - depreciation on the fixed assets taken over by the Assessee Company under the Scheme of Amalgamation, ought to be granted by taking the written down value of the fixed assets at ₹ 1,72,78,297/- and not ₹ 93,14,942 Decided in favour of Assessee.

Summary

Issues Involved:
1. Entitlement to claim depreciation on fixed assets post-amalgamation.
2. Determination of the written down value (WDV) for depreciation purposes.
3. Interpretation and application of relevant Income Tax provisions and rules.

Issue-wise Detailed Analysis:

1. Entitlement to Claim Depreciation on Fixed Assets Post-Amalgamation:
The primary issue revolves around whether the Applicant-Assessee is entitled to claim depreciation on fixed assets acquired under a Scheme of Amalgamation with its Parent Company based on the original cost or the written down value (WDV) of these assets. The court examined the Scheme of Amalgamation approved by the High Court, which transferred the industrial undertaking of the U.K. Company to the Assessee Company, including all assets and liabilities.

2. Determination of the Written Down Value (WDV) for Depreciation Purposes:
The court analyzed the provisions of the Income Tax Act, particularly sections 32, 34, and 43, and relevant rules. The Assessee argued that the WDV should be based on the original cost of Rs. 2,54,67,325/-, or alternatively, Rs. 1,72,78,297/- (cost less depreciation). However, the Assessing Officer determined the WDV as Rs. 93,14,942/- after accounting for depreciation that would have been granted to the U.K. Company. The ITAT upheld this view, implying that depreciation was granted implicitly under Rule 10(ii) of the Income Tax Rules.

3. Interpretation and Application of Relevant Income Tax Provisions and Rules:
The court emphasized that depreciation must be "actually allowed" as per the Income Tax Act, not on a notional or implied basis. The court referred to the Supreme Court judgment in Madeva Upendra Sinai v/s Union of India, which clarified that "actually allowed" means depreciation that has been taken into account or granted, not merely allowable on a notional basis. The court noted that there was no evidence to show that depreciation was actually allowed to the U.K. Company while computing profits under Rule 33/10.

Conclusion:
The court held that the written down value of fixed assets should be calculated based on the actual cost less the depreciation "actually allowed" to the U.K. Company. Since the Scheme of Amalgamation valued the fixed assets at Rs. 1,72,78,297/- (cost less depreciation), this figure should be used for calculating depreciation, not the original cost of Rs. 2,54,67,325/- or the notional figure of Rs. 93,14,942/- determined by the authorities. The court answered the reference in favor of the Assessee, directing that depreciation should be granted based on the WDV of Rs. 1,72,78,297/-.

The Income Tax Reference was disposed of in these terms, with no order as to costs.