2022 (7) TMI 585 - AT - Income Tax

Conversion of partnership into a private limited company - Depreciation on the value of the building as revalued prior to conversion of the erstwhile partnership firm into a private limited company - asset was transferred by the erstwhile partnership firm to the private limited company i.e., the Assessee on it s becoming a private limited company not taxable as capital gain u/s 47(xiii) - HELD THAT - On almost identical facts, the Hon ble Karnataka High Court held that the Assessee is entitled to depreciation on enhanced cost consequent to revaluation prior to conversion of the partnership firm into a private limited company, in the case of Padmini Products Pvt. Ltd. Vs. DCIT 2020 (10) TMI 424 - KARNATAKA HIGH COURT - As per section 47(xiii) transfer of a capital asset or intangible asset by a firm to a company because of succession of the firm by a company in the business carried on by the firm, shall not be regarded as transfer on satisfaction of certain conditions. The Court first found that intangible asset of the Assessee intangible assets, were transferred to the taxpayer for a valuable consideration. The Court found that authorities had neither questioned the valuation of the intangible assets nor did they doubt the genuineness of the transactions. Since the Assessee had succeeded the business of the firm, which had trademarks registered in its name and therefore, was entitled for depreciation. The Court held that the prerequisite for invoking explanation 3 to Section 43(1) of the ITA was that the AO had to establish that the main purpose of the transfer of such asset was to reduce the income-tax liability by claiming extra depreciation on enhanced cost. The Court held that the AO had not recorded any finding in this regard. Accordingly, the Court held that the Assessee was entited to claim depreciation on the intangible assets. Therefore where a partnership firm revalues its intangibles (being eligible for depreciation) prior to succession into a company, the company is entitled to depreciation on such assets as per the revalued figures. We are of the view that since neither the AO nor the CIT(A) had the benefit of the aforesaid decision of the Hon ble High Court, we deem it fit and proper to direct the AO to examine the issue afresh in the light of the aforesaid decision after affording the Assessee opportunity of being heard. We therefore allow these appeals for statistical purpose.

Summary

Issues:
- Whether the Revenue authorities were justified in restricting the claim of the Assessee for depreciation on the value of the building as revalued prior to conversion of the partnership firm into a private limited company.

Analysis:
1. The Assessee, engaged in the manufacturing business, revalued its Land and Building before converting the partnership firm into a private limited company. The revaluation reserve was credited to partners' accounts.
2. Upon conversion, all assets and liabilities were transferred to the company at book value. The company repaid unsecured loans using funds received from a business transfer agreement with M/s.Filtrauto, SA, France.
3. The Assessee claimed depreciation on the revalued building in its income tax return for the year ended March 2009. However, the AO disallowed the claim, stating depreciation is allowed only on the actual cost of the asset.
4. The Assessee contended that the revalued value should be considered for depreciation. The CIT(A) upheld the AO's decision, disallowing the excess depreciation claimed.
5. The Tribunal noted that the disputed disallowance of depreciation in multiple assessment years was due to the revaluation of the building. Section 32(1) requires depreciation on the Written Down Value (WDV) of the asset.
6. The Tribunal referred to Explanation 3 to Section 43(1) regarding the determination of actual cost in cases of asset transfer. Notably, the AO did not invoke this provision in the assessment order.
7. Citing a similar case where the High Court allowed depreciation on revalued assets, the Tribunal directed the AO to reexamine the issue in light of the High Court's decision, allowing the Assessee an opportunity to present its case.
8. Consequently, the Tribunal allowed the Assessee's appeals for statistical purposes, emphasizing the need for a fresh examination of the depreciation claim based on the revalued building cost.

This detailed analysis of the judgment highlights the key arguments, decisions, and legal provisions involved in the case regarding the claim of depreciation on the revalued building by the Assessee.