2023 (3) TMI 1085 - AT - Income Tax

Deduction in regard to unabsorbed depreciation and carry forward depreciation - Merger of partnership firm into Company - satisfaction of conditions mentioned in section 72A(6) - HELD THAT - All the stipulated conditions u/s.47(iii) of the Act, that all the assets of the partnership firm became the assets of the assessee company from the date of merger. Even all the partners of the firm before the takeover have become shareholders of the assessee company in the same proportion and the partners have not got any additional benefit before the takeover other than the shares allotted in the company in the same proportion which has taken over the firm. We also noted from the chart filed before us i.e., percentage of holding that the aggregate of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power and their shareholding continues to be as such for a period of 5 years from the date of succession. Another condition that the SEBI should approve the corporatization of the company is not applicable to the assessee company being a private limited company and that condition applies to the limited company. In view of the admitted factual aspects and as per provisions of law i.e., section 72A(6) of the Act and provisions of section 47(iii) of the Act or the proviso to clause xiv of section 47 of the Act, we are of the view that the assessee has complied with all the conditions and hence, entitled for claim of deduction in regard to unabsorbed depreciation and carry forward depreciation. Therefore, we confirm the order of CIT(A) and this issue of Revenue s appeal is dismissed.

Summary

Issues:
- Disallowance of depreciation by AO
- Conditions for claim of depreciation in case of succession

Analysis:
1. Disallowance of Depreciation by AO:
The appeal by the Revenue challenged the order of the CIT(A) deleting the disallowance made by the Assessing Officer (AO) on depreciation. The AO disallowed a significant amount of unabsorbed depreciation claimed by the firm, which was transferred to the assessee company. The AO contended that since the company took over the firm only from a specific date, the depreciation set off should be limited to that period. However, the CIT(A) directed the AO to allow the claim of set off after verifying the conditions as per the relevant provisions. The Tribunal, in a previous order, remitted the matter back to the CIT(A) to pass a detailed order.

2. Conditions for Claim of Depreciation in Case of Succession:
The main contention revolved around whether the assessee fulfilled the conditions for claiming depreciation in case of succession as per the provisions of the Income Tax Act. The AR for the assessee argued that the company was eligible for depreciation for the full year and not proportionate to the number of days. The AR highlighted the provisions of section 47(xiii) and section 72A(6) of the Act, emphasizing that all conditions were met for the carry forward and set off of accumulated losses and unabsorbed depreciation in case of amalgamation. The AR provided detailed evidence to support the fulfillment of conditions such as the transfer of assets and liabilities, shareholding patterns, and absence of additional benefits to partners.

3. Decision and Conclusion:
After hearing the arguments and examining the facts and legal provisions, the Tribunal upheld the order of the CIT(A) and dismissed the Revenue's appeal. The Tribunal found that the assessee had complied with all the conditions stipulated in the relevant sections of the Act for claiming deduction in relation to unabsorbed depreciation and carry forward depreciation. The Tribunal emphasized that the assets of the partnership firm had become assets of the assessee company post-merger, partners had become shareholders in the same proportion, and the shareholding criteria were met. Additionally, since the conditions under section 72A(6) were satisfied, the Tribunal concluded that the assessee was entitled to the claim of depreciation as allowed by the CIT(A).

In conclusion, the Tribunal's decision affirmed the assessee's eligibility for the claim of depreciation in the case of succession, based on the fulfillment of all statutory conditions, and dismissed the Revenue's appeal.