2025 (4) TMI 674 - HC - Income Tax

Entitlement to adjust the written down value of the assets of the amalgamating companies on the basis depreciation actually allowed to them and to claim depreciation on such adjusted written down value of the assets of the amalgamating companies - Assessee had not obtained approval of the Central Government under Section 72A of the IT Act and hence in terms of Section 72A unabsorbed depreciation should not be taken into account. HELD THAT - The appellant s claim was with reference to the adoption of correct written down value of the block of assets of the amalgamating company which vested in the appellant pursuant to the scheme of amalgamation. According to appellant provisions of Section 72A are not applicable as none of the amalgamating companies was not financially nonviable. Secondly if public interest has to be adjudged from the point of view of the share holders bank financial institution creditors consumers then for the sound reasoning in paragraph 9.6 in the order of the Commissioner of Income-tax (Appeals) we are satisfied that there was no element of public interest involved in the amalgamation. Thus this is not a case where the appellant was trying to carry forward and set off of accumulated loss and unabsorbed depreciation of the amalgamating company in the hands of amalgamated company. We have no hesitation in observing that the Tribunal erred in holding that because the assessee had not obtained approval of the Central Government required under Section 72A the order passed by the Commissioner of Income-tax (Appeals) impugned before the Tribunal calls for interference. CIT (Appeals) had held that the unabsorbed depreciation of the amalgamating companies should be added to the written down value of the block of assets of the amalgamated company with which we are in agreement with. We are in respectful agreement with the view of Madras High Court in EID Parry (India) Ltd. 2012 (7) TMI 698 - MADRAS HIGH COURT which covers the present case. Substantial question of law to be answered in favour of the assessee and against the Revenue to hold that the Tribunal was not justified in law in holding that in view of insertion of Section 72A in the Income Tax Act 1961 the appellant (being the amalgamated company) not having obtained approval of the Central Government was not entitled to adjust the written down value of the assets of the amalgamating companies on the basis of depreciation actually allowed to them and to claim depreciation on such adjusted written down value of the assets of the amalgamating companies.

1. ISSUES PRESENTED and CONSIDERED

The primary legal issue considered in this judgment was whether the appellant, as the amalgamated company, was justified in law to adjust the written down value (WDV) of the assets of the amalgamating companies based on the depreciation actually allowed to them, without obtaining the approval of the Central Government as required under Section 72A of the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents: The case revolves around the interpretation of Sections 32, 43(6), and 72A of the Income Tax Act, 1961. Section 32 deals with depreciation, Section 43(6) defines "written down value," and Section 72A pertains to the carry forward and set off of accumulated loss and unabsorbed depreciation allowances in cases of amalgamation. The court also referred to precedents from the Supreme Court and High Courts, including the Bombay High Court's decision in CIT v. Hindustan Petroleum Corp. Ltd. and the Madras High Court's decision in EID Parry (India) Ltd. v. Deputy Commissioner of Income-Tax.

Court's interpretation and reasoning: The Court analyzed whether the appellant was entitled to adjust the WDV of assets acquired through amalgamation by considering the depreciation actually allowed to the amalgamating companies. The Tribunal had reversed the decision of the Commissioner of Income-tax (Appeals) based on the lack of Central Government approval under Section 72A. However, the Court found that Section 72A was not applicable since the appellant was not attempting to carry forward unabsorbed depreciation but was instead recalculating the WDV of assets.

Key evidence and findings: The appellant argued that it was not seeking to carry forward unabsorbed depreciation but was recalculating the WDV based on depreciation actually allowed, as per Section 43(6). The Commissioner of Income-tax (Appeals) had agreed with this interpretation, holding that Section 72A was not applicable since the appellant was not claiming a carry forward of unabsorbed depreciation.

Application of law to facts: The Court applied the principles established in the cited precedents and statutory provisions to determine that the appellant was entitled to adjust the WDV of the assets based on the depreciation actually allowed, without needing Central Government approval under Section 72A. The Court emphasized that the purpose of Section 72A was to address carry forward and set off of accumulated losses and unabsorbed depreciation, which was not the appellant's claim.

Treatment of competing arguments: The Court considered the Revenue's argument that Central Government approval was required under Section 72A. However, it found that the appellant's situation did not involve the carry forward of unabsorbed depreciation, thus making Section 72A inapplicable. The Court agreed with the appellant's interpretation that the adjustment of WDV was governed by Section 43(6) and not Section 72A.

Conclusions: The Court concluded that the Tribunal erred in reversing the Commissioner of Income-tax (Appeals)'s decision. It held that the appellant was justified in adjusting the WDV of the assets based on the depreciation actually allowed to the amalgamating companies, without needing Central Government approval under Section 72A.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "We therefore answer the substantial question of law framed by this Court in favour of the assessee and against the Revenue to hold that the Tribunal was not justified in law in holding that in view of insertion of Section 72A in the Income Tax Act, 1961, the appellant (being the amalgamated company) not having obtained approval of the Central Government was not entitled to adjust the written down value of the assets of the amalgamating companies on the basis of depreciation actually allowed to them and to claim depreciation on such adjusted written down value of the assets of the amalgamating companies."

Core principles established: The Court established that in cases where the amalgamated company is not seeking to carry forward unabsorbed depreciation, Section 72A does not apply, and the adjustment of WDV should be governed by Section 43(6). The Court also reinforced the principle that statutory provisions should be interpreted based on their clear language, without implying additional requirements not explicitly stated.

Final determinations on each issue: The Court determined that the appellant was entitled to adjust the WDV of the assets based on depreciation actually allowed, without needing Central Government approval under Section 72A. The appeal was allowed, and the decision of the Tribunal was quashed, restoring the order of the Commissioner of Income-tax (Appeals).

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