2012 (12) TMI 891 - HC - Income Tax

Depreciation in the case of succession - One unit of assessee was transferred to the subsidiary company with all assets and liabilities at the book value on 1.11.1996 - Assessee claim depreciation on the opening WDV of the depreciable assets comprised in unit proportionately between Holding & Subsidiary company - Succession to business otherwise than on death u/s 170 - AO u/s 43(6)(c)(B) held that machineries of unit were sold and hence there could be no WDV to allow depreciation - The assets of unit were transferred to the subsidiary company at the WDV as on 31.10.1996 - As the assets were sold during the accounting period, the sale value had to be reduced from the WDV and only the balance depreciation could be allowed Held that - Contrary to the view of the Tribunal, we find that Section 170 of the Income Tax Act deals with succession to business, otherwise than on death. On a reading of Section 43(6)(c), Explanation 2 to the Section and Section 170 along with the fourth proviso to Section 32(1), we have no hesitation in agreeing with the assessee s case that when the assessee transferred its B Unit to the 100% subsidiary company, it was entitled to claim depreciation apportioned in terms of what is provided for under the fourth proviso to Section 32(1) of the Income Tax Act. The view of the Tribunal that the assessee was not entitled to any depreciation on the ground that there was only a sale, as both units continued to exist, cannot be sustained. As the fourth proviso to Sec. 32(1), that the entire unit is taken as one before succession and the aggregate deduction is calculated at the prescribed rates as if the succession had not taken place and such deduction, thereafter, is to be apportioned between the predecessor and the successor company in the ratio of number of days, for which the assets were used by them. Therefore, assessee is entitled to the claim of depreciation as provided for in the fourth proviso to Section 32(1) Appeal remand back to AO in favour of assessee

Summary

Issues Involved:
1. Applicability of depreciation under Section 170 read with the fifth proviso to Section 32(1)(ii) in case of transfers on succession.
2. Whether the fifth proviso to Section 32(1)(ii) read with Explanation 2 and Explanation 6 to Section 43(1) and Explanation 2 to Section 43(6)(c) applies to consistent treatment in depreciation between transferor and transferee companies in case of such succession.

Issue-wise Detailed Analysis:

1. Applicability of depreciation under Section 170 read with the fifth proviso to Section 32(1)(ii) in case of transfers on succession:

The assessee, engaged in the manufacture and sale of cotton yarn, transferred Unit B to its wholly-owned subsidiary. The assessee claimed depreciation for seven months, and the subsidiary claimed for the remaining five months. The Assessing Officer treated the transaction as a sale, reducing the sale value from the written down value for depreciation calculation. The Commissioner of Income Tax (Appeals) viewed the transaction as a succession, allowing the depreciation claim based on the fourth proviso to Section 32(1), which mandates apportionment of depreciation between predecessor and successor in case of succession. The Tribunal, however, viewed the transaction as a sale between two legal entities, rejecting the succession claim and denying depreciation. The High Court disagreed with the Tribunal, emphasizing that Section 170 deals with succession other than on death, and the fourth proviso to Section 32(1) applies, allowing the assessee to claim depreciation apportioned between the predecessor and successor.

2. Applicability of the fifth proviso to Section 32(1)(ii) read with Explanation 2 and Explanation 6 to Section 43(1) and Explanation 2 to Section 43(6)(c) for consistent treatment in depreciation:

The High Court noted that the fourth proviso to Section 32(1), effective from 1.4.1997, applies to the assessment year 1997-98. This proviso mandates that in cases of succession or amalgamation, the aggregate depreciation deduction should not exceed the amount calculated as if the succession or amalgamation had not occurred, and this deduction should be apportioned based on the number of days the assets were used by the predecessor and successor. Section 43(6)(c) and its explanations define 'written down value' and provide that in cases of transfer between holding and subsidiary companies, the written down value for depreciation purposes should be the actual cost reduced by the depreciation allowed in the preceding year. The High Court held that the assessee's transfer of Unit B to its subsidiary was a succession, not a sale, and thus the fourth proviso to Section 32(1) applied. The Tribunal's view that the transaction was a sale and both entities continued to exist was legally erroneous. The High Court remanded the matter to the Assessing Officer to re-work the depreciation in accordance with the fourth proviso to Section 32(1).

Conclusion:

The High Court set aside the Tribunal's order and remanded the matter to the Assessing Officer to re-calculate the depreciation based on the fourth proviso to Section 32(1) of the Income Tax Act, ensuring the apportionment of depreciation between the predecessor and successor in the ratio of the number of days the assets were used by each. The Tax Case Appeal was disposed of accordingly, with no costs.