2021 (6) TMI 877 - AT - Income Tax

Depreciation on assets for which the actual cost as per section 43(1) of the Income Tax Act, 1961 was nil - demerger in terms of explanation 4 to section 2(19AA) recognised - second round of appellate proceedings - AO has disallowed depreciation on the ground that the assessee had received assets free of cost from the Government of Uttaranchal - HELD THAT - As per settled accounting principles, every rupee invested in the business has a cost. The cost of borrowing from the bank is known to the business depending on the rate of interest but that does not mean that the capital introduced in the form of shareholders fund has no cost. In the present case, assets generating hydro power have been received by the assessee from the demerger of UP Jal Vidyut Nigam along with corresponding liabilities which it owns to the Uttaranchal Government and others. This liability represents nothing but the cost of the assets received on demerger. The assessee is entitled to depreciation on the written down value of these assets which been prescribed in Explanation 2B of section 43(6) of the Income Tax Act, 1961. The assessee is, therefore, entitled to depreciation. Somewhat similar situation arose in case of M/s Bharat Sanchar Nigam Limited (BSNL) when it got incorporated in 2000. Prior to BSNL s incorporation, the telecommunication services were being provided by Government of India, Ministry of Communication through its two departments, namely Department of Telecommunication Services and Department of Telecommunication Operation. The AO in case of BSNL referred to the capital structure of the BSNL to draw an inference that the cost of assets was being met by the general reserve as reflected in the capital structure of the company. As per AO, a sum equal to the general reserve would be required to be reduced from the cost of the assets in terms of Explanation 10 of Section 43(1) of the Act. This has been negated by the Hon ble Delhi High Court 2013 (5) TMI 416 - DELHI HIGH COURT - Decided against revenue.

Summary

Issues Involved:
1. Allowance of depreciation on assets with nil actual cost as per section 43(1) of the Income Tax Act, 1961.
2. Determination of the taxable income of the assessee based on audited accounts.
3. Validity of the disallowance of depreciation on assets transferred during demerger.

Issue-wise Detailed Analysis:

1. Allowance of Depreciation on Assets with Nil Actual Cost:
The primary issue is whether the assessee is entitled to claim depreciation on assets for which the actual cost is considered nil as per section 43(1) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed depreciation amounting to ?29,95,08,702/- on the grounds that the assets were acquired free of cost. However, the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim of depreciation, stating that the assets were transferred from UP Jal Vidyut Nigam Limited (UPJVNL) to Uttaranchal Jal Vidyut Nigam Ltd. (UJVNL) during a demerger, and the cost of these assets was duly accounted for in the balance sheets of both entities. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assets were not obtained free of cost and that the assessee is entitled to depreciation on the written down value of these assets.

2. Determination of Taxable Income Based on Audited Accounts:
The Tribunal noted that the absence of audited accounts for the relevant assessment year made it difficult to determine the true taxable income of the assessee. The matter was previously set aside by the Tribunal with directions to reassess the issues based on audited accounts. The AO, in fresh assessment proceedings, again disallowed the depreciation claim. However, the CIT(A) found merit in the assessee's claim, noting that the assets' values were derived from the balance sheet of UPJVNL, and the difference was shown as Reconstruction Reserve under Capital Reserve. The Tribunal agreed with the CIT(A), stating that the audited accounts should be used to determine the opening and closing values of the assets.

3. Validity of Disallowance of Depreciation on Assets Transferred During Demerger:
The Tribunal recognized the situation as a demerger in terms of explanation 4 to section 2(19AA) of the Income Tax Act. The AO's disallowance of depreciation was based on the premise that the assets were received free of cost. However, the Tribunal highlighted that the assets were transferred along with corresponding liabilities, representing the cost of the assets. The Tribunal referred to a similar case involving Bharat Sanchar Nigam Limited (BSNL), where the Delhi High Court ruled that reserves in the balance sheet do not represent a subsidy or grant but are part of shareholders' funds. Thus, the Tribunal concluded that the assessee is entitled to depreciation on the written down value of the assets received during the demerger.

Conclusion:
The Tribunal upheld the CIT(A)'s findings that the assessee is entitled to claim depreciation on the assets transferred during the demerger, as the assets were not obtained free of cost. The appeal of the Revenue was dismissed, and the decision was pronounced in the open Court on 31/05/2021.