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TMI Blog2012 (12) TMI 891X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee'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 - Tax Case (Appeal) No.471 of 2006 - - - Dated:- 11-9-2012 - MRS. CHITRA VENKATARAMAN AND MR. K.RAVICHANDRA BAABU JJ. For appellant: Mr. T.N. Seetharaman For respondent: Mr. M. Swaminathan Standing Counsel JUDGMENT (Jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue had to be reduced from the written down value and only the balance depreciation could be allowed. 3. Aggrieved by the assessment, the assessee went on appeal before the Commissioner of Income Tax (Appeals) and contended that the transaction was one of succession. Referring to Section 32(1) proviso, introduced by the Finance Act 1996, effective from 1997-98, the assessee contended that in the case of succession, depreciation should be allowed proportionately for different periods and the aggregate deduction should not be more than the total allowable depreciation, if the succession had not taken place. He pointed out that though the Assessing Officer had not mentioned about the provision, he had applied Section 43(6)(c)(B), according to which written down value and block of assets would be as at the beginning of the year as reduced by the sale value. Treating the transaction as sale, the Assessing Officer took the sale value to be the written down value as on 31.10.1996. Referring to proviso to Section 32(1) of the Income Tax Act introduced under the Finance Act 1996, effective from 1997-98, the first Appellate Authority held that the transfer being one of succession, the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and learned Standing counsel for the Revenue and perused the materials on record. 8. It is seen that the fourth proviso was introduced to Section 32(1) under Finance Act 2 of 1996 with effect from 1.4.1997. The said proviso was substituted as 5th proviso to Section 32(1)(ii) by the Finance Act of 1999 with effect from 1.4.2000. As for the present case relating to 1997-98, we are concerned about the 4th proviso, as it stood originally prior to the Amendment under the Finance Act, 1999. It deals with the methodology of working out the depreciation in the case of succession referred to in Section 170 of the Income Tax Act or in the case of amalgamation. The fourth proviso to Section 32(1) of the Income Tax Act reads as under:- " Provided also that the aggregate deduction in respect of depreciation of buildings, machinery, plant or furniture allowable to the predecessor and the successor in the case of succession, referred to in section 170 or the amalgamating company and the amalgamated company in the case of amalgamation, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i). Explanation 1- When in a case of succession in business or profession, an assessment is made on the successor under sub- section (2) of section 170 the written down value of 1[any asset or any block of assets] shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to. Explanation 2.- Where in any previous year, any block of assets is transferred,- (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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. In the face of Section 170 of the Income Tax Act, which relates to "succession otherwise than on death", the Tribunal committed a legal error in holding that there could not be a claim of depreciation as both Units are in existence. Given the fact that in a case of transfer of assets relating to B unit of the holding company to the subsidiary company leading to a succession of business and the existence of the companies continuing, we have no hesitation in holding that the assessee is entitled to the claim of depreciation as provided for in the fourth proviso to Section 32(1) of the Income Tax Act as it stood then. It may be noticed from the fourth proviso to Section 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 wh ..... 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