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TMI Blog2014 (8) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken over by it under a Scheme of Amalgamation with its Parent Company (May and Baker Ltd.), on the basis of the original cost of the said fixed assets, or on the basis of the written down value thereof, which had been arrived at by the authorities below by granting depreciation to the Parent Company on a notional or implied basis. 3. The facts stated briefly are that the Assessee, an Indian Company, was a subsidiary of one May and Baker Ltd., a U.K. Company. The said U.K. Company had an industrial undertaking in India. Under a Scheme of Amalgamation, the said industrial undertaking of the U..K. Company was hived off to the Assessee Company under a Scheme of Amalgamation that was approved by this Court and the assets and liabilities of the said undertaking were taken over by the Assessee Company in terms embodied in the Scheme of Amalgamation. 4. Prior thereto, the U.K. Company (which was the Parent Company of the Assessee Company) was assessed to tax in India right from Assessment Year 1960-61 in respect of its profits in relation to its Branch in India. The profits of the Indian Branch of the U.K. Company were determined as per Rule 33 of the Income Tax Rules as it then stoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia with limited liability under the Indian Companies Act 1913 (hereinafter called M&B) and excluding the dividend already declared on the said shares to be remitted to M&B on receipt of approval from all requisite authorities in India (all of which undertaking, property, assets, rights and powers are hereinafter for brevity's sake referred to as "the said undertaking of 'M&B') shall, without further act or deed be transferred to and vested in or deemed to be transferred to and vested in MBI pursuant to the provisions of section 394 of the Companies Act 1956 but subject nevertheless to all charges, if any, then affecting the same or any part thereof. It is hereby clarified that the said undertaking of M&B referred to in this paragraph relates only to the undertaking in India of M&B." (emphasis supplied) 7. Schedule 'A' referred to in paragraph 1 of the said Scheme set out the value of the fixed assets (at cost less depreciation) at Rs. 1,72,78,297/-. The original cost of these assets to the U.K. Company was Rs. 2,54,67,325/-. For all the three years in question, the Assessee claimed that for the purpose of granting depreciation, the cost of the assets should be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India etc., will be, for the purposes of assessment to income tax, calculated on any amount which bears the same proportion to the total profits and gains of the business of such person, as the receipts so accruing or arising, bears to the total receipts of the business. This computation has to be done in accordance with the provisions of the Income Tax Act. 10. In view of the fact that the profits and gains under Rule 10(ii) were to be computed in accordance with the provisions of the Income Tax Act, the ITAT held that it was evident that this method could be applied only after all statutory allowances including depreciation as set out in section 32, was allowed to the non-resident. The ITAT held that they could not loose sight of the fact that implicit in the computation of income under the method followed by the Assessing Officer viz. under Rule 10(ii), was the grant of depreciation. The ITAT therefore upheld the order of the Assessing Officer as well as the CIT (Appeals). Though the ITAT referred to the judgment of the Supreme Court in the case of Madeva Upendra Sinai v/s Union of India and others, reported in [1975] 98 ITR 209:(1975) 3 SCC 765 which laid down that the wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the previous year. Section 34 of the Act provides for the conditions under which depreciation would be allowed and stipulates that deductions/depreciation referred to in section 32(1) shall be allowed only if the prescribed particulars have been furnished by the Assessee. In other words, no deductions/depriciation can be allowed to an Assessee who hasn't furnished the prescribed particulars. Section 43 as it then stood, dealt with the definition of certain terms relevant to income from profits and gains of business or profession. For our purposes section 43(1) & 43(6) are relevant and reproduced hereunder:- 43. Definitions of certain terms relevant to income from profits and gains of business or profession.-In Sections 28 to 41 and in this section, unless the context otherwise requires- (1) "Actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: Explanation 1. -- .......... Explanation 2. -- .......... Explanation 3. -- .......... Explanation 4. -- .......... Explanation 5. -- .......... Explanation 6. -- .......... Explanation 7.-Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that portion of the cost thereof, if any, as has been met directly or indirectly, by any other person or authority [section 43(1)]; (iv) the written down value of the assets would be the actual cost to the Assessee, less the depreciation "actually allowed" to him under the Act [section 43(6)]; and (v) when under a Scheme of Amalgamation, a capital asset (in the present case, the industrial undertaking) is transferred by the Amalgamating Company (in the present case, the U.K. Company) to the Amalgamated Company (in the present case, the Assessee Company) and the Amalgamated Company is an Indian Company, the written down value of the transferred capital asset to the Amalgamated Company shall be taken to be the same as it would have been if the Amalgamating Company had continued to hold the capital asset for the purposes of its business [Expln 2A to section 43(6)]. In other words, the depreciation to be allowed to the Amalgamated Company would be on the same basis as it was being allowed to the Amalgamating Company before its amalgamation. If no depreciation was actually allowed to the Amalgamating Company, then the original cost of the capital asset that was transferred persuant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to brushed aside. Whilst deciding the validity of the second proviso to clause 2 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970 the Supreme Court had the occasion to consider the provisions of sections 32, 34 and 43 of the Income Tax Act, 1961. Whilst analysing the said provisions, the Supreme Court, in the SCC report, held:- 16. The definition of "actual cost" is to be found in Section 43(1) and that of "written-down value" in Section 43(6). The latter defines it to mean- "(a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act or under the 1922 Act or any Act repealed by that Act, or under any executive Orders issued when the Indian Income Tax Act, 1886 was in force." (emphasis supplied) 17. The pivot of the definition of "written-down value" is the "actual cost" of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of calculating the written down value, the figure of Rs. 2,54,67,325/- had to be taken into account. The Scheme of Amalgamation approved by the Assessee Company itself, has valued the fixed assets at Rs. 1,72,78,297/-, which valuation has been arrived at after taking into account depreciation. This being the case, and the Assessee having accepted the written down value of the fixed assets at Rs. 1,72,78,297/-, it cannot be heard to say that the written down value had to be calculated by taking into account the figure of Rs. 2,54,67,325/- being the original cost of the fixed assets to the U.K. Company. In any event, this argument runs contrary to Explanation 2A to section 43(6) set out above. In the Scheme of Amalgamation, with effect from 1st January, 1975 (the Appointed Date under the scheme) the U.K. Company and the Assessee Company had valued the fixed assets at Rs. 1,72,78,297/- being the cost less depreciation. In the assessment years in question, hypothetically, if the U.K. Company claimed depreciation on these fixed assets as if the amalgamation had not taken place, then depreciation would have been allowed to it on Rs. 1,72,78,297/- being the value of the fix ..... X X X X Extracts X X X X X X X X Extracts X X X X
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