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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 ..... ing the method that they did - there is no concept of depreciation being allowed on a notional basis or that the same can be granted implicitly as held by the ITAT - The depreciation has to be actually allowed – Relying upon Madeva Upendra Sinai Versus Union of India And Others [1974 (11) TMI 7 - SUPREME Court] - the written down value of fixed assets of the U.K. Company had to be calculated on the basis of the actual cost less the depreciation “actually allowed” to the U.K. Company - The written down value could not have been arrived at on the basis that depreciation had been granted on a notional basis - depreciation on the fixed assets taken over by the Assessee Company under the Scheme of Amalgamation, ought to be granted by taking the written down value of the fixed assets at ₹ 1,72,78,297/- and not ₹ 93,14,942 – Decided in favour of Assessee. - Income Tax Reference No. 146 of 1996 - - - Dated:- 13-8-2014 - S. C. Dharmadhikari And B. P. Colabawalla,JJ. For the Applicant : Mr H. Toor with Mr Sameer Chitnis i/b M/s Crawford Bayley and Co. For the Respondent : Mr. Suresh Kumar JUDGMENT [ Per B.P. Colabawalla J. ] :- 1. By this Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Branch of the U.K. Company were higher than those determined as per Rule 33/10 of the Income Tax Rules, 1962. 5. In view of avoiding a protracted litigation with the Department, the U.K. Company approached the CBDT by way of a settlement petition which was disposed off by its order dated 30th August 1990. On an agreed basis, the member of the CBDT ordered that the figure under assessment for Assessment Years 1960-61 to 1974-75 would be ₹ 95,00,000/- and for the Assessment Year 1975-76, would be ₹ 42,00,000/- as against the sum of ₹ 40,92,000/- disclosed by the U.K. Company. 6. As stated earlier, the Scheme of Amalgamation, under which the industrial undertaking alongwith all its assets and liabilities of the U.K. Company, were taken over by the Assessee Company, was approved by this Court with effect from 1st January 1975. The Scheme of Amalgamation between the U.K. Company and the Assessee Company [which at that time was known as May and Baker (India) Pvt. Ltd.] inter alia stated as follows :- 1. With effect from the 1st day of January 1975 (hereinafter called 'the Appointed Date') save as otherwise provided herein, the entire business and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Act. In other words, the Assessing Officer held that the written down value of the said fixed assets taken over by the Assessee Company as on 1st January 1975 was ₹ 93,14,942/-. 8. Being aggrieved thereby, the Assessee challenged the same before the CIT (Appeals) who confirmed the findings of the Assessing Officer. In further Appeal by the Assessee, the ITAT also confirmed the aforesaid findings on the reasoning that when the profits of the Indian undertaking of the U.K. Company were determined as per Rule 33/10 of the Income Tax Rules, depreciation is impliedly granted to the U.K. Company. That rule, according to the ITAT, prescribed more than one method for the determination of profits. The ITAT held that the method that had commended itself to the Assessing officer was the method set out in Rule 10(ii) of the Income Tax Rules, 1962 which read as under :- 10. In any case in which the Income-tax Officer is of opinion that the actual amount of income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore we proceed further, we need to make note of certain provisions of the Income Tax Act, 1961 and the Income Tax Rules, 1962. Section 32 of the Income Tax Act deals with depreciation and how it is to be allowed. Section 32(1)(ii) inter alia provides that in respect of buildings, machinery, plant or furniture owned by the Assessee and used for the purpose of business or profession, the prescribed percentage of depreciation is to be computed on the basis of the written down value of the asset. This is known as the written down value method. This method seeeks to ensure that the aggregate of the depreciation allowances granted, year to year, do not exceed hundred per cent of the original cost of the asset. For our purpose, the percentages that were prescribed and how depreciation was to be calculated was set out in Rule 5(1) as it then stood, and read as under :- 5. (1) Subject to the provisions of sub-rules (2) and (3), the allowance under clause (i) or clause (ii) of sub-section (1) of section 32 in respect of depreciation of buuildingsz, machinery, plant or furniture or the allowance under clause (i) of sub-section (1A) of section 32 in respect of depreciation of any struct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 Indian Income Tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income Tax Act 1886 (2 of 1886), was in force: Provided that in determining the written-down value in respect of buildings, machinery or plant for the purposes of clause (ii) of subsection (1) of Section 32, depreciation actually allowed shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of Section 10 of the Indian Income Tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written-down value for the purposes of the said clause (vi); Explanation 1. -- . Explanation 2. -- . Explanation 2A. Where in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right from the Assessment Year 1960-61 in respect of profits of its Branch in India. The profits of the Branch of the U.K. Company were determined as per Rule 33 (under the earlier rules) thereafter as per Rule 10 of the Income Tax Rules, 1962 . This was being done from year to year. Nothing has been brought on record to show or indicate that whilst computing the profits under the said rules, any depreciation was being actually allowed to the U.K. Company in relation to the assets of its branch in India. In fact, this was a query specifically put by us to Mr. Suresh Kumar, the learned counsel appearing on behalf of the Revenue. He was unable to bring to our attention any document whatsoever, that could indicate the same. In fact, the order of the ITAT dated 8th November, 1993 indicates otherwise. The ITAT confirmed the findings of the Assessing Officer as well as that of the CIT (Appeals) on the reasoning that when the profits of the Indian undertaking of the U.K. Company were determined as per Rule 33/10 of the Income Tax Rules, depreciation is impliedly granted to the U.K. Company. The ITAT held that they could not loose sight of the fact that implicit in the computation of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is thus limited to depreciation actually taken into account or granted and given effect to i.e. debited by the Income Tax Officer against the incomings of the business in computing the taxable income of the assessee; it cannot be stretched to mean notionally allowed or merely allowable on a notional basis. (emphasis supplied) 16. We find that the ratio laid down in the judgement of the Supreme Court would clearly apply to the facts of the present case and the ITAT was in grave error in ignoring the said judgement even though the same finds reference in its order dated 8th November, 1993. 17. In view of the clear statement of the law laid down by the Supreme Court in the aforesaid judgment as well as the analysis of the Income Tax Act, we have no hesitation in holding that in the facts of the present case, the written down value of fixed assets of the U.K. Company had to be calculated on the basis of the actual cost less the depreciation actually allowed to the U.K. Company. The written down value could not have been arrived at on the basis that depreciation had been granted on a notional basis, or implicitly as held by the ITAT, more so, when nothing contrary to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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