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TMI Blog2025 (4) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis depreciation actually allowed to them and to claim depreciation on such adjusted written down value of the assets of the amalgamating companies?" 2. Some few facts are relevant to answer the substantial question of law which arises in this appeal. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of manufacture and sale of aluminium based presensitised lithographic plates, chemicals and polyester based reprographic films for printing and other allied image transfer industries. Respondent no.1 is the Assessing Officer, who has passed the assessment order for the assessment year 1992-93 and respondent no.2 is the Commissioner of Income-tax who at the relevant time had jurisdiction and administrative control over the appellant's case. 3. The appellant at the relevant time was assessed by the Assistant Commissioner of Income-tax, Circle-7 (3), Mumbai and the Commissioner of Income-tax having jurisdiction over the appellant's case is Commissioner of Income-tax, City-VII, Mumbai. 4. TechNova Graphic Systems Pvt. Ltd. had filed a petition before this Court for being amalgamated with TechNova Platemak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by taking the written down value of the assets of the amalgamating companies on the basis of depreciation which was actually allowed to them. 7. The assessment for the assessment year 1991-92 was completed under Section 143 (3) of the IT Act vide order dated 10/03/1994 determining net loss of Rs. 27,25,537/-. The Assessing Officer inter alia restricted the depreciation allowance to Rs. 48,49,643/- as against the claim of Rs. 63,80,841/- made by the appellant. The Assessing Officer held that under the provisions of Section 72A of the IT Act which specifically dealt with situation relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowances in certain cases of amalgamation, a specific order of the Central Government had to be obtained which was not obtained by the appellant. The Assessing Officer therefore ignored the unabsorbed depreciation of Rs. 48,85,213/- of the amalgamating companies. 8. On appeal, the Commissioner of Income-tax (Appeals) vide his order dated 05/07/1995 allowed the appeal of the appellant as regards computation of depreciation allowance in respect of the assets of the amalgamating companies holding that Section 72A was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies ignoring the unabsorbed depreciation, that is, depreciation which was not actually allowed. 12. Being aggrieved by the assessment order dated 28/02/1995 passed under Section 143 (3) of the IT Act for the assessment year 1992-93, the appellant filed an appeal before the Commissioner of Income-tax (Appeals) on 30/03/1995. 13. The Commissioner of Income-tax (Appeals) disposed of the appeal of the appellant by order dated 18/10/1995 inter alia allowing the grounds of appeal regarding determination of written down value of assets acquired on amalgamation following its own order dated 05/07/1995 for assessment year 1991-92. 14. The Assessing Officer filed an appeal against the order of the Commissioner of Income-tax (Appeals) before the Tribunal. 15. Learned counsel for the appellant submits that when the appellant's authorised representative made a request for adjournment as the appeal for assessment year 1991-92 was still pending before the Tribunal, the Tribunal, rejected the appellant's request for adjournment. The Tribunal by its impugned order dated 10/01/2003 reversed the order of the Commissioner of Income Tax (Appeals) so far as it related to the issue of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als). Our attention is invited to the various statutory provisions which have been discussed in the order of the Commissioner of Income-tax (Appeals). 17. On the other hand, Shri Suresh Kumar, learned counsel appearing for the Revenue supported the order of the Tribunal. It is submitted that as there was no approval of the Central Government under Section 72A and that legal position obtaining prior to insertion of Section 72A of the IT Act as amended by Finance Act, 1978 has been relied upon by the Commissioner of Income-tax (Appeals), the Tribunal rightly came to the conclusion that the order passed by the Commissioner of Income-tax (Appeals) deserves to be set aside. He submits that the impugned order does not call for any interference. 18. For a proper appreciation of controversy, we straight away refer to the order passed by the Commissioner of Income-tax (Appeals) on 05/07/1995 for the assessment year 1991-92. Though this appeal concerns the order dated 18/10/1995 passed by the Commissioner of Income-tax (Appeals), but the Commissioner of Income-tax (Appeals) has referred to the reasons in his order dated 05/07/1995 to decide in favour of the assessee. Hence, we refer to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be, shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years." Pursuant to the scheme of Amalgamation all assets and liabilities of TechNova Graphic Systems Pvt. Ltd. (TGS) and Image Print Makers Pvt. Ltd. (IPM) vested in the Appellant Company with effect from 1.4.1990 and TGS and IPM were dissolved and ceased to own assets and to carry on business, the unabsorbed depreciation could not be given effect to in their own assessments for the Asst. year under appeal in accordance with the provisions of Section 32 (2) of the Act. Therefore, Section 32 (2) breaks down. Attention, in context of this proposition invited to the judgment of Hon'ble Cupreme Court in the case of CIT Vs. B.C. Shrinivasa Shetty, reported in (1981) 128 ITR 294. On page 299 of the report the Hon'ble Supreme Court observed as follows: "The character of the computation provisions in each case bears a relationship to the nature of charge. Thus, the charging sanction and computation pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually allowed". 9.4 It has been further argued that Explanation 3 deems depreciation carried forward under Section 32 (2) to be actually allowed. In view of this it has been argued that Explanation 3 to Section 43 (6) becomes inoperative and redundant for the purpose of the appellant where amalgamating companies have merged into the amalgamated company. (the assessee) by order of the Bombay High Court. My attention was also invited to the observations of the Supreme Court in the case of Madeya Upendra Sinal v/s. Union of India, reported in (1975) 98 ITR 209, wherein at page 223 it has been observed as under : "The pivot of the definition of "written down value" is the "actual cost of the assets, where the assets are acquired and also used for the business in the previous year, such value would be its full actual cost and the depreciation for that year would be allowed at the prescribed rate on such cost. In the subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in the clause (b) is "actually". It is the antithesis of that which is merely speculative, theoretical or imaginary. "Actually" contra-indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unabsorbed depreciation which is not to be set off or carries forward should not be taken into account. 9.6. With regard to the assessing officer taking resort to Section 72A, It has been stated by him that Section 72A of the Act is a very specific section for carry forward of unabsorbed depreciation and unabsorbed losses, the assessee is entitled to carry forward the same only if it is approved by the Central Government. It has been stated by the appellant that the provisions of said section are not applicable to the facts of its case. Section 72A of the Act is an enabling provision for "carry forward and set off" of accumulated losses and unabsorbed depreciation allowance. It may be noted that the Appellant did not claim carry forward of unabsorbed depreciation of amalgamating Companies in its own assessment. The Appellant's claim was with reference to the adoption of correct "written down value" of the block of assets of the amalgamating companies which vested in the Appellant pursuant to the Scheme of Amalgamation. The provisions of section 72A operates on satisfaction of conditions in sub-sec. (1), which are as follows : Sec. 72A (1) Where there has been an amalga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, it cannot be said that the amalgamation was in interest of banks, as their interest was never in jeopardy. (iii) The amalgamating companies were prompt in payment to their creditors for goods and services. Even if they were not amalgamated with the Appellant, they were in a position to meet their obligations. (iv) TechNova Graphic Systems Pvt. Ltd. was engaged in manufacture of polyster based reprographic films for printing and other allied industries, such as tracing film, masking film. These products were substituted for paper based products. But for amalgamation, if said company had discontinued its activities, the interest of consumers would not have sufferer, as they could very well use paper based similar products which are available in market in sufficient quantity. It may also be noted that under Import & Export Policy, these products were listed in Open General Licence List and any consumer could freely import the same without obtaining any specific licence. Image Print Makers Pvt. Ltd., was engaged in business of undertaking printing of magazines on job work basis. Had the company discontinued its activities. the magazine publishers could have got their mag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Ltd. (187 ITR 1) that Expln. 3 to Sec. 43 (6) would not be attracted in the case of the appellant as it is not the case of carry forward of depreciation U/s.32 (2). Since the two Companies have merged without winding up with the appellant Company, they cease to be Companies on which Sec.32 (2) is applicable. Explanation 3 to Section 43 (6) exclusively deals with carry forward of unabsorbed depreciation in case thẹ Соmраnу is in existence in the subsequent year. Thus the applicability of Explanation 3 is also ruled out in the case of the merging companies. In the absence of Explanation 3, we are left with Explanation 2(b) where depreciation actually allowed had to be taken into consideration for calculating "written down value" in the case of amalgamation. Actually allowed has been defined, an pointed out by the appellant in the case of Madeva Upendra Sinai v/s. Union of India & Ors. (98 ITR 209 (SC), as "Actually taken into account or granted and given effect to" in contrast to notional allowance on notional basis. The dictionary meaning of the word "actually" is "really", "in actual fact", and the word "actual" i.e. "real, existing in fact. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 43 (1) of the IT Act provides for definition of "actual cost". Section 43 (6) provides for the definition of "written down value". As far as the assets which are transferred under the scheme of amalgamation or merger is concerned, Explanation 2 of sub-section (6) is relevant. Explanation 2 substituted the original Explanation 2 and 2A by the Taxation laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 01/04/1988. Explanation 2A was later on inserted by Finance Act, 2000 with effect from 01/04/2000. Explanations 2 and 3 which are relevant to the case in hand are already reproduced hereinbefore which form part of paragraph 9.3 of the order passed by the Commissioner of Income-tax (Appeals). 20. At this stage a reference needs to be made to the decision of High Court Madras in EID Parry (India) Ltd. (supra). We are in respectful agreement with this decision which squarely covers the issue involved. Paragraphs 15, 16, 17, 19, 20, 21, 22, 23, 27, 28 of the said decision are relevant and hence extracted : "15. A reading of Explanation 2 shows that in the case of an amalgamation, the cost of the block of assets at the hands of the amalgamated company would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion about the unabsorbed depreciation is that, under normal circumstances, it is not carried forward as such, but is added to the depreciation for the following previous year and deemed to be a part of that allowance. This would be possible only if the assessee continued to carry on business in the following years. Thus, when the company is not in existence, the unabsorbed depreciation could not, under Section 32 (2), be treated and/or allowed as depreciation of the current year. 21. The Bombay High Court further pointed out that the main purpose of Explanation 3 was to avoid an anomaly, which would have otherwise resulted, but for Explanation 3. After narrating the anomales that Explanation 3 seeks to cure, the High Court further pointed out that the fiction created in Explanation 3 operates in a particular situation, i.e., a case in which any allowance in respect of any depreciation is carried forward under Section 32 (2). In the context of the fact that the amalgamating company is no longer in existence, the situation necessary for the application of the fiction did not arise. Thus the High Court pointed out that the case therein had to be approached independent of Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the Bombay High Court. The provisions contained in Explanation 2, applicable to the present case, in fact, brings out the intention better and is crisp in its language, as is evident from a reading of Explanation 2. As per Explanation 2, the actual cost of the block of assets at the hands of the amalgamated company is "the written down value of the block of assets" as in the case of the transferor company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said immediately preceding previous year. The use of the phrase "for the immediately preceding previous year" with reference to the written down value at the hands of the transferor company and the amount of depreciation actually allowed assumes significance in understanding what should be the cost of the block of assets at the hands of the amalgamated company. 27. In the background of the said discussion, which was also applied by this Court in the decision in Silical Metallurgic Ltd. (supra) we agree with the assessee's contention that the written down value of the assets at the hands of the amalgamated company will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en down value" of the block of assets of the amalgamating company which vested in the appellant pursuant to the scheme of amalgamation. According to learned counsel for the appellant, provisions of Section 72A are not applicable as none of the amalgamating companies namely TechNova Graphic Systems Pvt. Ltd. and TechNova Imaging Systems Limited was not financially nonviable. Secondly, if public interest has to be adjudged from the point of view of the share holders, bank financial institution, creditors, consumers, then for the sound reasoning in paragraph 9.6 in the order of the Commissioner of Income-tax (Appeals), we are satisfied that there was no element of public interest involved in the amalgamation. 22. Thus, this is not a case where the appellant was trying to carry forward and set off of accumulated loss and unabsorbed depreciation of the amalgamating company in the hands of amalgamated company. We have no hesitation in observing that the Tribunal erred in holding that because the assessee had not obtained approval of the Central Government required under Section 72A, the order passed by the Commissioner of Income-tax (Appeals), impugned before the Tribunal calls for inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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