Case Law Details
HIGH COURT OF MADRAS
Sree Jayajothi & Co. Ltd.
Versus
Commissioner of Income-tax-II, Mumbai
TAX CASE (APPEAL) NO.471 OF 2006
SEPTEMBER 11, 2012
JUDGMENT
Mrs. Chitra Venkataraman, J. – The assessee is on appeal as against the order of the Tribunal relating to the assessment year 1997-98, raising the following questions of law:-
1. Whether the Appellate Tribunal is right in law in holding that in respect of depreciation in case of transfers on succession under Section 170 read with the fifth proviso to Section 32(1)(ii) will not be applicable ?
2. Whether the Tribunal is right in law in assuming that the fifth proviso to Section 32(1)(ii) read with Explanation 2 thereunder besides Explanation 6 to Section 43(1) and Explanation 2 to Section 43(6)(c) providing for consistent treatment in the matter of depreciation between transferor and transferee company in case of such succession not regarded as transfer under the statute would be inapplicable, merely because the holding company and subsidiary company are two different entities ?”
2. The assessee herein is a company engaged in the business of manufacture and sale of cotton yarn. It had two units located at two different locations viz., Unit A at Rajapalayam and Unit B at Keelarajakularaman. It is stated that each unit functions as a full-fledged unit having separate staff and management with separate funds and accounts. In order to facilitate its expansion, the assessee decided that B unit should be constituted as a separate company. Accordingly, a wholly owned subsidiary by name Sri Jayajothi Textile Mills Pvt. Ltd., was formed and the unit B was transferred to the subsidiary company with all assets and liabilities at the book value on 1.11.1996. The assessee company claimed depreciation on the basis of the opening written down value of the depreciable assets comprised in B unit proportionately for a period of seven months from 1.4.1996 to 31.10.1996. The subsidiary company claimed depreciation proportionately for the remaining period of five months from 1.11.1996 to 31.3.1997 at the rate of 50% of the full depreciation as the assets were held by it for less than 180 days. In computing the assessment, the Assessing Officer pointed out that the machineries of unit B were sold and hence there cold be no written down value to allow depreciation; the assets of B unit were transferred to the subsidiary company at the written down value as on 31.10.1996; as the assets were sold during the accounting period, he held that the sale value 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 depreciation claim made by the assessee must be allowed. The Revenue went on appeal before the Income Tax Appellate Tribunal.
4. The Tribunal viewed that the transaction was one of sale by one legal entity to another legal entity and held that merely because the subsidiary company was the transferee company, the transaction would not loose the character as sale. The Tribunal further viewed that succession is an event which happens by death of a person. Since the assessee company as well as the transferee company were in existence, there was no succession between the assessee and the subsidiary company. Consequently, Section 32 (1) of the Income Tax Act would not be applicable. The Tribunal viewed that whenever there is a sale, the written down value should be reduced from the amount of depreciation actually allowed and the sale price shall be adjusted. Taking such a view, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals). Aggrieved by the order of the Tribunal, the present appeal has been filed by the assessee.
5. Learned counsel appearing for the assessee placed before this Court the depreciation statement for the year 1997-98 and submitted that the view of the Tribunal that there was a sale is not borne out by any records. Leaving that aside, going by the fourth proviso to Section 32(1) of the Income Tax Act as it then stood during the relevant year, introduced under the Finance Act 1996 with effect from 1.4.1997, in the case of succession referred to in Section 170 of the Income Tax Act or amalgamation, the depreciation has to be calculated as if the succession or the amalgamation had not taken place; after calculating the extent of depreciation, such deduction has to be apportioned between the predecessor and the successor or the amalgamating company and the amalgamated company, as the case may be, in the ratio of the number of days for which the assets were used by them. Referring to Section 43 (6)(c) and Explanation 2, thereto, learned counsel submitted that when the assets were transferred as per the written down value and with no consideration passing on between the assessee company and its subsidiary company, the Tribunal committed serious error in rejecting the case of the assessee.
6. Learned Standing Counsel appearing for the Revenue supported the order of the Tribunal.
7. Heard learned Counsel appearing for the 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 amalgamation had not taken place and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, as the case may be, in the ratio of the number of days for which the assets were used by them.”
9. Section 43 (6)(c) defines ‘written down value’ in the case of any block of assets. Explanation 2 to clause (c) of sub-section (6) deals with the transfer of block of assets by a holding company to a subsidiary company or by a subsidiary company to the holding company as given under sub-clause (iv) or sub-clause (v) of Section 47 and by the amalgamating company to the amalgamated company under the scheme of amalgamation. The written down value in such a case is defined in Section 43, as follows:
43. In sections 28 to 41 and in this section, unless the context otherwise requires-
(6) ” written down value” means-
(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 sub-section (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);]
(c) in the case of any block of assets –
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988 , the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,-
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and
(B) by the reduction of the moneys payable in respect of any asset failing within that block, which is sold or discarded or demolished or destroyed 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, as the case may be, of clause (v) of section 47 are satisfied; or
(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be 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 preceding previous year”
10. Going by the second proviso to Section 32(1) of the Income Tax Act restricting the allowance to 50% in the case of assets acquired by the assessee put to use for less than 180 days in the previous year and that in the case of succession or amalgamation, the predecessor and the successor are also entitled to claim depreciation allowance on the same assets, which, in aggregate, may exceed the depreciation allowance admissible for a previous year at the rates prescribed in Appendix I of the Income Tax Rules, the 4th proviso seeks to restrict the allowance in such cases to the amount computed at the prescribed rates by apportioning the allowance in the ratio of number of days for which the asset is put to use by the predecessor and the successor company. Given the fact that the block of assets were transferred at the written down value by the holding company to the subsidiary company, the written down value for the purpose of working out the depreciation would be as provided for in Explanation 2 viz., the actual cost of the block of assets, as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year at the hands of the transferee company.
11. Contrary to the view of the Tribunal, we find that Section 170 of the Income Tax Act deals with succession to business, otherwise than on death. On a reading of Section 43(6)(c), Explanation 2 to the Section and Section 170 along with the fourth proviso to Section 32(1), we have no hesitation in agreeing with the assessee’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. 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 which the assets were used by them. In working out the deduction, the number of days for which the assets were used by the predecessor and the successor, is to be taken into consideration and the apportionment is to be worked out based on the number of days for which the assets are used by the predecessor and successor company respectively. In the circumstances, the order of the Tribunal is set aside and the matter is remanded back to the Assessing Officer to re-work the depreciation in accordance with the fourth proviso to Section 32(1)of the Income Tax Act.
The Tax Case Appeal is disposed of accordingly. No costs.
