By Sri. K v. Aravind, Advocate

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 14 DAY OF SEPTEMBER, 2018 PRESENT HON’BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE AND HON’BLE MR.JUSTICE S.G. PANDIT ITA No.724 OF 2007 C/w ITA Nos.315-317/2013 IN ITA No.724 OF 2007: BETWEEN: M/S.PRAKASH ELECTRIC COMPANY PRIVATE LIMITED OPPOSITE POST OFFICE, AMBALAPADY, UDUPI DAKSHINA KANNADA-03 (REPRESENTED BY ITS MANAGING DIRECTOR SRI.SURYA PRAKASH.K., AGED ABOUT 53 YEARS S/O SRI. BOLA POOJARY.) ... APPELLANT (BY SRI.K.K.CHYTHANYA, ADVOCATE) AND: THE INCOME -TAX OFFICER WARD-1, UDUPI DAKSHINA KANNADA. ... RESPONDENT (BY SRI. K. V. ARAVIND, ADVOCATE) --- THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 18-07-2007 PASSED IN ITA Nos.180, 181 & 182/BANG/2007 FOR THE BLOCK ASSESSMENT YEARS 2001-02 TO 2002-03 & 2003-04, PRAYING THAT FOR THE REASONS STATED THEREIN THIS HON’BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, ALLOW THE APPEAL AND SET ASIDE THAT PART OF THE IMPUGNED ORDER OF THE INCOME-TAX APPELLATE TRIBUNAL BEARING ITA NOS.180, 181 & 182/BANG/2007 WHICH UPHOLDS THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN THE INTEREST OF JUSTICE AND EQUITY. INITA Nos.315-317/2013: BETWEEN: M/S. PRAKASH RETAIL PVT. LTD. OPPOSITE AMBALAPADY POST OFFICE UDUPI-576 103. (REPRESENTED BY ITS MANAGING DIRECTOR SRI. SURYA PRAKASH. K., AGED ABOUT 58 YEARS S/O SRI. BOLA POOJARY.) ... APPELLANT (BY SRI.K.K.CHYTHANYA, ADVOCATE) AND: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-I CANARA TOWERS MISSION HOSPITAL ROAD UDUPI-576 101. ... RESPONDENT (BY SRI. K. V. ARAVIND, ADVOCATE) THESE ITAs ARE FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 19/04/2013 PASSED IN ITA NO.872, 873, & 874/BANG/2012, FOR THE ASSESSMENT YEAR 2004-05 TO 2006-07, PRAYING THIS HON’BLE COURT TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NOS.872, 873 & ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS). 874/BANG/2012 DATED 19.04.2013 WHICH UPHOLDS THE THESE APPEALS COMING ON FOR HEARING THIS DAY, CHIEF JUSTICE, DELIVERED THE FOLLOWING: JUDGMENT These appeals under Section 260-A of the Income Tax Act, 1961 (‘the Act of 1961’) involving similar questions have been considered together, and are taken up for disposal by this common judgment. The appellant-company in ITA Nos.315-317/2013 is M/s.Prakash Retail Private Limited, that was formerly M/s.Prakash Electric Company Private Limited and in that name, ITA No.724/2007 has been filed. As these appeals relate to the same Company, the reference herein is made in singular to the appellant-company only. The appellant/assessee in ITA No.724/2007 has challenged the common order dated 18.07.2007 of the Income Tax Appellate Tribunal, Bangalore Bench 'A, in ITA Nos.180, 181 and 182/Bang/2007 for the Assessment Years 2001-2002, 2002-2003 and 2003-2004, wherein the Tribunal upheld the order of the Commissioner of Income Tax (Appeals), Mangalore, allowing depreciation on the basis of the written down value of the assets in the predecessor firm. The appellant/assessee in ITA Nos.315-317/2013 has challenged the common order dated 19.04.2013 of the Income Tax Appellate Tribunal, Bangalore Bench 'C', in ITA Nos.872, 873 and 874/Bang/2012 for the Assessment Years 2004-2005, 2005-2006 and 2006-2007, wherein the Tribunal upheld the order of the Commissioner of Income Tax (Appeals), Mysore, similarly allowing depreciation on the basis of written down value of the assets in the predecessor firm. The appellant/assessee in ITA Nos.315-317/2013 has challenged the common order dated 19.04.2013 of the Income Tax Appellate Tribunal, Bangalore Bench 'C', in ITA Nos.872, 873 and 874/Bang/2012 for the Assessment Years 2004-2005, 2005-2006 and 2006-2007, wherein the Tribunal upheld the order of the Commissioner of Income Tax (Appeals), Mysore, similarly allowing depreciation on the basis of written down value of the assets in the predecessor firm. It is noticed that ITA No.724/2007 was admitted for consideration by a Division Bench of this Court on 07.11.2007, but without specifically formulating the questions of law involved in the matter. Similarly, ITA Nos.315-317/2013 were admitted by another Division Bench of this Court on 22.10.2013 and these appeals were ordered to be connected with ITA No.724/2007 but again, without specifically formulating the questions of law. Looking to the subject-matter, it appears that the appeals have been admitted for consideration of the questions formulated in respective memos of appeals. Be that as it may, for a relevant subsequent event, we have formed the opinion that while allowing these appeals, the matters are required to be remanded for consideration afresh by the Assessing Officer. In this view of the matter, adjudication on each of the question raised in these appeals is not necessary. However, for reference, we may reproduce to the questions of law formulated in the memo of appeal (ITA No.724/2007), which are as follows: "1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the written down value of the predecessor firm should be taken to be the written down value of the successor appellant contrary to the clear provisions of section 43(1) read with Explanation 1 thereto and section 43(6) (ii) ? 2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the written down value of the predecessor firm should be taken to be the written down value of the successor appellant ignoring that the predecessor firm and the successor appellant are two distinct and separate tax entities and the assets of the predecessor firm have been taken by the successor appellant at fair value by discharging the consideration by way of allotment of shares ? 3) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the written down value of the predecessor firm should be taken to be the written down value of the successor appellant in the absence of explicit provisions requiring such treatment ? 4)Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the written down value of the predecessor firm should be taken to be the written down value of the successor appellant merely on the basis that the corporatisation of the firm into a company is entitled to exemption in respect of capital gains as per section 47 (xiii) whereas the computation of depreciation in the hands of the successor appellant and the exemption in respect of capital gains to the predecessor firm are not interlinked ? 5) Whether on the facts and in the circumstances of the case, the Honourable Tribunal was right in law in upholding the order of the Respondent applying the provisions of the Fifth Proviso to section 32(1), ignoring that the said proviso would only control the overall quantum of depreciation claim in the year of succession and not the manner of determination of written down value and the manner of computation of depreciation and in any case, the said proviso would not apply to the assessment years subsequent to the assessment year in with the succession takes place ? 5) Whether on the facts and in the circumstances of the case, the Honourable Tribunal was right in law in upholding the order of the Respondent applying the provisions of the Fifth Proviso to section 32(1), ignoring that the said proviso would only control the overall quantum of depreciation claim in the year of succession and not the manner of determination of written down value and the manner of computation of depreciation and in any case, the said proviso would not apply to the assessment years subsequent to the assessment year in with the succession takes place ? 6) Whether on the facts and in the circumstances of the case, the Honourable Tribunal was right in law in upholding the order of the Respondent applying the provisions of the Explanation 4 and Explanation 4A to section 43(1) and Explanation 1 to section 43(6) whereas these provisions are clearly not applicable to the case of the appellant ?" Briefly put, the relevant facts are that the appellant-company, said to be dealing with electrical household appliances, succeeded M/s.Prakash Electric Company, a partnership firm, on 01.05.1999. The appellant took over the assets and liabilities of the said firm-M/s.Prakash Electric Company; where the assets were acquired at the fair market price. The consideration towards acquisition of assets was to be discharged by way of allotment of shares to the partners. The appellant filed returns of income for the Assessment Years 2001-2002, 2002-2003 and 2003-2004, which are the subject-matter of ITA No.724/2007 and for the Assessment Years 2004-2005, 2005-2006 and 2006-2007, which are the subject-matter of ITA Nos.315-317/2013. The respondent -authority issued notices under Section 148 of the Act of 1961 for all the Assessment Years on the ground that the appellant-company has claimed depreciation on revalued value of assets instead of the written down value of assets. The appellant -company requested the authorities to treat the returns filed for the respective years as response to such notices. Subsequently, notices under Section 143(2) and 142(1) of the Act of 1961 were issued and the appellant-company responded to the same by furnishing necessary details. The respondent, having gone through the balance sheet and the depreciation chart for the respective Assessment Years, passed the Assessment Orders dated 28.02.2006/29.12.2008 respectively under Section 143(3) read with Section 147 of the Act, stating that the appellant -company has claimed excess depreciation. Aggrieved by the said Assessment orders, the appellant-company filed appeals before the jurisdictional Commissioner of Income Tax (Appeals). By the orders dated 12.01.2007/21.03.2012 respectively, the said appeals came to be dismissed on the ground that the appellant-company is not justified in claiming excess depreciation on the basis of revaluation of the fixed assets. Aggrieved by the orders dismissing the appeals, the appellant-company preferred appeals before the Income Tax Appellate Tribunal, Bangalore, being ITA Nos.180, 181 and 182/Bang/2007 and ITA Nos.872, 873 and 874/Bang/2012 respectively. The Tribunal, by its order dated 18.07.2007, dismissed ITA Nos.180, 181 and 182/Bang/2007, by upholding the order passed by the Commissioner of Income Tax. Thereafter, following the said order dated 18.07.2007, the Tribunal proceeded to dismiss ITA Nos.872, 873 and 874/Bang/2012 also, by its order dated 19.04.2013. As regards the question of depreciation, the Tribunal has held and observed as under (reproduced from the order dated 18.07.2007):- Aggrieved by the orders dismissing the appeals, the appellant-company preferred appeals before the Income Tax Appellate Tribunal, Bangalore, being ITA Nos.180, 181 and 182/Bang/2007 and ITA Nos.872, 873 and 874/Bang/2012 respectively. The Tribunal, by its order dated 18.07.2007, dismissed ITA Nos.180, 181 and 182/Bang/2007, by upholding the order passed by the Commissioner of Income Tax. Thereafter, following the said order dated 18.07.2007, the Tribunal proceeded to dismiss ITA Nos.872, 873 and 874/Bang/2012 also, by its order dated 19.04.2013. As regards the question of depreciation, the Tribunal has held and observed as under (reproduced from the order dated 18.07.2007):- “62. We have heard both the parties. As per section 32(1), depreciation is to be allowed on the block of assets. Section 43(6)(c) gives the method, by which, W.D.V in the case of block of assets is to be determined. It is provided that written down value of the block of assets is to be taken at W.D.V at the beginning of the previous year and to be further adjusted as per clause (A), (B) and (C) of section 43(6)(c). In the immediately preceding year, W.D.V of the assets I the hands of company at the close of year is based on the value of assets taken by the firm for the purpose of depreciation. Hence, for Assesyemtn eyar 2001-02, W.D.V of block of assets is to be taken as closing W.D.V in the hands of company for Assessment Year 2000-01 subject to adjustments as mentioned in section 43(6)(c). Since we had already held that section 45 is not applicable for charging capital gain in the hands of the firm, therefore, the cost of assets as acquired by the company cannot be taken at the revalued figure. However, finally if it is held that capital gain ischargeable either in the hands of the firm or in thecompany, then the assessee company will beentitled to depreciation on the revalued value ofassets. Looking to the finding given in the case of the firm, it is held that learned CIT(A) is justified in holding that depreciation will be allowable on the value of the assets, as per the written down value in the case of the firm.” (emphasis supplied) Learned counsel for the appellant submits that the finding of the Appellate Authority that depreciation is allowable on the value of the assets as per written down value, is not sustainable. He further submits that the entire actual cost of the assets, as defined in Section 43(1), should be taken and from the value so arrived, depreciation should be allowed. Learned counsel also submits that the Tribunal has failed to consider the fifth proviso to Section 32(1)which is applicable to cases where there is succession of business by the Company from the partnership firm and hence, erred in holding that the written down value of the predecessor firm should be deemed to be the actual cost in the hands of the successor appellant-company. During the course of submissions, learned counsel for the appellant has filed a memo dated 14.09.2018, enclosing a copy of the order dated 23.07.2018 passed by this Court in ITA No.884/2007 connected with ITA No.60/2015, that were filed against the order dated 18.07.2007 passed by the Tribunal in the appeals relating to the Assessment Year 2000-2001 by the Revenue as also by the Assessee. This Court, in the cross-appeals, reformulated the substantial question of law in the following manner: “Whether, in the absence of any specified time limit prescribed in Section 47(xiii) Clause (b) upon transfer of capital asset or intangible asset by a firm to a company as a result of succession of the firm by a Company in the business carried on by the firm, the allotment of shares to the erstwhile partners of the firm in the proportion to their capital accounts in the books of the firm has to be made at the time of the succession of the business by the company or within a reasonable period thereafter?” the cross-appeals, reformulated the substantial question of law in the following manner: “Whether, in the absence of any specified time limit prescribed in Section 47(xiii) Clause (b) upon transfer of capital asset or intangible asset by a firm to a company as a result of succession of the firm by a Company in the business carried on by the firm, the allotment of shares to the erstwhile partners of the firm in the proportion to their capital accounts in the books of the firm has to be made at the time of the succession of the business by the company or within a reasonable period thereafter?” The aforesaid question of law was answered in favour of the Revenue and against the assessee, while observing that the allotment of shares of the Company, which had succeeded the partnership firm, has to be complied before the end of relevant previous years in which such succession of business takes place. Further, this Court, on consideration of the provisions of Section 47(A) (3) and Section 47(xiii)(b) of the Act of 1961, held that the Tribunal was justified in holding that the successor company was liable to pay capital gains tax liability and not the partnership firm. Hence, it is pointed out by learned counsel for the appellant that this Court, by its order dated 23.07.2018 in ITA No.884/2007 and connected matter has held that the successor company is liable for capital gains tax. It is submitted that Section 32 of the Act of 1961 provides for depreciation on tangible and intangible assets owned wholly or partly by the assessee and used for the purpose of the business. Section 43(1) of the Act provides for actual cost of the assets and Section 43(6) of the Act provides for meaning of written down value. All the authorities, without properly appreciating the provisions of Section 43(1) Explanation 4 and 4A of the Act, have arrived at the conclusion that the depreciation claimed is excessive on re-valued assets. Significant it is to notice that the Tribunal has come to the conclusion that if capital gain is chargeable either in the hands of the firm or in the Company, then the assessee company will be entitled to depreciation on re-valued value of assets. As noticed above, this Court, in the appeals aforesaid (ITA No.884/2007 c/w ITA No.60/2015, decided on 23.07.2018), has fixed capital gains tax liability on the successor company. That being the position, with reference to the observations made by the Tribunal, the entitlement of the appellant-assessee to depreciation on the value of assets is required to be reconsidered by the Assessing Officer. Hence, the substantial questions of law formulated in these appeals are required to be answered in the manner that the matter requires re-consideration with regard to allowing of depreciation to the appellant-company. Subject to the observations foregoing, these appeals stand disposed of in the manner that, that part of the orders impugned relating to allowing of depreciation to the appellant-company for the Assessment Years in question is set aside and this aspect of the matter is remanded for reconsideration of the Assessing Officer. The appellant, through its counsel, shall stand at notice to appear before the jurisdictional Assessing Officer on 12.11.2018. Sd/- CHIEF JUSTICE Sd/- JUDGE NG* CT: SK