Pr. Commissioner Of Income Tax-5 v. Dharmanandan Diamonds Pvt.ltd

Yugandhara Patil 7-ITXA-127-2018.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 127 OF 2018 Pr. Commissioner Of Income Tax-5 VersusDharmanandan Diamonds Pvt.ltd. ...Appellant ...Respondent ****** Mr. Suresh Kumar for Appellant. Mr. M.M. Subramaniam i/b Mr. Vishnu Hadade for Respondent.****** CORAM: K.R.SHRIRAM & M.M.SATHAYE JJ. P.C. :- DATE : 14[th] JUNE 2023 1.The Appellant has proposed the following substantial questions of law. SUBSTANTIAL QUESTION OF LAW I.Whether on the facts and in the circumstances of the caseand in law, the ITAT erred in holding that assessee is eligible forclaiming depreciation of Rs.35,21,38,615/- on revalued assetsinstead of WDV? II.Whether on the facts and in the circumstances of the caseand in law, the Tribunal erred in not appreciating the fact thatthe conversation of firm to a company was an internalarrangement for evasion of Tax ? III.Whether on the facts and in the circumstances of the caseand in law, the Tribunal erred in holding that the assessee waseligible to claim depreciation as per the revaluation carried outand the report of the Government Approved Valuer? IV.Whether on the facts and in the circumstances of the caseand in law, the Tribunal was right in not appreciating the factthat depreciation claimed by the assessee was in respect ofrevalued assets where the depreciation claim is @ 80%? V.Whether on the facts and in the circumstances of the case 1 /7 7-ITXA-127-2018.doc and in law, the Tribunal erred in not appreciating the fact thatthere was a contravention of provisions of Sec. 47(xiii) of theIncome Tax Act, 1961 at the time of conversion of firm to acompany ? 2.Respondent, i.e., assessee is engaged in the business ofmanufacturing of diamonds and power energy. Return of Income Taxwas filed on 30/09/2009 declaring total loss of Rs. 16,28,78,976/-which was processed under Section 143(1) of the Income Tax Act,1961 (the Act) and MAT was determined under Section 115JB ofthe Act at 10% of the book profit at Rs. 13,56,39,861/-. 3.Assessee was incorporated on 31/08/2007 and henceassessment year 2008-09 was the first year of the Company.Assessee was created and constituted to take over all the assets andliabilities of erstwhile partnership firm-Dharmanandan Diamonds, tocarry out business in a more efficient manner. The total turn over ofthe assessee during the year was Rs.869.70 crores and as theassessee took over assets and liabilities of the firm as on01/09/2007, depreciation was claimed by the erstwhile partnershipfirm on the written down value as per its records upto 31/08/2007and assessee claimed depreciation from 01/09/2007 till 31/03/2008 2 /7 7-ITXA-127-2018.docat revalued price. The revaluation was done by Governmentapproved valuer. 4.In the subsequent year, i.e., AY 2009-10, which is theyear in question, the assessee-Company claimed depreciation on thewritten down value as on 31/03/2008 by reducing the depreciationclaim for the period from 01/09/2007 to 31/03/2008 on revaluedfigure. According to the assessing Officer, Petitioner had claimedexcess depreciation and disallowed the depreciation as claimed onthe revalued cost. The assessee’s claim of depreciation wasrecalculated at Rs.12,92,66,889/- in place of Rs.35,21,38,615/-. Thetotal income was determined under normal provisions atRs.5,64,14,373/- and book profit under Section 115JB was workedout at Rs.13,56,43,461/-. 5.The assessee impugned this order before theCommissioner of Income-tax (Appeals), who by an order dated04/03/2014, dismissed the Appeal. This order was impugned byassessee before the Income Tax Appellate Tribunal (ITAT), and ITATallowed the Appeal by an order dated 21/06/2017. It is this order of 3 /7 6.In our view, ITAT has come to the correct conclusion. Section 32(1) of the Act reads as under :- “Depreciation 32.(1) In respect of depreciation of -- 5.The assessee impugned this order before theCommissioner of Income-tax (Appeals), who by an order dated04/03/2014, dismissed the Appeal. This order was impugned byassessee before the Income Tax Appellate Tribunal (ITAT), and ITATallowed the Appeal by an order dated 21/06/2017. It is this order of 3 /7 6.In our view, ITAT has come to the correct conclusion. Section 32(1) of the Act reads as under :- “Depreciation 32.(1) In respect of depreciation of -- (i) buildings, machinery, plant or furniture, being tangible assets;"...… owned, wholly or partly by the assessee and used for the purpose of the business or profession, the following deductions shall be allowed-]…….. …...Provided alsothat the aggregate deduction, in respect ofdepreciation of buildings, machinery, plant or furniture, beingtangible assets or know-how, patents, copyrights, trademarks,licences, franchises or any other business or commercial rightsof similar nature, being intangible assets allowable to thepredecessor and the successor in the case of succession referredto in clause (xiii), clause (xiiib) and clause (xiv) of section 47 orsection 170 or to the amalgamating company and theamalgamated company in the case of amalgamation, or to thedemerged company and the resulting company in the case ofdemerger, as the case may be, shall not exceed in any previousyear the deduction calculated at the prescribed rates as if thesuccession or the amalgamation or the demerger, as the casemay be, had not taken place, and such deduction shall beapportioned between the predecessor and the successor, or theamalgamating company and the amalgamated company, or thedemerged company and the resulting company, as the case maybe, in the ratio of the number of days for which the assets wereused by them. ……” Section 43(1) defines actual cost which reads as under:- “In sections 28 to 41 and in this section, unless the contextotherwise 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 metdirectly or indirectly by any other person or authority: ……….” Rule 5 of Income Tax Rules, 1962 which deals with depreciation also states “…….. providedthat the aggregate depreciation allowed in respect of any asset for different assessment 4 /7 7-ITXA-127-2018.doc years shall not exceed the actual cost of the said asset ……….”. 7.Therefore, as per proviso to Section 32, aggregatededuction in respect of depreciation on tangible assets or intangibleassets allowable to the predecessor and the successor in the case ofsuccession, i.e., to the partnership firm and to the assessee,respectively, shall not exceed in any previous year, the deductioncalculated at the prescribed rates as if the succession or theamalgamation or the demerger, as the case may be, had not takenplace, and such deduction shall be apportioned between thepredecessor and the successor. This was applicable only to theassessment year 2008-09 when the succession took place as for lateryears, it would not be the case as the assets would no longer belongto the predecessor but only the successor, i.e., the assessee, who canclaim depreciation. 8.In this case, for assessment year 2008-09, predecessor,i.e., the partnership firm has claimed depreciation for five monthsfrom 01/04/2007 to 31/08/2007 and successor, i.e., assessee hasclaimed depreciation for assessment year 2008-09 for the periodfrom 01/09/2007 to 31/03/2008. By way of illustration, if 5 /7 Yugandhara Patil 8.In this case, for assessment year 2008-09, predecessor,i.e., the partnership firm has claimed depreciation for five monthsfrom 01/04/2007 to 31/08/2007 and successor, i.e., assessee hasclaimed depreciation for assessment year 2008-09 for the periodfrom 01/09/2007 to 31/03/2008. By way of illustration, if 5 /7 Yugandhara Patil 7-ITXA-127-2018.docsuccession had not taken place during assessment year 2008-09 andthe predecessor, i.e., the partnership firm would have claimed Rs. 1crore as depreciation, both predecessor and successor for that yearcould claim together only Rs. 1 crore as depreciation and nothingmore. Admittedly, this is what happened in the case at hand also.Appeal pertains to AY 2009-10 in which year the asset is clearlyowned by successor, i.e., assessee. The assessee as per Section 32r/w Rule 5 of the Act quoted above, will be entitled to claimdepreciation in respect of any assets on the actual cost of the saidassets. The actual cost of the said assets will be the actual cost whichthe assessee paid to the predecessor after revaluing the assets andcertainly in our view assessee will be entitled to claim depreciationfor the subsequent years on the basis of the actual cost paid. 9.Mr. Suresh Kumar submitted that for the actual cost nomoney was paid but shares were issued in lieu of cash. Certainlythat will be the cost which assessee has paid to procure the assets.This is the reason given by ITAT in the impugned order and we are inagreement with the view expressed by ITAT. 6 /7 Yugandhara Patil 7-ITXA-127-2018.doc 10.In the circumstances, in our view no substantial question of law arise. 11.Appeal dismissed. [M.M.SATHAYE,J.] [K.R.SHRIRAM, J.] 7 /7