Taxpublishers.in - Monday Corner Answer to the Quiz for the week (17 Feb 2025)

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Quiz for the week (17 Feb 2025): Akash Ltd has two undertakings engaged in manufacture of bricks and cement. The undertakings were geographically dispersed and maintaining identity. The cement unit was subjected to demerger to Prakash Ltd on 01.11.2023. The WDV of the assets covered in demerger was Rs.7 crores and the fair market value for the purpose of demerger was determined at Rs.20 crores. Depreciation for the assessment year 2024-25 was claimed on Rs.7 crores for the respective periods. For the assessment year 2025-26, the tax counsel of demerged company Prakash Ltd suggested claim of depreciation on Rs.20 crores and not on Rs.7 crores less depreciation of the assessment year 2024-25. Decide the validity of the suggestion. Best Answer : The query relates to apportionment of depreciation in the assessment year 2024-25 which is based on the number of days, the assets were used by the demerged entity vis a vis the resulting company. A further extension of this issue relates to claim of depreciation based on fair market value of the assets for the assessment year 2025-26 since the assets are vested with the resulting company who has paid consideration and whether that payment of consideration could be a reason for claiming depreciation on such actual cost instead of WDV of the predecessor. For this one has to refer to the relevant proviso to section 32 of the Act which reads as under: Provided also that the aggregate deduction, in respect of depreciation of buildings, plant or furniture, being tangible assets or know-how, patents, ...being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, 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 or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Thus, on plain reading of the provision one would say that the WDV of the predecessor would form the basis for claim of depreciation by the successor. No notice is to be taken of the fair market value of assets being considered for the purpose of depreciation by the resulting company which is posed in the query. One may refer to a decision in the case of Pr.CIT v. Dharmanandan Diamonds (P) Ltd. 2023 TaxPub(DT) 3706 (Bom-HC). Assessee in this case was incorporated on 31st August, 2007 and hence the assessment year 2008-09 was the first year of the successor-company. Assessee was created and constituted to take over all the assets and liabilities of erstwhile partnership firm- Dharmanandan Diamonds, to carry out business in a more efficient manner. The assessee took over assets and liabilities of the firm as on 01st September, 2007 and depreciation was claimed by the erstwhile partnership firm on the written down value as per its records up to 31st August, 2007 and the assessee-company claimed depreciation from 01st September, 2007 up to 31st March, 2008. It may be noted that the revaluation of assets was as valued by Government approved valuer. In the subsequent year, i.e., AY 2009-10, the assessee-company claimed depreciation by reducing the depreciation claim for the period from 01st September, to 31st March, 2008 on the revalued figure. According to the Assessing Officer, the assessee had claimed excess depreciation and disallowed the depreciation as claimed on the revalued figures. The assessee contested this order before the Commissioner of Income-tax (Appeals), who by an order dated 04th March, 2014, dismissed the Appeal. This order was impugned by assessee before the ITAT who allowed the Appeal by an order dated 21st June, 2017. The High Court held that the decision of ITAT is tenable in law. It said that as per proviso to section 32, aggregate deduction in respect of depreciation on tangible assets or intangible assets allowable to the predecessor and the successor in the case of succession, i.e., to the partnership firm and to the assessee, shall not exceed in any previous year, the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor. This was applicable only to the assessment year 2008-09 when the succession took place as for later years, it would not be the case as the assets would no longer belong to the predecessor but only the successor, i.e., the assessee, who can claim depreciation. It was held that the assessee as per Section 32 read with Rule 5 of the Act , will be entitled to claim depreciation in respect of any assets on the actual cost of the said assets. The actual cost of the said assets will be the actual cost which the assessee paid to the predecessor after revaluing the assets and accordingly the assessee will be entitled to claim depreciation for the subsequent years on the basis of the actual cost paid. The counsel for the Revenue submitted that for the actual cost no money was paid but shares were issued in lieu of cash. The court held that certainly that will be the cost which assessee has paid to procure the assets. This is the reason given by ITAT in the impugned order and thus, the court upheld the order of ITAT. This decision would help the assessee i.e. resulting company to claim depreciation on the enhanced value instead of the WDV of the predecessor being the starting point for computing the amount of depreciation.

Quiz for the week (17 Feb 2025):

Akash Ltd has two undertakings engaged in manufacture of bricks and cement. The undertakings were geographically dispersed and maintaining identity. The cement unit was subjected to demerger to Prakash Ltd on 01.11.2023. The WDV of the assets covered in demerger was Rs.7 crores and the fair market value for the purpose of demerger was determined at Rs.20 crores. Depreciation for the assessment year 2024-25 was claimed on Rs.7 crores for the respective periods. For the assessment year 2025-26, the tax counsel of demerged company Prakash Ltd suggested claim of depreciation on Rs.20 crores and not on Rs.7 crores less depreciation of the assessment year 2024-25. Decide the validity of the suggestion.

Best Answer :

The query relates to apportionment of depreciation in the assessment year 2024-25 which is based on the number of days, the assets were used by the demerged entity vis a vis the resulting company. A further extension of this issue relates to claim of depreciation based on fair market value of the assets for the assessment year 2025-26 since the assets are vested with the resulting company who has paid consideration and whether that payment of consideration could be a reason for claiming depreciation on such actual cost instead of WDV of the predecessor.

For this one has to refer to the relevant proviso to section 32 of the Act which reads as under:

Provided also that the aggregate deduction, in respect of depreciation of buildings, plant or furniture, being tangible assets or know-how, patents, ...being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, 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 or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

Thus, on plain reading of the provision one would say that the WDV of the predecessor would form the basis for claim of depreciation by the successor. No notice is to be taken of the fair market value of assets being considered for the purpose of depreciation by the resulting company which is posed in the query.

One may refer to a decision in the case of Pr.CIT v. Dharmanandan Diamonds (P) Ltd. 2023 TaxPub(DT) 3706 (Bom-HC).

Assessee in this case was incorporated on 31st August, 2007 and hence the assessment year 2008-09 was the first year of the successor-company. Assessee was created and constituted to take over all the assets and liabilities of erstwhile partnership firm- Dharmanandan Diamonds, to carry out business in a more efficient manner. The assessee took over assets and liabilities of the firm as on 01st September, 2007 and depreciation was claimed by the erstwhile partnership firm on the written down value as per its records up to 31st August, 2007 and the assessee-company claimed depreciation from 01st September, 2007 up to 31st March, 2008. It may be noted that the revaluation of assets was as valued by Government approved valuer.

In the subsequent year, i.e., AY 2009-10, the assessee-company claimed depreciation by reducing the depreciation claim for the period from 01st September, to 31st March, 2008 on the revalued figure. According to the Assessing Officer, the assessee had claimed excess depreciation and disallowed the depreciation as claimed on the revalued figures.

The assessee contested this order before the Commissioner of Income-tax (Appeals), who by an order dated 04th March, 2014, dismissed the Appeal. This order was impugned by assessee before the ITAT who allowed the Appeal by an order dated 21st June, 2017.

The High Court held that the decision of ITAT is tenable in law. It said that as per proviso to section 32, aggregate deduction in respect of depreciation on tangible assets or intangible assets allowable to the predecessor and the successor in the case of succession, i.e., to the partnership firm and to the assessee, shall not exceed in any previous year, the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor. This was applicable only to the assessment year 2008-09 when the succession took place as for later years, it would not be the case as the assets would no longer belong to the predecessor but only the successor, i.e., the assessee, who can claim depreciation.

It was held that the assessee as per Section 32 read with Rule 5 of the Act , will be entitled to claim depreciation in respect of any assets on the actual cost of the said assets. The actual cost of the said assets will be the actual cost which the assessee paid to the predecessor after revaluing the assets and accordingly the assessee will be entitled to claim depreciation for the subsequent years on the basis of the actual cost paid. The counsel for the Revenue submitted that for the actual cost no money was paid but shares were issued in lieu of cash. The court held that certainly that will be the cost which assessee has paid to procure the assets. This is the reason given by ITAT in the impugned order and thus, the court upheld the order of ITAT.

This decision would help the assessee i.e. resulting company to claim depreciation on the enhanced value instead of the WDV of the predecessor being the starting point for computing the amount of depreciation.