Whether assessee is entitled to claim depreciation on fixed assets taken over under a Scheme of Amalgamation on original cost of fixed assets or WDV?

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

INCOME TAX REFERENCE NO.146 OF 1996

Rhone-Poulenc (India) Ltd.

Appellant

Versus

The Commissioner of Income Tax

Respondent

Mr H. Toor with Mr Sameer Chitnis i/b M/s Crawford Bayley and Co. for Appellant

Mr Suresh Kumar for Respondent.

CORAM : S.C. DHARMADHIKARI AND

B.P. COLABAWALLA JJ.

Reserved on: 7th August 2014.

Pronounced on: 13th August 2014.

JUDGMENT [Per B.P. Colabawalla J.]:-

1. By this Income Tax Reference under section 256(1) of the Income Tax Act 1961, the Income Tax Appellate Tribunal (ITAT) has referred thefollowing question of law for the opinion and determination of this Court:-

“(A) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in approving the depreciation granted onRs.93,14,942/- when the profits of the Indian undertaking of non-resident parent company were computed in accordance with the provisions of Rule 10 of the Income Tax Rules ?”

2. The Assessment Years in question are 1976-77, 1977-78 & 1978-79.The question to be decided in this Reference is whether the Applicant –Assessee is entitled to claim depreciation on the fixed assets taken over by it under a Scheme of Amalgamation with its Parent Company (May and Baker Ltd.), on the basis of the original cost of the said fixed assets, or on the basis of the written down value thereof, which had been arrived at by the authorities below by granting depreciation to the Parent Company on notional or implied basis.

3. The facts stated briefly are that the Assessee, an Indian Company, was a subsidiary of one May and Baker Ltd., a U.K. Company. The said U.K. Company had an industrial undertaking in India. Under a Scheme of Amalgamation, the said industrial undertaking of the U..K. Company was hived off to the Assessee Company under a Scheme of Amalgamation that was approved by this Court and the assets and liabilities of the said undertaking were taken over by the Assessee Company in terms embodied in the Scheme of Amalgamation.

4. Prior thereto, the U.K. Company (which was the Parent Company of the Assessee Company) was assessed to tax in India right from Assessment Year 1960-61 in respect of its profits in relation to its Branch in India. The profits of the Indian Branch of the U.K. Company were determined as pe rRule 33 of the Income Tax Rules as it then stood and thereafter under Rule10 of the Income Tax Rules, 1962. This was being done from year to year. It appears that the Assessing Officer sought to re-open the completed assessment of the U.K. Company because he found that its Indian Branch was maintaining separate books of accounts, from which the profits and gains attributable to its Indian undertaking could be ascertained. The Assessing Officer was of the view that in most of the years, the profits as per the books of the Indian Branch of the U.K. Company were higher than those determined as per Rule 33/10 of the Income Tax Rules, 1962.

5. In view of avoiding a protracted litigation with the Department, the U.K. Company approached the CBDT by way of a settlement petition which was disposed off by its order dated 30th August 1990. On an agreed basis,the member of the CBDT ordered that the figure under assessment for Assessment Years 1960-61 to 1974-75 would be Rs.95,00,000/- and for the Assessment Year 1975-76, would be Rs.42,00,000/- as against the sum ofRs.40,92,000/- disclosed by the U.K. Company.

6. As stated earlier, the Scheme of Amalgamation, under which the industrial undertaking along with all its assets and liabilities of the U.K.Company, were taken over by the Assessee Company, was approved by this Court with effect from 1st January 1975. The Scheme of Amalgamation between the U.K. Company and the Assessee Company [which at that time was known as May and Baker (India) Pvt. Ltd.] inter alia stated as follows :-

“1. With effect from the 1st day of January 1975 (hereinafter called 'the Appointed Date') save as otherwise provided herein, the entire business and undertaking in India of May and Baker Limited, a Company incorporated under the English Companies Act and having its Registered Office at Dagenham, Essex, U.K. and a place of business in India at Bombay Agra Road, Bhandup, Bombay 400 078 (hereinafter referred toas 'M&B') including all its properties and assets of whatever nature and wheresoever situate and disclosed by its audited Indian Branch Balance Sheet as on the day prior to the Appointed date (all which assets are more particularly set out in Schedule A hereto) and including leases, tenancy rights, licences and quota rights situate in India but excluding the investments of M&B in the share capital of May and Baker (India) Pvt. Ltd., a company incorporated in India with limited liability under the Indian Companies Act 1913 (hereinafter called M&B) and excluding the dividend already declared on the said shares to be remitted to M&B on receipt of approval from all requisite authorities in India (all of which undertaking, property, assets, rights and powers are hereinafter for brevity's sake referred to as “the said undertaking of ‘M&B’) shall, without further act or deed be transferred to and vested in or deemed to be transferred to and vested in MBI pursuant to the provisions of section394 of the Companies Act 1956 but subject nevertheless to all charges, ifany, then affecting the same or any part thereof. It is hereby clarified that the said undertaking of M&B referred to in this paragraph relates only tothe undertaking in India of M&B.”

7. Schedule 'A' referred to in paragraph 1 of the said Scheme set out the value of the fixed assets (at cost less depreciation) at Rs.1,72,78,297/-. The original cost of these assets to the U.K. Company was Rs.2,54,67,325/-. For all the three years in question, the Assessee claimed that for the purpose of granting depreciation, the cost of the assets should be taken at the original cost viz. Rs.2,54,67,325/-, or alternatively at Rs.1,72,78,297/- (being the cost, less depreciation) as reflected in Schedule ‘A’ to the scheme of amalgamation. The Assessing Officer rejected both these figures and granted depreciation on the written down value of Rs.93,14,942/- which was arrived at after taking into account depreciation that would have been granted to the U.K. Company under the provisions of the Income Tax Act. In other words, the Assessing Officer held that the written down value of the said fixed assets taken over by the Assessee Company as on 1st January1975 was Rs.93,14,942/-.

To read the full judgement, please find the attached file.

Attached File:

http://bombayhighcourt.nic.in/generatenewauth.php?auth=cGF0aD0uL2RhdGEvanVkZ2VtZW50cy8yMDE0LyZmbmFtZT1PU0lUUjgwMTQ2OTYucGRmJnNtZmxhZz1O