Depreciation on revalued cost of assets after conversion of firm into company upheld

Claiming depreciation on revalued cost of assets after conversion of partnership firm into company Supreme Court dismissed Special Leave Petition of Income Tax Department  

In a recent order, the Hon’ble Supreme Court has dismissed the Special Leave Petition (SLP) of the Income Tax Department  challenging claim of depreciation on revalued cost of assets after conversion of partnership firm into company

ABCAUS Case Law Citation:
ABCAUS 4146 (2024) (07) SC

In the instant case, the Income Tax Department had challenged the order of the Hon’ble High Court confirming the decision of the ITAT allowing depreciation claim on revalued assets after conversion of firm into company.

The respondent assessee was engaged in the business of manufacturing of diamonds. The assessee was incorporated to take over all the assets and liabilities of erstwhile partnership firm to carry out business in a more efficient manner. As the assessee took over assets and liabilities of the firm, depreciation was claimed by the erstwhile partnership firm on the written down value as per its records upto conversion date and assessee claimed depreciation from the date of conversion to close of the financial year at revalued price. The revaluation was done by Government approved valuer.

In the subsequent year, which was the assessment year under question the assessee-Company claimed depreciation on the written down value as on the close of the preceding year by reducing the depreciation claimed by it in the preceding year on revalued figure.

However, according to the assessing Officer, Petitioner had claimed excess depreciation and disallowed the depreciation as claimed on the revalued cost and reworked the depreciation on WDV cost.

The CIT(A) dismissed the appeal of the assessee. However, the ITAT allowed the appeal of the assessee. The decision of the ITAT was challeneged by the Revenue in the Hon’ble High Court alleging that the conversation of firm to a company was an internal arrangement for evasion of Tax.

The Hon’ble High Court observed that ITAT has come to the correct conclusion. It was observed that Rule 5 of Income Tax Rules, 1962 which deals with depreciation also states “…….. provided that the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the said asset ……….”.

The Hon’ble High Court opined 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, respectively, 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 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.

The Hon’ble High Court observed that in the instant case for the preceding year i.e. assessment year in which the conversion took place, predecessor, i.e., the partnership firm had claimed depreciation for five months and successor, i.e., assessee had claimed depreciation for the remaining period of the year.

The Hon’ble High Court explained by way of illustration that if succession had not taken place during preceding assessment year and the predecessor, i.e., the partnership firm would have claimed Rs. 1 crore as depreciation, both predecessor and successor for that year could claim together only Rs. 1 crore as depreciation and nothing more. Admittedly, this is what had happened in the case at hand also.

The Hon’ble High Court further stated that the appeal pertains to succeeding Assessment Year in which year the asset was clearly owned by successor, i.e., assessee. The assessee as per Section 32 r/w 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 certainly assessee will be entitled to claim depreciation for the subsequent years on the basis of the actual cost paid.

The Hon’ble High Court noted that for the actual cost though no money was paid but shares were issued in lieu of cash which would constitute the cost which assessee had paid to procure the assets.

The Hon’ble High Court confirmed the reason given by ITAT and dismissed the appeal of the Revenue.

Not satisfied with the order of the Hon’ble High Court, the Revenue filed a Special Leave Petition before the Hon’ble Supreme Court. However, the Hon’ble Supreme Court dismissed the SLP observing that no error was found in the impugned order of the Hon’ble High Court. 

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