Court rules on depreciation post-amalgamation; value set at Rs. 1,72,78,297. Assessee prevails.

The court held that depreciation on fixed assets post-amalgamation should be calculated based on the actual cost less the depreciation "actually allowed" to the U.K. Company. The written down value for depreciation purposes was determined to be Rs. 1,72,78,297/-, as per the Scheme of Amalgamation, rejecting the original cost or notional figures proposed by the authorities. The court ruled in favor of the Assessee, directing that depreciation be granted based on this value. The Income Tax Reference was disposed of with no order as to costs.

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Issues Involved:
1. Entitlement to claim depreciation on fixed assets post-amalgamation.
2. Determination of the written down value (WDV) for depreciation purposes.
3. Interpretation and application of relevant Income Tax provisions and rules.

Issue-wise Detailed Analysis:

1. Entitlement to Claim Depreciation on Fixed Assets Post-Amalgamation:
The primary issue revolves around whether the Applicant-Assessee is entitled to claim depreciation on fixed assets acquired under a Scheme of Amalgamation with its Parent Company based on the original cost or the written down value (WDV) of these assets. The court examined the Scheme of Amalgamation approved by the High Court, which transferred the industrial undertaking of the U.K. Company to the Assessee Company, including all assets and liabilities.

2. Determination of the Written Down Value (WDV) for Depreciation Purposes:
The court analyzed the provisions of the Income Tax Act, particularly sections 32, 34, and 43, and relevant rules. The Assessee argued that the WDV should be based on the original cost of Rs. 2,54,67,325/-, or alternatively, Rs. 1,72,78,297/- (cost less depreciation). However, the Assessing Officer determined the WDV as Rs. 93,14,942/- after accounting for depreciation that would have been granted to the U.K. Company. The ITAT upheld this view, implying that depreciation was granted implicitly under Rule 10(ii) of the Income Tax Rules.

3. Interpretation and Application of Relevant Income Tax Provisions and Rules:
The court emphasized that depreciation must be "actually allowed" as per the Income Tax Act, not on a notional or implied basis. The court referred to the Supreme Court judgment in Madeva Upendra Sinai v/s Union of India, which clarified that "actually allowed" means depreciation that has been taken into account or granted, not merely allowable on a notional basis. The court noted that there was no evidence to show that depreciation was actually allowed to the U.K. Company while computing profits under Rule 33/10.

Conclusion:
The court held that the written down value of fixed assets should be calculated based on the actual cost less the depreciation "actually allowed" to the U.K. Company. Since the Scheme of Amalgamation valued the fixed assets at Rs. 1,72,78,297/- (cost less depreciation), this figure should be used for calculating depreciation, not the original cost of Rs. 2,54,67,325/- or the notional figure of Rs. 93,14,942/- determined by the authorities. The court answered the reference in favor of the Assessee, directing that depreciation should be granted based on the WDV of Rs. 1,72,78,297/-.

The Income Tax Reference was disposed of in these terms, with no order as to costs.

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