ITAT allows depreciation claim on enhanced asset cost revalued by approved valuer

The Income Tax Appellate Tribunal (ITAT) allowed the appellant company's appeal, overturning the disallowance of depreciation claimed by the company. The ITAT held that the appellant was entitled to depreciation on the enhanced cost of assets taken over from a previous firm, as revalued by a Government Approved Registered Valuer. The ITAT emphasized compliance with Section 47(xiii) of the Income Tax Act and cited relevant precedents to support its decision. The ITAT directed the Assessing Officer to allow depreciation as claimed by the appellant, setting aside the Commissioner of Income Tax (Appeals) order.

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Issues Involved:
1. Disallowance of depreciation claimed by the appellant company.

Detailed Analysis:

1. Disallowance of Depreciation:
The primary issue in this case revolves around the disallowance of depreciation amounting to Rs. 5,71,92,626/- claimed by the appellant company. The Assessing Officer (AO) allowed depreciation only to the tune of Rs. 5,71,92,626/- against the claimed amount of Rs. 15,78,34,916/-. This disallowance was based on the AO's order for the assessment year (AY) 2009-10, which was subsequently confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] for AY 2010-11, and relied upon for the current assessment year 2011-12.

The appellant company, engaged in the manufacturing of diamonds and energy, argued that the issue was already settled in its favor by the Income Tax Appellate Tribunal (ITAT) in the appellant’s own case for the earlier year AY 2009-10. The ITAT had reversed the CIT(A)’s decision and decided in favor of the appellant by holding that the depreciation should be allowed based on the Written Down Value (WDV) as revalued by a Government Approved Registered Valuer.

2. Revaluation of Assets:
The appellant company took over all assets and liabilities of the erstwhile firm M/s Dharmanandan Diamonds on 1.9.2007. The assets were revalued on 30.6.2007 by an independent Government Approved Registered Valuer to ascertain the prevailing market value. The appellant company calculated its WDV on 31.3.2008 based on the revalued price, less depreciation calculated on the WDV in the hands of the erstwhile firm.

3. Compliance with Section 47(xiii) of the Income Tax Act:
The AO disallowed the depreciation on the grounds that no capital gain tax was paid by the erstwhile firm upon revaluation of its assets, claiming exemption under Section 47(xiii) of the Income Tax Act. However, the ITAT noted that the appellant company had fulfilled all conditions under Section 47(xiii), which exempts capital gains tax if certain conditions are met. The ITAT emphasized that the exemption is valid as long as the conditions are not violated.

4. Determination of Actual Cost:
The ITAT also addressed the AO’s contention that the aggregate depreciation cannot exceed the actual cost of the assets in the hands of the appellant. The ITAT clarified that the actual cost should be the value at which the assets were taken over by the company, which was the revalued price as determined by the Government Approved Registered Valuer. The ITAT found no evidence of fraud, collusion, or ulterior motives in the revaluation process and upheld the appellant’s claim for depreciation based on the actual cost.

5. Precedents and Case Laws:
The ITAT referred to several precedents and case laws that supported the appellant’s claim for depreciation based on the revalued cost. Notably, the cases of M/s Ashwin Vanaspati Industry, Chitra Publicity Co Pvt Ltd, and Prakash Chemical Agencies P Ltd were cited, where it was held that depreciation should be allowed on the enhanced cost if the conditions of Section 47(xiii) are fulfilled.

6. Distinguishing Other Cases:
The ITAT distinguished the cases cited by the Departmental Representative, such as Poulose and Mathen (Pvt) Ltd, Mahindra Sons Ltd, and Ginners and Pressers Pvt Ltd, on the grounds that the facts were not applicable to the appellant’s case. The ITAT emphasized that the appellant’s case was covered by favorable precedents where the revaluation was done legitimately and the conditions of Section 47(xiii) were met.

Conclusion:
The ITAT concluded that the disallowance of depreciation by the AO was not sustainable and directed the AO to allow depreciation as claimed by the appellant. The ITAT set aside the order of the CIT(A) and allowed the appellant’s appeal, affirming that the appellant is entitled to depreciation on the enhanced cost at which the assets were taken over.

Order Pronouncement:
The order was pronounced on 15th March 2019, allowing the appellant’s appeal.

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