Depreciation allowed on demerger transferred assets. Revenue appeal dismissed.

The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision that the assessee is entitled to claim depreciation on assets transferred during a demerger, as the assets were not acquired free of cost. The Tribunal emphasized that the assessee can depreciate the assets based on their written down value. The appeal of the Revenue was dismissed, with the decision announced on 31/05/2021.

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Issues Involved:
1. Allowance of depreciation on assets with nil actual cost as per section 43(1) of the Income Tax Act, 1961.
2. Determination of the taxable income of the assessee based on audited accounts.
3. Validity of the disallowance of depreciation on assets transferred during demerger.

Issue-wise Detailed Analysis:

1. Allowance of Depreciation on Assets with Nil Actual Cost:
The primary issue is whether the assessee is entitled to claim depreciation on assets for which the actual cost is considered nil as per section 43(1) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed depreciation amounting to Rs. 29,95,08,702/- on the grounds that the assets were acquired free of cost. However, the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim of depreciation, stating that the assets were transferred from UP Jal Vidyut Nigam Limited (UPJVNL) to Uttaranchal Jal Vidyut Nigam Ltd. (UJVNL) during a demerger, and the cost of these assets was duly accounted for in the balance sheets of both entities. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assets were not obtained free of cost and that the assessee is entitled to depreciation on the written down value of these assets.

2. Determination of Taxable Income Based on Audited Accounts:
The Tribunal noted that the absence of audited accounts for the relevant assessment year made it difficult to determine the true taxable income of the assessee. The matter was previously set aside by the Tribunal with directions to reassess the issues based on audited accounts. The AO, in fresh assessment proceedings, again disallowed the depreciation claim. However, the CIT(A) found merit in the assessee's claim, noting that the assets' values were derived from the balance sheet of UPJVNL, and the difference was shown as Reconstruction Reserve under Capital Reserve. The Tribunal agreed with the CIT(A), stating that the audited accounts should be used to determine the opening and closing values of the assets.

3. Validity of Disallowance of Depreciation on Assets Transferred During Demerger:
The Tribunal recognized the situation as a demerger in terms of explanation 4 to section 2(19AA) of the Income Tax Act. The AO's disallowance of depreciation was based on the premise that the assets were received free of cost. However, the Tribunal highlighted that the assets were transferred along with corresponding liabilities, representing the cost of the assets. The Tribunal referred to a similar case involving Bharat Sanchar Nigam Limited (BSNL), where the Delhi High Court ruled that reserves in the balance sheet do not represent a subsidy or grant but are part of shareholders' funds. Thus, the Tribunal concluded that the assessee is entitled to depreciation on the written down value of the assets received during the demerger.

Conclusion:
The Tribunal upheld the CIT(A)'s findings that the assessee is entitled to claim depreciation on the assets transferred during the demerger, as the assets were not obtained free of cost. The appeal of the Revenue was dismissed, and the decision was pronounced in the open Court on 31/05/2021.

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