Depreciation on slump sale assets and TDS disallowance turned on actual cost, evidence, and applicable withholding provisions.

In a slump sale of a passive infrastructure undertaking, depreciation was allowed on the transferee's actual purchase cost because the transferor's written down value and the special rules on holding-subsidiary transfers or depreciation apportionment did not apply. Estimated site restoration cost could not be included in actual cost under section 43(1) as it was a future dismantling expense not incurred up to first use, so depreciation on that component was disallowed. Depreciation on new assets was also allowed where invoices and supporting records established the additions. Under section 40(a)(ia), disallowance failed for tower rent below the TDS threshold and for security charges treated as manpower supply, but was sustained for unsupported remaining expenses.

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Issues: (i) whether depreciation was allowable on the full purchase cost of assets acquired under slump sale from the holding company; (ii) whether depreciation was allowable on the estimated site restoration cost included in the asset value; (iii) whether depreciation on new assets was rightly disallowed for want of evidence; and (iv) whether the disallowance under section 40(a)(ia) was sustainable in respect of tower rent, security charges and other expenses.

Issue (i): whether depreciation was allowable on the full purchase cost of assets acquired under slump sale from the holding company

Analysis: The transferor had sold the passive infrastructure undertaking as a going concern by slump sale and had offered capital gains under section 50B. The provisions dealing with transfer between holding and subsidiary companies, apportionment of depreciation on succession, and the special rules in section 43 were found inapplicable on the facts. The written down value in the hands of the transferor could not govern the transferee's claim in the circumstances, and the assessee was entitled to depreciation on the actual purchase cost attributable to the assets.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): whether depreciation was allowable on the estimated site restoration cost included in the asset value

Analysis: Site restoration cost was an amount expected to be incurred only on dismantling of towers and not a cost incurred up to the stage when the asset was first put to use. Such expenditure could not form part of actual cost under the governing accounting principle and section 43(1). Consistent accounting practice could not override the statutory and accounting framework. The amount was also not allowable as an estimated deduction on the facts found.

Conclusion: The issue was decided against the assessee.

Issue (iii): whether depreciation on new assets was rightly disallowed for want of evidence

Analysis: The assessee produced invoices, binders of supporting documents and a GR-GI tracking system, and the addition of new towers during the year was not disputed. In the absence of a satisfactory basis to doubt the purchases and corresponding asset creation, the disallowance of depreciation on the new additions was not justified.

Conclusion: The issue was decided in favour of the assessee.

Issue (iv): whether the disallowance under section 40(a)(ia) was sustainable in respect of tower rent, security charges and other expenses

Analysis: Tower rent payments were below the threshold for tax deduction at source under section 194I and therefore the disallowance relating to that component could not stand. Security charges represented supply of manpower and did not constitute carrying out of any work within section 194C, so the related disallowance was also unsustainable. For the remaining items, the assessee did not establish that the tax deduction provisions were inapplicable, and the disallowance was sustained to that extent.

Conclusion: The issue was partly decided in favour of the assessee and partly against the assessee.

Final Conclusion: The assessment additions were sustained only to the extent of the site restoration cost and the remaining unproved expenditure components, while relief was granted on the purchase cost depreciation, new asset depreciation, tower rent and security charges.

Ratio Decidendi: In a slump sale, depreciation is allowable on the transferee's actual purchase cost where the special provisions governing transfer between related companies or apportionment of depreciation do not apply, but estimated future restoration expenditure not incurred up to the asset's first use cannot be capitalised as actual cost; for TDS, only payments squarely falling within the relevant charging provision can attract disallowance under section 40(a)(ia).

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