Bombay High Court allows cost step up of unabsorbed depreciation of amalgamating company despite amalgamation not qualifying for transition of losses

In case of Technova Imaging Systems Limited ^[1]  (Taxpayer), the issue before Bombay HC was whether unabsorbed depreciation (UAD) in the hands of amalgamating company has to be added back while computing “written down value” (WDV) of the assets acquired by amalgamated company despite the amalgamation not qualifying for transition of losses under the specific provisions^[2]  of the Income Tax laws (ITL).

In the facts of the case, two group companies amalgamated with Taxpayer-company via court approved scheme^[3]  with effect from 1 April 1990. Such amalgamation admittedly did not qualify for loss (including UAD) transition to amalgamated company since it did not fulfill the relevant conditions (including Central Government approval) as per extant law for tax year 1990-91.  

In case of amalgamation, the WDV of assets acquired by amalgamated company is determined at WDV in the hands of the amalgamating company. The definition of WDV, inter alia, requires reduction of depreciation “actually allowed” from the actual cost/WDV of the preceding year. The Taxpayer added back the UAD of the amalgamating companies while computing WDV of assets acquired on amalgamation on the ground that such UAD was not “actually allowed” to the amalgamating companies. The Tax Authority rejected such cost step up claimed by the Taxpayer, inter alia, on the grounds that (a) depreciation allowance is deemed to be “actually allowed” by a specific Explanation^[4]  and, hence, the UAD cannot be said to be not “actually allowed” in the hands of the amalgamating companies and (b) the amalgamation in the present case did not qualify for loss and UAD transition. 

While the first appellate authority upheld the Taxpayer’s claim, it was rejected and Tax Authority’s contention was upheld by the Mumbai Tribunal.

On further appeal by the Taxpayer, the Bombay HC upheld the Taxpayer’s claim and allowed the cost step up by, inter alia, relying upon earlier Bombay HC ruling in the case of CIT v. Hindustan Petroleum Corporation Ltd.^[5]  and Madras HC ruling in the case of EID Parry (India) Ltd. v. DCIT ^[6] . The Bombay HC held that the deeming fiction, of depreciation allowance being “actually allowed” even if not fully absorbed by profits, is not applicable in the present case since such fiction applied in the case of amalgamating companies which ceased to exist on being dissolved without winding up under the court approved scheme of amalgamation. It further held that the present case is not one where the Taxpayer is seeking transition of loss or UAD. The cost step up is claimed while computing correct WDV of depreciable assets acquired under amalgamation which requires reduction of depreciation “actually allowed” in the hands of amalgamating company. Since UAD was not “actually allowed” in the hands of the amalgamating companies, it could not be reduced while computing WDV of such assets. 

^[1] [TS-370-HC-2025(BOM)]
^[2] Section 72A of Income tax Act 1961
^[3] dated 13 November 1991
^[4] Explanation 3 to section 43(6)
^[5] [(1991) 187 ITR 1 (Bom HC)]
^[6] [(2012) (23 taxmann.com 348) (Mad HC)]