2022 (8) TMI 1377 - HC - Income Tax

Cost of acquisition / Actual cost - Acquired price OR written down value of asset of asset taken over as per the scheme of amalgamation - Depreciation on assets taken over from Bank of Thanjavur Ltd. in pursuant to amalgamation of Bank with assessee s bank approved by Reserve Bank of India - AO disallowed the depreciation on the ground that the assessee should have taken the written down value of the Bank of Thanjavur instead of the acquired price of the Indian Bank - HELD THAT - As after having considered the contention raised on the side of the appellant / assessee that it is not a case of amalgamation as contemplated under Explanation 7 to section 43; the assessee took over only the part of the business of Bank of Thanjavur and the Bank of Thanjavur is still existing and not completely got merged with the assessee bank the Tribunal was of the view that no evidence was produced to substantiate the said contention and accordingly rejected the claim of the appellant / assessee seeking depreciation in respect of the assets taken over from the transferor bank. In the absence of any concrete evidence to prove the stand so taken on the side of the appellant / assessee the Tribunal rightly reversed the orders of the CIT(A) and restored the orders of the assessing officer in the opinion of this court. As appellant prayed that the appellant / assessee may be granted an opportunity to furnish the required documentary evidence in support of their case that the transferor bank viz. Bank of Thanjavur is still functioning and only a part of the business of the said bank was merged with the transferee bank; and they claimed depreciation in respect of the assets taken over from the transferor bank on the basis of the valuation determined by the Government as per the scheme of amalgamation for which there is no serious objection on the side of the respondent. This court sets aside the order of the Tribunal which is impugned herein and remand the matter to the Tribunal for fresh consideration. The appellant is directed to produce all the required documents to substantiate their claim to the Tribunal within a period of four weeks from the date of receipt of a copy of this judgment.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment primarily revolves around the following issues:

• Whether the Income Tax Appellate Tribunal was correct in law in confirming the disallowance of part of the depreciation claimed by the appellant on assets taken over from the Bank of Thanjavur pursuant to a scheme of amalgamation.
• Whether the Tribunal was right in invoking Explanation 7 to Section 43(1) of the Income Tax Act to justify the disallowance of depreciation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Depreciation

• Relevant Legal Framework and Precedents: The case involves the interpretation of Section 43(6) of the Income Tax Act, which pertains to the valuation of assets for depreciation purposes. The appellant argued that the valuation should be based on the cost determined by the government under the amalgamation scheme.
• Court's Interpretation and Reasoning: The Tribunal held that the depreciation should be based on the written down value as per the records of the Bank of Thanjavur, not the value determined by the government.
• Key Evidence and Findings: The Tribunal noted the absence of evidence to substantiate the appellant's claim that only a part of the business was taken over and that the Bank of Thanjavur continued to exist.
• Application of Law to Facts: The Tribunal applied Explanation 7 to Section 43(1), concluding that the amalgamation resulted in the cessation of the Bank of Thanjavur, thus justifying the disallowance of depreciation.
• Treatment of Competing Arguments: The appellant argued that the assets' valuation should be based on the government's determination, while the respondent maintained that the Tribunal's interpretation of the law was correct.
• Conclusions: The Tribunal's decision was based on the lack of evidence from the appellant and the application of Explanation 7 to Section 43(1).

Issue 2: Invocation of Explanation 7 to Section 43(1)

• Relevant Legal Framework and Precedents: Explanation 7 to Section 43(1) addresses the valuation of assets in cases of amalgamation, focusing on the continuity of the transferor entity.
• Court's Interpretation and Reasoning: The Tribunal interpreted the provision to mean that the transferor bank ceased to exist post-amalgamation, thus supporting the disallowance of depreciation.
• Key Evidence and Findings: The Tribunal relied on the scheme of amalgamation and the absence of evidence to the contrary from the appellant.
• Application of Law to Facts: The Tribunal applied the explanation to conclude that the transferor bank's cessation justified the depreciation disallowance.
• Treatment of Competing Arguments: The appellant contended that the amalgamation did not result in the complete cessation of the Bank of Thanjavur, a claim unsupported by evidence.
• Conclusions: The Tribunal upheld the disallowance based on the application of Explanation 7, which was not effectively contested by the appellant.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "As such the case of the assessee clearly comes within the ken of Explanation 7 to section 43 (1). In our opinion, AO rightly disallowed the depreciation."
• Core Principles Established: The judgment reinforces the principle that in cases of amalgamation, the valuation of assets for depreciation purposes must consider the continuity or cessation of the transferor entity as per Explanation 7 to Section 43(1).
• Final Determinations on Each Issue: The Tribunal's decision to disallow depreciation was upheld due to the lack of evidence from the appellant and the applicability of Explanation 7. However, the High Court remanded the matter for fresh consideration, allowing the appellant an opportunity to present evidence.

The High Court ultimately set aside the Tribunal's order and remanded the case for fresh consideration, directing the appellant to produce necessary evidence within a specified timeframe. The Tribunal was instructed to reconsider the matter on its merits, with the possibility of restoring the original order if the appellant failed to furnish the required documents.