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TMI Blog2021 (12) TMI 1267X X X X Extracts X X X X X X X X Extracts X X X X ..... lity side of balance sheet of the assessee was still not settled, i.e. the loan amount transferred by UPJVNL to UJVNL was still under dispute and there was no clarity as on date with regard to the nature of liability i.e. reconstruction reserve. 3. Hence, the then AO had concluded that the assessee had only taken over the assets for which the liabilities were not ascertained till date. This implied that on date the assessee had the assets without the corresponding liability, i.e. in fact, the assets have been taken over by UJVNL from UPJVNL free of cost. Hence, the depreciation was disallowed u/s 32 of the I.T. Act, which worked out at Rs. "YYYYY/-"as per provisional accounts produced by the assessee. 4. The instant appeal of the revenue involved only one issue of depreciation. Depreciation: 5. This issue stands adjudicated by the order of ITAT in ITA No.5724/Del/2015 dated 31-05-2021. The operative portion of the said order is reproduced for ready reference:- "These are second round of appellate proceedings before us. Briefly stated, the facts of the case are that for the year under consideration a return declaring total income of Rs. 8,94,85,800/- was filed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 do not tally with the closing WDV for A.Y.2003-04. Hence for the purpose of coming to the amount to be disallowed for depreciation on assets taken over at the time of inception free of cost, the following method is being adopted. For the additions made during the year, the depreciation permissible under the I.T. Act, 1961 is to be allowed, as in the previous years there is no addition to the fixed assets as per the Schedule submitted. The balance depreciation claimed in the profit and loss account is to be disallowed and is to be added back to the taxable income for the year. The depreciation on additions made during the year comes to Rs. 2,44,07,898/-. After application of the rates as per I.T. Act 1961, and the assessee has debited an amount of Rs. 32,39,16,600/-. The depreciation amounting to Rs. 29,95,08,702/- which is the balance is therefore, disallowed and added back to the taxable income of the assessee." 2.2 Aggrieved again, the assessee filed an appeal before the Ld. first appellate authority. The Ld CIT (A) has extensively recorded the facts of the case and has found merit in claim made by the assessee. The appeal has been allowed by adjudicating as under: "The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., in this case the State of Uttaranchal had been utilized for getting the assets. The Ld. Commissioner of Income Tax Appeal-I, Dehradun, has also given due relief on account of depreciation on fixed assets while disposing of appeals for the following Assessment Years. A.Y. Appeal No. Date of Order 2002-03 283/DDN/2007-08 30-12-2008 2003-04 057/DDN/06-07 14-8-2007 2004-05 340/DDN/06-07 30-12-2008 2005-06 284/DDN/07-08 30-12-2008 2007-08 139/DDN/2009-10 27-12-2011 2008-09 68/DDN/2010-11 31-01-2012 2009-10 328/CIT(A)-1/2011-12 30-03-2012 2011-12 16/ CIT(A)/DDN/14-15 30-03-2015 The Ld. CIT (A) has also held that the assessee would be entitled to claim of depreciation on assets transferred from UP Jal Vidyut Nigam Limited to UJVNL. Copy of the orders are enclosed herewith as Annexure 1 to 8. It may be brought to your kind notice that for the AY 2005-06 most of the relief was allowed by the Ld. Commissioner of I. Tax Appeals, as such no appeal was filed by the assessee for the aforesaid Assessment Year. However, the department had filed an appeal before the Hon'ble ITAT against the order of CIT(A)-1. Dehradun for the aforesaid A.Y. 2005-06 only on one g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in the present case is what has been recognized as a demerger in terms of explanation 4 to section 2(19AA) of the Income Tax Act. The AO has disallowed depreciation on the ground that the assessee had received assets free of cost from the Government of Uttaranchal. The action of the AO in disallowing depreciation is not as per law. As per settled accounting principles, every rupee invested in the business has a cost. The cost of borrowing from the bank is known to the business depending on the rate of interest but that does not mean that the capital introduced in the form of shareholders fund has no cost. In the present case, assets generating hydro power have been received by the assessee from the demerger of UP Jal Vidyut Nigam along with corresponding liabilities which it owns to the Uttaranchal Government and others. This liability represents nothing but the cost of the assets received on demerger. The assessee is entitled to depreciation on the written down value of these assets which been prescribed in Explanation 2B of section 43(6) of the Income Tax Act, 1961. The assessee is, therefore, entitled to depreciation. Somewhat similar situation arose in case of M/s Bharat San ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of loans and the face value of the shares issued to the Government of India. A reserve represents the shareholders' fund and may be utilized in various ways including to declaredividends or for issuing bonus shares. There is no plausible reason to assume that the value of shareholders' holding in a company is limited to the face value of the issued and paid up share- capital and the reserves represent a subsidy or a grant or a reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of a company are met. We are thus of the view that the reasons as furnished by the Assessing Officer for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment and proceedings initiated on the basis of such reasons are liable to be quashed." 6. We have gone through the entire contents and the history of the assessee. In this case, the assets have been transferred from Uttar Pradesh Government (UPJVNL) to Uttaranchal Government (UJVNL). There is no claim of the depreciation twice by both the Governments. The demerger led to division of assets in a fixed ratio and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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