Facts of the Case

The appellant, PMV Maltings Pvt. Ltd., filed appeals under Section 260A of the Income-tax Act, 1961 challenging the order dated 03.02.2023 passed by the Income Tax Appellate Tribunal for Assessment Years 2015–16 and 2016–17.

The issue arose pursuant to a Scheme of Arrangement involving reorganisation and demerger, sanctioned by the Delhi High Court on 05.10.2012, with the appointed date being 01.04.2013. Under the scheme, the appellant acquired malt production units of Malt Company India Pvt. Ltd. located at Pataudi (Haryana) and Kashipur (Uttarakhand).

The difference between the purchase consideration and net assets acquired was recorded as goodwill amounting to ₹16.62 crore in Financial Year 2013–14, on which depreciation at the prescribed rate was claimed and allowed for Assessment Year 2014–15. For the subsequent Assessment Years 2015–16 and 2016–17, the appellant continued to claim depreciation on the written down value of goodwill.

The Tribunal disallowed the depreciation relying solely on the Fifth Proviso to Section 32(1) of the Act.

Issues Involved

Whether the Fifth Proviso to Section 32(1), which restricts aggregate depreciation in cases of succession, amalgamation or demerger, could be applied to deny depreciation on goodwill claimed by the resulting company in assessment years subsequent to the year of demerger.

Appellant’s Arguments

The appellant contended that goodwill is an intangible asset eligible for depreciation under Section 32 in view of the Supreme Court decision in CIT vs. Smifs Securities Ltd. It was argued that the Fifth Proviso to Section 32 applies only to regulate aggregate depreciation in the year of succession or demerger and has no application to subsequent years where the asset is owned and used solely by the successor.

It was further submitted that the Tribunal erred in law by extending the scope of the Fifth Proviso beyond its legislative intent.

Respondents’ Arguments

The Revenue argued that the computation of depreciation and written down value must be governed by Section 43(6) and its explanations, and that the Tribunal was justified in restricting depreciation by invoking the Fifth Proviso to Section 32 to prevent excess allowance.

Court Order / Findings

The Delhi High Court held that the Tribunal had erred in law by relying exclusively on the Fifth Proviso to Section 32(1). The Court observed that the proviso is designed to restrict aggregate depreciation claimed by the predecessor and successor in the year of succession, amalgamation or demerger, and not in subsequent years.

The Court noted that the demerger took effect in Financial Year 2013–14, making Assessment Year 2014–15 the only year to which the Fifth Proviso could potentially apply. For Assessment Years 2015–16 and 2016–17, the assets no longer belonged to the demerged company and were wholly owned by the appellant, entitling it to claim depreciation in accordance with Section 32.

The Court placed reliance on the judgments of the Karnataka High Court in Padmini Products (P) Ltd. vs. DCIT and the Bombay High Court in PCIT vs. Dharmanandan Diamonds (P) Ltd., which held that the Fifth Proviso applies only to the year of succession and not thereafter.

The Court further observed that the Tribunal failed to examine the issue from the perspective of computation of written down value under Section 43(6), having confined itself only to the Fifth Proviso.

Important Clarification

The Court clarified that the Fifth Proviso to Section 32 does not govern depreciation claims in perpetuity and cannot be used to deny depreciation in years following the year of succession or demerger. Once the asset vests solely in the successor, depreciation must be determined independently in accordance with the Act.

Final Outcome

The appeals were allowed. The Delhi High Court set aside the order dated 03.02.2023 passed by the Income Tax Appellate Tribunal and remitted the matter back to the Tribunal for fresh adjudication in accordance with law, holding that the Fifth Proviso to Section 32 was not applicable to Assessment Years 2015–16 and 2016–17.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770016981_PMVMALTINGSPVTLTDVsDYCOMMISSIONEROFINCOMETAXCIRCLE191ANR..pdf

 

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