THE issue before the Bench is - Whether for the purpose of computing depreciation, only the written down value of the transferred assets of the demerged company as per the accounts maintained under the Act shall constitute the written down value of the block of assets of the resulting company. And the verdict favours the Revenue.
Facts of the case
Assessee claimed depreciation aggregating to Rs.65,90,99,922/-. In the Annexure 3 of tax audit report, it was disclosed by the assessee that the assets transferred from the demerged company viz. Godrej appliances Ltd. pursuant to the scheme of arrangement u/s 291 and 394 of the companies Act 1956, have been taken over at the written down value of the block of assets as appearing in the books of accounts of the demerged company immediately before the demerger, as per explanation 2B to section 43 (6) of the Act. It was further stated that the written down value of the block of assets as appearing in the books of accounts of the demerged company was reduced by Rs.14,35,87,519/-, to incorporate the effect of interest capitalised by the assessee in the books of accounts and claimed as revenue expenses under the income tax in the earlier previous year's.
During assessment proceedings, the AO asked the assessee to explain as to why the relevant asset transferred to the assessee company should not be considered at the income tax written down value for the purpose of computing the depreciation u/s section 32 of the Act.
The assessee explained that though the words 'book value of assets' were replaced by 'written down value of assets' in explanation 2A of section 43(6) by the Finance Act 2000, a similar change was not made in explanation 2B, which deals with the computation of the written down value of the block of assets of the resulting company. By the Finance Act, 2000 the words 'value of assets' as appearing in the books of accounts in explanation 2B were replaced by the word 'written down value of the transfer of asset as appearing in the books of account' thereby fortifying the belief that the legislature intended that the written down value of the block of assets in respect of resulting company shall be computed on the book WDV of the assets transferred to it from the demerged company.
The AO, however, was not satisfied with the assessee's submissions. The AO referred to the memorandum explaining the provisions of the finance Bill, 1999, whereby the provisions relating to the demerger of companies were initially introduced. The AO held that the amendments were made to the various provisions of the Act on the basis of certain broad principles, one of which was that the merger should be tax neutral and should not attract an additional liability to tax nor to provide any undue benefit to an assessee. In the scheme of demerger, the demerged company is to reduce the written down value of the assets transferred to the resulting company. Hence, the resulting company should add to its block of assets written down value of the assets taken over by it. The assessee cannot take a tax advantage by entering into a scheme of demerger because the intention of the legislature was to make such a scheme tax neutral. Since depreciation was to be computed as per the provisions of section 32, the written down value of the assets as per Income Tax Act should be considered. The value of assets as per the books of accounts could not be considered while calculating depreciation under the Income Tax Act. Accordingly, the depreciation u/s 32 was considered by AO based on the WDV as per Act on such assets and depreciation in aggregate was allowed at Rs.39,75,12,704/-.
The CIT(A) observed that the identical issue was also there in the case of assessee's group company M/s. Godrej Industries Ltd. for A.Yrs.2002-03, 2003-04 and 2005-06. The ITAT vide its combined order dtd.30.09.2008 in ITA No.4196, 4197 / MUM / 2006 for A.Y. 2002-03 and 2003-04 and in ITA No.1090/MUM/2009 = 2011-TIOL-809-ITAT-MUM for A.Y. 2005-06 had decided the issue against the assessee. Since the facts of the issue under consideration were identical, he, therefore, following the decision of ITAT, in the case of Godrej Industries Ltd., decided the issue against the assessee.
On further appeal by the assessee, the Tribunal held that,
++ explanation 2A and 2B to section 43(6) were inserted by Finance Act, 1999 w.e.f. 01.04.2000. The relevant words under clause 2A were "written down value of the block of assets of the demerged company" whereas the corresponding relevant words under clause 2B were "the value of assets as appearing in the books of accounts". However, a subsequent amendment was made vide Finance Act, 2000 w.e.f. the same date i.e. 01.04.2000 vide which the words "the value of the assets as appearing in the books of account" were substituted with the words "written down value of the transferred assets as appearing in the books of account". At the time of insertion of the relevant provisions, the value of the assets of the demerged company was to be taken as its 'written down value' under clause 2A, whereas under clause 2B, the corresponding written down value of the assets of the resulting company was mentioned as the 'value of assets as appearing in the books of account'. However, immediately, before these provisions come into operation, an amendment was brought out in explanation 2B and the relevant words were substituted with 'written down value of the transferred assets'. However, the other relevant words "as appearing in the books of account" were not omitted. If the contention of the assessee is taken as correct, then in that event there would not have been any impact or change in the interpretation of the relevant provisions even after the amendment made by Finance Act, 2000. If, as contended by the assessee, the intention of the legislature has been that the written down value as appearing in the books of account maintained under the Companies Act be adopted, then it will not be understandable as to what was the purpose of immediate amendment made vide Finance Act, 2000, subsequent to the insertion of the relevant provisions made vide Finance Act, 1999 both w.e.f. 01.04.2000;
++ when we read the relevant words prior to amendment made vide Finance Act, 2000 i.e. 'the value of assets as appearing in the books of account' and the words appearing after the amendment made vide Finance Act, 2000 i.e. 'the written down value of the assets as appearing in the books of account', and if the contention of the assessee is to be accepted, then, the words appearing before amendment and after amendment made vide Finance Act 2000, will give the same meaning, resulting to inference that the legislature has not made any amendment in the said section and the said amendment will become meaningless and rendered redundant. However, the Parliament has not made a futile exercise in amending the relevant provisions vide Finance Act, 2000. Hence, the view taken by the AO after referring to the memorandum explaining the provisions of Finance Bill, 1999 is to be accepted that provisions relating to the demerger of companies were introduced based on certain principles one of which was that the demergers should be tax neutral and should not attract any additional tax liability. The value of the assets of the demerged company should be the same when transferred to the resulting company. The amendment made by Finance Act, 2003 w.e.f. 01.04.2004, is curative and clarificatory in nature. The omission of the words "as appearing in the books of account" have neither taken away nor affected any rights of the assessee which were accrued to him before the said amendment. The amendment made vide Finance Act, 2003 has just removed the ambiguity. It has neither taken away any right of any assessee nor has given any new right to the Revenue;
++ the emphasis of the legislature in explanation 2B after the amendment made vide Finance Act, 2000 was that the value of the block of assets in the case of resulting company shall be the written down value of the assets of the demerged company immediately before the demerger. Hence, there is no infirmity in the findings of the lower authorities that only the written down value of the transferred assets of the demerged company as per the accounts maintained under the Act shall accordingly constitute the written down value of the block of assets of the resulting company;
++ the omission of the words "as appearing in the books of account" neither have in any way affected any substantive right already vested in the assessee nor has taken away any such right which was accruing to the assessee before such omission. In fact, the curative amendment was made by the Parliament vide Finance Act, 2000 and only the ambiguity has been removed vide Finance Act, 2003 so as to bring clarity. Whatever rights had accrued to the assessee in view of the ambiguity in the provisions at the time of their insertion vide Finance Act, 1999, the same had been taken away/clarified immediately by removing the ambiguity through amendment made vide Finance Act, 2000. These grounds are accordingly decided against the assessee.
During assessment proceedings, the AO asked the assessee to explain as to why the relevant asset transferred to the assessee company should not be considered at the income tax written down value for the purpose of computing the depreciation u/s section 32 of the Act.
The assessee explained that though the words 'book value of assets' were replaced by 'written down value of assets' in explanation 2A of section 43(6) by the Finance Act 2000, a similar change was not made in explanation 2B, which deals with the computation of the written down value of the block of assets of the resulting company. By the Finance Act, 2000 the words 'value of assets' as appearing in the books of accounts in explanation 2B were replaced by the word 'written down value of the transfer of asset as appearing in the books of account' thereby fortifying the belief that the legislature intended that the written down value of the block of assets in respect of resulting company shall be computed on the book WDV of the assets transferred to it from the demerged company.
The AO, however, was not satisfied with the assessee's submissions. The AO referred to the memorandum explaining the provisions of the finance Bill, 1999, whereby the provisions relating to the demerger of companies were initially introduced. The AO held that the amendments were made to the various provisions of the Act on the basis of certain broad principles, one of which was that the merger should be tax neutral and should not attract an additional liability to tax nor to provide any undue benefit to an assessee. In the scheme of demerger, the demerged company is to reduce the written down value of the assets transferred to the resulting company. Hence, the resulting company should add to its block of assets written down value of the assets taken over by it. The assessee cannot take a tax advantage by entering into a scheme of demerger because the intention of the legislature was to make such a scheme tax neutral. Since depreciation was to be computed as per the provisions of section 32, the written down value of the assets as per Income Tax Act should be considered. The value of assets as per the books of accounts could not be considered while calculating depreciation under the Income Tax Act. Accordingly, the depreciation u/s 32 was considered by AO based on the WDV as per Act on such assets and depreciation in aggregate was allowed at Rs.39,75,12,704/-.
The CIT(A) observed that the identical issue was also there in the case of assessee's group company M/s. Godrej Industries Ltd. for A.Yrs.2002-03, 2003-04 and 2005-06. The ITAT vide its combined order dtd.30.09.2008 in ITA No.4196, 4197 / MUM / 2006 for A.Y. 2002-03 and 2003-04 and in ITA No.1090/MUM/2009 = 2011-TIOL-809-ITAT-MUM for A.Y. 2005-06 had decided the issue against the assessee. Since the facts of the issue under consideration were identical, he, therefore, following the decision of ITAT, in the case of Godrej Industries Ltd., decided the issue against the assessee.
On further appeal by the assessee, the Tribunal held that,
++ explanation 2A and 2B to section 43(6) were inserted by Finance Act, 1999 w.e.f. 01.04.2000. The relevant words under clause 2A were "written down value of the block of assets of the demerged company" whereas the corresponding relevant words under clause 2B were "the value of assets as appearing in the books of accounts". However, a subsequent amendment was made vide Finance Act, 2000 w.e.f. the same date i.e. 01.04.2000 vide which the words "the value of the assets as appearing in the books of account" were substituted with the words "written down value of the transferred assets as appearing in the books of account". At the time of insertion of the relevant provisions, the value of the assets of the demerged company was to be taken as its 'written down value' under clause 2A, whereas under clause 2B, the corresponding written down value of the assets of the resulting company was mentioned as the 'value of assets as appearing in the books of account'. However, immediately, before these provisions come into operation, an amendment was brought out in explanation 2B and the relevant words were substituted with 'written down value of the transferred assets'. However, the other relevant words "as appearing in the books of account" were not omitted. If the contention of the assessee is taken as correct, then in that event there would not have been any impact or change in the interpretation of the relevant provisions even after the amendment made by Finance Act, 2000. If, as contended by the assessee, the intention of the legislature has been that the written down value as appearing in the books of account maintained under the Companies Act be adopted, then it will not be understandable as to what was the purpose of immediate amendment made vide Finance Act, 2000, subsequent to the insertion of the relevant provisions made vide Finance Act, 1999 both w.e.f. 01.04.2000;
++ when we read the relevant words prior to amendment made vide Finance Act, 2000 i.e. 'the value of assets as appearing in the books of account' and the words appearing after the amendment made vide Finance Act, 2000 i.e. 'the written down value of the assets as appearing in the books of account', and if the contention of the assessee is to be accepted, then, the words appearing before amendment and after amendment made vide Finance Act 2000, will give the same meaning, resulting to inference that the legislature has not made any amendment in the said section and the said amendment will become meaningless and rendered redundant. However, the Parliament has not made a futile exercise in amending the relevant provisions vide Finance Act, 2000. Hence, the view taken by the AO after referring to the memorandum explaining the provisions of Finance Bill, 1999 is to be accepted that provisions relating to the demerger of companies were introduced based on certain principles one of which was that the demergers should be tax neutral and should not attract any additional tax liability. The value of the assets of the demerged company should be the same when transferred to the resulting company. The amendment made by Finance Act, 2003 w.e.f. 01.04.2004, is curative and clarificatory in nature. The omission of the words "as appearing in the books of account" have neither taken away nor affected any rights of the assessee which were accrued to him before the said amendment. The amendment made vide Finance Act, 2003 has just removed the ambiguity. It has neither taken away any right of any assessee nor has given any new right to the Revenue;
++ the emphasis of the legislature in explanation 2B after the amendment made vide Finance Act, 2000 was that the value of the block of assets in the case of resulting company shall be the written down value of the assets of the demerged company immediately before the demerger. Hence, there is no infirmity in the findings of the lower authorities that only the written down value of the transferred assets of the demerged company as per the accounts maintained under the Act shall accordingly constitute the written down value of the block of assets of the resulting company;
++ the omission of the words "as appearing in the books of account" neither have in any way affected any substantive right already vested in the assessee nor has taken away any such right which was accruing to the assessee before such omission. In fact, the curative amendment was made by the Parliament vide Finance Act, 2000 and only the ambiguity has been removed vide Finance Act, 2003 so as to bring clarity. Whatever rights had accrued to the assessee in view of the ambiguity in the provisions at the time of their insertion vide Finance Act, 1999, the same had been taken away/clarified immediately by removing the ambiguity through amendment made vide Finance Act, 2000. These grounds are accordingly decided against the assessee.
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