Case Note & Summary
The case involves an Income Tax Reference under section 256(1) of the Income Tax Act, 1961, arising from the assessment years 1976-77, 1977-78, and 1978-79. The applicant-assessee, Rhone-Poulenc (India) Ltd. (formerly May and Baker (India) Pvt. Ltd.), was a subsidiary of May and Baker Ltd., a UK company. The UK company had an industrial undertaking in India, and its profits were computed under Rule 33 (later Rule 10) of the Income Tax Rules, 1962, on a notional basis. Under a scheme of amalgamation approved by the Bombay High Court with effect from 1st January 1975, the UK company's Indian undertaking, along with its assets and liabilities, was transferred to the assessee. The assessee claimed depreciation on the fixed assets based on their original cost. However, the tax authorities allowed depreciation only on the written down value, which was calculated after notionally allowing depreciation to the UK company in prior years. The assessee contended that since the UK company was assessed under Rule 10 on a notional profit basis, no actual depreciation was allowed or claimed, and therefore the written down value should not be reduced. The Income Tax Appellate Tribunal (ITAT) referred the question of law to the High Court. The High Court analyzed the provisions of Rule 10 and the scheme of amalgamation. It noted that under Rule 10, the profits of a non-resident are computed on a notional basis without reference to actual book profits, and depreciation is not actually allowed but is deemed to have been allowed for the purpose of computing the notional profit. The court held that the assessee is entitled to claim depreciation on the original cost of the assets as appearing in the books of the UK company, and not on the written down value after notional depreciation. The court reasoned that the notional depreciation was not actually allowed or claimed, and the written down value for the purpose of the Income Tax Act should be the actual cost to the assessee, which is the original cost as per the amalgamation scheme. The court answered the question in favor of the assessee, holding that the Tribunal was not justified in approving depreciation on the written down value of Rs.93,14,942/-.
Headnote
A) Income Tax - Depreciation - Amalgamation - Rule 10 of Income Tax Rules, 1962 - The assessee, an Indian company, took over the industrial undertaking of its non-resident parent company under a scheme of amalgamation. The parent company's profits were computed under Rule 10 (formerly Rule 33) on a notional basis, and depreciation was notionally allowed. The question was whether the assessee could claim depreciation on the original cost of assets or on the written down value after notional depreciation. The High Court held that the assessee is entitled to depreciation on the original cost of the assets as appearing in the books of the parent company, and not on the written down value after notional depreciation, because the notional depreciation was not actually allowed or claimed. (Paras 1-10)
Issue of Consideration
Whether the assessee is entitled to claim depreciation on fixed assets taken over under a scheme of amalgamation on the basis of original cost or on the basis of written down value arrived at by granting notional depreciation to the parent company under Rule 10 of the Income Tax Rules, 1962.
Final Decision
The High Court answered the question in favor of the assessee, holding that the Tribunal was not justified in approving depreciation on the written down value of Rs.93,14,942/-. The assessee is entitled to claim depreciation on the original cost of the fixed assets as appearing in the books of the parent company.
Law Points
- Depreciation on fixed assets taken over under amalgamation
- Computation of profits under Rule 10 of Income Tax Rules
- 1962
- Notional depreciation to non-resident parent company
- Actual cost vs written down value
