Auditor’s report to be relied for allowance depreciation on unidentifiable assets received during amalgamation: Allahabad High Court

Facts of the case:

• The assessee company was formed after division of U.P. Power Corporation Ltd. (UPPCL) into four companies (assessee being one of them) under U.P. Transfer of Distribution Undertaking Scheme, 2003 (‘Transfer Scheme’).
• Pursuant to formation, the assets and liabilities, were transferred to the assessee, but no break up of assets value and item wise detail was provided in the Transfer Scheme. However, the assessee appointed an Auditor for physical verification of assets and determination of the value.
• As the report was awaited and the return date had fallen due, assessee had charged depreciation at a common rate of 7.84% as per the method prescribed by the government under Electricity Supply Act, 1948 on the gross fixed asset transferred to the assessee as per the Transfer Scheme.
• The Assessing Officer (AO) allowed depreciation only on the assets which were acquired after the transfer scheme came into effect and depreciation on balance assets transferred on the date of scheme was disallowed, as according to the AO these assets were not yet finalized and identifiable and hence not in use in the relevant year.
• Related to above facts the AO disallowed the depreciation claimed by the assessee in all the assessment years i.e. 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, and 2012-13. 

Contention of Department:

• Department contended that assessee was not entitled to claim depreciation on the fixed assets acquired on Transfer Scheme which was not yet finalized/ascertained on the fact that the actual assets are not identifiable and not being used as well as their full title have not been transferred to the assessee.
• It was further contended that, pursuant to sub-section 1(ii) of Section 32 of the Income Tax Act, 1961 depreciation shall be granted only when the assessee owned, wholly or partly and used for the purpose of business or profession that the deduction shall be allowed.

Held by High Court of Allahabad:

The auditor submitted his report in AY 2016-17 and the assets transferred under transfer scheme became identifiable in AY 2016-17. In light of the item wise report provided by the auditor, the matter is remanded back the case to assessing authorities to reconsider the matter and verify the records provided by the assessee.

Conclusion:

The assessing officer was unjustified in not allowing the depreciation on goodwill on the mere contention that the item-wise values were not allocated to the assets while claiming the depreciation, where on the contrary item wise report provided by the auditor was submitted with the assessing officer subsequently. Thus, the Auditor’s report could be taken as a base to substantiate the cost of the assets acquired in scheme of amalgamation.

Source: [2019] 111 taxmann.com 492 (Allahabad) Commissioner of Income-Tax v. Poorvanchal Vidyut Vitran Nigam Ltd, High Court of Allahabad