Assessee Entitled To Claim Depreciation In Respect Of Assets On The Actual Cost Of Assets: Bombay High Court

The Bombay High Court has held that the assessee is entitled to claim depreciation in respect of any assets based on the actual cost of the assets.

The bench of Justice K.R. Shriram and Justice M.M. Sathaye observed that the actual cost of the assets will be the actual cost that the assessee paid to the predecessor after revaluing the assets, and certainly, the assessee will be entitled to claim depreciation for the subsequent years on the basis of the actual cost paid.

The respondent/assessee is in the business of manufacturing diamonds and power energy. A return of Income Tax was filed, declaring a total loss, which was processed under Section 143(1) of the Income Tax Act, 1961, and MAT was determined under Section 115JB at 10% of the book profit.

The assessee was incorporated on August 31, 2007, and hence the assessment year 2008–09 was the first year of the Company. Assessee was created and constituted to take over all the assets and liabilities of the erstwhile partnership firm, Dharmanandan Diamonds, and carry out business in a more efficient manner. The total turnover of the assessee during the year was Rs. 869.70 crore.

As the assessee took over assets and liabilities of the firm, depreciation was claimed by the erstwhile partnership firm on the written-down value as per its records up to 31/08/2007, and the assessee claimed depreciation from 01/09/2007 till 31/03/2008 at the revalued price. The revaluation was done by a government-approved valuer.

The AO noted that the petitioner had claimed excess depreciation and disallowed the depreciation as claimed on the revalued cost. The assessee’s claim of depreciation was recalculated at Rs. 12,92,66,889 in place of Rs. 35,21,38,615. The total income was determined under normal provisions at Rs. 5,64,14,373, and the book profit under Section 115JB was worked out at Rs. 13,56,43,461.

The assessee challenged the order before the Commissioner of Income Tax (Appeals), who dismissed the Appeal. The order was impugned by the assessee before the Income Tax Appellate Tribunal (ITAT), and ITAT allowed the Appeal.

The Court noted that for the assessment year 2008-09, the predecessor, i.e., the partnership firm, has claimed depreciation for five months from 01/04/2007 to 31/08/2007, and the successor, i.e., the assessee, has claimed depreciation for the assessment year 2008-09 for the period from 01/09/2007 to 31/03/2008.

The court held that the appeal pertains to AY 2009–10, in which year the asset is clearly owned by the successor, i.e., the assessee. The assessee, as per Section 32 read with Rule 5, will be entitled to claim depreciation in respect of any assets on the actual cost of the assets.

Case Title: Pr. Commissioner Of Income Tax Versus Dharmanandan Diamonds Pvt. Ltd.

Case No.: Income Tax Appeal No. 127 Of 2018

Date: 14/06/2023

Counsel For Appellant: Suresh Kumar

Counsel For Respondent: M.M. Subramaniam

Click Here To Read The Order