By TIOL News Service

NEW DELHI, OCT 17, 2013: THE issues before the Bench are - Whether assets acquired by the merged entity pursuant to scheme of amalgamation u/s 394 of the Companies Act falls within the meaning of term 'transfer' of the Income Tax Act;Whether merger and acquisition can be one of the modes of acquisition of an asset;Whether imported cars originally purchased between 1st March, 1975 and 31st March, 2001, but transferred to the merged entity after the cutoff date of the merger i.e. 1st April, 2001 is entitled to depreciation and Whether bar/prohibition in clause (a) to proviso to Section 32(1) would apply on such imported cars acquired pursuant to a scheme of merger. And the verdict goes against the Revenue.

Facts of the case

The assessee is a public limited company engaged in the business of manufacturing and trading of readymade garments, accessories and made-ups. Under a scheme of arrangement and merger sanctioned by the Delhi High Court u/s 394 of the Companies Act, 1956 by order dated 5th October, 2004, proprietary concerns of the directors, M/s Vama Industries, Vikramaditya Exports and Meera Overseas had merged with the assessee. The appointed date was 1st April, 2004. Imported motor cars were originally acquired by the merged entities between 1st March, 1975 and 31st March, 2001, but upon and in view of the scheme sanctioned by the Delhi High Court, the said cars became the properties of the assessee with effect from 1st April, 2004. The question raised is whether the assessee is entitled to claim depreciation as the imported cars were acquired by them after 1st April, 2001. The contention of the Revenue was that the motor cars were acquired by the merged entities within the specified dates and, therefore, even the assessee was not entitled to depreciation on motor cars under the proviso. The said view of the AO was affirmed by the CIT(A), but on further appeal, the tribunal has accepted the plea of the assessee but on the question of costs or the written down value for the purpose of depreciation, matter has been remanded to the AO.

Aggrieved, the Revenue has filed this appeal before the High Court.

Having heard the parties, the High Court held that,

+ on the other hand, Explanation 7 to section 43(1) refers to acquisition of an asset under the scheme of amalgamation. This indicates that the Legislature has treated amalgamation as transfer and, therefore, had specifically thought it appropriate to provide how actual cost of the capital asset should be computed. Similarly, under sub-section (6) to Section 43 by defining the expression "written down value" reference is made to the written down value in the block of assets of the amalgamating company transferred to the amalgamated company. The said provision also uses the term "transferee company and transferor company" clearly indicating that in cases of amalgamation there is transfer of assets. Thus, we do not agree with the findings recorded by the tribunal that it is not a case of amalgamation;or merger and amalgamation are different or it is a case of purchase of business as a going concern and, therefore, different principles apply. In the present case, there was transfer, as merger or amalgamation results in transfer;

+ term "merger or amalgamation" has no precise legal meaning but it involves blending of two or more existing undertaking into one. In case of merger, there is complete blending of the merged undertaking into the other company, but this does result in the transfer of the assets from the merged undertaking. Assets are acquired by the other undertaking. Upon merger, the earlier concern or undertaking loses its identity and the ownership in the asset;

+ explanation 2 to Section 43(1) refers to acquisition of asset by gift or inheritance. Thus, acquisition of asset may be by way of sale for a price i.e. money, in exchange, or by way of several other modes including gift or inheritance. Merger and acquisition can be modes of acquisition of an asset.

+ in terms of the order passed under Section 394 of the Companies Act, 1956, the respondent company acquired the imported motor cars. The cars were not acquired and the respondent assessee was not owner of the motor cars prior to the said date. On merger of the three concerns with the respondent assessee, shares were issued as consideration to the proprietors of the business concerns. The shares issued were consideration for the transfer of the assets. It is immaterial, according to us, whether there was transfer of an undertaking, including the block of assets, which also included the imported motor cars;

+ it is clear that the respondent assessee had acquired the asset i.e. imported cars after the cutoff date i.e. 1st April, 2001 and, therefore, is entitled to depreciation and the bar/prohibition in clause (a) to proviso to Section 32(1) would not apply. The tribunal has rightly decided the issue in favour of the respondent assessee and against the Revenue. There is no merit in the present appeals and the same are dismissed.

(See 2013-TIOL-815-HC-DEL-IT)