3. Facts of the Case

  • During the relevant financial year pertaining to Assessment Year (AY) 1995-96, the plant and machinery in question were initially owned and operated by M/s Triveni Engineering Works Ltd. from April 1, 1994, to September 30, 1994.
  • Because this initial period exceeded 180 days, M/s Triveni Engineering Works Ltd. claimed 100% depreciation on the assets at the prescribed rates.
  • Effective October 1, 1994, M/s Triveni Engineering Works Ltd. merged into the successor company, M/s Triveni Engineering & Industries Ltd. (the Assessee), through a court-approved scheme of amalgamation.
  • The Assessee company subsequent to the merger utilized the exact same plant and machinery from October 1, 1994, to March 31, 1995. Since this period also exceeded 180 days, the Assessee claimed 100% depreciation in its independent tax assessment.
  • The Assessing Officer (AO) disallowed the claim, asserting that the aggregate depreciation claimed by the amalgamating and amalgamated corporate entities within a single financial year cannot mathematically exceed 100% of the prescribed asset rate.
  • The Income Tax Appellate Tribunal (ITAT) overturned the AO's decision, allowing the dual depreciation claims , prompting the Revenue to appeal to the High Court.

4. Issues Involved

  1. Whether the amalgamating company and the amalgamated company can both independently avail 100% depreciation under Section 32(1) on the same machinery if both fulfilled the dual requirements of asset ownership and utilization for more than 180 days within the same financial year.
  2. Whether the Fourth Proviso to Section 32(1), introduced by the Finance Act, 1996 (restricting and apportioning aggregate depreciation between predecessor and successor entities in a ratio of days), is clarificatory and retrospective, or substantive and prospective.

5. Petitioner’s (Revenue's) Arguments

  • The learned counsel for the Revenue argued that the cumulative depreciation allowable to an amalgamating and an amalgamated company cannot exceed 100% of the deduction calculated at the prescribed rate in any previous year.
  • It was strongly contended that even though the Fourth Proviso to Section 32(1) was systematically inserted by the Legislature with effect from April 1, 1997, it was purely clarificatory in nature. Therefore, it should apply retrospectively to prevent an inequitable scenario where aggregate annual corporate depreciation exceeds 100%.

6. Respondent’s (Assessee's) Arguments

  • The learned counsel for the Assessee asserted that prior to the statutory amendment effective April 1, 1997, the law only stipulated that the claimant entity must be the owner of the machinery and use it for the statutory period (more than 180 days) to get full depreciation. The Assessee fully met both conditions.
  • The Assessee placed strong reliance on the Memorandum Explaining the Provisions in the Finance (2) Bill, 1996. The memorandum openly acknowledged that under the existing law, predecessor and successor companies were legally entitled to independent depreciation allowances that could, in aggregate, exceed 100%. This proved that the amendment was a new, prospective restrictive measure rather than a clarification of old law.

7. Court Order / Findings

  • Prospective Application of the Amendment: The Delhi High Court observed that the legislative explanation in the Finance Bill explicitly recognized the dual eligibility of depreciation under the old provision. Thus, the Fourth Proviso was deliberately introduced to restrict this cumulative deduction for future cycles. Because the law explicitly made the proviso active from April 1, 1997, it cannot be applied retrospectively to AY 1995-96.
  • Absence of Apportionment Clause: Citing historical precedents from the Madras High Court (A.M. Ponnurangam Mudaliar) and the Patna High Court (S.K. Sahana and Sons), the Court ruled that in the absence of an explicit statutory provision mandating apportionment, there is no authority to split or scale down depreciation based on the exact number of months an asset was held.
  • Final Decision: The High Court dismissed the Revenue's contentions regarding depreciation, confirming that the ITAT acted correctly under the prevailing statutory legal framework of the time.

8. Important Clarification

  • The ruling clarifies that unless an amendment is expressly stated to be retrospective or is purely declaration-based without creating new liabilities/restrictions, it must be interpreted as prospective.
  • For corporate restructuring that occurred before April 1, 1997, both corporate entities are legally entitled to separate full or partial depreciation on common assets, provided they individually satisfy the ownership and 180-day utilization benchmarks under Section 32.

2. Sections Involved

  • Primary Section: Section 32(1) of the Income Tax Act, 1961 (Depreciation on Plant and Machinery).
  • Proviso in Question: Fourth Proviso to Section 32(1) of the Income Tax Act, 1961 (inserted via Finance Act, 1996).
  • Subsidiary Sections Covered: Section 37(2) (Entertainment and Hospitality Expenditure), Section 40A(7) (Provision for Approved Gratuity Fund), and Section 43B.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:10981-DB/AKS05082010ITA2582009_124135.pdf

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