The Bombay High Court granted relief to Technova Imaging Systems and allowed the depreciation claim without the approval under Section 72A of the Income Tax Act, 1961.
One of the main grounds issued by the assessee, Technova Imaging Systems, in the appeal was whether the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) was right in law to deny the appellant (the amalgamated company) the right to adjust the written-down value of assets and claim depreciation due to the lack of Central Government approval under section 72A of the Income Tax Act, 1961.
Coming to the facts of the present case, the assessee company was engaged in the business of manufacture and sale of aluminium-based presensitised lithographic plates, chemicals and polyester-based reprographic films for printing and other allied image transfer industries.
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In 1991, the Bombay High Court approved the merger of two companies, namely, TechNova Graphic Systems Pvt. Ltd. and Image Printmakers Pvt. Ltd., into TechNova Imaging Systems, with effect from 1-4-1990. These two companies, now dissolved, had some unabsorbed depreciation from earlier years. While filing its income tax returns for the financial years 1990–91 and 1991–92 (relevant to assessment years 1991–92 and 1992–93), TechNova didn’t directly claim those unabsorbed amounts as carried forward losses. Instead, it recalculated depreciation by adjusting the written-down value of the assets it inherited from the merged companies, based on depreciation that had previously been allowed but not fully used.
But, the assessing officer (AO) reduced the depreciation claimed, arguing that without specific government approval under Section 72A of the Income Tax Act, such unabsorbed depreciation couldn’t be used. TechNova appealed this decision, and the Commissioner of Income-tax (Appeals) [CIT(A)] ruled in its favor, clarifying that the company wasn’t trying to carry forward the losses but was simply revaluing the assets in line with tax provisions under Sections 32 and 43(6). This interpretation was accepted for both assessment years, though the AO challenged the ruling and took the matter to the Income Tax Appellate Tribunal.
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The appellant’s counsel argued that the ITAT wrongly denied an adjournment request, despite a related appeal for 1991–92 still pending. On 10-1-2003, the Tribunal reversed the CIT(A)’s decision on depreciation, stating it was based on outdated law before Section 72A was amended in 1978, and noting the appellant had not obtained the required Central Government approval under that section.
The revenue’s counsel submitted that there was no approval of the Central Government under Section 72A of the Income Tax Act and that the ITAT was justified in setting aside the order passed by the CIT(A).
The High Court observed that the appellant did not claim carry forward of unabsorbed depreciation of amalgamation of amalgamating companies in its own assessment.
The HC further observed that “the tribunal was not justified in law in holding that in view of insertion of Section 72A in the Income Tax Act, 1961, the appellant (being the amalgamated company) not having obtained approval of the Central Government was not entitled to adjust the written-down value of the assets of the amalgamating companies on the basis of depreciation actually allowed to them and to claim depreciation on such adjusted written-down value of the assets of the amalgamating companies.”
The bench observed that no Section 7A approval was needed for a depreciation claim post-amalgamation. The Chief Justice of the Bombay High Court, Justice M.S. Karnik, allowed the assessee’s appeal and set aside the impugned order.
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