Depreciation Claim u/s 32 of ITA Allowable on Actual Cost of Assets Taken Over from Dissolved Firm: Madras HC [Read Order]
The Court clarified that it did not matter if the partners were from the same family, as the Act did not make any such distinction
![Depreciation Claim u/s 32 of ITA Allowable on Actual Cost of Assets Taken Over from Dissolved Firm: Madras HC [Read Order] Depreciation Claim u/s 32 of ITA Allowable on Actual Cost of Assets Taken Over from Dissolved Firm: Madras HC [Read Order]](https://images.taxscan.in/h-upload/2025/07/23/2068103-itat-assessment-depreciation-section-263-taxscan-.webp)
The High Court of Madras, held that depreciation claim under Section 32 of Income Tax Act,1961,is allowable on actual cost of assets taken over from a dissolved firm.
Sundaram Spinning Mills (P) Ltd,petitioner-assessee, was incorporated on 15.12.1982 and became a partner in a firm on 19.01.1983, holding a 25% share. The other two partners held 37.5% each. On 31.03.1984, the firm was dissolved, and the assessee took over all assets and liabilities as per the balance sheet.
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The deed also required the assessee to pay compensation to the retiring partners within a year. From 01.04.1984, the assessee continued the firm’s business.
For the assessment year 1985-86, the assessee filed its return and claimed depreciation on the asset value taken over from the firm, based on a valuation done in April 1982 when the firm was reconstituted.
The Assessing Officer (AO) denied the depreciation claim by applying Explanation 1 to Section 43(6) of the Income Tax Act. The appeal was dismissed, and the Income Tax Appellate Tribunal (ITAT) upheld the order on 28.09.2007.
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The Division bench comprising K.R.Shriram (Chief Justice) and Sunder Mohan (Justice) noted that the main issue was whether the assessee was eligible to claim depreciation on the assets taken over from the firm.
The Court held that since the firm had dissolved on 31.03.1984, only the assessee had claimed depreciation for the assessment year 1985-86. It ruled that under Section 32 read with Rule 5, the assessee was entitled to claim depreciation based on the actual cost paid to the retiring partners, as per the April 1982 valuation.
The bench clarified that it did not matter if the partners were from the same family, as the Act did not make any such distinction. It relied on the Bombay High Court’s ruling in PCIT-5 v. Dharmanandan Diamonds Pvt. Ltd. to support its view.
The Court answered the legal questions in favour of the assessee and disposed of the appeals.
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