Transfer by way of gift pursuant to court order need to be considered at the actual cost in the hands of the recipient and eligible for deprecation: Delhi ITAT
Delhi Tribunal in the case of Indus Towers Limited (ITA No 1962/Del/2023) has discussed the importance of the binding nature of court-sanctioned schemes and the recognition of such transfers under the Income Tax Act.
Let us have a Short Overview of the case:
Indus Towers Ltd. is engaged in providing passive infrastructure telecommunication services to telecom operators. During this period, a scheme was filed for the merger of VInfL, BIVL, and ICTIL with Indus Towers Ltd. This scheme was sanctioned by the Delhi High Court with an appointed date of April 1, 2009.
Depreciation issue
The primary issue revolves around the depreciation of PIAs transferred to Indus Towers Ltd. under the scheme. The key points of contention:
Nature of transfer: The assets were transferred without any consideration, which the assessee claimed as a ‘gift’. According to Expl 2 to Section 43(1) of the Act, if an asset is acquired by way of gift, the actual cost to the assessee is the WDV of the asset in the hands of the previous owner.
Tax depreciation: Indus Towers Ltd. claimed tax depreciation on the PIAs based on the WDV of these assets in the hands of the OpCos as of April 1, 2009.
The AO disputed this, arguing that the transfer was not a gift and thus the actual cost should be nil, resulting in no depreciation.
AO’s reasoning:
The AO provided several reasons for disallowing the depreciation:
The transfer was part of a demerger scheme and not sanctioned as a gift.
The transaction involved consideration in the form of shares issued during the amalgamation.
There was no intent or documentation to treat the transfer as a gift.
CIT(A)’s decision:
The CIT(A) upheld the AO’s decision, agreeing that the transfer did not constitute a gift and thus the WDV in the hands of the OpCos could not be considered the actual cost for Indus Towers Ltd.
ITAT’s analysis and decision:
The ITAT examined the scheme of arrangement and the High Court’s order, which recognized the transfer as a gift.
It was noted that the scheme was sanctioned by the High Court, and the tax department did not challenge this at the time of sanction.
The ITAT referred to various decisions, which emphasized the binding nature of court-sanctioned schemes.
The ITAT concluded that the transfer of PIAs as a gift was valid and the WDV in the hands of the OpCos should be considered the actual cost for Indus Towers Ltd. for the purpose of depreciation.
The ITAT allowed the depreciation on the PIAs transferred to Indus Towers Ltd., recognizing the transfer as a gift and considering the WDV in the hands of the OpCos as the actual cost.
There were also other issues involved, such as, Provision for site restoration obligation, provision for expenses, service level adjustment credits, depreciation on energy saving devices, reconciliation of turnover in service tax vis-a-vis income tax, upfront fees paid to banks and unverifiable expenses.
The copy of the order is as under:
