Adjustment of Written-Down Value in Amalgamations Without Central Government Approval under Section 72A

Introduction

Technova Imaging Systems Ltd. v. Deputy Commissioner of Income Tax (Bombay High Court, 09 April 2025) concerned the tax treatment of depreciation on assets received under court-sanctioned amalgamation. The appellant, a manufacturer of lithographic plates and allied products, had absorbed two small companies (TechNova Graphic Systems Pvt. Ltd. and Image Printmakers Pvt. Ltd.) by order of the Bombay High Court effective 1 April 1990. On filing returns for successive years, the appellant adjusted the opening written-down value (WDV) of the acquired assets by adding back the unabsorbed depreciation of the transferor companies (i.e., depreciation “actually allowed”). The Income-Tax Department denied that adjustment, invoking Section 72A (which governs carry-forward of losses and unabsorbed depreciation in approved amalgamations) on the ground that no Central Government approval under Section 72A had been obtained. The principal issue was whether, in absence of such approval, the appellant could still compute WDV under Sections 32 and 43(6) of the Income-tax Act, 1961 by reference to depreciation actually allowed to the amalgamating companies.

Summary of the Judgment

The Division Bench (Chief Justice Alok Aradhe and M.S. Karnik, J.) allowed the appeal. It held that:

The appellant did not seek carry-forward under Section 72A and had not claimed unabsorbed depreciation as a loss under Section 32(2).
Section 72A is inapplicable where no Government approval is sought or where the conditions of financial non-viability and public interest are unfulfilled.
Under Section 43(6) Explanation 2(b), the cost of a block of assets at the hands of the amalgamated company is the preceding WDV of the amalgamating company “as reduced by the amount of depreciation actually allowed.”
Explanation 3 (deeming carried-forward depreciation as “actually allowed”) applies only where depreciation has been carried forward under Section 32(2), which by the very nature of a dissolved transferor company could not occur.

Consequently, the appellant was entitled to adjust the WDV by reference to actual depreciation allowed to the transferor companies, notwithstanding absence of Section 72A approval.

Analysis

Precedents Cited

CIT v. Hindustan Petroleum Corp. Ltd. (187 ITR 1 (Bom. HC, 1999)) — Held that under the pre-1988 “Explanation 2A,” WDV at the hands of the amalgamated company is the transferor’s WDV less depreciation actually allowed; unabsorbed depreciation (not carried forward) is not to be added.
Madeya Upendra Sinai v. Union of India (98 ITR 209 (SC, 1975)) — “Actually allowed” depreciation means amounts “actually taken into account” by the tax officer, not notional or hypothetical allowances.
CIT v. B.C. Shrinivasa Shetty (128 ITR 294 (SC, 1981)) — A charge and its computation form an integrated code; where computation provisions cannot apply, the charge does not arise.
CIT v. Dharampur Leather Co. Ltd. ([1960] 60 ITR 165 (SC)) — Clarified scope of “actually allowed” depreciation.
EID Parry (India) Ltd. v. DCIT ([2022] 23 taxmann.com 348 (Mad. HC)) — Applied Hindustan Petroleum in the post-1988 explanatory scheme (Explanation 2 and 3) and held that Explanation 3 applies only to carry-forwards under Section 32(2).

Legal Reasoning

The court’s reasoning rests on a close reading of:

Section 32(2) — Allows carry-forward of unabsorbed depreciation only where the same can be given effect in subsequent assessments. A dissolved transferor company cannot claim a Section 32(2) carry-forward.
Section 43(6) and Explanations —
- Explanation 2(b): For a block of assets transferred on amalgamation, cost to the amalgamated company = the WDV at the hands of the amalgamating company “as reduced by the amount of depreciation actually allowed.”
- Explanation 3: Deems depreciation carried forward under Section 32(2) to be “actually allowed.” It applies only if a Section 32(2) carry-forward exists, which it does not where the transferor has ceased to exist.
Section 72A — Governs special carry-forward and set-off in “approved” amalgamations where the transferor was financially non-viable and the merger was in the public interest. Here, no approval was sought, and the statutory pre-conditions (financial non-viability, public interest, notified conditions) were not met.

Thus, the appellant’s addition of unabsorbed depreciation to WDV was authorized by Explanation 2(b) (Sections 32 and 43), independently of Section 72A.

Impact

This decision clarifies that:

An amalgamated company need not obtain Section 72A approval to adjust WDV of assets by reference to depreciation actually allowed to transferor companies.
Explanation 3 to Section 43(6) does not expand to create fictional allowances where no Section 32(2) carry-forward is possible.
Taxpayers can reliably apply Explanation 2(b) in future mergers and amalgamations to prevent unwarranted disallowance of depreciation on transferred assets.

Complex Concepts Simplified

Written-Down Value (WDV): The balance cost of a block of assets for depreciation purposes, i.e. original cost minus depreciation “actually allowed.”
Unabsorbed Depreciation: The portion of depreciation allowance that remains unused because business income was insufficient in earlier years.
Section 32(2) Carry-Forward: Normally permits unabsorbed depreciation to be added to the next year’s allowance—only if the company continues in business.
Explanation 2(b) to Section 43(6): For amalgamations, fixes the incoming cost basis as the predecessor’s WDV less depreciation actually allowed—regardless of unabsorbed amounts.
Explanation 3 to Section 43(6): A deeming fiction that treats carried-forward depreciation (under Section 32(2)) as “actually allowed,” but it applies only if a carry-forward exists.
Section 72A Approval: A special route to carry-forward losses and unabsorbed depreciation in notified, financially distressed mergers—but unnecessary for WDV adjustments under Explanation 2(b).

Conclusion

Technova Imaging Systems Ltd. v. DCIT establishes an important precedent: in court-approved amalgamations, an amalgamated company may recalculate the opening WDV of acquired assets by reference to depreciation actually allowed to the transferors, even if no Central Government sanction under Section 72A is obtained. Explanation 2(b) to Section 43(6) governs this adjustment independently of the special carry-forward regime in Section 72A. The ruling brings clarity to tax treatment of transferred assets in mergers, ensures correct depreciation allowances, and curtails administrative efforts to invoke Section 72A where it is inapplicable.