Depreciation: Actual cost: Subsidy: Section 43(1), Expln. 10: A.Ys. 2001-02 and 2002-03: Assessee a Government Company took over the telecommunication business from Government Department: Assets transferred at book value: Consideration in form of shares, debts and reserves: Reserve not a subsidy, grant or reimbursement for meeting cost of assets transferred: Reserves not to be reduced from fixed assets to arrive at actual cost: Reopening of the assessment for reducing the actual cost by reserve<

The assessee company was incorporated to provide the telecommunication services which were being provided earlier by the Department of Telecommunications of the Government of India. The assets were transferred at book value. Consideration was paid in the form of shares, debts and reserves. The Assessing Officer found that the consideration included reserves. He held that the cost of assets was being met by the reserves and therefore held that the reserve is required to be reduced from the cost of the assets in terms of Explanation 10 to section 43(1). He therefore reopened the assessments for the A.Ys. 2001-02 and 2002-03 and recomputed the depreciation by reducing the reserve from the cost of assets.

On a writ petition filed by the assessee, the Delhi High Court accepted the assessee’s claim and held as under:

“i) There was no basis for the Assessing Officer’s assumption that whereas value of share capital issued to the Government as part consideration for transfer of business to the assessee was limited only to the face value of the shares, reserves represented a subsidy, grant or reimbursement for meeting the cost of assets transferred.
ii) Free reserves and surpluses of a company could not be considered anything but part of shareholders’ funds. The book value of equity share consists of not only the paid up capital but also the reserves and surpluses of the company. The scheme of hiving off the business of telecommunication services by the Government of India to a corporate entity entailed incorporation of a wholly owned Government company (i.e., the assessee) and the transfer of the business as a going concern along with all its assets and liabilities to the company. Reserves was an integral part of the shareholders funds.
iii) The Government of India had transferred the assets to the assessee company at their book value and the book value of the Government of India’s holding on the assessee company as shareholder and a creditor aggregated the book value of the assets transferred. The configuration of the capital structure of the assessee had no impact on the value of the Government’s holding in the assessee as reserve(s) of a company are subsumed in the book value of its capital.
iv) There is no plausible reason to assume that the value of shareholders’ holding in a company is limited to the face value of the issued and paid up share capital and the reserves represent subsidy or a grant or reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of the company are met.

v) We are thus of the view that the reasons as furnished by the Assessing Officer for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment and the proceedings initiated on the basis of such reasons are liable to be quashed.”