Depreciation in Amalgamation, Demerger, Succession and LLP Conversion
# Depreciation in Cases of Business Reorganization
## Applicable Situations
The special rule applies in the following business reorganizations during the previous year:
1. Amalgamation (transferor → transferee company)
2. Demerger (demerged → resulting company)
3. Conversion of Company into LLP (under Sec 47(xiiib))
4. Succession of firm/proprietorship by a company (under Sec 47(xiii)/(xiv))
## Rule for Computation of Depreciation
### Step 1: Compute Whole-Year Depreciation
Depreciation is calculated for the FULL year on the relevant block of assets, as if nothing has happened (i.e., as if no reorganisation occurred).
### Step 2: Apportion Between Predecessor and Successor
The depreciation so computed is then distributed between the predecessor and successor in the ratio of the number of days the assets were used by each.
## Logical Insight
This prevents double-claim of full-year depreciation by both entities. It also ensures that the benefit of depreciation is not lost merely because of restructuring during the year.
Worked example
### Example 1
Example: ABC Ltd. amalgamates with XYZ Ltd. on 1st October 2024 (i.e., 183 days into the financial year).
WDV of block of P&M (15%) on 01.04.2024 = ₹1,00,00,000
Successor (XYZ Ltd.) — for 182 days: ₹15,00,000 × 182/365 = ₹7,47,945
### Example 2
Example: Sole proprietor Mr. S succeeds his business with a company on 1st January 2025. The proprietor used the asset from 1.4.2024 to 31.12.2024 (275 days); the company from 1.1.2025 to 31.3.2025 (90 days).
Apportion full-year depreciation 275 : 90 between proprietor and company.
⚠️ Common exam mistakes
Calculating depreciation separately for both predecessor and successor entities for the full year — leads to double depreciation.
Calculating depreciation for only one entity and ignoring the other.
Apportioning in some other ratio (e.g., turnover) instead of number of days of use.
Forgetting that the rule also applies to LLP conversions and proprietor-to-company successions.
Bare-Act text Fifth Proviso to Section 32(1) · Income-tax Act, 1961 · click to expand
Fifth proviso to Section 32(1): In the case of succession of business or amalgamation or demerger, the aggregate deduction in respect of depreciation allowable to the predecessor and the successor or, as the case may be, the amalgamating company and the amalgamated company, or the demerged company and the resulting company shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or amalgamation or demerger had not taken place, and such deduction shall be apportioned between them in the ratio of the number of days for which the assets were used by them.