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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI AMARJIT SINGH
O R D E R
Per : Kuldip Singh, Judicial Member:
Since common question of law and facts have been raised in these inter-connected appeals, the same are being disposed of by way of composite order to avoid repetition of discussion.
The appellant, ACIT-2(2)(1), Mumbai (hereinafter referred to as ‘the Revenue’) by filing the present appeals, sought to set aside the impugned orders even dated 30.03.2023, by raising identically worded grounds except the difference in figures of depreciation (for the sake of brevity grounds for A.Y. 2013-14 are being taken), passed by the National Faceless Appeal , 2060, 2061 & 2062/M/2023 2 M/s. JK Shah Education Private Limited Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment years 2013-14, 2014-15, 2015-16 & 2016-17 on the grounds inter-alia that :- “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of depreciation on teaching system and methods of Rs.4,47,00,000/- in spite of the fact that the assessee has reduced the amount of intangible assets from the books from F.Y. 2013-14 and continued to claims depreciation on intangible assets as per Income Tax Act? 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding the facts that the amount expended by the appellant would be income of the recipient which will be offered to tax in the year which it is earned without appreciation the fact that Mr. J. K. Shah has not offered any income on the transaction of business transfer agreement to the assessee company? 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the individual Mr. J. K. Shah has made payment towards tax in A.Y. 2013-14 whereas said individual has not offered any income to tax in this regard. 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in giving relief to the assessee by allowing the claim of depreciation on intangible assets whereas the individual Mr. J.K. Shah and the company are related parties and the company has itself written off all the intangible assets in A.Y.2013-14 in the books of account?”
Briefly stated facts necessary for consideration and adjudication of the issues at hand in the aforesaid appeals are : the return of income filed by the assessee declaring total income at loss of Rs.8,52,76,655/-, loss of Rs.1,91,21,635/-, Rs.Nil income & income of Rs.11,98,57,860/- for A.Y. 2013-14, 2014-15, 2015-16 & 2016-17 respectively were subjected to scrutiny. The assessee company is into providing and imparting education and training to students in all streams of education and other professional courses. The assessee company is also into business of property and real estate. During the assessment proceedings it is noticed by the , 2060, 2061 & 2062/M/2023 3 M/s. JK Shah Education Private Limited Assessing Officer (AO) that the assessee company has made new addition of fixed assets amounting to Rs.89,98,42,096/- (in A.Y. 2013-14) under the block intangible assets which includes teaching systems and methods of Rs.17,88,00,000/- and claimed depreciation thereon @ 25% to the tune of Rs.4,47,00,000/-. It is also a fact on record that the assessee company has entered into a business transfer agreement (BTA) on 15.06.2012 with Jitendar Kantilal Shah Classes to purchase his running business w.e.f. 16.06.2012 and as such current year’s financials for the year ending 31.03.2013 are not comparable with previous year ending 31.03.2012. The assessee company was called upon to explain the new addition to fixed assets under the block “intangible assets” and justify its claim of allowability of depreciation on such fixed assets. Declining the contentions raised by the assessee the AO proceeded to disallow the depreciation claimed by the assessee company primarily for the reason that when the assessee company has already claimed the depreciation on goodwill, which is akin to teaching systems and methods, so the assessee company cannot be allowed to claim the depreciation twice by changing the name of assets. Consequently the AO framed the assessment under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) at the total loss of Rs.4,05,76,655/-, Rs.1,44,03,365/- & Rs.2,61,73,290/- for A.Y. 2013-14, 2014-15 & 2015-16 and book profit under section 115JB of the Act being positive at Rs.12,01,21,971/-, Rs.14,46,82,405/-, Rs.4,50,48,655/- & Rs.21,04,76,861/- for A.Y. 2013-14, 2014-15, 2015-16 & 2016-17 respectively.
The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted the disallowance made by the , 2060, 2061 & 2062/M/2023 4 M/s. JK Shah Education Private Limited AO by allowing the appeals. Feeling aggrieved with the impugned orders passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing the present appeals.
We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
Undisputedly the assessee has purchased the ongoing business of M/s. J.K. Shah Classes on slump sale basis. It is also not in dispute that the assessee company has obtained valuation report of teaching systems and methods on the basis of which it has claimed it to be “intangible assets”. It is also not in dispute that the assessee company categorized the teaching systems and methods as “intangible assets” as “any other business or commercial rights of similar nature”. It is also not in dispute that the assessee company made an alternative contention that “if teaching systems and methods is not considered as “any other business or commercial rights of similar nature” then the same should be allowed for depreciation considering it as a part of residual goodwill of the business”. It is also not in dispute that the AO has allowed the depreciation on “trade mark” and “goodwill”. It is also not in dispute that Mr. J.K. Shah being proprietor of M/s. J.K. Shah Classes was the transferor and the assessee company is transferee entity having maximum shares. His wife is another shareholder and no third party is involved in this transaction.
In the backdrop of the aforesaid undisputed facts two questions arise for determination inter-alia are that: , 2060, 2061 & 2062/M/2023 5 M/s. JK Shah Education Private Limited “1. As to whether the Ld. CIT(A) has erred in allowing the depreciation claimed by the assessee on teaching systems and methods which the assessee company has itself claimed to be part of residual goodwill of the business”? “2. As to whether teaching systems and methods is inextricable part of trade mark and goodwill of M/s. J.K. Shah Education Pvt. Ltd.”?
We have perused the impugned orders passed by the Ld. CIT(A) who has allowed the depreciation claimed by the assessee company on teaching systems and methods by treating the same as “intangible assets” by returning following findings: “5.9 The learned AO has given regard to the provision of Section 32 which defines specific items of intangible properties comprising of know-how, patent, copyrights, trademarks, licences, franchises. However, he has not given regard to broader category of intangibles falling in general clause viz. "any other business or commercial rights of similar nature". In order to evaluate intention of law for such residual category of intangibles it is worth referring provision of Section 92B as stated above. On perusal of provision of definition of intangible property contented under explanation to section 92B (2), it is evident that the "method" of doing certain thing very well falls under definition of intangible property. The above definition also encompasses human capital related intangible which is not considered as intangible by the learned AO. Further the provision also comprises of room for any other similar item which derives value from its intellectual content which is also very vast in coverage. 5.10 The learned AO has merely mechanically considered the definition of know- how, patents, copyrights, trademarks, licences, franchises and has not gone beyond this. He also contented that human art of teaching is self-developed and cannot be termed as intangible. However, he ignored the fact that such art is being purchased in the underlined transaction which is very well intangible as discussed above and being specifically covered under explanation to Section overline 92B (2) as "human capital related intangible assets". 5.11 Further it is pertinent to mention that the amount expended by the appellant would be income of the recipient which will offered to tax in the year which it is earned and could be revenue neutral transaction and very much essential in the business parlance. Thus, the learned AO has not given regard to commercial expediency of the under lined transaction and has stepped into shoes of the business man and tried to determine the terms of deal instead of looking into substance of the transaction. The learned AO has only given regard to nomenclature of the transaction and has not evaluated the content which it carries comprising of multiple things viz 'Professor and Faculty system', , 2060, 2061 & 2062/M/2023 6 M/s. JK Shah Education Private Limited 'system for syllabus and course content Student education feedback and counseling', etc. The benefit resulting out of such intangible in form of increasing revenue and profitability of the appellant is also ignored by the learned AO. 5.12 In view of the above I am of the considerate view that the addition made by the learned AO for Rs.4,47,00,000/- is not correct and therefore is being deleted.”
The Ld. D.R. for the Revenue challenging the impugned deletions of disallowance made by the AO contended that the consideration paid by the assessee company to the proprietor is notional in the form of allocation of shares without making actual payment of money. Shares are valued at the premium to the extent of Rs.515 as against the face value of Rs.10 which proves that purchase consideration was not paid through tax paid money. It is also contended that valuation of the consideration of shares is based on assumptions and projections because value of net assets is meager as compared to the value made by DCF.
We are of the considered view that this contention of the Ld. D.R. for the Revenue is misconceived because no such transfer of assets including teaching method of proprietorship concern to the assessee company has been disputed by the AO. Moreover, it is a transaction entry from proprietor to assessee company owned by the proprietor himself.
The Ld. D.R. for the Revenue further contended that the assets transferred are notional and intangible being trade mark and teaching systems and methods and valuation of assets is also based on assumptions and projections.
However, on the other hand, to repel this argument the Ld. A.R. for the assessee company by relying upon the order passed by the Ld. CIT(A) contended that teaching systems and methods is , 2060, 2061 & 2062/M/2023 7 M/s. JK Shah Education Private Limited an intangible assets having been duly explained in explanation to section 92B(2)(ii)(h)(l) of the Act.
The AO has denied the depreciation to the assessee by applying the provisions contained under section 32 of the Act and proceeded to hold that the amount paid by the assessee towards acquiring teaching systems and methods do not qualify to call any other business or commercial rights as no right as such are involved assisting the assessee to conduct a business. Because the assessee has acquired running business of coaching classes including faculties who have been absorbed by transferee themselves having their own method in their subjects.
However, the Ld. CIT(A) overturned the findings returned by the AO by holding that the AO has failed to understand the intent of law that any other commercial rights can also be termed as intangible which is very broad category arising out of the application of mind and relied upon explanation to section 92B of the Act.
Before proceeding further and to appreciate the intention of law on the issue we would like to reproduce the explanation to section 92B of the Act which is extracted for ready perusal as under: "Explanation to Section 92B (2) (ii) the expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how: (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; , 2060, 2061 & 2062/M/2023 8 M/s. JK Shah Education Private Limited (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements:
(h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes."
“5.9 The learned AO has given regard to the provision of Section 32 which defines specific items of intangible properties comprising of know-how, patent, copyrights, trademarks, licences, franchises. However, he has not given regard to broader category of intangibles falling in general clause viz. "any other business or commercial rights of similar nature". In order to evaluate intention of law for such residual category of intangibles it is worth referring provision of Section 92B as stated above. On perusal of provision of definition of intangible property contented under explanation to section 92B (2), it is evident that the "method" of doing certain thing very well falls under definition of intangible property. The above definition also encompasses human capital related intangible which is not considered as intangible by the learned AO. Further the provision also comprises of room for any other similar item which derives value from its intellectual content which is also very vast in coverage. 5.10 The learned AO has merely mechanically considered the definition of know- how, patents, copyrights, trademarks, licences, franchises and has not gone beyond this. He also contented that human art of teaching , 2060, 2061 & 2062/M/2023 9 M/s. JK Shah Education Private Limited is self-developed and cannot be termed as intangible. However, he ignored the fact that such art is being purchased in the underlined transaction which is very well intangible as discussed above and being specifically covered under explanation to Section 92B (2) as "human capital related intangible assets".
5.11 Further it is pertinent to mention that the amount expended by the appellant would be income of the recipient which will offered to tax in the year which it is earned and could be revenue neutral transaction and very much essential in the business parlance. Thus, the learned AO has not given regard to commercial expediency of the under lined transaction and has stepped into shoes of the business man and tried to determine the terms of deal instead of looking into substance of the transaction. The learned AO has only given regard to nomenclature of the transaction and has not evaluated the content which it carries comprising of multiple things viz. 'Professor and Faculty system', 'system for syllabus and course content Student education feedback and counselling', etc. The benefit resulting out of such intangible in form of increasing revenue and profitability of the appellant is also ignored by the learned AO.
5.12 In view of the above I am of the considerate view that the addition made by the learned AO for Rs.4,47,00,000/- is not correct and therefore is being deleted.”
Bare perusal of the explanation to section 92B(2) goes to prove that intangible assets include “human capital related intangible assets such as trained and organized work force, employment agreement, union contracts and any other similar item that derives its value from its intellectual contents” rather than its physical attributes.
When we examine the view taken by the Ld. CIT(A) that teaching systems and methods is an intangible asset qualifies for depreciation in the light of the business growth over the assessee after acquisition it goes to prove that after transfer of business by J.K. Shah Classes to the assessee company there is a tremendous growth as is evident from the Revenue and profit earned before tax during 05 years of transfer which is as under: Assessment AY 11-12 AY 12-13 AY 13-14 A Y 13-14 A.Y. 2014-15 Year (Up to post 15.6.12) , 2060, 2061 & 2062/M/2023 10 M/s. JK Shah Education Private Limited 15.6.12) Revenue 25,23,25,357 27,49,89,010 6,66,78,915 29,45,77,577 44,94,99,342 Profit before 13,20,61,375 12,11,71,602 3,84,93,180 12,01,21 971 14,46,82,405 tax
It is also a fact on record that now assessee’s turnover is Rs.500 crores from the teaching classes business which is certainly because of “human capital” related intangible assets which includes trained and organized teaching systems and methods which has derived its value from its intellectual contents. The Ld. D.R. for the Revenue further contended that transfer of proprietorship concern by the assessee to his own private limited company is a colourable arrangement just to claim the depreciation of Rs.22,00,00,000/- against the profit of Rs.14,00,00,000/- with an intention to evade the tax.
To repel this argument addressed by the Ld. D.R. for the Revenue the Ld. A.R. for the assessee again by relying upon the impugned order passed by the Ld. CIT(A) contended that these arguments are beyond the purview of Ld. D.R. as no such findings have been returned by the AO and that the transaction is revenue neutral. Because the amount spent by the assessee company on purchase of the business of the proprietorship concern M/s. J.K. Shah & Company (both businesses being owned by one and the same person), the income of the recipient would be subjected to tax in the year in which it was earned. When the entire business purchased by the assessee company consists of human capital related intangible assets viz. teachers, service contract with them, specific curriculum, course contained, feedback of the student and counseling etc., it certainly amounts to intangible assets eligible for depreciation leading to the enhanced revenue and profitability of , 2060, 2061 & 2062/M/2023 11 M/s. JK Shah Education Private Limited the assessee company. The Ld. D.R. for the revenue further contended that explanation to section 92B is applicable to the international transactions and Ld. CIT(A) has erred in applying the same to the domestic transactions.
We are of the considered view that the Ld. CIT(A) has rightly examined the issue in the light of the provisions contained under section 32 along with explanation to section 92B(2) by holding that “human capital” related intangibles are also intangibles assets qualifying for depreciation. From explanation to section 92B(2) the intention of the legislation is quite apparent and is applicable to both domestic as well as international transactions.
While arguing its case the Ld. D.R. for the Revenue also relied upon the order passed by the co-ordinate Bench of the Tribunal in case of ACIT vs. Dosti Realty Ltd. in for A.Y. 2016-17 which is not applicable to the facts and circumstances of the case being related to issue of depreciation of goodwill which is not the issue before the Bench. Reliance of the Ld. D.R. on the order passed by the Tribunal in case of Arkema Peroxides India (P.) Ltd. vs. ACIT (2013) 31 taxmann.com 4 (Chennai-Trib) which is depreciation of non compete fee and decision rendered by Hon’ble Bombay High Court in case of Powerdeal Energy Systems (I)(P.) Ltd. vs. ACIT (2015) 55 taxmann.com 454 (Bombay) which is on assessee’s claim for depreciation on intangible assets based on incorrect valuation are not applicable to the facts and circumstances of the case.
In view of what has been discussed above, answer to question No.1 framed in preceding para 6 of the order is in , 2060, 2061 & 2062/M/2023 12 M/s. JK Shah Education Private Limited negative, similarly answer to question No.2 framed in the preceding para 6 of the order is also in negative because teaching systems and method is not an inextricable part of trade mark and goodwill it being a “human capital” related intangible assets having derived its value from intellectual contents. The contention of the Ld. D.R. for the Revenue that there is a fictitious consideration for transfer of the business as shares are valued at the premium to the extent of Rs.515 against the face value of Rs.10 is not sustainable because when we examine the year on year turnover and profit of the assessee company, which is brought on record by the assessee by way of filing synopsis in tabulated form as under: Fin. Year Sales Profit before Tax Year on year growth of sales 2012-13* 29,45,77,577 12,01,21,971 - 2013-14 44,94,99,342 14,46,82,405 53% 2014-15 61,35,62,394 21,49,21,659 36% 4% 2015-16 63,72,32,708 21,04,76,861 2016-17 69,35,49,429 19,22,12,507 9% 2017-18 75,16,27,734 23,62,31,463 8% 2018-19 77,34,06,388 20,29,04,239 3% 9% 2019-20 84,33,22,994 20,13,83,123 Fin Year 2012-13 - Data is from 15/6/2012 to 31.3.2013.
Even otherwise valuation of the shares has been made by applying the permissible method which is fortified from the year on year growth in the turnover and the profit of the assessee company. Furthermore, it is brought on record by the assessee that in October 2022 Mr. J.K. Shah one of the shareholders of the assessee company has diverted his 76% stakes in the company to “Edu Tech Firm Varanda Learning Solution” for a total consideration of Rs.337.82 crores at the valuation of Rs.1295/- per share. These facts go to prove that the valuation of these shares adopted at the time of transfer was at fair market value as per business transfer agreement. , 2060, 2061 & 2062/M/2023 13 M/s. JK Shah Education Private Limited 24. In view of what has been discussed above, we are of the considered view that the Ld. CIT(A) has rightly allowed the depreciation claimed by the assessee company on the “Education system and method” for the years under consideration by treating the same as “human capital” related intangible assets which has derived its value from its intellectual contents. So finding no illegality or perversity in the impugned orders passed by the Ld. CIT(A) aforesaid appeals filed by the Revenue are hereby dismissed. Order pronounced in the open court on 20.12.2023.