M/S. V.V.V. & SONS EDIBLE OILS LTD.,,VIRUDHUNAGAR vs. DCIT, CENTRAL-1,, MADURAI

आयकर अपीलीय अिधकरण,‘डी’ �याय पीठ, चे�ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ीमहावीर �संह, उपा�य� एवं �ी जी. मंजुनाथ, लेखा सद�य के सम� BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER

आयकरअपीलसं./ITA Nos.: 2275, 2276, 2277, 2278, 2279, 2280 & 2281/CHNY/2019 िनधा�रण वष�/Assessment Years: 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 & 2016-17 V.V.V. & Sons Edible Oils Ltd., The ACIT, 443, Main Bazaar, v. Central Circle-1, Virudhunagar – 626 001. Madurai. PAN: AACCV 6897R (अपीलाथ�/Appellant) (��यथ�/Respondent) & आयकर अपीलसं./ITA No.: 1765/CHNY/2019 िनधा�रण वष�/Assessment Years: 2009-10

V.V.Vanniaperumal & Sons, The ACIT, 443, Main Bazaar, v. Central Circle-1, Virudhunagar – 626 001. Madurai. PAN: AACFV 2382G (अपीलाथ�/Appellant) (��यथ�/Respondent)

अपीलाथ� क� ओर से/Appellant by : Shri P. G. Sekar, C.A ��यथ� क� ओर से/Respondent by : Dr. S. Palani Kumar,CIT

सुनवाई क� तार�ख/Date of Hearing : 10.05.2022 घोषणा क� तार�ख/Date of Pronouncement : 05.08.2022

2 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: These 7 appeals by the assessee in ITA Nos.2275 to 2281/CHNY/2019 are arising out of the common order of Commissioner of Income Tax (Appeals)-19, Chennai in ITA No.311 to 315/17-18dated 28.05.2019. The assessments were framed by the Asst. Commissioner of Income Tax, Central Circle-1, Madurai u/s 143(3) r.w.s. 153A of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the assessment years 2010-11 to 2016-17, vide orders of even date 31.12.2017.

3 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 DCIT (cited supra). Though the Tribunal is empowered to pass any order in the stay applications, it has to consider each and every issue independently and render its findings with proper reasonings, since reasoning is the heartbeat of every conclusion. Without following this rudimentary principle of law, the second respondent has passed the impugned order, merely referring to the case number of the earlier judgment of the co-ordinate Bench of the Tribunal. Such course adopted by the Tribunal, in the opinion of this Court, cannot be countenanced.

7.In such view of the matter and also in the light of the admitted facts that the petitioner has already paid a substantial amount and is also inclined to pay a further sum of Rs.2 crores in addition to the third installment of Rs.75,00,000/-, this Court, without expressing any opinion on the merits of the grounds raised by the petitioner in the stay applications as it is tantamount to dealing with the legal issues involved in the main appeals, holds as under: (i)the order dated 30.09.2019 passed by the second respondent (ITAT) is set aside, subject to payment of Rs.2 crores + Rs.75 lakhs by the petitioner, within a period of four weeks from the date of receipt of a copy of this order.

(ii)On such payment, the second respondent (ITAT) shall take up the main appeals viz., ITA Nos.2275, 2276, 2277, 2278, 2279, 2280 and 2281/CHNY/2019 and dispose of the same, on merits and in accordance with law, after affording due opportunity of personal hearing to all the parties, within a period of eight weeks thereafter.

(iii)Till the disposal of the main appeals by the second respondent (ITAT), there shall be an order of interim stay in respect of recovery.

In view of these directions these appeals were together after hearing both the assessee and the Revenue.

4 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 ITA Nos.2275 to 2281/CHNY/2019, AYs 2010-11 to 2016-17 3. The first issue in these 7 appeals of assessee is against the order of CIT(A) taking the brand value as nil confirming the order of AO and consequent disallowance of depreciation on the brand value. Connected issue is as regards to valuation of tangible assets, wherein the AO valued the tangible assets at Rs.14,56,16,817 and CIT(A) restricting at Nil value. For this issue assessee has raised identically worded grounds in all these 7 appeals. The lead assessment year for this issue is AY 2010-11 and will take the facts from the same and consequent depreciation in all the assessment years was disallowed by the AO and confirmed by CIT(A). Hence, we will take the facts and issue from assessment year 2010-11 and the ground raised reads as under:- 1 DEPRECIATION ALLOWABLE ON GOODWILL The ld. CIT(A), Chennai has just followed the Assessing Officer’s calculation of the value of Assets at Rs.14,56,16,817.

The Assessing Officer has taken the value of Tangible Assets before revaluation of Rs.15,08,27,949 instead of the revalued Tangible Assets of Rs. 27,25,13,492. The difference in the assets is Rs.12,16,85,543, which has not been taken into account for Depreciation.

5 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 assessment year 2009-10 on conversion of assessee group partnership firm V.V. Vanniaperumal & Sons, Virudhunagar. The partnership firm V.V. Vanniaperumal & Sons, Virudhunagar carried on the business of manufacturing of gingelly oil under the registered brand name of ‘Idhayam’ and selling the same all over India and also involved in exports of the same. The promoters of the partnership firm i.e., partners, and the directors and shareholders of the present assessee company, are in the same line of family business / group business for more than six decades. Before conversion of partnership firm V.V. Vanniaperumal & Sons into public limited company V.V.V & Sons Edible Oils Ltd., the transferor partnership firm valued all its assets and liabilities at net realizable value and transferred the same to assessee company vide agreement dated 30.04.2008 entered into between V.V. Vanniaperumal & Sons, a partnership firm and V.V.V & Sons Edible Oils Ltd., a company incorporated under the Companies Act, 1956, wherein the partnership firm has revalued its tangible assets and also valued its brand through a Valuer determining its brand value at Rs.60.24 crores. The erstwhile partnership firm V.V. Vanniaperumal & Sons transferred all its assets and liabilities to the new company i.e., the assessee V.V.V & Sons Edible Oils Ltd., by way of an

6 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 unregistered deed. As per this agreement, the consideration for the same has been paid in the form of allotment of fully paid equity shares issued by the assessee company to the partners of the transferor firm V.V. Vanniaperumal & Sons. The total valuation of the net asset taken over i.e., assets and liabilities was Rs.86,97,13,000/- and out of the same, one item as per agreement is intangible assets i.e., patents and trademarks as valued by the Valuation report of G. Sekar Associates, Chartered Accountants dated 30.04.2008 and valued at Rs.60,24,10,640/-. Before undertaking the transfer, the transferor partnership firm accordingly valued all its assets and liabilities at Rs. 86,97,13,000/- and the company in consideration of the same has paid the consideration in the form of allotment of fully paid equity shares to the partners of the transferor firm. The relevant agreement is enclosed in assessee’s Paper Book-I in the case of V.V. Vanniaperumal & Sons vs. PCIT for assessment year 2009-10 at pages 139 to 146. The brand valuation report valued by G. Sekar Associates, Chartered Accountants valuing the same on the intangible asset i.e., patents and trademarks at Rs.60,24,10,640/- is enclosed assessee’s Paper Book-I at pages 147 to 199. This brand valuation and consequent

7 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 disallowance of depreciation is under dispute in all these seven assessment years 2010-11 to 2016-17.

4.1 The AO while framing assessment u/s.143(3) r.w.s. 153A of the Act vide order dated 31.12.2017 noted that the assessee has claimed depreciation on the brand value of Rs.60,24,10,640/- in the below mentioned five assessment years and he noted this fact in para 8.3 as under:- 8.3 It is seen that out of the sum of Rs.60,24,10,640/- created as brand value, the assessee company had claimed depreciation as detailed below:-

Depreciation claimed on Asst. Year brand value @ 25% 2012-13 Rs.15,06,02,660/- 2013-14 Rs.11,29,51,995/- 2014-15 Rs.8,47,13,996/- 2015-16 Rs.6,35,35,497/- 2016-17 Rs.4,76,51,623/-

4.2 According to AO, the brand value of erstwhile partnership firm assessee’s V.V. Vanniaperumal & Sons is not acquired by the business entity and brand value is nothing but a self-generated asset which was created in the books of accounts by the erstwhile firm. The assessee company claimed depreciation in respect of brand value for the financial year 2011-12 relevant to assessment

8 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 year 2012-13 to till date but the same was not allowed for the reason that no consideration was paid to the partnership firm bythe assessee company for acquiring the said brand value. Therefore, the AO estimated the cost of acquisition of brand value for the assessee company at ‘nil’. For this, he noted the reason that all the assets and liabilities available in the books of accounts of the erstwhile partnership firm was succeeded by the assessee company and no consideration has been paid by the assessee company for brand value. He also noted that though the assessee company claims that the shares were allotted to the partners of the erstwhile partnership firm in lieu of alleged transfer of brand value, it does not have any material effect as there is no real asset exists in either of their hands. The AO noted that the exercise undertaken by the erstwhile partnership firm to value its brand at Rs.60.24 crores and brought into the books of firm for which no corresponding monetary or other assets are paid out. Hence, according to AO the purchase consideration of the brand value for firm is zero and therefore opening written down value in the books of assessee company for the brand value is also taken at zero and no depreciation was allowed.

9 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 4.3 The AO after considering the various projections as is considered by the Chartered Accountant in the valuation report submitted by the assessee and valuation of brand on the basis of projections of population, consumption of gingelly oil, actual achievements, discount factors, discounting at 28% by the assessee including gingelly oil cake, groundnut oil, groundnut oil cake and economic benefit to the assessee, in cumulatively, he noted that the brand value worked out by the partnership firm in respect of majority of products are not genuine, not based on scientific basis and therefore entire brand value does not exist as an intangible asset.

4.4 Further notwithstanding the above zero value theory of brand value, the AO considered the issue of allowing depreciation of goodwill after revaluation of the assets and liabilities taken over by the assessee company from the firm V.V. Vanniaperumal & Sons as on 30.04.2008 and he revalued the assets and liabilities and the details as computed by the AO in para 17.1 & 17.2 is as under:- 17.1 Assets:- Sl.No. Particulars Amount in Rs. Remarks 27,25,13,492 (before revaluation- 1 Tangible (Revalued) Rs.15,08,27,947)

10 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 Total tangible and Intangible (Patents and 2 60,24,10,640 intangible assets: trademarks Rs.87,49,24,132 Investments (Book 3 10,00,000 value) Current assets, loans 4 34,90,06,283 and advances Total 1,22,49,30,415

17.2 Liabilities:- Sl.No. Particulars Amount in Rs. Remarks 1 Long term liabilities 15,91,20,795 2 Current liabilities 19,60,96,620 Total 35,52,17,415 Net assets taken over (assets – 86,97,13,000 liabilities) (including intangible assets) Net assets taken over (assets – liabilities) (excluding intangible assets) 50,08,34,232 Assets (1+3+4) (Tangible assets before Revaluation @ 15,08,27,949 Liabilities (a+b) 35,52,17,415 Balance assets value 14,56,16,817

4.5 Therefore, the AO noted all the assets and liabilities of the erstwhile firm V.V. Vanniaperumal & Sons taken over by the present assessee company V.V.V & Sons Edible Oils Ltd., for an agreed consideration of Rs.86,97,13,000/- for which consideration was said to have been paid by way of allotment of 1.49 crores equity shares of nominal value of Rs.10 at a premium of Rs.48.37 per share to the partners of the firm. The AO noted that the assessee company had

11 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 taken over the entire business of the firm as a going concern without any consideration qua brand value and moreover the assessee company paid only by issuing shares to the partners of the erstwhile firm which is again only a book entry in the books of the assessee company. Therefore, according to AO, the consideration paid by the assessee company in term of issuance of equity shares cannot exceed the actual value of the assets transferred and hence, the AO estimated the goodwill of the assessee company as on 01.04.2009 at Rs.14,56,16,817/- and allowed depreciation at the rate of 25% relying on the decision of Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd., 348 ITR 302(SC)and also Co- ordinate Bench of ITAT in the case of DCIT vs. Toyo Engineering India Ltd., ITA No.3279/Mum/2008.

4.6 The AO by applying the above ratio, recomputed the depreciation being difference between the book value of the asset and the liabilities transferred to goodwill account of the assessee company which worked out to Rs.14,56,16,817/-. According to AO, depreciation is to be allowed on it for the assessment year 2010- 11,after revaluing the same for assessment year 2009-10. he

12 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 reworked the depreciation for assessment year 2009-10 &2010-11 as under:- Asst. Year Opening W.D. Value Depreciation allowable 2009-10 Rs.14,56,16,817 Rs.3,64,04,204 2010-11 Rs.10,92,12,612 Rs.2,73,03,153

Aggrieved, assessee filed appeal before CIT(A).

4.7 The CIT(A) after hearing the assessee and going through the submissions and case laws noted that the AO has allowed depreciation to certain extent and in assessment year 2011-12 it was allowed at Rs.2,04,77,364/- as against claim made by assessee at Rs.8,19,09,459/- after considering the reply of assessee dated 15.02.2019 and analyzing the provisions of section 32 r.w.s 47(xiii), 48, 49 & 55 and sections 28 to 41 and also section 43 of the Act, dismissed the claim of assessee by discussing in para 6.6.1 as under:- 6.6.1. The appellant that the definitions in capital gains provisions cannot be for interpreting the applicability of provisions in the provisions pertaining to Profits from business and profession. The various of income provided for in the Income tax Act are mutually exclusive but they are not watertight compartments as far as interpretation of the terms is concerned, Also there can be impact of transaction under one later on or subsequently on the determination of income under other of income, the cost of acquisition of one from another entity. If the cost of acquisition under one head of income is Nil, it cannot be so that under the other head it can be taken as a separate figure altogether. The heads of income are separate but

13 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the income to be assessed under each head has to be in harmony with the other heads also, unless and until it is specifically provided for. In the present case the appellant has acquired the capital asset of goodwill under transfer and that transaction is exempt from capital gains because the cost of acquisition and cost of improvement of the same has to be construed either as nil or the cost to the previous owner. That in the case under consideration happens to be Nil as already confronted to the appellant as per letter referred above. It cannot be so that under one head the cost of acquisition of the property is computed at Nil and the under the other head it is otherwise. That can never be the intent of the legislature. The interpretation attempted by appellant would mean double benefit to the appellant. First getting exempted from capital gains tax and then taking benefit of depreciation under the Head of profits and gains from business. There has to be harmonious interpretation of the provisions of law.

6.6.2. The appellant's second assertion is that the claim of benefit of depreciation u/s 32, section 43 is very clear. This contention of the appellant is not correct. Here it would be worthwhile to refer to the fifth proviso of section 32 that deals with depreciation. The same is extracted below- ………….. ………….

The perusal of the above provision shows that in case of succession envisaged under section 47 (xiii) i.e the transfer under which the present appellant has got the goodwill and brand value transferred the depreciation is to be allowed as if the succession had not taken place Had the succession not taken place in the present case from firm to company then the firm could not have claimed the depreciation in its own hands and consequently depreciation cannot be claimed in the case of subsequent corporatization of the firm into company. Even if valuation was carried out by the firm of the goodwill then also it was not entitled to depreciation as it was a self- generating asset and thus not entitled to depreciation. And following the provisions of the fifth proviso of section 32 quoted above the depreciation has to be limited to the extent admissible in the hand of the previous owner as if the succession had not taken place. This interpretation is quite in harmony with the related provisions given under the head capital gains where such transfer is exempted from capital gains. A benefit of exemption is already provided under one head therefore the deduction available under

14 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the head profit and gains from business and profession has to be accordingly limited. Otherwise that would be unfair to the other taxpayers.

It would be apposite to mention here that the term actual cost itself is categorical in implying what it really means. It states as per section as per section 43(1) as follows “43(1) the actual cost of the assets to the assessee, reduced by that portion of the cost thereof if any as has been met directly or indirectly by any other person or authority”. In the present case the actual cost of the assessee is Nil only and the cost met directly or indirectly by any other person is also Nil. Therefore the only conclusion possible in the present case is that the actual cost of the goodwill taken over by appellant company from the firm is Nil only and hence the deprecation eligible is also nil only.

It is clearly stated that actual cost has to be the cost of the asset to the appellant. In this case that cost is Nil only. The appellant has not paid any cost or consideration for goodwill it has acquired from its erstwhile firm. Or it could be the cost met directly or indirectly by any other person. That also in the appellant’s case is Nil only as the goodwill as an asset has been created by the firm on its own by carrying out revaluation otherwise it has not borne any cost for acquiring goodwill.

Now, let’s see what is provided in explanation 2 to section 43. The same is given as follows:- ………………… ………………… ………………… It can be seen that the explanation 2 to section 43 above is discussing the actual cost of an asset tangible or intangible in case of inheritance that is when asset is transferred from one entity to the other or is gifted by one entity to the other. The actual cost is such situation has to be the actual cost of the previous owner. It needs to be mentioned here that section 49 also discusses the similar situation of inheritance along with succession where assets are transferred as per the circumstances and situation envisaged in section 47(xiii). This can be seen from the section 49 quoted below for ready reference:- ………………………. ……………………….

15 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 On the basis of above similarity of situations contemplated in section 49 and explanation 2 to section 43 it can safely be interpreted that the actual cost in such situation when a capital asset is transferred from one entity to the other the actual cost has to be cost of the previous owner. ………………………… ………………………… The above explanations are contemplating situations of transfer of assets in case of transfer of assets from holding company to a subsidiary company or vice versa, from amalgamating company to amalgamating company or from demerged entity to resulting company. In all these situation since it is not to be considered as transfer for capital gains purposes as per provisions of section 47 therefore actual cost has to be taken as it would have been, had the earlier entities continued to hold the capital asset for the purpose of their own business. The circumstances in the present case are similar. Though the issue stands clearly explained as per the provisions under the head capital gains, but here also the situation remains the same. The appellant firm is succeeded by a company and capital assets are transferred. Since the transfer is exempted from capital gains the actual cost on transfer has to be as it would have been had the earlier firm continued to hold the asset. The firm was not entitled to depreciation. Even after revaluing the asset the firm is not entitled to depreciation as there could not be claim of depreciation on self generating asset or goodwill. Regarding the self-generated goodwill which is not acquired but created by the enterprise itself Ind AS 38- Intangible Assets provides as under: Internally generated goodwill …………………………… …………………………… Hence, no depreciation is normally allowed on the self-generated goodwill in accounting as it is not an intangible asset".

Thus the erstwhile firm from which the appellant got converted into company would not have been entitled in the first place to claim any depreciation; as a consequence the subsequent company is also automatically barred from claiming any depreciation.

Further the appellant during the appellate proceedings has relied upon the Honble Supreme Court Judgement in the case of Smifs securities to argue his case. But the case of the appellant is clearly distinguishable. In the present case the appellant has paid no consideration for the transfer of

16 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 assets. However, in the case of smifs securities the consideration was actually paid. The relevant part of the judgement is given below

[quote] 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [CIT(A), for short] has come to the conclusion that the authorized representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration: that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [‘ITAT’ for short]. We see no reason to interfere with the factual finding. [unquote] Thus ratio in the case of above judgment would not apply to the present case.

4.8 Further, the CIT(A) on merits directed the AO to take the nil value of goodwill or brand value and no depreciation should be allowed to the assessee even on tangible assets and for this, he gave his final finding in para 11 as under:- “11. From the perusal of the facts and legal provisions enlisted and elaborated in the foregoing paras it is clear that the issue did emanate from search and seizure operation. The span of the years involved did give the assessing officer a vantage point for examining the design of the appellant in making a wrong claim of depreciation. However as examined in the light of legal provisions it has been seen that the transfer of goodwill in case of

17 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 appellant is not entitled to depreciation because the cost of acquisition and cost of improvement is such transfer is Nil. Secondly even the actual cost as per fifth proviso to section 32 the same has to be taken as the cost as if the succession from firm to company had not taken place that is Nil. Thus on the issue of claim of depreciation on goodwill it is held that Depreciation would be available on Nil value only i.e. Nil. The claim made by the appellant is thus not found valid, even the extent of depreciation allowed by assessing officer not correct. The assessing officer is accordingly directed to take cost of goodwill/brand value at Nil and depreciation worked out accordingly.

Aggrieved, assessee is in appeal before the Tribunal.

18 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the previous year 2008-09 w.e.f. 30.04.2008 i.e. relevant to assessment year 2009-10 on conversion of assessee partnership firm V.V. Vanniaperumal & Sons, Virudhunagar. The partnership firm V.V. Vanniaperumal & Sons, Virudhunagar carried on the business of manufacturing of gingelly oil under the registered brand name of ‘Idhayam’ and selling the same all over India and also involved in exports of the same. The promoters of the partnership firm i.e., partners became the directors and shareholders of the present assessee company in the same ration of holding, are in the same line of family business / group business for more than six decades. Before conversion of partnership firm V.V. Vanniaperumal & Sons into public limited company V.V.V & Sons Edible Oils Ltd., the transferor partnership firm valued all its assets and liabilities at net realizable value at Rs.86,97,13,000/- including the brand valued at Rs.60,24,10,640/- being intangible assets i.e. patents, trademarks and brand value registered in the name of ‘IDHAYAM’ and transferred the same to assessee company vide agreement dated 30.04.2008 entered into between V.V. Vanniaperumal & Sons, a partnership firm and V.V.V & Sons Edible Oils Ltd., a company incorporated under the Companies Act, 1956. The erstwhile partnership firm V.V. Vanniaperumal & Sons transferred all its assets

19 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 and liabilities to the new company i.e., the assessee V.V.V & Sons Edible Oils Ltd., by way of an unregistered deed. As per this agreement, the consideration for the same has been paid in the form of allotment of fully paid equity shares issued by the assessee company to the partners of the transferor firm V.V. Vanniaperumal & Sons. The relevant agreement is enclosed in assessee’s Paper Book- I in the case of V.V. Vanniaperumal & Sons vs. PCIT for assessment year 2009-10 at pages 139 to 146. The brand valuation report valued by G. Sekar Associates, Chartered Accountants valuing the same on the intangible asset i.e., patents and trademarks at Rs.60,24,10,640/- is enclosed assessee’s Paper Book-I at pages 147 to 199. Even to justify the facts otherwise, the assessee submitted corresponding computation of the value of the brand at the entity’s cost of capital @14% gives the following value:- S.No. Name of the Brand Discounting Factor Discounting Factor @ 14% @ 28% Maximum Valuation Actuals as per possible / permitted Valuation report, as per International adopted by the Valuation Practice Company. Actual cost of Capital 100% Risk Premium @ 14% considered added to cost of Reasonable growth in capital @ 14%, to sales from year 6 negate the effect of onwards @ 15% projections. Thus assumed for arriving at computing perpetual discounting rate cash flows @28% No growth in sales

20 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 from year 0 onwards assumed for computing perpetual cash flows. 1 Idhayam Gingely Oil 1,144,683,933 484,025,086 2 Idhayam Gingely Oil 223,894,452 95,394,034 Cake 3 Mantra Groundnut 51,005,081 20,631,518 Oil 4 Mantra Groundnut 62,277,651 24,586,460 Oil Cake 5 Sambandhi Ellu 66,054,148 28,593,510 6 SIM SIM Oil 35,362,522 14,260,329 7 Tahini 782,260 341,124 8 Wealth 2,575,633 1,091,324 9 DOTS 802,718 360,778 Brand Value 1,587,438,398 669,284,163 Brand Value (in 158.74 66.93 Crores) Less:- Nil (Not required as 10% Variance in per Standards / 6.69 Estimation practices) Total Brand Value (in Crores) 158.74 60.24

6.1 The assessee claimed that conservatism adopted by the company in its approach to valuation is very clear from the above table. The company could have actually valued its brand in-total at Rs.158.74 Crs, but whereas in actual it is valued only at Rs.60.24 Crores (which is less than 40% of the total permitted valuation).This brand valuation of Rs 60.24 Crores and consequent disallowance of depreciation is under dispute in all these seven assessment years 2010-11 to 2016-17.

21 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 6.2 We noted that vide unregistered agreement dated 30.04.2008, the partnership firm transfer its business as a going concern and the same is between one form of taxable person i.e. firm to another form of taxable person i.e. the assessee company. The consideration for the same has been paid in the form of allotment of fully paid up equity shares of Rs.1.49 Crs. on the face value of Rs.10/- at a premium of Rs.48.37 per share issued to partners of the firm in the same ratio of capital contribution in the firm, who ultimately became the Directors or the shareholders of the assessee’s company.

6.3 The first dispute between the assessee and the department is the brand value introduced in the balance sheet by the assessee’s firm before conversion into a Public Limited Company w.e.f.30.04.2008. The assessee’s contention was that before undertaking the conversion of the partnership firm into public limited company, the transferor partnership firm valued all its assets and liabilities at net realizable value i.e. Fair Market Value (FMV). The firm being family business for such a long period and their registered brand name ‘IDHAYAM’ is internationally known name for its independent identity of the product ‘IDAYAM’ Gingelly Oil. The firm

22 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 valued the registered brand name including the brand value for a sum of Rs.60,24,10,640/-. The assessee contended that this brand was valued through independent and scientific method of valuation as per the internationally accepted standards using the double discounting rate of market at the rate of 28% also giving further discount of 10% for error and margins and transferred the same to the assessee company when conversion took place on 30.04.2008 i.e. for AY 2009-10. The ld.Counsel for the assessee before us contended that the partnership firm was not liable for capital gains tax, because it has satisfied all the prescribed conditions u/s.47 (xiii) of the Act and the transaction was rightly accepted by the AO by not treating the transfer for the purpose of charging of capital gains tax.

23 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 u/s.132 of the Act. He argued that the seized document revealed various discrepancies and particularly the issue of depreciation on so called brand value claimed by the assessee company from AY 2012- 13 onwards, though the firm was converted into assessee company on 01.05.2008 relevant to AY 2009-10. He stated that the partnership firm was dissolved on 30.04.2008 and the assessee company came into existence as on 01.05.2008 and accordingly, the AO computed the depreciation on goodwill valued by him at Rs.14,56,16,817/- in the hands of the assessee company for AYs 2009-10, 2010-11 & 2011-12 and consequently in future AYs under consideration. However, the CIT(A) reversed the findings of the AO and valued the goodwill at NIL. The ld.CIT-DR stated that though the so called brand value was brought into the books of accounts of the assessee company on 01.05.2008, but they debited the depreciation on brand value in the P&L A/c and added back in the computation of income for AYs 2009-10 to 2011-12. According to him, this is very strange that the company did not claim any deduction on account of claim of depreciation on the brand value for these three AYs. Strangely, the assessee company started claiming depreciation on brand value only from AY 2012-13. He argued that the ld.CIT(A) during appellate proceedings examined this issue in

24 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 depth and held that there was neither goodwill nor brand value existed and hence, disallowed the claim of deduction in regard to depreciation on both of these non-existent intangible assets i.e. either ‘Goodwill’ or ‘Brand Value’. According to him, the ld.CIT(A) upheld the disallowance of depreciation on brand value by invoking the 5th proviso to sec.32(1)(ii) of the Act.

7.1 The ld.CIT-DR stated that the provisions of Sec.32(1)(ii) of the Act, deals with deprecation on know-how, patent, copyright, trademark, licences, franchises, or any other business or commercial rights of similar nature being intangible assets acquired on or after first day of 1998. This section got an amendment by the Finance Act, 2021 w.e.f. 01.04.2021 and depreciation on goodwill of a business of a profession was excluded.

7.2 The ld.CIT-DR also contested the brand valuation report of the partnership firm prepared by the Chartered Accountant disputed the working, methodology, turnover and projections. According to him, the entire estimation of future sales to be achieved, is without any basis and also disputed the profitability. He stated that the expected turnover like in 2009 disclosed Rs.230 Crs. and actual turnover

25 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 there is shortfall in terms of percentage from 18% to 33%. He also questioned the discounting method adopted by the valuer. But he could not substantiated these from the figures filed by the assessee and even not contradicted the valuation reoprt submitted by assessee.

26 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 of co-ordinate Bench of this Tribunal Bangalore Bench in the case of M/s.Padmini Products Pvt. Ltd. v. DCIT in ITA No.1530 & 1531/Bang/2016 dated 28.04.2017, is reversed by the Hon’ble Karnataka High Court in the case of Padmini Products (P) Ltd., vs. DCIT in ITA No.154 of 2014, order dated 05.10.2020. Subsequently, the revenue carried the matter before the Hon’ble Supreme Court and Hon’ble Supreme Court admitted the SLP of the Revenue and stayed the judgment of Hon’ble High Court of Karnataka vide order dated 17.07.2021 in SLP Appeal (C) Nos.13665 & 13745 of 2021. It means that the order of the tribunal as on the date holds the ground. The ld.CIT-DR heavily relied on the Tribunal’s order in the case of Padmini Products Pvt. Ltd. (supra) stating that the Tribunal has considered the 5th proviso to Sec.32(1)(ii) of the Act and held applicable even in case of conversion of a partnership firm into a Private Ltd. Co.

8.1 We noted that the assessee has cited the case law of larger bench of this Tribunal i.e.Ahmedabad Bench, Third Member Case in the case of Chitra Publicity Co. (P) Ltd. v. ACIT [2010] 4 ITR (Trib.) 738 (Ahmedabad ITAT) (TM), wherein, the Tribunal has considered the issue of actual cost in terms of explanation-3 to Sec.43(1) and

27 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the relevant Paras of the order (majority order passed by Third Member) 14 to 18 reads as under: 14. I have carefully examined above circumstances/reasons, arguments and case law in support of application of Expln. 3 to s. 43(1) in this case. I have already commented upon circumstance (i) and on "satisfaction" of the AO that main purpose of transaction was to claim higher depreciation on transferred assets in the hands of the assessee. Yet the main purpose of Expln. 3, in my view, is to empower the AO to determine actual cost of assets where the assessee is wrongfully claiming depreciation on enhanced cost of such assets. What is actual cost ? How is it to be determined ? Actual cost of an asset to the assessee is always question of fact governed and depending upon the circumstances of the case. However, application of principles for the determination of actual cost is a question of law [see decision of Supreme Court in the case of Jogta Coal Co. Ltd. vs. CIT (supra) cited above]. The actual cost normally means real cost, the real worth of the assets acquired by the assessee. Depending upon the facts of the case, it might be WDV in the hands of the transferor but cannot be cost to the transferee. No principle of general and universal application on "actual cost" is possible to lay down. However, in none of the authorities cited and noted above, WDV was taken as "actual cost". Something was added to WDV depending upon the facts and circumstances of the case. In these days of high inflation, it is a matter of common knowledge that there is vast difference between market value of an asset and its WDV as reflected in record. Further, Courts while holding that actual cost is not the "price" paid, were concerned with question whether incidental expenses like freight, warehousing, insurance charges, legal charges incurred in connection with acquisition and interest incurred on capital contributed or borrowed to acquire assets should be added to the price. It was also rightly argued by Shri Soparkar that actual cost should be taken as a commercial concept and understood in the sense in which no commercial man would misunderstand it. 15. The Revenue authorities and learned AM, in the proposed order, have observed that AO is authorized to pierce the veil of the corporate and ascertain the true nature of the transaction. There can be no quarrel on above proposition. However, in my view, it is unnecessary to fall back on the above legal proposition as under the above Explanation, there is sufficient power with the AO to disregard the cost of assets taken by the transferee and determine the actual cost of assets. He can make a disallowance, provided circumstances envisaged in the provision are satisfied. The Revenue authorities and the learned AM in

28 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the proposed order have made out a good case that the main purpose of transfer of asset was reduction of liability to income-tax (by claiming depreciation on enhanced cost). However, as already noted, recording of above satisfaction is not the main purpose of the Explanation. The real purpose of the provision is to authorize the AO to determine actual cost to the assessee. What is the meaning of the "actual cost" ? "Actual cost" is to be determined by the AO having regard to all the circumstances of the case. In other words, facts and material on record is to be considered in the process of determination of actual cost. Such cost cannot be any fancy or imaginary figure. This is clear from use of strong words like "determine" and check in the provision on arbitrary exercise of power by the AO. The AO is required to determine the actual cost with the previous approval of the Jt. CIT. Therefore, the AO has to satisfy Jt. CIT that exercise of determination of cost has been carried in a reasonable and proper manner. The provision of approval by the Jt. CIT is for the benefit of the Revenue and the assessee. It is to prevent the AO from taking any amount as "actual cost". 16. It has been contended on behalf of the Revenue that actual cost is not market value but is WDV of assets in the hands of the transferee, particularly on the facts of the case when value of hoarding and of goodwill/trade name was nil in the books of the erstwhile firm. The assessee company, after acquisition claimed depreciation on cost of assets which was arbitrarily fixed without any basis. Reliance, as noted above, has been placed on proviso (c) to s. 47(xiii), s. 32(1) and s. 43(6) of the IT Act. 17. After careful consideration of above provisions and facts and circumstances of the case, I am unable to accept the stand of the Revenue. As noted above actual cost should ordinarily mean real cost or real worth of assets. If it is not market value, then what is it? Mechanism to take WDV as provided in Expln. 2 to s. 43(6)(c) is not available in Expln. 3 to s. 43(1). Further, assets whose actual cost is to be determined under Expln. 3 are second hand and it is always difficult to find actual cost or value of such assets as compared to new assets. In the case of transfer of an asset between two unconnected parties price fixed is ALP governed by market condition. This ALP between two unconnected parties is nothing but market value of the asset. This ALP has to be taken as the "actual cost" for purposes of depreciation. There is no way to ignore it and it is not possible to record merely that the main purpose of transaction is the reduction of income-tax liability. Such ALP or market value cannot have a different meaning even in case of a transaction between connected and related parties if fixed bona fidely as per

29 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 market conditions. There is no prohibition on connected parties to carry arm’s length transactions where real value of item transferred is paid. Law frowns on fraudulent transactions carried to hoodwink the Revenue. Having held that the assessee has shown enhanced cost of assets, the AO under Expln. 3 to s. 43(1) has to determine the "actual cost" to assessee which can only mean arm’s length value or real value or worth of assets transferred. Above proposition has been duly accepted by Courts. In the case of Ginners & Pressers (P) Ltd. vs. CIT (supra), the decision of Bombay High Court strongly relied upon by the Revenue, their Lordships have made the following observations : "There is no doubt that, in the absence of fair market value of the assets transferred being known on the date of transfer, the requisite inference under the proviso to s. 10(5)(a) of the Act cannot be drawn. But it is not as if the taxing authorities as well as the Tribunal have not dealt with this aspect of the matter at all while deciding the question of applicability of the proviso to s. 10(5)(a) to the facts of the present case." 17.1 It is, therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining "actual cost". The provision requires consideration of all the circumstances including cost in the hands of the transferor, WDV, inflationary trends, conditions and life of assets transferred etc. in the exercise of determination of cost of assets. It is true that cost shown in the transfer is primarily the cost to the transferee and such cost therefore, is a piece of good evidence. But cost shown is not final and AO is empowered under Explanation to revalue the asset and determine its actual cost. He has to determine the cost on some good and acceptable basis. In the present case, actual cost of hoardings and of goodwill has been taken at nil merely because such assets were not shown as an asset in the accounts of the erstwhile firm and no depreciation was claimed. This action of the AO endorsed by higher authorities and in the proposed order of learned AM, in my view has no legal support. As already discussed, provisions of s. 47(xiii) or of s. 43(6) are not attracted here as these provisions have very different purposes to serve. These deemed provisions cannot be read in the Expln. 3. 17.2 The plain language of the provision [Expln. 3 to s. 43(1)] leaves no amount of doubt that it is AO who has to record satisfaction relating to main purpose of the transaction to the assessee (reduction of liability to income-tax). It is AO who has to determine "actual cost" of assets having regard to all the circumstances of the case and with the previous approval of the Jt. CIT. It should, therefore, leave no doubt that burden

30 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 to determine "actual cost" in accordance with law is on AO and not on the assessee. The AO has to show that he has gathered relevant material and determined actual cost after application of mind. His action is required to be approved by his superiors. 18. In the case of CIT vs. Jogta Coal Co. Ltd. (supra), their Lordships at p. 99 of the report referred to the case of Craddock vs. Zevo Finance Co. Ltd. (1946) 27 Tax Cases 267. Their Lordships have stated as under : "The learned Law Lords came to the conclusion that the Crown had failed to establish that the value of the investments was less than the nominal value of the consideration for which the respondent company had acquired them, namely, the liability to discharge the debentures and interest thereon and the allotment of the share capital as fully paid." 18.1 The jurisdictional High Court in the case of Ashwin Vanaspati Industries vs. CIT (supra) at p. 33 observed as under : "Hence, it is crystal clear that the AO is obliged to record a satisfaction that the assets were transferred for reducing the liability to pay income-tax and for this purpose an appellate authority cannot substitute its opinion to sustain the applicability of the said Expln. 3 only because the assets which are transferred were used by any other person before the date of acquisition. The duty cast upon the AO by the provision is to determine the actual cost and not to substitute a valuer’s opinion. At the same time, merely because a document in the nature of contract of purchase is entered into denoting a certain price the same would not conclusively establish the correctness of the claim made by an assessee if the AO is of the opinion that the transaction is by way of subterfuge or device in order to avoid tax which the assessee is otherwise liable to pay or that the transaction is illusory or colourable or that the assessee has acted fraudulently. In such circumstances, it would always be open to the AO to go behind the contract and ascertain the actual cost so as to determine the correct liability to tax." 18.2 In spite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that "AO is obliged"; "duty cast on AO" to determine actual cost of assets to the assessee, in the present case, the burden has been placed on the assessee to prove that actual cost of asset was the value it had claimed for the purpose of the depreciation. No attempt whatsoever was made by the AO or by the CIT who approved of his action or by CIT(A) to collect any material or to take any steps to determine the actual cost of the

31 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 assets. The evidence produced by the assessee before the AO in the shape of valuation report was wrongly rejected and on reasons which are totally unsustainable. In support of value (cost of hoardings at Rs. 4,77,96,000 and of goodwill at Rs. 3 crores), the reports of the registered valuer were placed before the AO. The AO did not consider above reports, although it was incumbent upon him to dislodge them. The learned CIT(A) in the order for asst. yr. 2005-06 rejected the report of valuation of hoardings as on 1st April, 2003 as the report was dt. 3rd Oct., 2004 and held it to be got prepared to suit the assessee’s requirement. The learned AM in his proposed order, took a similar view and cast burden on the assessee with a general observation that assessee did not lead any supporting evidence to justify the cost claimed. The learned AM’s views on the production of documents are factually incorrect. The learned JM in his proposed order has rejected all the above reasons including the reason given by the learned CIT(A) in the appellate order. 18.3 It is well-known that registered valuers are experts and value and reliability of their opinion would depend upon the material contained in their reports. They are competent to fix value of properties for several earlier years. Even otherwise WTO in the wealth-tax purposes is required to determine in the present, the value of assets as on the valuation dates which may be five or seven years earlier. If this is not possible, as is being inferred by the learned CIT(A) and by the learned AM, then scheme of fixation of value of assets under the WT Act cannot work. Such a view would defeat the very purpose of the WT Act and, therefore, cannot be accepted as correct. As regards fixation of value of assets as on 1st April, 2003, I do not see anything wrong if parties having regard to their experience and other factors available at the relevant time had fixed the value of assets transferred. It was for the AO to point out and find defect in the value (cost shown) claimed and proceed to determine the actual cost. AO was to collect and examine all the relevant material available on record including actual cost of hoardings and not mechanically adopt value at nil. Besides cost of hoardings, life of hoarding at the time of transfer, increase in cost of making and erection of such hoardings etc. was to be seen. Whether cost (value) got depreciated on account of wear and tear was to be examined. The list of circumstances is by no means exhausted and there can be other relevant circumstances required to be considered in the exercise of determination of actual cost of the hoarding.

32 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 8.2 After considering the provisions of Explanation 3 of section 43(1), 43(6) and 47(iii) of the Act, finally held as under:- 23. Proceeding to the question of actual cost of goodwill or trade name, it is well established that goodwill is an important asset of business which is acquired over a period of time. There are well-recognized methods of computing value of goodwill/trade name of a business. It is computed by taking into account profits made by the concern over a period, capital employed, efforts of the partner etc. and thereafter its value is determined. As per information placed on record, sales effected by the firm and the company are available at p. 73 of the paper book. The turnover of the firm in the last year of its business i.e. in financial year 2002-03 is shown at Rs.8,58,26,749. In the earlier two years also, it is more than Rs. 8 crores. It jumped upto Rs.11,67,00,000 in the first year of company’s business and thereafter it jumped to Rs. 14,38,00,000. These turnover figures are not in dispute. Based on above turnover figures, the registered valuer who without a doubt is an expert, determined the value of goodwill/trade name at Rs. 3 crores. Detailed calculations are given in the valuation report. It was open to the AO to examine those calculations and to arrive at its own conclusion. Such exercise was not undertaken. Merely because goodwill acquired by the firm was not shown as an asset or was shown at slightly less figure and no depreciation was claimed by the firm, its value was taken at nil. How could value of goodwill or trade name for a concern making high profit and in business for several years, be nil ? What the AO has done is quite contrary to the principle laid down by the Supreme Court in the case of Jogta Coal Co. Ltd. vs. CIT (supra). In the said case, it was held that having accepted the total cost for the transfer and where the actual cost of assets determined is less than the stated sale consideration, the differences would be taken towards goodwill of the business. Here the parties under agreement themselves determined the value of goodwill and stated the same in the memorandum of transfer which is further supported by an expert opinion. The AO, without considering relevant facts and circumstances of the case and for erroneous reasons, took actual cost of goodwill at nil. In my considered opinion, no basis whatsoever has been given for taking value of goodwill/trade name at nil. No fault has been found in the valuation report given in this case and, therefore, the same could not be rejected. Above aspects have not been noted by the learned AM in his proposed order. 24. Even in the case of buildings at Rajkot and Surat, actual cost of these buildings has been taken at the WDV found in the hands of the firm. In these days of high inflation, value of immovable properties like

33 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 land and buildings have jumped several fold and there is no comparison between the value/worth of a building and its WDV in books. AO made no attempt to find whether there was any error in the cost of buildings claimed by the parties in the memorandum. Therefore, the said figure could not be rejected. 25. In the above circumstances and when no attempt was made by the AO to undertake exercise of finding actual cost as required by the statutory provision and as per principles laid down by the jurisdictional High Court in the case of Ashwin Vanaspati Industries vs. CIT (supra), it is not possible to hold that provisions of Expln. 3 to s. 42(1) have been rightly applied. No good ground has been laid for not accepting cost fixed between the parties in the memorandum as "actual cost" of three assets. The power vested in the AO in Expln. 3 to s. 43(1) was not exercised in accordance with law. Without proper determination of "actual cost", it is not possible to record a satisfaction that assessee has claimed depreciation on enhanced cost of assets to the assessee. In view of close connection between circumstances/conditions (ii) and (iii) and in view of my finding on condition No. (iii), I hold that condition No. (ii) is also not satisfied. No case for taking action under Expln. 3 to s. 43(1) has been made out. On facts and circumstances of the case, there was no justification to remand the matter back to the AO to have another innings and determine actual cost of goodwill/trade name and of buildings at Rajkot and Surat. 26. I have also gone through the decision of Hon’ble Madras High Court in the case of CIT vs. Sekar Offset Press (1995) 214 ITR 516 (Mad). In that case, the assets were transferred at the market value between partners. The Court held that Expln. 3 to s. 43(1) had no application to the case as the main purpose of the transfer of assets was not reduction of tax liability. The decision is relevant. The other decision of the Tribunal in the case of Unimed Technologies Ltd. vs. Dy. CIT (2000) 69 TTJ (Ahd) 25 : (2000) 73 ITD 150 (Ahd) is also considered relevant as in above case, valuation report furnished by the assessee in support of cost of the assets acquired was accepted by the Tribunal, as AO did not appoint his own valuer nor thought it necessary to examine assessee’s valuer. In the absence of any other valuation report and there being no other evidence to show that the report was not reliable, it was held that valuation report filed by the assessee could not be ignored. Factual position here is similar. I am, therefore, of the view that two decisions cited on behalf of the assessee are relevant to the facts of the case. Learned AM in the proposed order has taken great pains to distinguish the decision of the jurisdictional High Court in the case of Ashwin Vanaspati Industries vs. CIT (supra). However, I do not

34 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 find any material distinguishing feature to hold that principles laid down in that case are not applicable to the facts of the case before me. In my considered opinion, the aforesaid decision should be applied to consider whether Expln. 3 to s. 43(1) is correctly applied. This aspect has been elaborated above.

8.3 As regards to the issue of brand value determined as per brand valuation report, we noted that the valuer determined the brand value on the basis of many factors like concept of brand, methodology and approach, methodology applied for valuing the brand, computing discount rates, and steps, stages and sources of brand valuation. The valuer has carried out the detailed working and assumptions and estimation on expected sales, value based on market size and market share. The assessee has given its computation of the brand value on the basis of the Actual Sales Quantity Achieved and actual Advertisement expenditure incurred, the value of the Brand comes to the following:- Computation on the basis Actual Sale Qty Achieved Sale Qty Brand Revenue Advt. NBR After Year Total BR Net BR (Kg) / kg Expn Tax (Actuals) 2009 12,450,228 10.00 124,502,280 4,247,611 120,254,669 78,165,535 2010 11,894,939 11.00 130,844,329 21,056,130 109,788,199 71,362,329 2011 13,832,289 12.10 167,370,693 21,850,962 145,519,731 94,587,825 2012 15,601,812 13.31 207,660,118 16,744,194 190,915,924 124,095,351 2013 14,370,407 14.64 210,397,129 29,886,138 180,510,991 117,332,144 2014 to N 644,682,110 644,682,110 Total 1,130,225,294 Total (Rs. In Crs.) Rs.113 Crs

35 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 From the above table, considering the actual sale quantity achieved for the years, along with perpetual results from 2014 onwards gives the the brand value at Rs.113crs, whereas what is actually considered for Gingely oil is only Rs.48.40 crs, which is approximately 42% of the total actual results / actual value made by the company, which clearly illustrates the actual performance was well ahead of the projection considered for the calculations.The relevant details are available in assessee’s brand valuation report submitted by G.Sekar and Associates Chartered Accountants at pages 161 to 199. In the given case of VVV & Sons, the firm, the discount rate is computed on the basis of the following workings:- Particulars 2008 2007 2006 Fixed Assets 224,661,921 252,760,989 209,061,906 Current Assets 389,251,829 260,178,717 271,169,571 Total Assets – [A] 613,913,750 512,939,706 480,231,476 Less : Current Liabilities 410,121,294 284,126,660 288,243,459 Net Assets 203,792,456 228,813,046 191,988,017 Net Profit 43,084,972 29,194,480 73,348,325 Return on Capital 21% 13% 38% Weight 3 2 1 (More weights for Latest Year) Weighted Average Return 21% Less Tax @ 35% (7%) Post Tax Return on Capital 14% Add : Risk Premium @ 100% 14% Net Discount Rate 28%

8.4 The assessee submitted that 10% error in Estimation has to be considered. The Risk has been eliminated at each and every stage of

36 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 computation by adopting a conservative method while making assumptions. However the date is arrived only by assumptions which do possess an overall risk which has to be eliminated. We noted that in the brand valuation report the valuer determined the discount rate on the basis of last two years performance before the relevant brand valuation and the details have been submitted in assessee’s Paper Book-1 in Page 161. Similarly, the discount rate allowed by the assessee is 28% of the brand value and an additional 10% for errors and margins in the estimation has been considered to eliminate the overall risk involved in the estimation. We noted that if these factors had been considered, the actual quantity achieved during AY 2009-10 to 2012-13, there is average increase on the main products is above 16%. Accordingly, the assessee following model for amortization based on future turnover can be made by the entity as under:- Turnover (Expected) in Rs. Amortization Amount (in Rs. S.No. Year Crores Crores) (at a growth rate of 10% p.a.) 1 2009 230.00 1.90 2 2010 253.00 2.09 3 2011 278.30 2.29 4 2012 306.13 2.52 5 2013 336.74 2.78 6 2014 370.42 3.05 7 2015 407.46 3.36 8 2016 448.20 3.69 9 2017 493.03 4.06 10 2018 542.33 4.47 11 2019 596.56 4.92 12 2020 656.22 5.41

37 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 13 2021 721.84 5.95 14 2022 794.02 6.55 15 2023 873.42 7.20 Total 7,307.67 60.24

8.5 We also noted the factual position that if we calculate the brand value on the basis of actual quantity achieved, it is estimated by the valuer at Rs.60.24 Crs. as under:- Summary of Values of Brand (See Annexure for Computation) S. Name of the Brand Amount (Rs.) No. 1 Idhayam Gingely Oil 484,025,086 2 Idhayam Gingely Oil Cake 95,394,034 3 Mantra Groundnut Oil 20,631,518 4 Mantra Groundnut Oil Cake 24,586,460 5 Sambandhi Ellu 28,593,510 6 SIM SIM Oil 14,260,329 7 Tahini 341,124 8 Wealth 1,091,324 9 DOTS 360,778 10 Hardil and Sarsol (Nominal Value) 60,992 Total Brand Value (for the entity as a 669,345,155 Whole) Less : Variance for Errors in Estimation 10% 66,934,515 Net Brand Value 602,410,640 Brand Value (in Crores) 60.24

8.6 Hence, according to us, the Revenue is unable to point out any defect in the brand valuation report, wherein we have reproduced various details from the data provided by assessee. Once the Revenue could not point out any defect in the valuation or the estimated data provided and actual performance of the assessee, we

38 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 could not interfere in the brand valued by the assessee, which is on the basis of scientific estimation and on the basis of material placed before the valuer.

39 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 8. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32 (1) of the Income Tax Act, 1961 [‘Act’, for short]. 9. We quote herein below Explanation 3 to Section 32(1) of the Act: "Explanation 3.‐‐ For the purposes of this sub‐section, the expressions "assets' and "block of assets' shall mean‐‐ [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know‐how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 10 Explanation 3 states that the expression "asset' shall mean an intangible asset, being know‐how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words "any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature”. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 11 In the circumstances, we are of the view that "Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 12. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ["CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee‐Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee‐Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding.

40 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 9.1 Even, this issue has been considered by the Hon’ble Gujarat High Court on the issue of valuation of intangible and applicability of explanation-3 to Section 43 of the Act, in the case of Ashwin Vanaspati Industries v. CIT 255 ITR 26(Guj), which has been reproduced in para 8.1 of this order.

41 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 scientific method of valuation as per internationally expected standards using the double discount rate of the market, @ 28% + 10% margin of errors in the present case, and transferred the same to the assessee company i.e. the transferee by satisfying all the conditions prescribed under the Act i.e.47(xiii) of the Act. According to us, now this value is found to be reasonable in regard to brand value and assessee is eligible for claim of depreciation acquired from the partnership firm in lieu of allotment of fully paid equity shares to the partners of the partnership firm. We noted that the authorities below have wrongly applied the provisions of section 55(2)(a) of the Act, for determining the NIL value of the brand, which cannot be a case where all the materials was produced by the assessee before the authorities below and even now before us. According to us, the assessee has rightly computed depreciation on actual cost basis u/s.43(1) of the Act and not applied the provisions of Sec.55(2)(a) of the Act. Hence, we accept the value determined by the valuer at Rs.60,24,10,642/- and direct the AO to allow depreciation on the same as per law.

42 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 although conversion of partnership firm into private limited company took place in financial year 2009-10, the assessee has claimed depreciation only from AY 2013-14 onwards. The assessee claimed that as per fifth proviso to section 32(1) of the Act, in the year of succession he cannot claim depreciation because of overlapping of period of depreciation to be claimed by predecessor and successor. However, for remaining two assessment years the assessee by oversight has not claimed depreciation on brand value. But contended that even assessee has not claimed depreciation as per provisions of section 32, the AO should allow depreciation as per law. We find that even if the assessee does not claim depreciation on assets, the AO should allow depreciation in accordance with provisions of section 32 of the Act and thus, we direct the AO to allow depreciation on brand value from the year in which the assessee is entitled for such depreciation.

43 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 2010-11. Hence, we will take the facts from assessment year 2010- 11 and will decide the issue. The relevant ground raised by assessee reads as under:- 2. COST OF CONSTRUCTION OF BUILDING AT ANBU ILLAM the MEMIORANDUM of the Company contains A The Main Objects of the Company B The Incidental or Ancillary Objects and C Other Objects not included in A and B are enunciated in the Memorandum.

Clause 6 of c Other objects not included in A and B runs as follows To establish and carry on educational institutions schools and or colleges where students may obtain on moderate terms a sound religious musical ethical classical mathematical technical and general education of the highest order subject to the approval of the appropriate authority.

On the basis of Clause 6 mentioned above we have constructed the Buildings for the Anbu Illam Thulir School and RJ Mantra School.

13 Brief facts are that the assessee company entered into an agreement dated 11.06.2009 with M/s.Govintharam Builders, Virudhunagar for construction of building for V.V. Vanniaperumal Anbu Illam which is run by M/s. V.V. Vanniaperumal Charities, Virudhunagar and incurred expenditure of Rs.4,80,630/- excluding the cost of steel and cement which was incurred by the assessee company in the financial year 2009-10 for the above said entities. According to AO, the expenditure incurred for construction of building for Anbu Illam run by M/s. V.V. Vanniaperumal Charities and V.V. Vanniaperumal Primary School Charity Trust, properties of

44 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 M/s. V.V. Vanniaperumal Charities, the expenditure cannot be allowed in the hands of the assessee company as the assets are not utilized for the purpose of business of the assessee. Therefore, the AO disallowed a sum of Rs.8,01,050/- by including the cost of cement at 40% and cost of steel at 40% estimated by the AO.

13.1 Similarly, the assessee claimed construction expenses of Rs.6,42,404/- being construction expenses for running kindergarten school in the name of Tulir School and managed by M/s. Idhayam Rajendran Charities. The AO noted that the kindergarten school was run in the building and the school had vacated the premises long back and therefore building is vested with Shri V.R. Muthu in its individual capacity. The AO noted that the construction expenditure incurred by assessee company is capital in nature as the land is not owned by assessee company and ownership of the same does not vests with it. Therefore, the contract value of Rs.6,42,404/- and thereby enhancing the same by cost of cement at 40% and cost of steel at 40%, estimated the total cost of construction at Rs.10,70,673/- and disallowed the same as not related to the business. The AO therefore made two additions i.e., disallowance of construction expenses of V.V. Vanniaperumal Anbu

45 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 Illam of Rs.8,01,050/- and construction expenses of Tulir School building at Rs.10,70,673/-. Aggrieved assessee preferred appeal before CIT(A).

13.2 The CIT(A) confirmed the action of the AO in regard to disallowance of construction expenses of Anbu Illam by observing as under:- 14.1……… ……………………… During the appellate proceeding the appellant did not deny that the expenditure had been incurred by it. It did not give the details of cement and steel also. The appellant only reiterated the argument made before the A.O. The expenditure was to establish and carry on educational institutions as provided in the MOU of the company. The expenditure was towards construction of building for ANBU ILLAM and VV Vanniaperumal Primary School. However, these are Trust properties of M/s Vanniaperumal Charities Virudhunagar. Thus apparently this expenditure is done by appellant on behalf of somebody else - a related party. The assessing officer has held that this not for the business of the company. The appellant company is engaged in business of selling of gingerly oils etc. it is not in schooling business, nor it is establishing a school in under its own ownership. The MOU states that it establishes and carries on educational institutions but that implies it should do it on its own. The present act of getting a building constructed on behalf of somebody even though a related party is actually an act of donation and an act of application of income hence the same cannot be allowed as an expenditure. In the situation described above find no reason to interfere with the order of the A.O and the addition made is upheld

46 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 13.3 Similarly, the CIT(A) also confirmed the action of AO in regard to disallowance of cost of construction of R.J. Tulir School by observing in para 12.2 as under:- 12.2 During the appellate proceeding the appellant did nto deny that the expenditure had been incurred by it. It did not give the details of cement and steel also. The appellant only reiterated the argument made before the AO. The expenditure was to establish and carryon educational institutions as provided in the MOU of the company. The expenditure was towards construction of building for Tulir School and managed by M/s. Idhayam Rajendran Charities. However, current occupant as mentioned in order is Shri V.R. Muthu. Thus apparently this expenditure is done by appellant on behalf of somebody else – a related party. The assessing officer has held that this not for the business of the company. The appellant company is engaged in business of selling of gingerly oils etc., it is not in schooling business, nor it is establishing a school in under its own ownership. The MOU states that it establishes and carries on educational institutions but that implies it should do it on its own. The building does not appear in the balance sheet. The present act of getting a building constructed on behalf of somebody even though a related party is actually an act of donation and an act of application of income hence the same cannot be allowed as expenditure. The addition made by the assessing officer is upheld. Aggrieved assessee is in appeal before the Tribunal.

47 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 working in the organization it was created to take care of full expenses of the children and to give education, stay, food, etc., upto Vth standard of those children if either they lost any one of the parents or both. In 1961, not even one primary school was there in 2 km radius of the town Virudhunagar. In order to make the society to have basic education, primary education is being provided in local Tamil language. The business of the assessee is labour oriented and they have to carry the minimum weight of 50 kgs to 75 kgs of the raw materials as well as finished products while working in the organization. To support the families of the labourers and the children who lost either of their parents, this ‘Anbu llam' is functioning. This unit has been visited and appreciated by so many V.I.P.s including Late K Kamaraj, former Chief Minister of Tamil Nadu, Late R Venkataraman, former President of India, etc. It is only a labour welfare measure which has been started almost 60 years ago to take care of the children who lost their parents. It is worth to note that there are about 540 labourers who are covered under ESI and about 500 employees and executives who are not under ESI coverage. Since the place is used for more than 60 years, expenditure incurred on maintaining and upkeep of the premises shall be treated as ‘in the course of business'. This labour welfare

48 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 measure is known to the entire town of Virudhunagar where one of its factories is situated. Considering the size of the organisation, and volume of business involved and the number of workers employed, it is during the course of business only and hence, for the purpose of business.

14.1 We noted that the assessee has incurred expenditure on repair of building of Rs. 4,80,630/- and the Assessing Office made an adhoc addition of 40% on the above sum towards steel and cement to an extent of Rs. 3,20,420 and disallowed an amount of Rs. 8,01,050. We also noted from records that the assessee also brought to the knowledge of authorities below that one of the objectives of the company in its Memorandum of Association is "to establish and carry on educational institution, schools and/or colleges where students may obtain on moderate terms a sound religious, musical, ethical, classical, mathematical, technical and general education of highest order, subject to the approval of the appropriate authority. The assessee also incurred an expenditure of Rs. 6,42,404 and the Assessing Officer made an adhoc addition of Rs. 4,28,269 towards cost of cement and steel and in aggregate disallowed an expenditure of Rs.10,70.673. We noted that one of

49 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the objectives of the company is "to establish and carry-on educational institution, schools and/or colleges where students may obtain on moderate terms a sound religious, musical, ethical, classical, mathematical, technical and general education of highest order, subject to the approval of the appropriate authority".The assessee company has completed its 50th golden year in 1996 and the company established its factory in Villipathiri in 1992, and another factory in Varalotti in 2002 which is 4 kms away from Villipathiri. Accordingly, to provide quality education to the children of more than 850 employees of the company, RJ Thulir Kinder Garden was started in the existing rented godown premises of the company. The school was started within the premises of the company so as to provide convenience for the employees. The said premises, being a leased one, is being occupied by the company since 1986. The company incurred expenditure towards construction of classrooms by modifying the rented godown premises. The company has not claimed any depreciation benefit on the above. However, due to lack of sanction from the statutory authorities to run the school within the factory premises, being an industrial area, the school was shifted to other place. Even now, the said premises is under the occupation of the company and it is used as godown for

50 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the business of the company. The lease rental payments made by the company to the owner of the land is also offered as income in the hands of the owner.

14.2 We have also considered the arguments made by ld.CIT-DR, Dr. S. Palanikumar as he referred to Form No.3CA for all the AYs i.e., 2010-11 to 2016-17 reflecting the nature of business carried out by the assessee company and he argued that once the assessee is in the business of edible oils, it is not the business of the assessee to run a school and accordingly, construction expenditure at the best can be held to be capital in nature. For this, ld.CIT-DR relied on the case laws of Hon’ble Supreme Court in the case of A.V. Thomas and Co. Ltd., vs. CIT, [1963] 48 ITR 67(SC) and CIT vs. Amalgamation (P) Ltd., [1997] 92 taxmann 132 (SC).

13.3 We noted that no doubt the assessee is not in the business of running an educational institute but the assessee’s employees numbering more than 850 are residing in remote area where their children cannot go to school as there is no nearby school in the rural area. According to us, in such situation running a school is for the welfare of employees and providing education to children of the

51 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 employees is an allowable expenditure in the hands of the assessee company. This issue has been dealt with by the Hon’ble Karnataka High Court almost on the same facts in the case of CIT vs. Pandavapura Sahakara Sakkare Karkhane Ltd., [1998] 174 ITR 475 (Karn), wherein it is held that contribution by the co-operative society for the education fund under the provisions of Karnataka Co- operative Societies Act is held deductible as expenditure. Even Hon’ble Bombay High Court in the case of Krishna Sahakari Sakhar Karkhana Ltd., vs. CIT [1998] 229 ITR 577 held that contribution made by the assessee under section 68 of the Maharashtra Co- operative Societies Act, 1960 for the education fund created for the purpose of the education of the children of the employees is held to be deductible. Since the issue is exactly identical here also, the assessee company has constructed the building for running a school in the vicinity of the factory building for the children of the employees of the assessee company. This according to us, is allowable expenditure and we direct the AO accordingly. This issue is arising in all the 7 assessment years in regard to construction expenses of ‘Anbu Illam’, construction of ‘R.J. Mantra Tulir School’ and interest on loan taken for construction purposes for the building

52 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 of R.J.Mantra English School, is allowable in all these assessment years. We direct the AO accordingly.

53 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 Aggrieved, assessee preferred appeal before CIT(A) and the CIT(A) restricted the disallowance to the extent of exempt income and directed the AO accordingly in all these 7 assessment years. Aggrieved, assessee is in appeal before the Tribunal.

54 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 year 2015-16 at Rs.2,62,33,225/- and for assessment year 2016-17 at Rs.2,73,17,518/- added by AO and confirmed by CIT(A). This common issue in all these 5 years is as regards to shifting of profit from assessee to its sister concern M/s. Rasathe Garments on account of sale conducted of gingely oil cake and ground nut oil cake. The facts and circumstances identical in all the 5 AYs are exactly identical and issue is common. The assessment order is based on the very first year i.e., AY 2012-13 and the order of CIT(A) is a common order for all the years. Hence, we will take the facts from assessment year 2012-13 and will decide the issue. The relevant ground raised by assessee reads as under:- 5. SHIFTING OF PROFITS TO SISTER CONCERN The Apex court in the case of Union of India vs. Azadi Bachao Andolan held that while a colourable means have resulted in a sham transaction that does not mean that tax planning would not be allowed as per law.

55 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 are one and the same and functioning from the same premises at No.443, Main Bazaar, Virudhunagar. The AO noted that the firm Rasathe Garments is a loss making entity and never paid income-tax since its inception. He brought out the details of loss returned in assessment years which is tabulated in the assessment order. According to AO, the assessee has adopted a colourable devise for reducing its taxable income by routing the sales of gingelly oil cake and groundnut cake through its sister concern M/s. Rasathe Garments. The AO noted that the gingelly oil cake and groundnut oil cake sold by assessee to third parties through its sister concern M/s. Rasathe Garments but sister concern was only a bill preparing entity. He noted that sales of all the products including the oil cakes were managed by Sales Manager and Senior Sales Officer of the assessee company including the trade enquiries and purchase orders. The AO noted in his assessment order that the designated Sales Manager and Senior Sales Officers of the assessee company are i) Shri V. Murugan, ii) Shri Durairaj and iii) Shri Vadivel. We noted that the sales bills for the assessee company and its sister concern M/s. Rasathe Garments are generated on a pre-printed form in the system signed by one of the above persons. He noted that these personnel were either on the payroll of the assessee company

56 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 or M/s. V.R. Muthu & Bros., and not the employee of the sister concern M/s. Rasathe Garments. The AO also noted one of the answer given by one of the partners of M/s. Rasathe Garments and also Director of assessee company Shri V.R. Thendral vide Question No.6 of sworn statement recorded during the course of search on 25.04.2016, he deposed that “Oil cake manufactured is kept at M/s. V.V.V. and Sons Edible Oils Ltd., in a loose condition without packing”. The AO noted from the above statement that the stock of oil cakes was retained by the assessee company itself and transfer of goods is effected directly to third parties to whom actual sale is made but not to the sister concern M/s. Rasathe Garments. The AO further noted the statement of Shri N. Durairaj, Manager of the assessee company and also Shri G. Vadivel, Senior Officer of the assessee company and noted that Shri N.Durairaj, Manager – Business Development in his sworn statement recorded during the search on 25.04.2016, in reply to question stated that he was an employee in the rolls of M/s V.V.V and Sons Edible Oils Ltd., for the past two decades and drawing salary income from V.V.V and sons Edible Oils Ltd,. He further stated that he along with other employee, Shri Vadivel look after the sale of Gingelly Oil, groundnut oil, Gingelly and ground nut oil cakes, etc. They used to get orders

57 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 for oil cakes from the parties over phone. They prepared sale bills for V.V.V and Sons Edible Oils Ltd, and Rasathe Garments. He further stated that on receipt of order for sale of oilcake received from traders in a day, a single sale bill is raised by V.V.V and Sons Edible Oils Ltd., in the name of M/s Rasathe Garments and subsequently required number of bills are prepared in the bill books of M/s Rasathe Garments to various parties on the same day. However, goods are delivered by the assessee-company from its factory premises. Shri G.Vadivel, Senior Officer in his sworn statement recorded on 25.04.2016 affirmed that he has been working as an employee of M/s V.R.Muthu & Bros., for the past ten years. He further stated that he assisted Shri N.Durairaj, Manager of V.V.V. & Sons Edible Oils Ltd., in the sale of Gingelly and groundnut oil and oilcakes. The statement deposed by him affirms on the same lines given by Shri N.Durairaj.

19.1 Further, the AO noted that the entire sales carried out through its sister concern M/s. Rasathe Garments is on credit basis but not even a single vendor is allowed to make order without pre- payment and billed on payment basis only. Therefore he observed that there is no real sale of the above two items to the assessee’s

58 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 sister concern M/s. Rasathe Garments. Hence, he observed that the assessee company has shifted its profit to its sister concern and the reasons for performing this dubious method by the assessee company is to reduce its profit and restrict tax liability, to give better financial shape to its sister concern by minimizing its losses and to provide funds to its sister concern for its business activities in the guise of so-called oilcake business. Therefore, the AO also applied the decision of Hon’ble Supreme Court in the case of Mcdowell vs. CTO, (1985) 154 ITR 148 (SC). Hence, he treated the profit element of the credit sale made to its sister concern M/s. Rasathe Garments at Rs.1,71,76,214/- and treated the same as undisclosed income of the assessee. Aggrieved assessee preferred appeal before CIT(A).

19.2 The CIT(A) confirmed the action of AO simpliciter by observing in para 15.2 as under:- “15.2 During appellate proceedings assessee could not give any other reason to rebut the conclusion drawn by the Assessing Officer. The TP assessment relied upon by the appellant is not relevant in the present case as the same has been done without appreciating the documentary evidence in possession of the assessing officer. Moreover SDT provisions are applicable for only A.Y.2014-15 onwards and assessing officer can still look into the transactions happening between related parties u/s 40A. I see no reason to disagree with the conclusion arrived at by the A.O and hence the addition made by the assessing officer in respective years is upheld.

59 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 Aggrieved, now assessee is in appeal before the Tribunal.

60 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 transaction is at Arm’s length and the AO has nowhere stated that the sales price by the assessee and consequent purchase price of the assessee’s sister concern M/s.Rasathe Garments is excessive or unreasonable, no disallowance can be made. According to ld.AR if at all disallowance is to be made that is to be made in the hands of the assessee’s sister concern if at all it seems excessive or unreasonable because the whole of the Income-tax Law provides for disallowance if the expenditure is excessive or unreasonable only in the hands of the receiver of the goods and not in the hands of seller in term of provisions of section 40A(2)(a) of the Act.

61 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 assessment year 2012-13 onwards. The quantification of profit AY- wise by the AO is as under:- AY Profit quantified (in Rs) 2012-13 1,71,76,214 2013-14 1,92,15,133 2014-15 43,58,694 2015-16 2,62,33,225 2016-17 2,73,17,518

During the search operation the investigation unit has detected that the appellant company had diverted substantial amount of sale of Ground nut oil cake and Gingelly Oil cake to its sister concern Rasathe Garments through book entries and on the same day it was subsequently sold to various customers by Rasathe Garments with profit. The AO had discussed the entire modus operandi in detail in the assessment order at paragraph 7.0. How the billings are managed is discussed at paragraph 7.3. At 7.4 the persons involved in these transactions are discussed. The sworn statements of various employees engaged in this activity of Profit shifting was also discussed in the assessment order at paragraph 7.5. At paragraph 7.6 sworn statement of N. Durairaj who explained the modus operandi is discussed by the AO. The sample invoices of sale are scanned and produced at page-9-11 of the assessment order for the AY 2012-13. At paragraph 7.7 it was demonstrated that the entire

62 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 sale of Oil cake to Rasathe garments was credit sales only through book entries.

21.1 It is submitted that M/s Rasathe Garments was in the business of Manufacture and sale of garments like nighties, chutidhar, shirts, trousers, lungis, in skirts and garments. They are not a trader of any other goods or articles. It was found that both the entities (Appellant Company and the firm Rasathe garments) were operating in same premise and the sale of Ground nut oil cake and Gingelly oil cake were made through book entries only. The search operation has resulted into a finding that the firm Rasathe garments had incurred huge loss over the period time and to set off the profit of VVV sons (appellant) such arrangements were made. The modus operandi has been discussed elaborately by the Assessing Officer on the basis of seized material in the assessment order.

21.2 The ld.CIT-DR with regard to evidences from accounts of Rasathe Garments submitted that that the evidences available from financials and Tax audit report of Rasathe Garments is obtained from the AO and placed on record for better appreciation of the modus operandi detected. The tax audit report uploaded or filed along with

63 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 the return of income of Rasathe Garments is placed as annexure-1 from page number 1 to 23, had revealed a fact that the nature of business reported year after year was Manufacturing (others) under the business code of 0124. This had revealed a fact that the firm was not a genuine trader of Oil cakes. The business code has been published every year for the purpose of filing of tax returns. It is enclosed as annexure-2 in and placed at page number 24-31 in Revenue’s Paper-book. If the firm had engaged in genuine business activity of trading of Oil cakes, they should have reported both in the Form 3CD. As the firm Rasathe garments is engaged only in Manufacture and sale of various garments, it was only reported as their business. They were not the manufacture of Oil Cake. It was a by-product of the appellant company and not manufactured by Firm Rasathe garments. For shifting of profit, VVS Sons Limited recorded the sale of by-product of Gingelly Oil Cake and Ground Nut Oil Cake in the accounts of loss making entity Rasathe Garments.

21.3 The ld.CIT-DR further submitted that on Analysis of P&L account, apart from the tax audit report the profit and loss account also obtained and it is placed in annexure-3 from page number 32- 53 of Revenue’s Paper-book. It is evident that out of total sales or

64 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 total turn-over of Rasathe Garments, the sale of Ground nut oil cake and Gingelly oil cake alone contributed around 95-96%. If the 95% of the volume of transaction was from trading activity, they ought to have reported different business code and not reported manufacturing as their main business. In Tax Audit report the nature of business was mentioned as Manufacturing under business code 0124 year after year. The sale of main goods like nighties, chutidhar, shirts, trousers, lungis, in skirts and garments contributed not more than 5% of the turn-over. This activity was started from AY 2012-13 onwards and not prior to that. This firm commenced its business long back. Since its inception it had reported only loss. It is presented at para 7.1 of the order.

21.4 The ld.CIT-DR further stated that in regard to stock and turn- over ratio; closing stock and opening stock, in all the AYs another clinching evidences detected from the Tax audit report was that the opening stock and closing stock of Gingelly Oil Cake and Groundnut Oil Cake was NIL (Page No.4,11,17 and 23). It is apparent that it was a sham transaction with a sole intention to divert or shifting the profit by VVV sons to its sister concern which was incurring persistent historical loss. For the volume of purchase and sale oil

65 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 cakes worth of Rs.59.00 Cr to 62.00 Cr, there was no opening stock and closing stock of oil cakes. Without having stock no assessee can book turnover of Rs.59 to 62 Cr. It is demonstrated unambiguously that it was only a book entry with the sole intention to shift the profit.

66 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 partnership firm Rasathe Garments are separate taxable entity, both assessed to income-tax as well as to VAT. There is no dispute about the sale of goods by assessee company to the firm Rasathe Garments is not at Arm’s length price or fair market price, which has been separately assessed. We noted from the argument made by ld.AR for the assessee and evidence filed before us in assessee’s paper-book consisting of pages 1 to 241, wherein complete invoices, sale purchase bills, VAT audit reports, tax audit reports in Form No.3CB for all these assessment years are filed. The assessee has also filed CST form and GST registration certificate of the assessee company as well as the partnership firm M/s. Rasathe Garments, to prove that these are separate entities. The ld.AR drew our attention to the transfer pricing order passed u/s.92CA of the Act in the case of assessee company as well as Rasathe Garment, wherein TP adjustment for assessment year in regard to transactions for purchase of gingelly oil cake and purchase of groundnut oil cake was accepted at Arm’s length and no adjustment whatsoever was made by the AO.

22.1 We noted the facts of the case that there is nothing coming out of the order of the AO or the CIT(A) or argued by ld.CIT-DR

67 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 now, that the price of the transaction entered into between these two parties is excessive and unreasonable and particularly in the hands of the firm in term of the provisions of section 40A(2)(a) of the Act. The provisions of section 40A(2) of the Act applies for making disallowance of expenses for payments, which have been claimed as deduction in computation of profit & loss account of business and it shall not apply for income or gains under any circumstances. Further, we are of the view that as per income-tax law, the disallowance if the expenditure is excessive or unreasonable, can be made only in the hands of the receiver of the goods and not in the hands of the seller of the goods. In view of the above facts and circumstances, we cannot accept the argument of Revenue that the transaction is colourable device coming within the ambit of case law of Mcdowell supra. Further, we also point out that this transaction of sale and purchase although gives profit but it is taxed neutral from the point of view of the Revenue for the reason that the firms profit is taxable from Re.1 as the maximum marginal rate and even the profits of the assessee company is also taxable at the maximum margin rate. Once this is the situation, there is no impact on taxability of the profit and hence, we are of the view that the addition made by AO and confirmed by CIT(A) on account of

68 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 shifting of profit of the assessee company to its sister concern M/s. Rasathe Garment, a partnership firm is without any basis and hence, deleted. For all these 5 assessment years, the additions made are deleted and the issue of assessee appeals is allowed.

Working through the year one really needs a break and a vocation (business) travel The Apex Court in Gordon Woodroffe Leather Mfg Co vs CIT 1962 44 ITR 551 has given the following three tests in allowing or disallowing payments to employees a That the payment should have been made as a matter of practice which affected the quantum of salary b That there was an expectation by the employee of getting a gratuity and c That the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee

69 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 In a subsequent decision in T Sassoon J David and Co P Ltd vs CIT 1979 118 ITR 261 the Apex Court held that the three tests mentioned in the above Supreme Court case have to be read disjunctively Consequently if a payment satisfiesany of the three tests the same would be admissible

The AO noted that the expenditure debited in the books of accounts of the assessee company on account of foreign tour expenses on 27.04.2011 was for some of the employees along with their spouse

70 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 travelling to Thailand and Bangkok on a tour package. According to AO, the assessee is unable to correlate these expenses with the purpose of business. Hence, he disallowed the same. Aggrieved assessee preferred appeal before CIT(A). The CIT(A) considering the submissions of the assessee and noted that in the absence of any documentation of the relation of the activities on this trip with the business of the appellant the assessing officer has disallowed the expenditure and according to him there is no reason to interfere with the order of the assessing officer for disallowing the expenditure. Hence the disallowance made is confirmed.

ITA No.1765/CHNY/2019, AY 2009-10 26. This appeal by the assessee in ITA No.1765/Chny/2019 is arising out of the Revision order passed by the Principal Commissioner of Income-Tax, Central-2, Chennai u/s.263 of the Act in C.No.2744/C-2/2018-19, dated 28/03/2019. The assessment was

71 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 framed by the ACIT, Central Circle-2, Madurai u/s.143(3) r.w.s. 147 of the Act for the assessment year 2009-10 vide order dated 31.12.2016.

Since the delay is for a short period of 5 days and we find cause as reasonable, we condone the delay and admit the appeal.

72 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 assessee at Rs.60,24,10,640/-. For this, assessee has raised following grounds:- 2.1 Where an assessee valued its brand name on the basis of projected sale quantity after considering the discounting factor and the same is accepted by the Learned Assessing Officer and the company achieved the sale based on the above quantity after considering the discount. In his order, Learned Assessing Officer specifically mentioned that the allowability of depreciation on such brand value to the successor company shall be the decision of the Learned Assessing Officer of that respective company. Revision of that order by the Learned Principal Commissioner of Income Tax u/s 263 to reconsider the Brand Valuation in the hands of the Assessee Firm without considering the discount on the projected sale quantity. The act of the Learned Principal Commissioner of Income Tax is mere change in opinion and the order of assessing Officer u/s 143(3) r.w.s 147 is not erroneous and prejudicial to the interest of the revenue and Learned PCIT's direction u/s 263 may be set aside. 2.2 Where the issue related to the allowability of depreciation in the hands of the successor company, whether the Learned Principal Commissioner of Income Tax exercising powers u/s 263 in the assessment of predecessor firm is legally tenable? 2.3 When the assessee valued its brand on the basis of projected sales quantity after considering the discounting factor and the successor company achieved sales quantity above the projected figure reduced by the discount. The direction of the Learned PCIT to compare the actual quantity of sale with the projected quantity before considering discount factor is not commercially viable comparison and the same is not prudential in terms of accepted business norms and so his direction may be declared as null and void.

73 I.T.A. Nos.2275-2281/Chny/2019 & ITA No.1765/Chny/2019 order passed by PCIT will not survive and hence, the same is quashed. The appeal of the assessee is allowed in term of the above.

Order pronounced in the open court on 5th August, 2022 at Chennai.

Sd/- Sd/- (महावीर �सह ) (जी. मंजुनाथ) (MAHAVIR SINGH) (G. MANJUNATHA) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 5th August, 2022 RSR आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकरआयु� (अपील)/CIT(A) 4. आयकरआयु� /CIT 5. िवभागीय�ितिनिध/DR 6. गाड�फाईल/GF.