ASST CIT 15(2)(1), MUMBAI vs. KRYSTAL COLLOIDS P.LTD, MUMBAI

ORDER

PER N.K. PRADHAN, AM

M/s Krystal Colloids Pvt. Ltd. 2 3171/Mum/2016 2. The ground of appeal reads as under: On the facts and circumstances of the case in law, the Ld. CIT(A) erred in deleting the disallowance of depreciation on intangible assets and other assets amounting to Rs.36,75,000/- acquired by the assessee from proprietary concern pursuant to conversion u/s 47 (xiv) of the Act even when the proprietary concern was not possession of any intangible assets which could fit into basic definition of intangible assets as per the Income Tax Act, 1961.

3. In a nutshell, the facts are that the assessee had claimed depreciation of Rs.36,75,000/- [@ 10% on Written Down Value (WDV) of intangible assets of Rs.3,67,50,000/-] as per Schedule-4 of fixed assets to Form 3CD. In response to a query raised by the AO during the course of assessment proceedings, the assessee submitted that the business of the proprietor Mr. Nayan Mepani was acquired by way of a transfer by the assessee and the conversion was carried out under the provisions of section 47(xiv) of the Act. It was also stated before the AO that the conversion was carried out by bringing all the assets and liabilities of the proprietary firm at their respective fair value including intangible assets and the valuation of the assets was carried out by a government approved valuer. The intangible assets comprised of the following :

1. Technical Knowhow Rs. 2,75,00,000/- 2. Trademarks & Trade Name Rs. 67,50,000/- 3. Goodwill Rs. 25,00,000/- Total Rs. 3,67,50,000/- M/s Krystal Colloids Pvt. Ltd. 3 3171/Mum/2016 It was also submitted before the AO that in the course of corporatization, the assessee acquired all the assets (including intangible assets) and liabilities from Mr. Nayan Mepani, proprietor of Krystal Colloids vide ‘Agreement for Assignment of Business’ dated 24.03.2005 and had discharged the consideration for the transfer by issue of equity shares. The assessee thus submitted before the AO that it has rightly claimed depreciation @ 10% on WDV of intangible assets. However, the AO was not convinced with the above explanation of the assessee for the reason that the assessee himself is the owner in the instant case and there is no transfer involving sister concerns as the management and owners remain the same. The AO noted that the assessee-company is claiming depreciation on intangible assets acquired on conversion from proprietary concern to corporate entity on 31.03.2005. The proprietary-firm, just before conversion, carried out valuation of its fixed assets on account of which intangible assets of Rs.3,67,50,000/- were added to the fixed assets, on the basis of registered valuer’s valuation report. The AO further observed from details filed in respect of creation of intangible assets and its valuation that the proprietary-firm was infact not in possession of any intangible assets which had allegedly been transferred to the assessee-company on conversion. The AO noted that as per the valuer’s report, on revaluation, the proprietary-firm was in possession of technical knowhow worth Rs.275.00 lakhs and trademarks at Rs.67.50 lakhs. The AO, referring to Accounting Standard (AS)-26 observed that there were three parameters which should exist to meet the definition M/s Krystal Colloids Pvt. Ltd. 4 3171/Mum/2016 of an intangible assets namely identifiability, control over resource and expectation of future economic benefits flowing to the enterprise. The AO found from the details filed by the assessee that it had tried to project the technique and expertise in its manufacturing process as an intangible assets owned by it, which is not acceptable as per AS-26 as well as within the meaning of intangible asset in the Act. The AO also found that the assessee is not eligible for depreciation on intangible assets as per the 5th proviso to section 32(1) which provides that the aggregate deduction in respect of depreciation allowable to the predecessor and successor in the case of succession referred to in clause (xiii) of section 47 shall not exceed in any previous year the deduction calculated at the prescribed rate as if succession had not taken place. The proprietary concern has added the intangible assets in its fixed assets on the basis of the registered valuer’s report just before conversion. The intangible assets added on revaluation, were self-generated assets in the hands of the proprietary-firm and its actual costs to the proprietary concern was Nil. Thus the AO held that the assessee-company as well as the proprietary-firm were not entitled to claim any depreciation on the intangible asset, the same being internally generated assets and having no actual cost. Finally, the AO also held that the assessee is not entitled to depreciation claim on intangible asset in view of provisions of Explanation-3 to section 43(1), which has been created as a safeguard to protect the interest of revenue against corporatization schemes, which M/s Krystal Colloids Pvt. Ltd. 5 3171/Mum/2016 are devoid of economic or commercial justification and can be regarded as pure tax planning scheme. The AO thus held that in assessee’s case, the proprietary concern has been converted into corporate concern having two shareholders i.e. the assessee and his wife. The assessee is having 99% of shareholding and the remaining 1% shareholding is with his wife. Thus, for all practical purposes, the control and management of business has remained with the same person as before conversion. No new shareholder has been added to augment the share capital base of the company or professional/technical competence. By holding that the sole aim of conversion appears to claim extra depreciation on intangible assets acquired during the course of running of proprietorship-firm, the AO disallowed the claim of depreciation of Rs.36,75,000/- made by the assessee.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) has followed the appellate order passed by her predecessor in respect of AYs 2008-09 and 2009-10 and allowed the appeal, thus holding that (i) the action of the AO in disallowing the benefit of depreciation on intangible assets to the assessee cannot be upheld, if such disallowance was to be made, it should have been done in AY 2005-06, itself, (ii) the 5th proviso to section 32 is only applicable in the year of succession and it cannot be applied to the succeeding year, in this case the succession was carried out on 31.03.2005 and the appeal pertains to AY 2008-09.

M/s Krystal Colloids Pvt. Ltd. 6 3171/Mum/2016 5. Before us, the Ld. DR submits that the proprietary concern was not in possession of any intangible asset which could fit into the basic definition of intangible assets as per the Act, therefore, the Ld. CIT(A) erred in deleting the disallowance of depreciation on intangible assets and other assets amounting to Rs.36,75,000/- acquired by the assessee from the proprietary concern pursuant to conversion u/s 47(xiv) of the Act. Thus the Ld. DR supports the order passed by the AO.