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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER PER SUSHMA CHOWLA, JM:
The appeal filed by the assessee is against the order of Commissioner of Income Tax-II, Thane, dated 01.04.2011 relating to assessment year 2007- 08 passed under section 263 of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- Ground 1 On the facts and in the circumstances of the case and in law, the learned CIT has wrongly assumed jurisdiction under section 263 of the Act and erred in setting aside the assessment order passed by the assessing officer ('AO') under section 143(3) of the Act by holding that the said order is erroneous and prejudicial to the interest of the Revenue.
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Ground 2 On the facts and in the circumstances of the case and in law, the learned CIT has wrongly assumed jurisdiction under section 263 of the Act and erred in holding that the claim of depreciation has been accepted by the AO without making any enquiry with regard to the correctness of the claim of depreciation on know-how and patents and thus, resulting in excessive allowance of depreciation, particularly when the said claim has been accepted since A.Y. 2003-04. Ground 3 On the facts and in the circumstances of the case and in law, the learned CIT has erred in holding that for determining the written down value of an asset under Section 43(6) of the Act, the AO has to determine the actual cost of the asset every year even when the asset forms part of the block of assets. Without prejudice to the above, the CIT has erred in holding that the actual cost of assets forming part of the block of asset can be changed in subsequent years based on reanalysis and reappraisal of the facts in the later years. Ground 4 On the facts and in the circumstances of the case and in law, the learned CIT has erred in directing the AO to undertake a fresh assessment to decide whether depreciation on know how is allowable under Section 32 of the Act. Ground 5 On the facts and in the circumstances of the case and in law, the learned CIT has erred in holding the Appellant has not purchased any knowhow from ICI. Ground 6 On the facts and in the circumstances of the case and in law, the learned CIT has erred in holding that the knowhow of Syngas and PCEO divisions have not been used for the purpose of the Appellant's business. Ground 7 On the facts and in the circumstances of the case and in law, the learned CIT has erred in concluding that the allocation of value to various individual items of intangible assets based on an independent valuer's report, has not been done in a fair and reasonable manner and hence, the values allocated to intangibles including knowhow cannot be accepted as correct value of individual items of the intangible assets. Ground 8 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned CIT has erred in holding that the value of land at Panki division is Rs.174.36 crores and the value of land at Taloja is Rs.13 crores.
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The issue arising in the present appeal is against exercise of jurisdiction by the Commissioner under section 263 of the Act.
The learned Authorized Representative for the assessee at the outset pointed out that the issue which arises in the present appeal i.e. whether the assessee is entitled to depreciation on know-how, trademark and patents has been decided by the Tribunal in assessment years 2004-05 to 2007-08. He brought to our attention the fact that for the first time, such depreciation was claimed in assessment year 2003-04 which was not disturbed by any of the authorities. However, the Commissioner passed the order under section 263 of the Act holding that no depreciation is to be allowed on know-how, trademarks and patents in assessment year 2007-08. Subsequently, the CIT(A) enhanced the assessment for assessment years 2004-05 onwards. The learned Authorized Representative for the assessee further stated that all objections of the Commissioner in 263 order were covered by the CIT(A) in enhanced order for assessment year 2004-05. The assessee filed an appeal before the Tribunal against the order of enhancement for assessment year 2004-05 and the Tribunal has elaborately discussed the issue and allowed the claim of assessee. The learned Authorized Representative for the assessee took us through various paras of show cause notice and also the order of Commissioner. He then drew our attention to various paras of the order of Tribunal in ITA No.1507/PUN/2012, relating to assessment year 2004-05 and ITA No.2036/PUN/2012, relating to assessment year 2005-06, order dated 12.12.2017 where the issue of allowing depreciation on know-how, trademarks and patents has been considered. He also pointed out that the Commissioner in the order passed under section 263 of the Act says that no enquiry was
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made by the Assessing Officer and hence, the order passed is both erroneous and prejudicial to the interest of Revenue. He pointed out that for the first time, the said depreciation was claimed and allowed to the assessee in assessment year 2003-04 and hence, the Assessing Officer could not tinker with the depreciation on assets in assessment year 2007-08, where the said assets had entered the block of assets and hence, there was no error in the order of Assessing Officer. He further pointed out that both on 263 and on merits of the case, the issue is to be decided in favour of assessee.
The learned Departmental Representative for the Revenue on the other hand, pointed out that the matter is to be argued by the Special Counsel, who had moved application for adjournment. However, we find that this matter has been fixed for hearing on various dates and even along with earlier appeals decided by the Tribunal. Hence adjournment was refused, since issue is covered by the order of Tribunal in earlier years and we proceed to decide the present appeal accordingly.
On perusal of record, the order of Commissioner and the order passed by the Tribunal in assessment years 2004-05 and 2005-06 (supra), we proceed to decide the present issue of exercise of jurisdiction under section 263 of the Act. It may be pointed out that consequent to the order passed in assessment years 2004-05 and 2005-06, the Tribunal has also decided the issue on merits in assessment years 2006-07. The Commissioner was of the view that the Assessing Officer had without any enquiry allowed depreciation on know-how, trademarks & patents and hence the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue for lack of enquiry.
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The case of assessee on the other hand, was that the said issue of allowability of depreciation on know-how, trademarks and patents for the first time arose in assessment year 2003-04 and the same was allowed to the assessee by speaking order of Assessing Officer. Thereafter, the said assets entered the block of assets and the same could not be disturbed by any consequent order. Admittedly, the assessee had claimed the aforesaid depreciation in assessment year 2003-04 which was allowed by the Assessing Officer and the same was not disturbed. For the first time, the said position was looked into and the order of Assessing Officer was reversed by the Commissioner by exercising his jurisdiction under section 263 of the Act in assessment year 2007-08. Consequent thereto, the CIT(A) while deciding the appeals of assessee in assessment years 2004-05 and 2005-06 followed the same line of reasoning as that of the Commissioner in the order passed under section 263 of the Act in assessment year 2007-08 and passed an order of enhancement for the aforesaid years and decided the issue of allowability of depreciation against the assessee. The Commissioner issued show cause notice to the assessee dated 29.11.2010, wherein vide para 1 the facts of the case were noted and the Commissioner further observed as under:- “10. In short, since the „Actual Cost‟ of the asset i.e. Know-how, Patent and Trademark which is the basis for computing the allowable depreciation, is not available in the present case, depreciation u/s 32 in respect of Trademark, Patent and Know-how cannot be allowed. The AO has, however, allowed the depreciation on Know-how, Trademark and Patent without making proper enquiries with regard to the actual cost of these assets and has allowed the depreciation on an estimated amount and not on the basis of actual cost of the asset to the assessee. The order of the AO, therefore is erroneous as well as prejudicial to the interest of revenue in as much as excessive depreciation on Know-how, Trademark and Patent has been allowed resulting in loss of revenue. You are, therefore, requested to submit your say as to why the order passed by the AO u/s 143(3) for A.Y. 2007-08 be not set aside.”
After considering the reply of assessee, the Commissioner passed the order on different aspects of case. The first aspect was deliberated under para
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6 - Know-how of Syngas division (Panki) is neither purchased nor is owned by the assessee. The Commissioner in this regard observed as under:- “6.8 It is thus evident that assets of syngas division including its knowhow were not purchased by the ICI and the assessee is not the owner of assets of syngas division including its knowhow. Similarly, it is noticed that no patent or technology acquired from the ICI for its PCEO division is registered in the name of the assessee. There is no other material also to show that assessee had purchased or that the ICI has transferred any knowhow to the assessee for its PCEO division. The assessee thus cannot be said to have purchased any knowhow/patent from ICI and therefore, cannot be considered as the owner of any patent or knowhow of the PCEO division as well.”
The second aspect was deliberated under para 7 - No evidence to show that Knowhow of syngas division has been used for the purpose of business and conclusion of the Commissioner was vide para 7.4, which reads as under:- “7.4 On the basis of the above discussion, it can be concluded that the assessee is neither owner of the knowhow nor there is any material to prove that knowhow acquired from the ICI particularly that of the syngas division has been used by the assessee for the purpose of its business. Thus, twin condition for allowing depreciation u/s 32 is not satisfied in respect of the knowhow the assessee therefore, is not eligible for depreciation in respect of knowhow.”
The next aspect of the issue was actual cost of the intangible assets were not correctly shown by the assessee. Various aspects of the transactions were taken up by the Commissioner in paras 8.3 to 8.9 and it was concluded in para 8.10 as under:- “8.10 It is thus clear that the figure of Rs.125 cr considered by the assessee as the total value of the intangibles assets of the business purchased does not really represent the correct total value of intangibles assets. If market value of land both at Panki and Taloja is considered, there will be no amount left out of purchase consideration which could be considered as paid towards intangibles such as knowhow. Consequently, it can be concluded that allocation of value to various individual items of intangibles assets has not been done in a fair and reasonable manner and therefore, values allocated to intangibles including knowhow cannot be accepted as the correct value of individual items of the intangibles assets such as knowhow and value so assigned can be acknowledged as actual cost for the purpose of allowing depreciation.”
The Commissioner also took note of the fact that depreciation had been allowed on the basis of details submitted in the year 2003 and where the actual
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cost had been accepted in earlier year that the depreciation had to be allowed in current year on the basis of WDV and he observed as under:- “15. It is also submitted that depreciation has been allowed on the basis of the details submitted in the year 2003. In this regard it may be mentioned that each assessment as separate asst year and that the principal of ras-judicata is not applicable in its strict sense in the matter of income tax proceedings. In other words whenever a claim of deduction or allowance is made in the return of income, the AO is duty bound to make enquiries with regard to the correctness and allowability of such claim of allowance in each asst year. The position and function of the ITO is different from that of Civil Court. The court is neutral to the dispute and dispute is decided by the civil court on the basis of evidences brought before it. The Civil court thus simply gives the decision on the basis of pleading and evidence which comes before it. The ITO however is not only the adjudicator but also an investigator. He therefore cannot remain passive in the face of return which may be in order but call for enquiries. It is the duty of the AO to ascertain the truth and the facts stated in the return. If these facts are not verified by the AO, the order passed by him would become erroneous. 16. It is also stated that since the actual cost had been accepted in earlier year, depreciation has to be allowed in the current year on the basis of wdv computed on the basis of the actual cost and that actual cost cannot be modified in the current year. This contention of the assessee is also not tenable. If wrong values have been accepted as actual cost of the asset in earlier year and the mistake is detected in the later years in order to determine the correct taxable income of an assessee the AO is duty bound to rectify the mistake. Reliance in this regard is placed on the decision of the Supreme Court in the case of Saharanpur Electric Co. 194 ITR 294…..”
The Commissioner concluded by holding as under:- “17 It is thus seen that the figure of the actual cost accepted in earlier is not sacrosanct and can be modified in subsequent year if it is found that the same has been wrongly accepted in earlier years.”
The Commissioner further observed that It therefore, cannot be said that the AO adopted one of the plausible view. The CIT thus exercised his jurisdiction under section 263 of the Act.
All these issues have been considered by the Tribunal while deciding enhancement made by the CIT(A) on account of depreciation on know-how, trademarks, patents allowed by the Assessing Officer. The Tribunal
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summarized the issues arising on this account vide para 38 at page 42 of the decision and the same reads as under:-
“38. The assessee is in appeal against the order of CIT(A). The issues which arise in the present appeal before us are manifold and overlapping. Elaborate submissions have been made by both the learned Authorized Representatives for and against the orders of authorities below with special emphasis on enhancement made by the CIT(A) and we proceed to decide the same after referring to various facts and aspects of the case. First of all, the issues which need adjudication are as under:- a) Claim of depreciation on tangible assets and intangible assets i.e. non- compete fee and goodwill; b) Bifurcation of slump price into the value of tangible assets and intangible assets; c) Determination of value of land at Taloja and Panki for its value to be attributed from slump price; d) Allocation of value to trademarks, patents and know-how and goodwill, out of purchase consideration of Rs.153.18 crores; e) Claim of depreciation on such trademarks, patents and know-how and goodwill; f) Basis for exercise of power of enhancement by the CIT(A); g) Disallowance of depreciation once the assets had entered into block of assets, in view of section 43(6) of the Act; h) Corporate issue of expenses pertaining to increase in share capital.”
The Tribunal further decided the issue of allocation of value of consideration to the two lands i.e. Panki and Taloja. In respect of land at Panki, the conclusion is in para 48 of the order of Tribunal, which reads as under:-
“48. Reading the terms of BTA as agreed upon between the parties, ICI India Ltd. agreed to transfer, sell and / or to assign its Indian business as a going concern. As referred to in paras hereinabove, Indian business was defined and understood between the parties, was catalyst business carried on by ICI India Ltd. under the name and style Synetix. The same included business plant & machinery, business properties, employees, debtors, all the rights and liabilities of ICI India Ltd. in or to the business IP, the business goodwill and primary and secondary books and records. However, the term „Indian business‟ did not talk about Panki activities and also excluding the „Excluded assets‟. We have already referred to the list of „Excluded assets‟, which clearly excludes among others Panki sites, employees and Panki assets along with excluded IP. All these excluded assets are enlisted in Part I of Schedule 10 to the BTA. The Panki activities were the manufacture of items of products which were covered as per Toll Conversion Agreement i.e. in respect of manufacturing activities carried on at Panki site. Another important term which needs to be taken note of is that Panki assets which clearly have not been taken over and it is part of excluded assets i.e. assets which were not been taken over and the terms of BTA talks of leasehold and licensed properties comprising Panki sites together with building thereon. It also talks of
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plant & machinery, equipment, computer and other assets at Panki. In order to understand the intention of the parties, it is necessary to refer to Toll Conversion Agreement, which was also entered into between ICI India Ltd. and the assessee company on 02.12.2002, wherein it was agreed upon that ICI India Ltd. would manufacture the products on behalf of assessee for the stipulated term. The said production was to be undertaken exclusively for the assessee in accordance with relevant specifications. It was also agreed upon that the aforesaid plant & machinery, equipment, assets at Panki site were to be exclusively used for manufacturing the said products for and on behalf of the assessee, by ICI India Ltd. Another relevant clause was that ICI India Ltd. shall manufacture the products using technical information licensed to it pursuant to clause 4.2. In other words, as per the terms of BTA, ICI India Ltd. had already transferred business carried on under the name of Synetix including the business IP to the assessee but since Panki activities and Panki assets were excluded from the said takeover of business by the assessee from ICI India Ltd., the said assets i.e. land and building including the plant & machinery remained to be transferred. However, under the Toll Agreement, the said assets and site were to be used by ICI India Ltd. in order to manufacture the products for and on behalf of the assessee i.e. till the date Panki site and the assets were transferred, the manufacturing activities had to be carried on by ICI India Ltd. for and on behalf of assessee. Though under the Toll Agreement, it was decided that the said Panki site would be transferred at the value of Rs.1 lakh, which we shall consider in the paras hereinafter; but the parties did agree to understanding to carry on the business in a particular manner. On analysis of the terms of BTA and Toll agreements, it transpires that the value of land at Panki was not part of slump price since the same was not transferred on the date of signing of BTA and TCA. ICI India Ltd. owned 279.30 acres of land, out of which catalyst business was being carried on part of it i.e. 27.53 acres, which admittedly, was to be transferred to the assessee. The said land was under lease with Kanpur Development Authority, for which necessary permission was required before the land could be transferred. Hence, the conclusion of CIT(A) in this regard that the land at Panki was transferred and its value as per valuation done by KDA works out to Rs.174.36 crores is without any basis. In the absence of any land at Panki being transferred under the BTA, there is no merit in findings of CIT(A) in this regard.”
In respect of land at Taloja, the issue was considered in paras 49 to 51 of the order of Tribunal and it was held as under:- “49. Now, coming to the second piece of land on which catalyst business of ICI India Ltd. was being carried on i.e. at Taloja. As per understanding between the parties with special reference to Schedule 4, which defined the business property in Part II, clause 12, it is provided that at completion, ICI India Ltd. and the purchaser i.e. assessee shall enter into Leave and License Novation Agreement in accordance with their respective obligations pursuant to Schedule 5. In part III, while enlisting the business properties in respect of said property at Taloja, the tenure is mentioned to be license – ICI India Ltd. In other words, the business at Taloja site was run by ICI India Ltd. on land which was leased from HLL, ICI India Ltd. was not the owner of said piece of land and hence, was not in position to pass on the ownership of the land. In Schedule 12, the list of agreements and deeds are enlisted. Under Part I, which in addition to the Deed of Restricted Covenants and Toll Conversion Agreement also talks of Novation of Leave and License Agreement in respect of Taloja Manufacturing site between HLL, ICI India Ltd. and Indian purchaser i.e.
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assessee and it is mentioned „it is completed‟. The copy of said agreement is placed at pages 393 to 397 of the Paper Book, Vol-II. In view of above said facts and circumstances, we hold that the CIT(A) has erred in concluding that the said properties i.e. lands at Taloja and Panki sites had been transferred to the assessee under BTA. There is no merit in the said findings of the CIT(A), in view of the above said facts and circumstances. The land at Taloja was leasehold land, wherein ICI India Ltd. had taken the same on leave and license basis from HLL and was not the owner of said land and has no authority to transfer to the assessee under BTA agreement. 50. Before parting, we may also refer to Leave and License Agreement between HLL and ICI India Ltd., which is placed at pages 382 to 392 of the Paper Book Vol-2. This is with regard to land at Taloja, under which ICI India Ltd. was given the right to use the said land. On 02.12.2002 Leave and License Novation Agreement was signed between HLL, ICI India Ltd. and the assessee for use of land at Taloja, copy of which is placed at pages 393 to 397 of the Paper Book, Vol-II. 51. Another point to be noted in respect of Taloja land is that HLL sold its business to ICI India Ltd. in 2001 and Leave and License was given to ICI India Ltd. for the said land. However, ICI India Ltd. sold its business to the assessee in 2002 and hence, the Novation between HLL, ICI India Ltd. and the assessee. Another document which needs reference is the Memorandum of Understanding dated 02.04.2008, copy of which is placed at pages 332 onwards of the Paper Book between HLL and the assessee, wherein the said land was agreed to be sold by HLL to the assessee for Rs.6.93 crores. The Deed of Assignment is placed at page 399 of the Paper Book, the said Deed of Assignment which was entered after approval from MIDC on 19.01.2009. In view thereof, there is no merit in the stand of CIT(A) that the land at Taloja was transferred by ICI India Ltd. to the assessee under BTA and hence, the value of slump price is first to be attributed to the cost of said land.”
The Tribunal then, took up the issue of spreading over of the value of slump price over the fixed assets acquired and balance over the goodwill and also know-how, patents and trademarks and held that the assessee had acquired know-how, trademarks and patents from ICI Ltd. The relevant findings of Tribunal are as under:- “53. Now, coming to the terms and conditions of BTA, which the parties have agreed upon, under which the catalyst business of ICI India Ltd. has been taken over by the assessee, then the next step to be deliberated upon is spreading over of the value of slump price over the fixed assets acquired and balance over the goodwill and also know-how, patents and trademarks. The assessee had obtained valuation report/s from an independent Valuer under which it had identified the cost of fixed assets acquired and also the value of know-how, patents and trademarks and the balance was attributed to goodwill. The CIT(A) had disallowed the claim of assessee on the ground that the most important asset acquired by the assessee was the land at Panki and Taloja sites and since the Valuer had not attributed any cost to the same, working of the Valuer was not correct. We have already in the paras hereinabove held
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that no cost was to be attributed to the Panki site and Taloja site out of slump price, since both the sites have not been acquired by the assessee as owner on the date of BTA. For the sake of repetition, it may be pointed out that the site at Taloja is leasehold right held by ICI India Ltd. and though ICI India Ltd. was the owner of Panki site, but necessary permission was required from KDA before it could be so transferred and in the absence of the same, nothing was transferred to assessee. Another aspect of non-transfer of site and plant & machinery is the Toll Agreement, which was entered into between the parties. ICI India Ltd. in the first instance, transferred all the rights to carry on the business including Business IP, trademarks, rights and intellectuals as is clear from the terms of said Toll Agreement entered into between ICI India Ltd. and assessee. Till the receipt of permission from requisite authority for transfer of land, though the catalyst business has been transferred by ICI India Ltd. but it undertook to carry on said business for and on behalf of assessee. The Panki assets and Panki activities were to be carried on by ICI India Ltd. using trademarks and intellectual property rights, which it had originally assigned to the assessee, who in turn, as per the terms of Toll Agreement allowed ICI India Ltd. to use the same. In case we read the terms of BTA and the Toll Agreement, then it becomes very clear that as per BTA, the assessee had acquired the aforesaid rights including intellectual rights in the catalyst business carried on by ICI India Ltd. However, for the limited purpose of carrying on the manufacturing activity at Panki site, the said trademarks and intellectual property rights were being used by ICI India Ltd., since the assessee permitted them to so use it. The CIT(A) however, had concluded that since the business at Panki site was being carried on by ICI India Ltd., then there is no merit in the claim of assessee that trademarks, know-how and other intellectual property rights had been transferred to the assessee and hence, no value is to be attributed to the same. Again, we make reference to BTA, under which the business goodwill is defined to be goodwill of ICI India Ltd. in relation to business including exclusive rights by the purchaser to trade under this name of business. „Business IP‟ means all intellectual properties which at the ROW transfer time was owned by ICI India Ltd. and which has been used exclusively in, or exclusively relates to, the business excluding the „Excluded IP‟ and all intellectual property licensed to the purchaser under the IP Agreement. Then, even „business technical information‟ has been defined; in addition the disclosed information and environmental terms were also handed over to the assessee. However, all these were with benchmark that the „Excluded IP‟ as defined would not be transferred. Similarly, „Excluded assets‟ would not be transferred on the transfer of Indian business. The „Excluded assets‟ also talked about Excluded IP, Excluded Contracts along with Panki site, Panki employees and Panki assets. In case, we look at the definition of the term „Indian Business‟, it also talked about in addition to the business plant & machinery, business properties, employees and debtors, benefits of business contracts, all right & title of ICI India Ltd. in or to the business IP and business goodwill. In other words, it was not only the business but the right to carry on business along with intellectual rights being business IP, goodwill of business were also acquired by the assessee under BTA. Once the same has been so acquired, then the slump price is to be spread over, not only, over the value of tangible assets i.e. plant & machinery and other assets, but balance over the value of trademarks, know-how and patents and if any balance is so left, then over the goodwill. 54. The assessee during the course of hearing has furnished additional evidence of documents in connection with acquisition of technical know-how by the assessee which are placed at pages 1 to 21 of the Paper Book. The assessee has also furnished Novation of Agency Agreement, Customer
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Contracts and Distribution of Customer list which are placed at pages 22 to 42 of the Paper Book. We have already considered the claim of assessee in this regard and in view of additional evidence which is in continuation with terms of BTA entered into, we find merit in the plea of assessee and hold that the assessee has acquired the said know-how, trademarks and patents from ICI India Ltd.”
The Tribunal further held that Even if we accept the said stand of learned Departmental Representative for the Revenue, ultimately after the slump price has been attributed first to the value of tangible assets, then the balance is to be attributed to intangible assets and once the same is done and whether it is under the umbrella of know-how, trademarks, patents or goodwill, it makes no difference since all these are covered under the umbrella of intangible assets, which are eligible for claim of depreciation under section 32(1)(ii) of the Act. The goodwill is also an intangible asset eligible for said depreciation as held by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). In view thereof, we find no merit in the stand of learned Departmental Representative for the Revenue and the same is rejected (part of para 56).
The Tribunal then relied on series of decision to decide the issue whether the assessee was entitled to depreciation on tangible and intangible assets i.e. including the value of know-how, trademarks, patents and goodwill. The Tribunal also noted that allocation was done in assessment year 2003-04, which was accepted in the hands of assessee and depreciation was allowed on the value of know-how, trademarks and patents, which was not disturbed in the said order. The findings of Tribunal are in para 63, which reads as under:- “63. The CIT(A) while denying the claim of assessee had placed reliance on the ratio laid down by the Hon'ble Supreme Court in Saharanpur Electric Co. Ltd. Vs. CIT (supra), wherein the proposition was laid down in case of seller of business and it was held that there was no merit in allocating slump price over the value of assets. First of all, the said ratio is in respect of assessment year prior to amendment and in the case of seller of business. Further, AS-10 of Accounting Principles also provide for the working of value of tangible and
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intangible assets and once the same is so allocated, the assessee is entitled to the claim of depreciation on such assets. The total consideration exchanged between the parties was Rs.153.18 crores. The assessee has allocated sum of Rs.27.49 crores to the value of assets including plant & machinery which has been taken over by the assessee. Further, the assessee had allocated sum of Rs.125.68 crores to the value of know-how, patents and trademarks, and goodwill. The said exercise was carried out in a systematic manner by the Valuer and in the absence of findings of any fallacy in the said distribution, there is no merit in rejecting the values adopted by the assessee. So, sum of Rs.153.18 crores in the first instance is to be allocated to cost of tangible assets, further to the value of trademarks, patents and know-how and the balance to the goodwill. The assessee had undertaken the allocation in assessment year 2003-04, which has been accepted in the hands of assessee. Further, it may be pointed out herein itself that the assessee has been allowed depreciation on the value of know-how, patents and trademarks by the Assessing Officer, which has not been disturbed in the preceding year. However, the depreciation claimed on goodwill was not allowed to the assessee, which was allowed by the Tribunal in turn, following the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra).”
Further, the issue which was deliberated upon by the Tribunal was where the assessee had already bifurcated the slump price over the cost of tangible assets, value of know-how, trademarks, patents and balance to the goodwill in assessment year 2003-04 and depreciation having been allowed to the assessee and the assets having been entered the block of assets, can the value of WDV disturbed? The finding is in paras 70 and 71 which reads as under:- “70. The next aspect of the issue is that where the assessee had already bifurcated slump price over the cost of tangible assets, value of know-how, trademarks, patents and balance to the goodwill in the preceding year i.e. assessment year 2003-04 and depreciation having been allowed to the assessee in the preceding year, consequent to which the said assets were part of block of assets and during the year under consideration, depreciation is claimed on the WDV of the said assets as on the start of financial year, then can the authorities disturb the same?. The claim of assessee vis-à-vis depreciation on tangible assets, know-how, patents and trademarks, goodwill and non-compete fee have either been allowed by the Assessing Officer or by the Tribunal in assessee‟s own case in assessment year 2003-04. The value of the said assets and allocation of price amongst tangible and intangible assets had been accepted in preceding year and depreciation has been claimed and allowed in the hands of assessee. Once the assets had entered into block of assets and have already been allowed, the depreciation and the WDV of the said assets had been determined in the preceding year, which is brought forward at the start of financial year, then the assessee is entitled to claim the depreciation on the said WDV or not, was the next issue which was elaborately argued before us.
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Both the learned Authorized Representatives referred to different parts of section 43(6) of the Act. The learned Authorized Representative for the assessee referred to clause (c) of section 43(6) of the Act, which talks of „block of assets‟. However, the learned Departmental Representative for the Revenue placed reliance on clause (b) of section 43(6) of the Act. The learned Departmental Representative for the Revenue was of the view that in case depreciation has not been allowed correctly in the preceding assessment years, then the same can be looked into by the Assessing Officer in succeeding year. He thus, emphasized that when an error had been made by Assessing Officer while working the value of assets under clause (b), then the same can be looked into afresh while deciding the case of allowability of depreciation in succeeding year. We find no merit in the stand of Revenue since after insertion by the Taxation Law (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 01.04.1988, the concept of „block of assets‟ had been brought on Statute. The said section very clearly provides that aggregate of WDV of all assets falling within the „block of assets‟ at the beginning of previous year and adjusted, could be increased by the cost of any asset acquired during the previous year and could be reduced by the money payable in respect of any asset, which is falling under „block of assets‟, which has been sold or discarded, and on the balance, the assessee is entitled to claim depreciation. In view of the amendment to the Act and in view of the concept of „block of assets‟ what has to be seen is the aggregate WDV of assets which are falling within the same block at the beginning of previous year, that is the first step. Thereafter, in case any new asset is acquired, then the value of such asset is to be included; and in case any such asset from the „block of assets‟ is sold, then the value of same is to be excluded. However, none of the authorities can tinker with the WDV of the assets for any reason whatsoever. Once the asset has entered into „block of assets‟ and thereafter, depreciation has been allowed and in the succeeding year, the WDV of such asset is to be accepted as sacrosanct and depreciation has to be allowed on the same. Such is the proposition laid down by the Hon‟ble Bombay High Court in Director of Income Tax (IT) Vs. HSBC Asset Management (I) (P.) Ltd. (supra), wherein the Hon‟ble High Court held as under:- “9. Having perused this Appeal Memo including the impugned orders, we are of the opinion that the Delhi High Court judgment has been delivered on 5rh November 2012 and the impugned order was passed on 15th June, 2011. The Tribunal has essentially based its conclusion on the consistent stand of the assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-04. The assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head “intangible assets”. The Assessing Officer allowed the claim for that assessment year by an order under section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under section 143(3) for assessment year 2003-04 continues to operate and no proceedings under the Act were initiated to disturb the same. 10. In these circumstances and without any material being placed on record to substantiate the shift in stand for the subject assessment
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year that the Tribunal emphasizing rule of consistency allowed Assessee‟s appeal. We do not think that such a view which has been taken in the given facts and circumstances and peculiar to the Assessee‟s case gives rise to any substantial question of law. Reliance placed on the Delhi High Court judgment therefore, cannot carry the case of the revenue in this matter any further. What comes within the purview of Section 32(1)(ii) of the Income Tax Act, 1961 and whether the department was right when it allowed the depreciation on the basis or foundation for the earlier assessment years need not be gone into in this Appeal. Question as posed and termed as substantial question of law can be determined and decided in an appropriate case. Leaving open all contentions in that behalf, we dismiss this appeal.”
The Tribunal further concluded the issue by holding as under:- “73. The learned Departmental Representative for the Revenue in this regard placed reliance on the decision of Hon‟ble High Court of Kerala in B. Raveendran Pillai Vs. CIT (supra). However, in view of the decision of the jurisdictional High Court on the issue in hand, we find no merit in the reliance placed upon by the learned Departmental Representative for the Revenue. The stand of learned Departmental Representative for the Revenue that there could be instances where WDV can be changed and since in the present case there was allocation which was different from the actual cost, then harmonious construction was to be given to the provisions of said section does not stand. We find no merit in the stand of learned Departmental Representative for the Revenue that actual cost for entire block could be examined in the succeeding year if there were circumstances necessitating such change. We find no merit on the same and the same is rejected. Since we have decided the issue both on merits and also on preliminary issue of whether the WDV of assets could be disturbed in the succeeding year, we hold that the issue of enhancement whether can be made by the CIT(A) or not becomes academic in nature and the same is not adjudicated. Accordingly, we direct Assessing Officer to allow claim of depreciation on tangible assets; know-how, trademark and patents; goodwill and non-compete fee. However, the value of intangible assets would be reduced by Rs.13 crores on account of value of Panki land. The grounds of appeal raised by the assessee are thus, partly allowed.”
The issue of claim of depreciation on know-how, trademarks and patents has thus been decided by the Tribunal in favour of assessee by deliberations in the appeal relating to assessment years 2004-05 and 2005-06 vide consolidated order dated 12.12.2017. The issue thus, on merits stands decided in favour of assessee. Once the issue has been decided in favour of assessee then, on merits the order of Commissioner under section 263 of the Act cannot be upheld.
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Now, coming to the second aspect of the order of Commissioner in invoking the jurisdiction under section 263 of the Act. The Tribunal has taken a view that where bifurcation of assets had taken place in assessment year 2003- 04 and depreciation had been allowed on the assets i.e. tangible assets and know-how, trademarks, patents and balance value attributed to goodwill; the Assessing Officer had allowed the depreciation on tangible assets and the value attributed to know-how, trademarks and patents while completing assessment for assessment year 2003-04, which cannot be disturbed. However, the Assessing Officer denied the depreciation on goodwill, which was allowed by the Tribunal vide separate order. The assets thus, entered into the block of assets and depreciation was claimed on the WDV from assessment year 2004-05 onwards. The Commissioner in the year under appeal vide order passed under section 263 of the Act had held the order passed by the Assessing Officer in allowing the aforesaid depreciation on know-how, trademarks and patents, as erroneous and prejudicial to the interest of Revenue. The Assessing Officer had allowed the depreciation on WDV of intangible assets of know-how, trademarks and patents, since the same was allowed to the assessee since the year of first claim and it had entered into the block of assets. The Tribunal vide order dated 12.12.2017 in assessment years 2004-05 and 2005-06 has held that once the assets entered into block of assets, then depreciation on WDV on such assets cannot be disturbed in the subsequent orders. In such scenario, the Assessing Officer could not have tinkered with the claim of depreciation on know-how, trademarks and patents in the subsequent years and hence, the order passed by the Assessing Officer allowing the same, cannot be said to be erroneous and hence not prejudicial to the interest of Revenue. Consequently, there is no merit in the exercise of
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jurisdiction by the Commissioner under section 263 of the Act. Thus, we hold the order passed by the Commissioner under section 263 is both invalid and bad in law both on jurisdictional issue and even on merits of claim of depreciation on WDV of know-how, trademarks and patents in subsequent years, where the assets had already entered into block of assets way back in assessment year 2003-04. The grounds of appeal raised by the assessee are thus, allowed.
In the result, appeal of assessee is allowed.
Order pronounced on this 24th day of July, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 24th July, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “ए” / DR 3. ‘A’, ITAT, Pune; गार्ड पाईऱ / Guard file. 4.
आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune