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Income Tax Appellate Tribunal, BANGALORE BENCH, ‘B’, BANGALORE
PER LALIET KUMAR, JUDICIAL MEMBER
This appeal by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals) -5, Bangalore dated 27th Jan, 2016 for the assessment year 2012-13.
The assessee has raised the following grounds of appeal:
2.1 The brief facts of the case are that the assessee company filed return of income declaring a loss of Rs.6,91,37,352/- and latter the assessee filed revised return of income on 12/12/2001 declaring total loss of Rs.7,20,76,759/-. The case was selected for scrutiny assessment and notice u/s 143(2) was issued on 8/8/2013. The notice stipulates as under:
In response to the notice, the authorized representative filed reply and produced the books of account and the AO was not convinced with the reasons given by the assessee and, therefore, the AO assessed the income by disallowing the depreciation of intangible to the extent of 3,91,32,683/- vide order dated 13/11/2014.
Aggrieved by the order of the AO, the assessee filed appeal before the CIT(A), who in turn upheld the order of the AO. Hence, the assessee is before us.
Before us, the AR submitted that the assessment proceedings were not valid as notice u/s 143(2) was issued pursuant to the original return of income and not on the basis of the revised return of income dated 12/12/2012.
In fact, argument of the assessee is not correct as there is no status to revised return in the eye of law merely to rectify any omission or wrong statement made in the original return. It is clear from the notice u/s 143(2) that the AO noted down the filing of revised return on 12/12/2012, therefore, it cannot be said that notice was issued without considering the revised return. In our view, this contention of the assessee is baseless and is required to be dismissed.
We find that the reasoning given by the learned CIT(A) in paragraph 5 is the correct reasoning as the notice was issued by the AO within a period of limitation and there is no delay in issuing notice.
Accordingly, the ground No.1 is decided against the assessee.
With respect to ground No.2, it is pointed out by the learned DR that this issue is covered against the assessee in the assessee’s own case for earlier assessment years from 2005-06 to 2008-09 in to 430/Bang/2013 dated 10/1/2014, wherein at paragraph 16 to 25 it has been held as under:
“16. The first question for adjudication before us is whether the earlier partnership firm was required under law to revalue the assets before its conversion into a company. As rightly pointed out by the learned counsel for the assessee, when a partnership firm is dissolved, it needs to revalue its assets as the partners are entitled to receive the value of the assets as on the date of dissolution in the ratio of their contribution of capital and, therefore, to arrive at the value of the assets as on the date of dissolution the revaluation of assets and liabilities is required to be done. Similar is the case where any of the partners retires or any new partner is inducted. But what happens when there is no induction of a new partner or retirement of any partner or dissolution of partnership firm? The requirement of revaluation of the assets and liabilities arises only in the circumstances mentioned above. In the case on hand, the assessee had revalued its assets on the ground that it was getting converted into a private limited company. The learned counsel for the assessee had placed reliance upon the decision of the Hon’ble Supreme Court in the case of Kartikeya A.V Sarabhai (cited Supra) in support of his contention that the shareholders who buy shares will not have any interest in the property of the company which is entirely distinct from the shareholder and the true position of the shareholder in a company on buying the shares is that he becomes entitled to a percentage in the profits of the company if and when company declares, subject to memorandum of association that the profits or any portion thereof should be distributed as dividend amongst the shareholders and he has further right to percentage in the assets of the company which would be left-over after winding up. Thus, he tried to bring out distinction between the rights of the partners in a partnership firm which is joint and several in contrast to the rights and liabilities of the shareholders in a company. He has also relied upon the decision of the Hon’ble Supreme Court in the case of Vodafone International holdings reported in 341 ITR 1 (SC) to bring out distinction between the holding company and wholly owned subsidiary in which the Hon’ble Supreme Court has held that the legal relationship between the holding company and wholly owned subsidiary is that they are two legally distinct persons and holding company does not own the assets of a subsidiary and in law the management of the business of the subsidiary also lies with its directors. Thus, according to him, the partnership firm and the assessee company are two different and distinct legal entities and it cannot be said that the assessee company has not acquired any assets from the erstwhile partnership firm. To appreciate these contentions of the assessee, we have to examine the procedure and effect of conversion of a partnership firm into a company. The Hon’ble Bombay High Court in the case of CIT Vs. Texspin Engg and Manufacturing
Works reported in (2003) 263 ITR 345 (Bom) has considered the effect of conversion of a partnership firm into a limited company by virtue of sec. 575 of the Companies Act and has held that under part IX of the Companies Act, when a partnership firm is converted to a limited company, the properties of the erstwhile firm vests in the limited company. It was observed that there is a difference in vesting of the property and distribution of the property. It was held that on vesting in the limited company under part IX of the Companies Act, the properties vest in the company as they exist while distribution of property on dissolution pre- supposes division, realization, encashment of assets and appropriation of the realized amount as per the priority and that this difference is very important. Having observed thus, the Hon’ble High Court held that there is no transfer of property and no capital gains arise from such a transaction. The Hon’ble High Court was dealing with the case of the partnership firm while in the case on hand, we are dealing with the case of the company. In the case of Texspin, the questions considered were - (1) whether capital gains arose in the hands of the partnership firm on conversion of the firm into the company, and (2) whether the firm was entitled to depreciation on the assets owned by it till the date of transfer.
The case on hand is a reverse case. The company is claiming the depreciation on the value of the assets in its books of accounts. The claim of depreciation is on trademarks which are intangible assets and depreciation thereon is allowable u/s 32(1)(ii) of the IT Act. The two conditions mentioned in sec. 32 are that the assets should be owned by the assessee and should have been used for the purposes of the business or profession of the assessee. The sub-clauses thereto enumerate the deductions allowable u/s 32. Sub-clause (ii) thereof provides for a deduction at a prescribed percentage of the written down value of the block of assets. 5th proviso thereto provides that in respect of circumstances such as succession, amalgamation or demerger, the average deduction on account of depreciation on tangible or intangible assets shall not exceed, in any previous year, the deduction calculated at the prescribed rates as if the succession, amalgamation or demerger has not taken place and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and amalgamated company or the demerged company and the resulting company as the case may be, in the ratio of days for which the assets were used by them.
In all the three circumstances above, the erstwhile company ceases to exist and a new company comes into existence. In the case on hand also, on account of conversion, the erstwhile partnership firm ceased to exist while the company has come into existence. Therefore, the assets come to vest in the hands of the company and there is no cost of assets to the company on such vesting. When the transaction itself has been treated to be not a transfer, but is akin to succession, in our opinion the 5th proviso to sub-clause (ii) of sec. 36(1) applies and the depreciation has to be calculated as if there is no transfer.
Further, as there is no transfer, there is no cost to the assessee. Depreciation is allowable on the WDV of the asset and WDV has been defined u/s 43(6) to mean in the case of assets acquired in the previous year, the actual cost to the assessee. As actual cost to the assessee was ‘Nil’, the WD value of the assets in the hands of the predecessor firm shall be considered for the allowance of depreciation.
Therefore, we do not see any reason to interfere with the orders of the authorities below.
The learned counsel for the assessee had placed reliance upon the decision of ITAT at Ahmedabad in the case of Prakash Chemical Agencies Pvt. Ltd. reported in (2012) 136 ITD 222 (Ahd) but we find that it is the case of a takeover of the business of a partnership firm by the assessee company therein whereas in the case before us,
it is the case of conversion of partnership firm into a company. Therefore, the said decision is not applicable to the case on hand.
The other objection of the learned counsel for the assessee is that the conversion has taken place in the previous year relevant to assessment year 2004-05 and hence it can be examined only in A.Y 2004-05 and not in subsequent year. We are unable to argue with this contention of the assessee. Sub-sec(6) of sec. 43 defines ‘Written Down Value’ and it provides for both the acquisition of assets during the relevant previous year and acquisition of assets before the relevant previous year and both the clauses mention ‘actual cost to the assessee’. In the second circumstance i.e where the assets are acquired before the previous year as in the case of the assessee before us, the WDV shall be the actual cost to the assessee less all depreciation actually allowed to him under the Income-tax Act. Therefore, it is clear that the claim of depreciation can be examined even in the assessments years subsequent to the assessment year in which the succession has taken place. This argument is accordingly rejected.
The other objection of the assessee is that though only the AO is entitled to invoke the provisions of Explanation 3 to sec. 43(1) of the IT Act, the CIT(A) has invoked the same which is impermissible. On perusal of the order of the CIT(A), we find that he has not invoked the provisions of Explanation 3 to sec. 43(1) of the IT Act but has only justified the action of the AO in questioning the claim of depreciation by citing the provision of sec. 43(1) and Explanation 3 thereof. Therefore, we seen no strength in this argument of the assessee.
Further, u/s 251 of the IT Act, the powers of the CIT(A) are co-terminus with that of the AO meaning that he can do what the AO could do and can also direct the latter to do what the latter failed to do as laid down by the Hon’ble Supreme Court in the case of CIT Vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC). Therefore, we do not see any infirmity in the order of the CIT(A) which needs interference. Therefore, this argument of the assessee is also rejected.
In the result, the appeals filed by the assessee for all the assessment years are dismissed.”
Respectfully following the decision of coordinate bench of the tribunal in the assessee’s own case, we deem it appropriate to dismiss this ground of the assessee as well.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open court on 3rd March, 2017.