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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
Both the appeals of the assessee and the Revenue are directed against the same order of the Commissioner of Income Tax (Appeals) -1, Coimbatore, dated 12.05.2015 and pertain to assessment year 2011-12. Therefore, we heard both the appeals together and disposing of the same by this common order.
The first ground of appeal in the assessee’s appeal is with regard to disallowance of depreciation.
Shri S. Sridhar, the Ld.counsel for the assessee, submitted that the assessee is engaged in the business of manufacturing and sale of gold and diamond jewellery, silver articles and other related business. During the year under consideration, the assessee was also engaged in derivatives through Multi Commodities Exchange.
In the course of its business activity, the assessee acquired a brand called “Ishtaa”. The assessee claimed depreciation on the intangible asset, namely, the brand “Ishtaa”. The Assessing Officer, however, found that the brand “Ishtaa” was owned by M/s Ishtaa Gold Jewellery Pvt. Ltd., which is an associate company of the assessee. The company itself was amalgamated with assessee with effect from 31.12.2009. As per the scheme of amalgamation, the Assessing Officer found that intellectual property rights was also transferred to the assessee. Therefore, according to the Ld. counsel, the Assessing Officer found that it is a colourable device for the purpose of reducing the tax effect by claiming depreciation on the brand value.
The Ld. counsel for the assessee submitted that the brand value, namely, “Ishtaa” was acquired by the assessee before the scheme of amalgamation. In fact, for the assessment year 2010-11, a similar disallowance was made by the Assessing Officer and the assessee has not carried the matter on appeal. According to the Ld. counsel, merely because the order of the Assessing Officer for the assessment year 2010-11 was not challenged, it does not mean that the impugned order for the assessment year under consideration cannot also be challenged. According to the Ld. counsel, the principle of res judicata is not applicable. According to the Ld. counsel, each assessment year is separate and distinct.
Therefore, when the assessee raised the issue of depreciation, it is for the Assessing Officer to examine the same and decide the matter on merit. The Ld.counsel further submitted that in any way, the order of the Assessing Officer for assessment year 2010-11 cannot stand in the way to this Tribunal in examining the matter on merit for the year under consideration. The order of the Assessing Officer for assessment year 2010-11 cannot bar the assessee in claiming depreciation for the year under consideration. More so, this Tribunal cannot reject the claim of the assessee on the ground that the order of the Assessing Officer for the assessment year 2010-11 was not challenged. According to the Ld. counsel, this Tribunal has to examine the issue independently for the year under consideration and decide the same on merit.
The Ld.counsel for the assessee placed his reliance on the judgment of Apex Court in Maharana Mills (Private) Ltd. v. ITO (1959) 36 ITR 350, judgment of Uttarakhand High Court in CIT v.
Enron Expat Services Inc. (2010) 327 ITR 626 and the judgment of Delhi High Court in HCL Technologies v. ACIT (2015) 377 ITR 483.
The Ld.counsel has also submitted that the amalgamation was with effect from 31.12.2009. The assessee acquired the brand before the amalgamation. Therefore, according to the Ld. counsel, it cannot be said that it is a colourable device for acquisition of intangible asset, namely, the brand “Ishtaa”. Referring to Section 32 of the Act, the Ld.counsel submitted that Explanation 3 to Section 32 clearly says that intangible asset, namely, the brand is also one of the assets which is eligible for depreciation. Referring to page 69 of the paper-book, the Ld.counsel submitted that these are details of the payment made by the assessee for acquiring the brand “Ishtaa”. In fact, the assessee acquired the brand “Ishtaa” for a consideration of `8,38,00,000/-. This is not in dispute. Therefore, according to the Ld. counsel, the CIT(Appeals) is not justified in confirming the order of the Assessing Officer.
On the contrary, Shri V. Nandakumar, the Ld. Departmental Representative, submitted that for the assessment year 2010-11, the assessee claimed depreciation before the Assessing Officer for acquiring the brand, namely, “Ishtaa” from M/s Ishtaa Gold Jewellery Pvt. Ltd. The Assessing Officer, in fact, disallowed the claim of the assessee and no further appeal was filed. The factual situation being similar as that of the assessment year 2010-11, the Assessing Officer disallowed the claim of the assessee for the year under consideration also. Moreover, M/s Ishtaa Gold Jewellery Pvt. Ltd. was amalgamated with assessee-company with effect from 31.12.2009 as per the scheme of amalgamation approved by the Madras High Court. As per the scheme of amalgamation, the entire intangible asset was transferred to the assessee. Therefore, there is no requirement for the assessee to purchase the brand name separately by excluding all assets. The Ld. D.R. further submitted that after amalgamation, the assessee is claiming set off of huge losses to the extent of `9.94 Crores of the amalgamated company.
At the very same time, the assessee is also claiming depreciation on the brand name “Ishtaa” by claiming that the assessee has purchased the brand name for `8.38 Crores. According to the Ld. D.R., the claim of depreciation is nothing but a colourable device to reduce the tax liability, therefore, the CIT(Appeals) has rightly confirmed the order of the Assessing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims depreciation on the brand “Ishtaa” claiming that it was purchased for a total consideration of `8.38 Crores. The details of payment made by the assessee are available at page 69 of the paper-book. In fact, the funds were transferred through banking channel. There is no dispute about the details of payment made by the assessee for acquiring the brand value “Ishtaa”. The assessee claims that the payments were made as follows:-
Details of Bank Payments for Brand rights
Date Bank Amount ` 16/11/2009 State Bank of India – CC A/c 1,55,00,000 17/11/2009 State Bank of India – CC A/c 2,10,00,000 17/11/2009 State Bank of India – Current A/c 94,00,000 18/11/2009 State Bank of India – CC A/c 1,00,00,000 24/12/2009 State Bank of India – CC A/c 1,00,00,000 26/12/2009 HDFC Bank – Current A/c 1,00,00,000 30/12/2009 HDFC Bank – Current A/c 84,00,000
Total 8,38,00,000 Subsequently, M/s Ishtaa Gold Jewellery Pvt. Ltd. which owned the brand “Ishtaa”, was amalgamated with the assessee-company.
Admittedly, M/s Ishtaa Gold Jewellery Pvt. Ltd. is the associate company of the assessee. Even though M/s Ishtaa Gold Jewellery Pvt. Ltd. is the associate company of the assessee, in the eye of law, the assessee is a separate and independent entity and M/s Ishtaa Gold Jewellery Pvt. Ltd. is also a different and distinct entity.
Under the Income-tax Act, they are separate independent assessable unit. Therefore, for all practical purposes, the assessee as well as M/s Ishtaa Gold Jewellery Pvt. Ltd. has to be considered as independent and separate entity.
The assessee has paid about `8.38 lakhs by means of 8. cheque as referred in the earlier part of this order. The Revenue disallowed the claim of the assessee on the intellectual property, namely, brand name “Ishtaa” that the owner of the brand name “Ishtaa” was subsequently amalgamated with assessee-company.
The Assessing Officer has also observed that M/s Ishtaa Gold Jewellery Pvt. Ltd. is a loss making company and after amalgamation, the assessee itself claiming set off of losses against the profit earned by it. This Tribunal is of the considered opinion that the mere claiming set off of loss suffered by the amalgamated company cannot be a reason to disallow the claim of the assessee for depreciation. As rightly submitted by the Ld.counsel for the assessee, Explanation 3 to Section 32 specifically says that the brand name, the intangible asset is also one of the assets eligible for depreciation. The assessee demonstrated before this Tribunal that a sum of `8.38,00,000/- was paid through banking channel, which is not disputed by the Revenue. The only objection of the assessee appears to be that after amalgamation, the intellectual property right to the brand name should be transferred to the assessee. Therefore, the claim of the assessee that the brand name “Ishtaa” acquired outside the scheme of amalgamation is nothing but a colourable device. When the assessee claims that the brand name “Ishtaa” was acquired outside the scheme of amalgamation and the payment was also made, this Tribunal is of the considered opinion that the acquisition of brand name cannot be doubted especially when the payment was not in dispute.
The subsequent amalgamation made in respect of other intangible assets left out other than the brand name “Ishtaa”. M/s Ishtaa Gold Jewellery Pvt. Ltd. is also engaged in designing, manufacturing and sale of gold jewellery, it has several intangible assets apart from the brand name. Therefore, the intangible assets other than the brand name, might have been transferred during the course of amalgamation. This Tribunal is of the considered opinion that merely because there was subsequent amalgamation with effect from 31.12.2009 that cannot be construed as if the assessee has not acquired any brand name. When the assessee acquired the brand name by making payment through banking channel before amalgamation, this Tribunal is of the considered opinion that the assessee is eligible for depreciation as claimed.
The Ld. D.R. contended that during the assessment year 2010-11, a similar claim of the assessee was disallowed by the Assessing Officer on the ground that it was a colourable device. No doubt, no appeal was filed by the assessee against the order of the Assessing Officer. Therefore, the Assessing Officer has followed his order for assessment year 2010-11. As rightly submitted by the Ld.counsel for the assessee, each assessment year is separate and distinct. Moreover, the order of the Assessing Officer cannot be a bar on this Tribunal to appreciate the matter on merit. In other words, this Tribunal can go into the merit of the claim irrespective of the order of the Assessing Officer for assessment year 2010-11.
Therefore, merely because the assessee has not filed any appeal against the order of the Assessing Officer for assessment year 2010-11 that cannot be a reason for rejecting the claim of the assessee by this Tribunal. Therefore, this Tribunal is of the considered opinion that the assessee is eligible for depreciation on the brand value acquired on payment of `8,38,00,000/-. Therefore, the Assessing Officer is not justified in disallowing the claim of the assessee.
Now coming to Revenue’s appeal, the first ground of appeal is with regard to disallowance of the claim of the assessee under Section 80-IA of the Act.
We have heard the Ld. Departmental Representative and the Ld.counsel for the assessee. The Assessing Officer disallowed the claim of the assessee only on the ground that an SLP is pending before the Apex Court against the judgment of the Madras High Court in Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT (340 ITR 477). After hearing the Ld. D.R. and the Ld.counsel for the assessee, this Tribunal finds that the CBDT by its circular accepted the judgment of Madras High Court in Velayudhaswamy Spinning Mills (P) Ltd. (supra) and instructed all its officers to withdraw the pending appeal. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly allowed the claim of the assessee by applying the judgment of Madras High Court. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
The next ground of Revenue’s appeal is with regard to disallowance of loss suffered by the assessee in derivatives transactions.
Shri V. Nandakumar, the Ld. Departmental Representative, submitted that Section 43(5)(e) of the Act was inserted by Finance Act 2013 with effect from 01.04.2014. This appeal of the assessee relates to assessment year 2011-12, therefore, the provisions of Section 43(5)(e) of the Act is not applicable at all to the assessee’s case. According to the Ld. D.R., before the introduction of Section 43(5)(e) of the Act with effect from 01.04.2014, the transaction of the assessee was covered by Section 43(5)(a) of the Act.
Therefore, according to the Ld. D.R., for the year under consideration, the transaction entered into by the assessee in derivatives through Multi Commodities Exchange is a speculative transaction. Therefore, the loss suffered by the assessee cannot be allowed to set off against the profit of the assessee.
Referring to the order of the CIT(Appeals), the Ld. Departmental Representative submitted that the assessee entered into a hedging transaction which is nothing but a speculative one.
According to the Ld. D.R., merely because the assessee carried on the transaction in order to reduce the losses suffered in different business, it will not loose its character as speculative transaction.
Hence, the transaction entered into by the assessee falls within the ambit of speculative transaction. According to the Ld. D.R., the loss suffered in such transaction cannot be allowed to set off.
We have considered the rival submissions on either side and perused the relevant material available on record. We have carefully gone through the orders of both the authorities below. The Assessing Officer disallowed the claim of the assessee to the extent of `2,97,27,437/- on the ground that it is a loss arising out of speculative transaction. The main contention of the Assessing Officer appears to be that the transaction of the assessee would not fall under the provisions of Section 43(5)(a) of the Act. The specific provision, excluding the derivatives transaction, was introduced by Finance Act, 2013 with effect from 01.04.2014 in Section 43(5)(e).
Therefore, the provisions of Section 43(5)(e) of the Act is not applicable for the year under consideration. Therefore, the Assessing Officer found that the loss suffered by the assessee is in the nature of speculative transaction. Therefore, it cannot be allowed to set off.
From the material available on record it appears that the assessee-company purchased the gold through Bank of Nova Scotia and corresponding sale of jewellery and bullion was made on the basis of Trade Settlement Advices with Multi Commodities Exchange. As and when the gold jewellery was manufactured, the assessee either makes Bank of Nova Scotia to take physical delivery or through booking with Multi Commodities Exchange.
Hedging was resorted to when the funds position was not comfortable and the price of the gold was not beneficial in the spot market. The series of transactions made by the assessee with Bank of Nova Scotia and Multi Commodities Exchange are closely linked with the assessee’s business of manufacturing and sale of gold jewellery and purchase of gold. Therefore, the transaction of assessee is apparently for purchase of raw material, namely, the gold for manufacturing the gold jewellery and in order to safeguard the loss, the assessee was selling the jewellery through Multi Commodities Exchange. Therefore, this Tribunal is of the considered opinion that the transaction of the assessee would squarely fall under Section 43(5)(a) of the Act. Therefore, the contention of the Revenue that the transaction of the assessee would not fall under Section 43(5)(a) of the Act is not justified.
Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee and hence, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
In the result, the assessee’s appeal in is allowed and the Revenue’s appeal in I.T.A. No.1811/Mds/2015 is dismissed.
Order pronounced on 7th October, 2016 at Chennai.