DCIT, CHENNAI vs. DODSOL ENGINEERING & CONSTRUCTION (INDIA) P LTD., CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The appeals filed by the Department are directed against

different orders of the Commissioner of Income-tax (Appeals)- 6 &1, Chennai for the above assessment years passed u/s.143(3) and 250

of the Income Tax Act, 1961 (herein after referred to as ‘the Act’). Since the issue in these three appeals is common in nature, hence

ITA No.1794, 1795 & :- 2 -: 2174/Mds/2015.

these appeals are combined, heard together, and disposed of by a

common order for the sake of convenience.

The grounds of appeal raised by the Revenue are as 2.

under:-

‘’2.1 The learned CIT(A) erred in holding that excess consideration paid over and above the networth of the undertaking would constitute goodwill without going into the fact whether any goodwill at all was transferred? 2.2 The learned CIT(A) erred in holding that there has been a transfer of intangible asset i.e. design and Drawings amounting to Rs.7.15 Crores without examining the valuation report as to how the value has been attributed to design and drawings, all the more since the transferer has not shown in its assets schedule’’.

consider the facts as narrated in ITA No.1794/Mds/2015 of

assessment year 2006-07 for adjudication.

The Brief facts of the case that the assessee is engaged in 4.

the business of design engineering and engineering consultancy for

power, oil and construction industry and filed e-return of income for

the assessment year 2006-07 on 27.11.2006 with total income of

�92,78,549/- and the return of income was processed u/s.143(1) of

the Act on 07.02.2008. As per scrutiny norms, the notice was issued

u/s.143(2) of the Act and ld. Authorised Representative of assessee

appeared from time to time furnished information. The ld. Assessing

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Officer on verification of details found that assessee has claimed

depreciation on designs and drawings �1,78,75,000/-. The assessee

in the financial year 2005-06 paid �13,76,69,181/- for acquisition of

business of M/s. International Development Engineering Associates

Limited (herein after referred to as ‘IDEA’) as going concern and weras

the net worth of the IDEA was valued at �1,18,27,436/-. The assessee

company has bifurcated acquisition cost in the books of accounts as

tangible assets �1,79,83,621/- and intangible assets �11,96,85,560/-.

The assessee has further split the intangible assets as under:-

(a) Goodwill : �4,81,85,560/- (b) Designs and Drawings : �7,15,00,000/- ------------------- �11,96,85,560/- --------------------

The assessee bifurcated the intangible assets and claimed depreciation

as per Income Tax Rules. The assessee has valued designs and

drawings at �7,15,00,000/- and claimed depreciation @25%. The

Business undertaking was purchased in slump sale were assessee paid

more than the net worth value of the IDEA company and the excess

amount paid over and above net worth of the undertaking is treated

as intangible asset dividend into goodwill and designs and drawings.

The disputed issue being the assessee has valued designs and

drawings at �7,15,00,000/- on purchase as going concern. The ld.

Assessing Officer is of the opinion that Designs and Drawings are

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custom made and used for specific purpose as per the requisition of

the customers. Due to change of ownership there cannot be any value

and does not fit in slot of Capital Assets. The transferee IDEA used

designs and drawing for its activities and claimed as Revenue

expenditure in profit and loss account. The ld. Assessing Officer is of

the opinion that ‘’transferee’’ undertaking IDEA never capitalized the

designs and drawing in their financial accounts, the excess

consideration over the networth is in the nature of intangible assets.

The assessee company cannot value the designs and drawings and

capitalized in the Books of account for claim of depreciation as per the

provisions of Act, were designs and drawings does not have slot in

inclusive definition of intangible assets for the claim of depreciation.

The ld. Assessing Officer based on the purchase transaction and

capitalization, has disallowed depreciation and assessed total income

u/s.143(3) of the Act vide order dated 26.12.2008. Aggrieved by the

order, the assessee has filed an appeal before Commissioner of

Income Tax (Appeals).

In the appellate proceedings, the ld. Authorised 5.

Representative of the assessee reiterated the submissions made before

Assessing Officer and briefed history of acquisition of transfee IDEA

company by the assessee and filed written submissions explaining

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Designs and Drawings are part of intangible assets within explanation

3(b) to Sec. 32(1) of the Act and eligible for depreciation. The

ld.CIT(A) referred the submissions and explanation at page Nos. 4 &

5 of his order and judicial decision. The Commissioner of Income Tax

(Appeals) dealt on the submissions and the findings of the Assessing

Officer and the reasons for apportionment of acquisition cost forming

part of intangible assets being designs and drawings and relied on the

Apex Court decision of CIT vs. Smifs Securities Ltd (2012) 348 ITR 302

were it was held that difference in the amount paid and the net worth

of the business acquired in amalgamation will be the payment for

goodwill and such goodwill is an intangible asset and eligible for

depreciation. The ld. CIT(A) has dealt on the decisions and the

findings of the Apex Court and applied the principles to the assessee

company and observed at para 4.1.4 to 4.1.6 of order and allowed the

assessee appeal as under:- ‘’4.1.4 In the present case also the assessee acquired the entire business of IDEA as a going concern for the Slump .sale' consideration of Rs.13,76,69,181/-. Hence the difference between the consideration paid (Rs.13,76,69,181) and the net worth of the business of IDEA at the time of transfer (Rs.l,18,27,436), amounting to ₹12,58,41,745/- will amount to the cost for acquisition of ‘’goodwill'. Further, as held by the Supreme Court in the above case, this entire amount of "goodwill- is an intangible asset, falling under ambit of explanation-3(b) to section 32(1) and eligible for depreclation@25%. However, out of the above amount of Rs.12,58,41,745/-, which can be regarded as "goodwill-, the present assessee has apportioned only ₹7,15,00,000/- towards 'Designs & Drawings' and

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claimed depreciation. 4.1.5 Designs and drawings are part of intangible assets falling under the ambit of explanation 3(b)to section on32(1) and eligible for depreciation@ 25%, as held by several judicial authorities like –

CIT vs. Metallurgial Engg. Consultants (India) Ltd (1996) 221 ITR 90 (PAT)

Section 32, read with section 43(3) of the Income Tax Act, 1961- Depreciation allowance of – Assessment years 1973-74 to 1976-77- Whether know how comprising technical and manufacturing information, data, detailed design, plans, drawings, blue prints etc. fall within meaning of ‘plant’ under section 43(3) and thus, acquisition of such technical knowhow is entitled to depreciation - Held, yes.

Nippon Electronics (P) Ltd. vs. CIT (116 ITR 231) Kar.

Section 32 of the Income Tax Act, 1961- Depreciation -whether depreciation was allowable on the cost of designs, blue-prints and technical knowhow in computing taxable profits –held, yes.

IAC vs. Chemaux Ltd (1986) 16 ITD 89 (Bom)

Section 43(3) Read with section 32 of the Income Tax Act, 1961- Plant –Whether Designs and Drawings for improving quality of existing products which were manufactured by assessee should be considered as ‘plant’ for the purpose of depreciation allowance – Held, yes.

4.16 Therefore, I am of the considered opinion that the Designs and Drawings as intangible assets falling under ambit of explanation -3(b) to section 32(1) and eligible for depreciation @25%. I am also of the opinion that the assessee’s apportionment of a part of the consideration for Designs and Drawings and claiming depreciation on such Designs and Drawings is also jusitified. In fact, in view of the above decision of the Supreme Court in the case of CIT vs. Smifs Securities Ltd (2012) 348 ITR 302 (SC), the entire difference between the amount paid and the net worth of the business acquired from IDEA will be the ‘’goodwill’’ and the assessee is eligible for depreciation on the entire amount. However, the assessee, has only considered a part of the said amount for the purpose of

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claiming depreciation . Thus, even if the assessee’s appointemtn of the consideration between Designs & Drawings and goodwill etc, is not scientific, it is still beneficial to the Revenue. Therefore, the Assessing Officer’s action of disallowance of depreciation on Designs and Drawings is not justified. The Assessing Officer is directed to allow the assessee’s claim of depreciation on Designs and Drawings. The assessee succeeds in its appeal.

Aggrieved by the Commissioner of Income Tax (Appeals) order, the

Revenue has assailed an appeal before Tribunal.

Before us, the ld. Departmental Representative reiterated 6.

and argued the grounds that the ld.Commissioner of Income Tax

(Appeals) has erred in considering the excess amount paid over and

above the networth treated as goodwill and there is no information of

transfer of goodwill or acknowledgement by the transferee company.

Further ld. Commissioner of Income Tax (Appeals) erred on

apportionment of intangible asset towards designs and drawings

�7,15,00,000/- without any examination or basis of any valuation

report and reasons attributable to apportionment towards designs

and drawings and ld. Commissioner of Income Tax (Appeals) has not

done diligent assessment on the apportionment and prayed for set

aside the order of Commissioner of Income Tax (Appeals).

on the findings of the Commissioner of Income Tax (Appeals) and

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dealt exhaustively on facts and also decision of Apex Court were the

excess price paid over and above the networth has to be treated as

goodwill and takes the characteristic of intangible assets and further

supported his arguments with Audited Accounts statements, valuation

statements and judicial decisions on the concept of goodwill and

prayed for dismissing the Revenue appeal.

judicial decisions cited and documents filed by the ld. Authorised

Representative in support of submissions. The ld. Departmental

Representative contested the order of Commissioner of Income Tax

(Appeals) in directing the Assessing Officer to allow depreciation on

designs and drawings as intangible asset and there is no scientific

methodology of apportionment of cost. The ld. Authorised

Representative argued that the assessee company has acquired the

net worth of the IDEA company and paid amount more than net

worth of the company and difference takes the characteristic of

goodwill being intangible asset. The assessee has bifurcated the

excess amount into goodwill of �4,18,85,560/- and designs and

drawings of �7,15,00,000/-. The ld. Authorised Representative drew

our attention to the financial statements and disclosures in the

schedule and depreciation duly supported by the valuation report. We

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on perusal of the assessment order and Commissioner of Income Tax

(Appeals) order, no where the ratio and the methodology of bifurcating

the intangible assets between goodwill and designs and drawings was

discussed. The bifurcation shall be supported by a methodology of

apportionment which is accepted globally. The Commissioner of

Income Tax (Appeals) has made an exhaustive observations on the

judicial decisions and the Apex Court decision on the intangible assets

but assessee could not support with calculation in valuation of designs

and drawings. The ld. Authorised Representative has demonstrated

the value of Designs and Drawings supported by valuation report

issued by a Chartered Engineer with valuation certificate on

engineering designs and drawings containing the various specification

of project work, and the basis of allocation of cost. The assessee has

reflected intangible assets in separate schedule forming part of

accounts and claimed depreciation. The facts that IDEA undertaking

transfee company never disclosed the cost of designs and drawings as

Capital Asset but claimed as Revenue expenditure as per findings of

Assessing Officer. Considering the apparent facts, valuation certificate,

financial statements and judicial decisions relied by the Commissioner

of Income Tax (Appeals), we are of the opinion that the Assessing

Officer has not verified the valuation certificate relied by the assessee

in support of the value of �7,15,00,000/- being the basis for the

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assessee to claim the depreciation . Therefore, we remit the disputed issue to the file of Assessing Officer for limited purpose to verify and examine the valuation certificate and the value adopted by the assessee company in the books for claim of depreciation and pass the order after providing adequate opportunity of being heard to the assessee.

Similarly, The appeal of the Revenue in ITA Nos.1795 for 9. assessment years 2008-09 and ITA No.2174/Mds/2015 for assessment year 2010-2011 are allowed for statistical purpose.

In the result, the appeals of the Revenue in ITA Nos.1794, 10. 1795 & 2174/Mds/2014 are allowed for statistical purpose.

Order pronounced on Friday, the 20th day of May, 2016, at Chennai.

Sd/- Sd/- (चं� पूजार�) (जी. पवन कुमार) (CHANDRA POOJARI) (G. PAVAN KUMAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:20.05.2016 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF