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

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

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’’.

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 , 1795 & :- 3 -: 2174/Mds/2015.

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 , 1795 & :- 4 -: 2174/Mds/2015. 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 , 1795 & :- 5 -: 2174/Mds/2015.

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 , 1795 & :- 6 -: 2174/Mds/2015. 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 , 1795 & :- 7 -: 2174/Mds/2015. 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).

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.

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 , 1795 & :- 10 -: 2174/Mds/2015. 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 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 10. 1795 & 2174/Mds/2014 are allowed for statistical purpose.

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