M/S PIK PEN PRIVATE LIMITED,MUMBAI vs. ITO-8(2)(4), MUMBAI

in the form of a firm named „Veekay Industries‟ and the same is succeeded by the assessee-company and the trademark “PIK” was acquired by the assessee for a sum of Rs. 5.25 Crs. The said trademark was originally registered by M/s. Balaji Pen Pvt. Ltd. Subsequently, on 1.4.1992, the said trademark was purchased by the firm M/s. Veekay Industries for a sum of Rs. 100/-. The said trademark was valued by an approved valuer, who quantified the value of the trademark at Rs. 5.52 Crs vide its Valuation Report dated 17.11.1998, relevant for the AY 1999-2000. The said amount was credited to the investment reserve account in the books of account of the said firm on 31.1.1999. The firm is then succeeded by the assessee-company on 1.2.1999. Assessee started claimed depreciation u/s 32 of the Act on the said revalued trademark worth of Rs. 5.25 Crs.

“1. The Ld AO erred on facts and in law in not obtaining the approval of the Joint Commissioner of Income Tax before substituting the value of brand acquired by the appellant while applying Explanation-3 to section 43(1).

2. The Ld AO failed to appreciate that without obtaining the approval of the JCIT, he could not have substituted the value of brand as per Explanation-3 to section 43(1) as the mandatory condition of approval not being complied with the order passed by the AO substituting the cost is bad in law.

4. After considering the said additional grounds as well as the original grounds, the Tribunal set aside the issue relating to the allowability of the depreciation on the revalued cost of the trademark to the file of the CIT (A). Para 7 of the said Tribunal‟s order (supra) is relevant in this regard. In the additional grounds, extracted above, it is evident that the assessee questioned the applicability of Explanation-3 to section 43(1) of the Act. It is the claim of the assessee that the Assessing Officer has not obtained the approval of the JCIT, which is the statutory requirement specified in the said Explanation-3 the consequence of the same is that the assessee‟s claim of depreciation should be allowed without any substitution on the cost. In the set aside proceedings, CIT (A) considered the above additional grounds raised by the assessee and called for the relevant records for ascertaining the fact of obtaining the approval of the JCIT. It appears that relevant records are not available for his perusal. Consequently, CIT (A) decided the issue by inference and the relevant lines from para 1.7 of his order are extracted as follows:-

“1.7. ......... ......... In the instant case, the AO has clearly mentioned in the last sentence of the first para on page 8 that the main purpose of such valuation was for reduction of liability to tax. However, in the absence of complete records it cannot be said that the AO had obtained prior approval of the JCIT. Hence, the disallowance of claim of depreciation under this section is also not correct.”

nullity. In this regard, Ld Counsel for the assessee brought our attention to Ground no.2 of the original grounds of appeal which reads as under:-

“2. The Ld CIT (A) failed to appreciate that when he has given finding that there was no approval of JCIT, he ought to have allowed the depreciation as claimed by the assessee.”

“6. The Ld CIT (A) failed to appreciate that when he has given a finding that there was no approval of the JCIT, he ought to have held that Explanation-3 of section 43(1) cannot be invoked as adjustment being nullity in law, disallowance of depreciation by the Assessing Officer is bad in law and may be deleted.”

referring the asset to the DVO for his valuation, if any, on the trademark. Assessing Officer is not an expert on this issue and therefore, the rejection of the valuation report furnished by the assessee is not correct. For this proposition, Ld Counsel for the assessee relied on the decision of the ITAT, Ahmedabad in the case of Unimed Technologies Ltd vs. DCIT [2000] 73 ITD 150 (Ahd.) and the judgment of the Hon‟ble Gujarat High Court in the case of Ashwin Vanaspati Industries vs. CIT [2002] 255 ITR 26 (Guj). These decisions suggest for accepting the valuation report furnished by the assessee and depreciation should be granted on the enhanced cost of the asset.

We find that the Tribunal in the aforesaid order has observed that even in the second round, the Ld. Commissioner of Income Tax (Appeal) has left so many gaps with regard to facts of Assessing Officer’s failure to obtain prior approval of JCIT and consequences of not obtaining of such approval on the claim of the assessee. Thus, considering the observation made in para-10 of the aforesaid order of the Tribunal, on the same observation/direction, we direct the Ld. Commissioner of Income Tax (Appeal) to obey/comply with the direction and thus, the issue is allowed for statistical purposes.

Thus, the appeal of the assessee is allowed for statistical purposes.

3. Now, we shall take up the appeal for Assessment year 2000-01 ( ), with respect to levying penalty of Rs.8,08,500/- on account of disallowance of depreciation on brand. The ld. counsel contended that the assessee did not furnish inaccurate particulars of income warranting penalty u/s 271(1)(c) merely on the ground that the said claim of depreciation was rejected by the Assessing Officer.

3.1. We have considered the rival submissions and perused the material available on record. We find that the Tribunal for Assessment year 2001-02 (vide order dated 11/12/2015 set-aside the issue to the file of the Ld. Commissioner of Income Tax (Appeal) as has been reproduced above while disposing of the appeal of the assessee for Assessment year 2007-08. In the aforesaid order, following observation was made:-

“10. On hearing Ld Representatives of both the parties on the issues raised before us for the AY 1999-2000, we find the CIT (A) in the second round has left so many gaps with regard to the fact of AO‟s failure to obtain prior approval of the JCIT and the consequences of not obtaining such approval on the claim of the assessee. The CIT (A) did not consider the fact whether the provisions of Explanation-3 to section 43(1) of the Act actually apply to the facts of the present case; whether AO merely ignored the claim of depreciation on the revalued cost of the trademark. Further, CIT (A) has also not considered whether there is any substitution of valuation at all when the AO considered the value of the trademark at “zero”. CIT (A) is directed to pass a speaking order as to how the Explanation-3 to section 43(1) OF THE Act applies to the facts of the present case from all angles if the conditions specified in the said Explantion-3 are fully satisfied or not. He is also directed to pass an order on how the AO is permitted to reject the valuation report furnished by the assessee when the AO does not have any other report on hand from the DVO or otherwise. Further, CIT (A) is also directed to examine the applicability of the cited judgment of the Hon‟ble Gujarat High Court in the case of Ashwin Vanaspati Industries (supra) and others. Further also, CIT (A) should examine the applicability of the 5th proviso to section 32(1) of the Act and give reasons in writing on how the amended provisions apply to the facts of the present case. Thus, we remand the whole of the issue relating to the claim of depreciation on the trademark to the file of the CIT (A) for third round of the proceedings before him. This time, the CIT (A) is directed to examine each of the issues discussed above in a time bound manner attending to all the arguments raised by the Ld Counsel for the assessee before him in the set aside proceedings. It is needless to mention that the assessee shall be granted reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Accordingly, all the issues raised in the original grounds as well as additional grounds are allowed for statistical purposes.”

Considering the aforesaid observation made by the Tribunal. Direction was issued as to how the Assessing Officer permitted to reject the valuation report furnished by the assessee when the Assessing Officer does not have any other report in hand from the DVO or otherwise. In view, of the aforementioned observation, we are of the view that at least penalty u/s 271(1)(c) will not survive, because, the Revenue has not substantiated that the assessee either furnished the inaccurate particulars of concealed its income, which are necessary ingredients for imposing penalty u/s 271(1)(c) of the Act. Even, if a wrong claim is made, it is the duty of the Assessing Officer either to rejected or to guide the assessee. The decision in Reliance Petro Products Pvt. Ltd. and CIT vs Ajayb Singh & Company 253 ITR 630 (P & H) supports the case of the assessee. The Hon’ble Apex Court in Reliance Petro Products Ltd. observed as under:-

“10. It was tried to be suggested that Section 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the Assessing Officer had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature.”

In the light of the aforesaid observation from Hon’ble Apex Court and the factual matrix that the Tribunal even remanded the matter back to the file of the Ld. Commissioner of Income Tax (Appeal) even for the third round of the proceedings, the penalty is directed to be deleted. Thus, this appeal of the assessee is allowed.

Finally, i. the appeal in is allowed for statistical purposes and ii. the appeal in with respect to penalty u/s 271(1)(c) is allowed.

This order was pronounced in the open in the presence of ld. representatives from both sides at the conclusion of the hearing on 19/05/2016.