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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI SANJAY GARG & SHRI RAJESH KUMAR
Per Sanjay Garg, Judicial Member :
These two appeals by the Revenue have been preferred against two separate orders of Commissioner of Income Tax (Appeals) (in short ‘CIT(A)’) both dt. 28.2.2013 relevant to A.Ys. 2008-09 and 2009-10. Since the issues raised in both the appeals are identical in nature, hence both the appeals were heard together and, for the sake of convenience, are disposed of by this common order. The facts have been taken from for A.Y 2008-09.
2 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013
The brief facts of the case are that the assessee-company is engaged in the business of facility management solutions covering house-keeping and allied service activity for corporate, government and semi-government undertakings. The business of the assessee-company was erstwhile carried out by the partnership firm ‘M/s. Clean ‘N’ Carewel Services’. The partners of the firm decided to convert the partnership firm into a corporate entity, therefore, the said partnership firm was succeeded in its business by the assessee-company on 31.3.2007 through the process of corporatization under the incentive provisions of Sec. 47(xiii) of the Income Tax Act, 1961. The assessee- company purchased/acquired the entire business and accordingly issued shares to the partners for a like amount as per the relevant provisions. The entire business of the partnership firm including intangible assets like trademark and other business related assets were thus transferred to the assessee-company at their book value/respective fair values. During the assessment proceedings, the AO noted that the assessee had claimed depreciation @ 25% on the WDV of intangible assets at Rs.650,00,000/-. He noted that these assets had been transferred to the corporate entity by the partnership firm on revaluation of assets done just before the partnership concern was taken over by the assessee-company at book value on 31.3.2007. The AO noted that there was no change in effective ownership of the assets on conversion from partnership to company, and that the intangible assets added by the partnership concern into fixed assets just before conversion were self-generated assets. The AO held that these items such as trademark, business related intangibles cannot be 3 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013 recognized as intangible assets of the company. The AO observed that the revaluation of the assets had been done to claim depreciation on enhanced value of the assets. He further observed that the depreciation could be allowed on actual cost of assets to the assessee. The value of assets determined before conversion was the fair value of the assets and it was not cost of acquisition of these assets by the company. He, therefore, held that there was no transfer of such assets on conversion, but only vesting of rights in assets from one entity to another and that, in that event, the actual cost of the asset for both the entities would remain the same. He accordingly held that the assessee- company was not eligible for claim of depreciation on value of intangible assets determined on the basis of fair market value of the assets before conversion of the firm into company. He, therefore, held that the actual cost of intangibles/trademark to the assessee would be Nil and accordingly disallowed the claim of depreciation thereon. Regarding the other fixed assets on which depreciation had been claimed on the revalued costs, the AO held that the same would need to be taken at WDV as on 31.3.2007 in the books of the firm and not at the revalued price. He was of the opinion that in the present case no cost had been incurred for acquiring the said assets and that the revaluation of the assets was only to increase the value on paper and claim higher depreciation and held that no revaluation had to be done. The AO accordingly calculated the depreciation allowable to the assessee at Rs.26,96,827/- as against Rs.1,81,84,467/- claimed by the assessee. He accordingly disallowed the depreciation claim of Rs.1,54,87,640/-.
4 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013
Being aggrieved by the order of the AO, the assessee preferred appeal before CIT(A) and explained the transaction between the erstwhile firm and the assessee company. Before the CIT(A), the assessee contended that the succession of the firm by the assessee company has been accepted as a genuine transaction in the hands of the partnership firm, therefore, the AO should not have taken a different view in the case of the assessee company. The CIT(A) observed that the AO had granted exemption u/s. 47(xiii) on transfer of capital assets to the erstwhile firm and therefore facts of the case were covered by the decision of the Tribunal in the case of Modular Infotech Pvt. Ltd., 40 DTR 172 and Chitra Publicity Co. Pvt. Ltd., 127 TTJ 01, wherein the Tribunal had taken a view that in cases covered by Sec. 47(xiii), the successor company ought to be entitled to depreciation based on the cost incurred by it. The CIT(A) accordingly directed the AO to allow the claim of depreciation of the assessee.
Being aggrieved by the order of the CIT(A), revenue is in appeal before us.
At the outset, the ld. AR of the assessee has stated that the issues raised in this appeal are squarely covered by the decision of the coordinate Bench of the Tribunal in the case of M/s. Suyash Laboratories Ltd. in & 4004/Mum/2012 dt. 14.10.2015.
We have perused the order of the Tribunal relied upon by the ld. AR. We find that the issues are squarely covered in favour of the assessee by the above decision of the Tribunal. The relevant part of the 5 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013 order of the Tribunal, for the sake of convenience, is reproduced as under :
“8. We have given a thoughtful consideration to the rival submissions and have carefully perused the orders of the authorities below. The undisputed fact is that by an agreement for assignment of business, the entire assets and liabilities of M/s. Suyush Chemicals, a partnership firm registered under the provisions of Indian Partnership Act 1932 have been assigned to the assessee company. It is also an undisputed fact that the assessment of the firm M/s. Suyush Chemicals was made u/s. 143(3) of the Act and vide order dated 29.11.2006, the AO has accepted the transaction between the firm and the assessee company u/s. 47(xiii) of the Act. It is also an undisputed fact that the firm has revalued its assets in the financial year 2003-04 pertaining to assessment year 2004-05 whereas the impugned assessment years before us are A.Y. 2005-06 & 2006-07. We failed to understand how the objections raised by the AO re relevant in the case of the assessee when the transaction has been accepted in the hands of the erstwhile partnership firm.
8.1. A perusal of the assessment order shows that the AO has heavily relied upon Explanation-1 to Sec. 43(6) of the Act. The relevance of the applicability of Explanation-1 to Sec. 43(6) of the Act is highly questionable in the hands of the present assessee inasmuch as the said explanation refers to the provisions of Sec. 170(2) of the Act which is relevant when the predecessor cannot be found then the assessment of the income of the previous year in which the succession took place upto the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor. The facts of the case in hand do not warrant any relevance to the aforesaid provision of the Act.
8.2. It would not be out of place to mention here that the revaluation of the assets is supported by the certificate of a registered valuor and the AO has not appointed his own valuor for valuation of disputed assets nor the AO has disputed the valuation adopted by the 6 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013 assessee, this rules out the applicability of Explanation-3 to Sec. 43 of the Act. The Hon’ble High Court of Gujarat in the case of Ashwin Vanaspati Industries Vs CIT 255 ITR 26 has made the following observations:
“The valuation report is by a registered valuer. Neither in the assessment order nor in the Tribunal’s order is there any whisper that the valuation report by the registered valuer is incorrect in any manner whatsoever. Once there is a report by the registered valuer it is encumbent upon the authority to dislodge the same by bringing adequate material on record in the form of a departmental valuation report, because in the absence of the same a technical expert’s opinion (registered valuer’s report) cannot be dislodged by any authority by merely ignoring the same. In the present case that is what has happened. Neither the Assessing Officer the Tribunal have even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever. They have simply ignored the valuation report.
The assessee having made a claim for depreciation on enhanced cost, which is the actual cost in its hands, it was necessary for the authority who wanted to determine the “actual cost” (as required by Explanation 3 to section 43 of the Act) to place some evidence on record. It could not have substituted its opinion and adopted the book value or the written down value in the hands of the assessee-company. As can be seen from Explanation 3 to section 43(1) of the Act, the Income-tax Officer is required to determine the actual cost to the assessee having regard to all the circumstances of the case and if in his opinion the written down value was the actual cost, he ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. On his having failed to do so, even if the earlier portion of the provision, viz., the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied”.
7 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013
8.3. This decision of the Hon’ble High Court of Gujarat directly apply on the facts of the case and strengthens the claim of depreciation by the assessee.
8.4. One more allegation by the AO that the assessee has not incurred any cost in acquiring the assets as the consideration has been paid by the allotment of shares. The AO is totally misdirected in not understanding the provisions of Sec. 47(xiii) of the Act which read as under:
“any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company.
Provided that (a) all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company ;
(b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession ;
(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company ; and (d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues
8 M/s. CNCS Facility Solutions Pvt. Ltd. & 3721/Mum/2013 to be as such for a period of five years from the date of the succession ;
(e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).”
8.5. Thus it can be seen from clause (c) above that the partners of the firm should not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. Considering the entire facts in totality in the light of the judicial decisions referred to above, we could not find any reason to interfere with the findings of the Ld. CIT(A).
In the result, the appeals filed by the Revenue for both the years under consideration are dismissed.”
The ld. DR has also fairly agreed that the issues raised by the revenue are squarely covered by the above findings/decision of the Tribunal. Hence, respectfully following the decision of the Tribunal on identical issue, we do not find any merit in the appeals of the revenue and same are, therefore, dismissed.
In the result, both the appeals of the revenue are dismissed.
Order pronounced in the open court on 22/03/2016.