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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMARJIT SINGH
O R D E R PER D. KARUNAKARA RAO, AM: There are 10 appeals under consideration involving the AYs 1990-2000 to 2006-07; 2008-09 and 2009-10. All these appeals are filed by the assessee. Since, the issues involved in all these appeals are similar as well as interconnected, therefore, considering the commonalitiy of the issues involved and for the sake of convenience, all these appeals are clubbed, heard together and disposed of in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.
The core issue raised in all these appeals relates to the allowability of depreciation on the „actual cost‟ of the asset arrived at by virtue of revaluation of the „trademark‟. Since, the AY 1999-2000 is the first year, where such revaluation was done, our decision on the claim of this year would have cascading effect on the rest of the AYs under consideration by virtue of allowability of depreciation on the WDV valuation. Therefore, our decision on the raised in appeal for the AY 1999-2000 becomes relevant and significant for adjudication of the rest of the appeals under consideration.
Firstly, we shall take up the issues raised in appeal the AY 1999-2000. Briefly stated relevant facts of the case are that the assessee came into existence 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.
In the background of these facts, during the scrutiny assessment proceedings, Assessing Officer did not allow the claim of depreciation on the said revalued trademark amounting to Rs. 5.25 Crs. In the process, AO invoked the provisions of Explanation-3 to section 43(1) of the Act. This issue travelled to the ITAT in the first round of the second appellate proceedings. Before the Tribunal, assessee raised additional legal grounds and the same are extracted in page 3 of the order of the Tribunal in ITA No.2218/M/2006 (AY 1999-2000), dated 29.7.2009 and the said additional grounds read as under: “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.”
5. Basing on the above conclusion drawn by the CIT (A), Shri Dr. K. Shivram, Ld Counsel for the assessee submitted that the AO failed to obtain the prior approval of the JCIT before the revalued cost is substituted. In such circumstances, the order of the AO on this issue becomes 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. Improving the said Ground no.2, Ld Counsel for the assessee also filed an additional ground and the same reads as under:- “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.”
7. Further, Dr. Shivram submitted that having given a finding on the absence of approval of the JCIT as specified in Explanation-3 to section 43(1) of the Act, disallowing the claim of depreciation on the revalued cost of asset, as claimed by the assessee, is bad in law. Further, bringing our attention to the order of the Tribunal in the first round of the proceedings (supra), Ld Counsel for the assessee submitted that the CIT (A) failed to adjudicate the Ground no.2 by passing a speaking order as to how the claim of depreciation is validly substituted by the AO without having taken the approval of the JCIT. On this issue, Ld Representatives of both the parties in the litigation submitted that this issue requires remanding of the matter to the file of the CIT (A) for second time for fresh adjudication by passing a speaking order.
8. Further, Ld Counsel for the assessee submitted that the Assessing Officer merely rejected the valuation report dated 17.11.1998 furnished by the assessee without 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. 9. Further, Ld Counsel for the assessee brought our attention to the fact that the CIT (A) erroneously invoked the 5th proviso to section 32(1) of the Act, when such proviso came into statute only from the AY 2000-01. The amended provision do not apply to the trademark valued vide the valuation report dated 17.11.1998. 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.
In the result, appeal of the assessee for the AY 1999-2000 is allowed for statistical purposes. II (Assessment Year: 2000-2001) I.T.A. No.7232/M/2012 (Assessment Year: 2001-2002) I.T.A. No.7233/M/2012 (Assessment Year: 2002-2003) I.T.A. No.7234/M/2012 (Assessment Year: 2003-2004) I.T.A. No.7235/M/2012 (Assessment Year: 2004-2005) I.T.A. No.7236/M/2012 (Assessment Year: 2005-2006) I.T.A. No.4385/M/2013 (Assessment Year: 2008-2009) I.T.A. No.4384/M/2013 (Assessment Year: 2006-2007) I.T.A. No.4386/M/2013(Assessment Year: 2009-2010)