CLR Editorial Notes:- Explanation 3 to section 43(1) can’t be invoked for computing actual cost of assets merely because assessee has paid some extra price for acquiring that asset unless other conditions of such explanation stand satisfied
References: Section 43 (1) Definitions of certain terms relevant to income from profits and gains of business or profession.
(1) “actual cost” means the actual cost5 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:
[Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.
Explanation 3.”Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the [Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the [Joint Commissioner], determine having regard to all the circumstances of the case.)
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2013-ITS-78-ITAT-Nirma Industries (P.) Ltd. -Vs- Deputy Commissioner of Income-tax, Circle 5, Ahmedabad , On. JANUARY 24, 2013
IN THE ITAT AHMEDABAD BENCH ‘A’
Nirma Industries (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle 5, Ahmedabad
A.K. GARODIA, ACCOUNTANT MEMBER AND KUL BHARAT, JUDICIAL MEMBER IT APPEAL NOs. 386 & 658 (AHD.) OF 2010 [ASSESSMENT YEAR 2001-02]
JANUARY 24, 2013
S.N. Soparkar and Himanshu Shah for the Appellant. Shelley Jindal for the Respondent.
ORDER
A.K. Garodia, Accountant Member – These are cross appeals filed by the assessee and the revenue and these are directed against the order of Ld. CIT (A) II, Ahmedabad dated 30.11.2009 for the assessment year 2001-02.
2. First, we take up the appeal filed by the assessee in I.T.A. No. 386/Ahd/2010. The grounds No. 1-4 are interconnected which read as under:
“(1) In law and in facts and circumstances of the Appellant’s case, the learned CIT (A) has grossly erred in the points of law and facts.
(2) In law and in facts and circumstances of the Appellant’s case, the learned CIT (A) has grossly erred in upholding issue of notice u/s.148 of Income-tax Act.
(3) In law and in facts and circumstances of the Appellant’s case, the learned CIT (A) has grossly erred in upholding reassessment order u/s.147 of Income-tax Act.
(4) In law and in facts and circumstances of the Appellant’s case, the learned CIT (A) has grossly erred in holding that there is no change of opinion and reopening of the assessment is justified.”
2.1 It was submitted by the Ld. A.R. that ground No.1 is general. Regarding grounds No.2-4, it was submitted that although the reopening is within four years but it is on account of change of opinion and, therefore, not justified. He further submitted that the assessee had purchased the Trade Mark from Nirma Construction Works Ltd (NCWL) and Smt. Shantiben K Patel (SKP) by entering into a tripartite agreement dated 26.03.2001 for a total consideration of Rs.500 crores. Out of this, Rs.50 crores had been paid to SKP and the balance amount of Rs.450 crores was paid to NCWL. On the same, the assessee has claimed depreciation of Rs.62.50 crores on this intangible asset u/s 32 of the Income tax Act, 1961. He further submitted that notice was issued by the A.O. u/s 142(1) of the Income tax Act, 1961 on 05.08.2003 in the course of original assessment, available on pages 22-23 of the paper book and in clause (6) of Annexure to this notice which is available on page 23 of the paper book, specific query was raised by the A.O. regarding acquisition of trade mark right by the assessee during this year. The A.O. also asked for furnishing copy of the original documents entered into for acquisition of these rights in. He further pointed out that he A.O. also asked regarding how the trade mark right were valued at Rs.500 crores and how the payments for the same were made. This was also asked as to whether this payment was made to one party or to more than one party. He also submitted that reply to this notice u/s 142(1) was submitted to the A.O. on 22.08.2003 and the copy of the same is available on pages 25-30 of the paper book. He also submitted that another notice u/s 142(1) of the Income tax Act, 1961 was issued by the A.O. on 24.03.2004 and the copy of the same is available on page 49 of the paper book and in this notice also, the A.O. made various queries regarding acquisition of the trade mark by the assessee company from NCWL and SKP. The reply of this notice along with remaining queries of the A.O. in the earlier notice had been submitted to the A. O. along with letter dated 28.03.2004 and its enclosures, which are available on pages 50-72 of the paper book. He further submitted that on page 64 of the paper book is another reply on this issue dated 27.03.2004. Regarding reasons recorded by the A.O. for reopening of the assessment, he submitted that the reasons recorded by the A.O. are available on pages 81-82 of the paper book. 2.2 He also submitted a copy of the judgement of Hon’ble Gujarat High Court rendered in the case of Gujarat Power Corporation Ltd. v. ACIT in Special Civil Application No.29792 of 2007 dated 3.07.2012 and our attention was drawn to Question No.2 on page 14 of this judgement and it was submitted that in that case also, the issue before the Hon’ble Gujarat High court was this as to whether when during the course of assessment, the A.O. had examined the claim put forth by the assessee by raising queries with respect to such a claim and reply was filed by the assessee with respect to the claim and thereafter, at the time of framing assessment, he did not reject the claim without recording reasons, it could not be stated that A.O. had not formed an opinion and, therefore, any attempt on his part to reopen such a assessment without bringing new or additional material would amount to a mere change of opinion and, therefore, reopening is barred. He further drawn our attention to page 22 of this judgment of Hon’ble Gujarat High Court and pointed out that the Hon’ble Gujarat High Court has also considered the judgement of Hon’ble Apex Court rendered in the case of ACIT v. Rajesh Javeri Stock Brokers P. Ltd. as reported in 291 ITR 500 (S.C.) and then he drawn our attention to pages 40-47 of this judgement of Hon’ble Gujarat High Court where, the Hon’ble Gujarat high Court has given a decision. He drawn our attention to page 43 of this judgement of Hon’ble Gujarat high Court and pointed out that it was held by Hon’ble Gujarat High that in a situation where the A.O. during scrutiny assessment notices a claim made by the assessee, having some prima facie doubt raises query asking assessee to satisfy him with respect of such a claim and thereafter does not make any addition in the final order of assessment, he could be stated to have formed an opinion whether or not in a final order, he gives the reasons for not making addition. It was his submission that in the present case, this issue of reopening is squarely covered in favour of the assessee by this judgment of Hon’ble Gujarat high Court. He also placed reliance on another judgment of Hon’ble Gujarat High Court rendered in the case of Rasna Private Ltd. v. ACIT in Special Civil Application No.375 of 2005 dated 09.07.2012 and it was submitted that as per this judgement also, the issue in dispute is covered in favour of the assessee. He submitted that in that case also, the reopening was made on this basis that the assessee has claimed deprecation on non compete territory right of Rs.65,62,500/- and it was the allegation of the A.O. that the depreciation is not available on non compete territory right and, therefore, income of the assessee has escaped assessment. It was submitted that in that case also, it was held by Hon’ble Gujarat High Court that reopening is not justified.
2.3 One more submission was made that the entire case has been framed by the A.O. as per Explanation (3) to Section 43(1) but in the facts of the present case, this explanation (3) to Section 43(1) is not applicable and hence, for this reason also, the reopening is not justified.
2.4 As against this, the Ld. D.R. supported the orders of authorities below. It was also submitted by him that the A.O. had new material for reopening and hence, reopening is valid and the judgments cited by the Ld. A.R. are not applicable. He also submitted that the sellers are related parties of the assessee buyer and, therefore, Explanation (3) to Section 43(1) is applicable. Reliance was also placed by him on the following judgements:
(i) Apollo Hospital Enterprises Limited v. ACIT, 287 ITR 25 (Mad.)
(ii) Aswani Enterprises v. ACIT, 314 ITR (AT) 29 (Chennai)
(iii) Guj Narmada Valley Fertilizer Co. Ltd. v. DCIT, 319 ITR 120 (Guj.)
2.5 In the rejoinder, it was submitted by the Ld. A.R. that new material has no nexus or live link because the reopening is not based upon it. Regarding this judgment of Hon’ble Gujarat High Court cited by the Ld. D.R. rendered in the case of Guj Narmada Valley Fertilizer Co. Ltd. v. DCIT (supra), it was submitted that this is in favour of the assessee. He also placed reliance on the judgement of the Tribunal rendered in the case of Shree Rajasthan Synthetics Limited v. ACIT as reported in 93 ITD 78 in support of this contention that the A.O. cannot rely upon borrowed satisfaction.
2.6 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. First we discuss about the facts of the present case. It is seen that in the present case, the original assessment was completed by the A.O. u/s143(3) and the relevant assessment order dated 31.03.2004 is available on pages 73-75 of the paper book. We also find that in para 4 of this assessment order, this is noted by the A.O. that the intangible asset of Rs.500 crores were acquired as per the depreciation schedule and depreciation @ 12.5% was claimed by the assessee during this year on the same. After making this observation, the A.O. has accepted the return of income of the assessee declaring a loss of Rs.55,49,27,279/-. As per various queries raised by the A.O. in the course of original assessment proceedings by way of issuing various notices u/s 142(1) of the Income tax Act, 1961, various queries were raised by the A.O. regarding the acquisition of this intangible asset at a cost of Rs.500 crores including this query as to how the trade mark were valued at Rs.500 crores including the date and mode of payment made to various parties in this regard. The reply to these queries were also submitted by the assessee before the A.O. in the course of original assessment proceedings and the reopening in the present case is on this basis that this valuation of acquisition of intangible asset is not proper and the same was over valued. In the light of these facts, we find force in the submissions of the Ld. A.R. that the reopening in the present case is on mere change of opinion and hence, the same is not justified. The judgment of Hon’ble Gujarat High Court rendered in the case of Gujarat Power Corporation Ltd. (supra) supports the case of the assessee. In that case, the question no.2 before the Hon’ble Gujarat high Court raised was :
“(2) Whether during the course of original assessment, the Assessing Officer had examined a certain claim put-forth by the queries with respect to such a claim, elicited response from the assesses with respect to the claim and thereafter at the time of framing assessment, did not reject the claim without recording reasons, could it be stated that the Assessing Officer had formed an opinion and that therefore, any attempt on his part to reopen such an assessment without any new or additional material would amount to a change of opinion and therefore, reopening would be barred?”
2.7 In that case, it is observed by Hon’ble Gujarat High Court in Para 37 of this judgment that if a certain claim of the assessee is examined by the A. O. in original assessment proceedings, queries raised, reply received but thereafter he makes no addition or disallowance without giving reasons, it would not be permissible to reopen the assessment even within a period of 4 years from the end of the relevant assessment year on very same ground. On this basis, it was held by Hon’ble Gujarat High Court in that case that after 01.04.1989, reopening of the assessment within a period of 4 years can be made as long as this claim is not based on mere change of opinion. In this judgment, Hon’ble Gujarat High Court has also considered the judgment of Hon’ble Apex Court rendered in the case of CIT v. Kelvinator of India Limited, 320 ITR 561 and reproduced relevant portion of some of the observations of Hon’ble apex court from page 564 of 320 ITR. For the sake of ready reference, we also reproduce the same as under:-
“However, one need to give schematic interpretation to the words “reason to believe” failing which, we are afraid, section 147 would give arbitrary powers to the A.O. to reopen assessment on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The A.O. has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain preconditions and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place.”
2.8 In the present case, we have seen that not only query was raised by the A.O. in the course of original assessment proceeding but reply was also submitted by the assessee and, thereafter, in the assessment order also, it is noted by the A.O. that assessee has made claim of depreciation on these intangible assets @ 12.5% and he did not make any disallowance and under these facts, we are of the considered opinion that in the present case, the reopening done by the A.O. is on mere change of opinion and, therefore, the same is not valid as per this judgement of Hon’ble Gujarat High court rendered in the case of Gujarat power Corporation Ltd. (supra) and also as per the judgment of Hon’ble Apex Court rendered in the case of CIT v. Kelvinator of India Limited (Supra). Respectfully following these two judgments, we hold that in the present case, the reopening is not valid and because it is on mere change of opinion and therefore, grounds No.2-4 of the assessee’s appeal are allowed.
2.9 Regarding various judgments cited by the Ld. D.R., we find that it includes one judgment of Hon’ble jurisdictional High Court rendered in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. v. DCIT. We find that in this case, the judgment is in favour of the assessee and it was held by Hon’ble Gujarat high Court that there was no material with the A.O. to hold belief that income chargeable to tax had escaped assessment. Hence, this judgment of Hon’ble Gujarat high Court is not rendering any help to the revenue in the present case. Other judgements cited by the Ld. D.R. include a judgement of Hon’ble Madras High Court and the judgment of Chennai bench of the tribunal and since we are following the judgment of Hon’ble Jurisdictional High Court, these judgements cited by the Ld. D.R. are not relevant in the present case.
2.10 Regarding this submission of the Ld. D.R. that new material was brought on record by the A.O. for reopening, we find that the copy of reasons recorded are available on pages 81 to 83 of the paper book. In the same, there is no mention about any new material brought on record by the A. O. The reason given by the A.O. is only this that RSM & Co. has made valuation by adopting Royalty rate of 4% but the Royalty received in the period of sale of these brands was 1%. He has given a chart of Royalty rate in the reasons, as per which, Royalty was 1% for 31.03.1998 to 31.03.2000, 2% for 1.4.2000 to 31.03.2002 and 4% from 1.4.2002 onwards. These rates are reproduced by the A.O. from Para 1.6 of the report of RSM & co. and hence, this is also not a new material because the valuation report of RSM & Co. was very much available in course of original assessment proceedings. Hence, it is seen that as per the reasons recorded by the A.O. for reopening, there is no mention of any new material and hence, this argument is also devoid of any merit.
3. Grounds No.5-6 of the assessee’s appeal are regarding merit of addition made by the A.O. and the same read as under:
“(5) In law and in facts and circumstances of the Appellant’s case, the learned CIT(A) has grossly erred in holding that Explanation 3 to section 43(1) is applicable in the appellant’s case and cost of the assets has to be determined on the facts of the case.
(6) In law and in facts and circumstances of the Appellant’s case, the learned CIT(A) has grossly erred in holding that cost of the assets as per provision Explanation 3 to section 43(1) should be taken for Rs.152.89 crores against claim of Rs.500 crores.”
3.1 Regarding merit of these issues regarding allowability of depreciation as claimed by the assessee, various arguments were raised by both the sides and thereafter, a brief written note was submitted by the learned AR of the assessee containing those arguments and hence, we reproduce the brief written note about these arguments as under:
Brief Written note
“The Appellant submits this note in support of its argument on merits to justify its claim of depreciation on Rs.500 crores, being cost of acquisition of Trade Mark/Brand Name ‘Nirma/Nima’. To clarify, this note does not cover the challenge of reopening of assessment which has already been argued earlier.
Appellant submits that the action of the Learned Assessing Officer (A.O.) in denying depreciation on the actual cost of Rs.500 crores as partly confirmed by the CIT (A) is bad and illegal for the following reasons.
Ordinarily an assessee is entitled to claim of depreciation on the “actual cost” of the asset acquired by him. (57 ITR 335 & 48 ITR 859) However, the law permits the A.O. under Explanation 3 to section 43(1) to substitute for the actual cost claimed by the assessee, the cost as may be worked out by him. However, as held by Hon’ble Gujarat High Court in the case of Ashwin Vanaspati Industries v. CIT (255 ITR 26) “Explanation 3 to the said section requires (i) The assets which are acquired by the assessee were used by any other person before the date of acquisition (ii) The ITO arrives at objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enhanced cost (Hi) Then the ITO is empowered to determine the actual cost having regard to all the circumstances of the case.” (emphasis supplied)
In the present case there is no dispute as regards the satisfaction of first condition. However, second condition is not satisfied at all. If one examines assessment order, the A.O. has jumped to the third condition namely determination of “actual cost” (according to him) without recording any satisfaction about second condition. It is true that in para 16 of the assessment order he has made allegation about alleged tax planning by the group. However, that by itself, does not satisfy the second condition which requires the A.O. to come to a conclusion, on the basis of the objective facts, that the main purpose on transfer of assets was to reduce tax liability by claiming depreciation with reference to enhanced cost. More so, even finding of tax planning or evasion cannot be substituted for recording of satisfaction of second condition. For this purpose, the assessee relies upon judgment of Ashwin Vanaspati Industries (supra) where Hon’ble High Court held as follows:-
“The question then arises is : Expln. 3 to section 43(1) of the Act only talks of assets which were used by any other person for the purpose of business prior to date of acquisition and are transferred and the main purpose of transfer of such assets is reduction of tax liability by claiming depreciation on the enhanced costs; the assessee having acquired only assets can the provision not become applicable? First of all, we do not have any finding recorded by any authority to the effect that the main purpose of transfer was for claiming depreciation at an enhanced cost. Though the ITO has stated that dissolution had been effected to defraud the Revenue by transfer of assets of the firm to the company what is more material and necessary is that there is no finding to the effect that the enhanced cost was incurred with the main purpose of reduction of liability to income-tax by claiming depreciation on the enhanced cost ¦¦¦¦
¦¦¦¦.. Considering the matter from another angle, the ITO has merely stated that the dissolution was a method adopted to defraud the Revenue but nowhere is it stated that the main purpose of transfer of such assets was for claiming depreciation with reference to enhanced cost. The Tribunal has in para 13 of its order referred to various figures carried forward business loss, carried forward unabsorbed depreciation and investment allowance, etc, in support of its conclusion but it has lost sight of the fact that these are all incidents or effects of the transaction and not for the purpose ¦¦¦¦
¦¦¦¦ Therefore, the AO has never considered that the transaction was entered into with a view to reduce tax liability by claiming set off of unabsorbed depreciation, carried forward business loss and investment allowance and rightly so in our view, as section does not stipulate that the main purpose of the transfer of assets is to reduced income-tax liability by setting off various items of brought forward loss, etc ¦¦. (emphasis supplied)
In view of this, it is submitted that invocation of Explanation 3 to section 43(1) is illegal and the actual cost of Rs.500 crores is eligible for depreciation.
Alternatively, and without prejudice to above submission the appellant submits that A.O. has failed to perform his obligation under the third condition. Third condition requires him to determine the actual cost having regard to the all the circumstances of the case. In the present case, the assessee had supported its cost of four valuation reports of renowned Chartered Accountants. The A.O. has found faults with them, (in the submission of the assessee for incorrect reasons) The A.O. has, however, not got such valuation done by independent valuers. This is not permissible in law. Hon’ble Gujarat High Court in the case of Ashwin Vanaspati Industries (supra) has held as follows:-
” ¦¦ more significantly such enhanced cost is supported by valuation report obtained prior to the point of time of the dissolution. The valuation report is by a registered valuer. ¦¦¦¦¦ significantly such enhanced cost is supported by valuation report obtained prior to the point of time of the dissolution. The valuation report is by a registered valuer. Neither in the assessment nor in the Tribunal’s order there is 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 incumbent upon an authority to dislodge the same by bringing adequate material on record in the form of Departmental valuation report, because in absence of the same a technical expert’s opinion (registered valuer’s report) cannot be dislodged by any authority by merely ignoring the same ¦¦¦..
¦¦¦¦ The assessee having made a claim for depreciation on enhanced cost, which is actual cost in its hands, it was necessary for the authority who wanted to determine the ‘actual cost’ (as required by Expln.3 to s.43 of the Act) to place some evidence on record. It could not have substituted its opinion and adopted book value or the written down value in hands of the assessee-company. As can be seen from the Expln.3 to s.43(l) of the Act, the ITO is required to determine 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 provisions, viz, the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied ¦¦¦. ” (emphasis supplied)
This judgment has been followed by Hon’ble Tribunal in the case of Chitra Publicity Co. Ltd. v. ACIT (127 TTJ Page 1) where Id. Third member has held as follows:
“In the above circumstances and when no attempt was made by the AO to undertake exercise of finding actual cost as required by the statutory provision and as per principles laid down by the jurisdictional High Court in the case of Ashwin Vanaspati Industries v. CIT (supra), it is not possible to hold that provisions of Expln.3 to s.43(l) have been rightly applied. No good ground has been laid for not accepting cost fixed between the parties in the memorandum as “actual cost” of three assets. The power vested in the AO in Expln. 3 to s.43(l) was not exercised in accordance with law. Without proper determination of “actual cost”, it is not possible to record a satisfaction that assessee has claimed depreciation on enhanced cost of assets to the assessee. In view of close connection between circumstances/conditions (ii) and (iii) and in view of my finding on condition No.(iii), I hold that condition No.(ii) is also not satisfied. No case for taking action under Expln.3 to s.43(l) has been made out. On facts and circumstances of the case, there was no justification to remand the matter back to the AO to have another innings and determine actual cost of goodwill/trade name and of buildings at Rajkot and Surat.
I have also gone through the decision of Hon’ble Madras High Court in the case of CIT v. Sekar Offset Press [1995] 214 ITR 516 (Mad.). In that case, the assets were transferred at the market value between partners. The Court held that Expln. 3 to s.43(l) had no application to the case as the main purpose of the transfer of assets was not reduction of tax liability. The decision is relevant. The other decision of the Tribunal in the case of Unimed Technologies Ltd. v. Dy. CIT [2000] 69 TTJ (Ahd) 25 : [2000] 73 ITD 150 (Ahd) is also considered relevant as in above case, valuation report furnished by the assessee in support of cost of the assets acquired was accepted by the Tribunal, as AO did not appoint his own valuer nor thought it necessary to examine assessee’s valuer. In the absence of any other valuation report and there being no other evidence to show that the report was not reliable, it was held that valuation report filed by the assessee could not be ignored. Factual position here is similar. I am, therefore, of the view that two decisions cited on behalf of the assessee are relevant to the facts of the case ¦¦¦.. (emphasis supplied)
The Id. D.R. submitted that this judgment cannot apply because the A.O. has not independently valued the asset. He has merely ‘corrected’ figures of the report of RSM & Co. It is submitted that this argument is factually incorrect and legally unsustainable. The Chartered Accountants had arrived at figure of royalty on the basis of the agreement. If the A.O. would choose not to go by the agreement, he is substituting his opinion for the opinion of an expert. He has, therefore modified the report and come to a different conclusion. This is not permissible. Under the circumstances, even on this ground, assessee is entitled to succeed.
Without prejudice to what is submitted above, it is submitted that even on facts, the A.O. has erred in determining the value of Trade Mark at Rs.53.34 crores.
(i) The A.O. has chosen to fully ignore the reports of M/s. N.M. Raiji, Deloite Haskins and Sells and Kaushik Patel & Co. without giving any reason except disputing percentage of royalty. In this connection it may be noted that so far as report of Deloite Haskins and Sells is concerned, it had correctly taken percentage of royalty. That apart, they had given two alternative methods of valuation, therefore, criticising that report is completely wrong. So far as report of Kaushik Patel & Co. is concerned, it has taken correct rate of royalty as agreed upon. Therefore, this report also cannot be faulted.
(ii) That apart fundamental assumption that rate of royalty is wrong is incorrect. Royalty rate was 1% for sometime, 2% for sometime (because of special request reduced to 1%) and 4% thereafter. The A.O. chose to ignore this for two reasons and both of them are factually and legally unsustainable.
(a) First reason given by the A.O. is that valuers have taken Trade mark of “with goodwill” whereas in the present case asset was transferred “without goodwill”. This observation is incorrect for the following reasons.
(i) The concept of presence or absence of goodwill is in relation to the “business” and not Trade Mark and Brand Name. (Please refer to section 37 & 41 of the Trade Mark and Mercantile Act, 1958 quoted on pages 23 & 24 of the assessment order). This not the controversy at all in the present case.
(ii) The Valuers have valued Trade Mark on the basis of its yield namely, royalty. The figure of royalty does not indicate change depending upon whether it is with or without goodwill. Once that figure does not change, the question of inclusion or exclusion of goodwill is immaterial.
(iii) There is nothing to show that valuers have valued Trade Mark on a basis other than what was legally permissible.
(iv) In any case now that The Hon’ble Supreme Court has held that goodwill is also depreciable (CIT v. Smifs Securities Ltd. [2012] 210 Taxman 428) this controversy is meaningless.
(b) Second reason given by the A.O. for substituting 0.5% was that at the time of search an unsigned document was found which shows rate of royalty 0.5%. It is submitted that no reliance can be placed on the same documents for the following reasons:
(i) Admittedly documents is signed by only one party which was not acted upon.
(ii) Another document was found at the time of search showed royalty of 5%.
(iii) Merely because there was an unsigned agreement as to 0.5% the actual agreement followed by actual conduct of the parties of giving royalty at 1% to 4% royalty cannot be ignored.
Under the circumstances, attempt on the part of the A.O. to undervalue actual cost of the asset from Rs.500 crores to Rs.53.34 crores is illegal. The appellant, therefore, respectfully submits that the appeal be allowed.
Ahmedabad
9th November 2012
Urvashi Shodhan
Advocate for the Appellant”
3.2 Ld. D.R. has also submitted a brief synopsis of arguments and the same are also reproduced below:
“SYNOPSIS OF THE ARGUMENTS
The satisfaction required for invoking explanation-3 to section. 43(1) can be inferred from the following observations made by the A.O in the order
1. The satisfaction note – Page:3, Para:2 from the top –
A.O mentions that A.O has power to decide the actual cost of the assets if he is satisfied that the main purpose of the transfer is to reduce the tax liability by claiming enhanced depreciation as per explanation 3 to sec. 43 of the act.
2. The proceedings are accordingly taken up and a specific show cause was given which is mentioned by the A.O in Para:5 on Page:3
3. Page:9 Para: 10 fifth line from the top-Therefore, it clearly transpired that the value of the asset sold by NCWL/SKP to the assessee company has been inflated and on this sale consideration NCWL/SKP did not pay the capital gain tax/tax on income from other sources and on this inflated valuation of the asset. The depreciation has been claimed by the assessee company. One unit of the assessee company alongwith “brands/ trademarks” demerged with NL and NL started claiming depreciation on this inflated value of the intangible assets. The assessee was asked to explain as to why in the light of powers vested in the hands of the A.O in Explanation -3 of sec. 43 of the Act. The right value of the asset should be determined and only the depreciation should be allowed to it.
4. Page: 24, Para: 13.9 last lines-
In this regard, it is observed that the main purpose of the transfer of the assets was to reduce the tax liability of the assessee. The detail observations in this regard are given in the following paras
5. Page: 25, Para: 14.2 last six lines-The ultimate effect of the entire process is that the NL after the demerger of NIL, i.e. the assessee company in NL alongwith these brands/trademarks is claiming depreciation on intangible assets which have been self generated by it. This can never happen but from the deliberate planning done by Nirma Group in long run. From finance act-1998 the depreciation had been introduced in the intangible assets of the business and the assessee group has done this on to take unwarranted benefit of the same in this manner.
6. Page: 32, 9th line from the top-It is apparent that the sale of grants/trademarks from NCWL to the assessee (NIL) is not at arms length. The entire transaction has been done in such a way that the capital gain tax/tax on income from other sources had been avoided by SKP and NCWL and the depreciation had been claimed after highly inflating the value of assets under consideration i.e. brands/trademarks. Thus the assessee group has avoided tax by resorting to unwarranted tax planning. 7. Page: 33, the para which begins from the words-
The tax planning has been done by the assessee ¦¦¦ and ¦¦¦¦ Thus the assets which was self generated by NL was made to look like an acquired assets to claim depreciation u/s. 32(1) (ii) of the Act.
The above observations of the A.O. can be treated as objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enhanced cost ,as required by Hon’ble Gujarat High Court while deciding the case of Ashwin Vanaspati Industries (255 ITR 26).
(Shelly Jindal)
CIT.DR.(ITAT),
Ahmedabad”
3.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. First of all, we reproduce the provisions of Section 43(1) and its Explanation (3) which are as under:
“43. In sections 28 to 41 and in this section, unless the context otherwise requires-
(1) “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:
[Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.]
Explanation 1.-Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under [clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35 or under any corresponding provision of the Indian Income-tax Act, 1922 (11 of 1922).
[Explanation 2.-Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall be the actual cost to the previous owner, as reduced by-
(a) the amount of depreciation actually allowed under this Act and the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and
(b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets.]
Explanation 3.-Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the [Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the [Joint Commissioner], determine having regard to all the circumstances of the case.”
3.4 We find that in the present case, the entire case of the A.O. is based on Explanation (3) to Section 43(1) as reproduced above. As per this explanation, we are of the considered opinion that the A.O. can determine the original cost of the assets for allowing depreciation to the assessee only if he is satisfied that the main purpose of transfer of such asset, directly or indirectly to the assessee, was the reduction of liability to income tax by claiming extra depreciation with reference to an enhanced cost. It is not sufficient that one of the main purposes was this. Hence, in our humble opinion, this is the first prerequisite that the A.O. has to establish that the main purpose of transfer of such asset was the reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish this, it has to be established that apart from claiming additional deprecation on enhanced cost, there is no other main purpose for acquiring the asset in question. In the present case, the A.O. is only disputing the valuation of intangible asset i.e. the trademark acquired by the assessee from related parties without even making an allegation that such acquisition of assets was not having any main purpose except claiming extra depreciation. This can be explained by way of an example also.
‘Let us assume that Mr. ‘A’ purchases a machine which is very much required by him for his business purpose but for such acquisition of machine by him, he paid some extra price as per the A.O. This is not the case of the A.O. that using of machine for business purpose is not the main purpose of acquiring of machine and in that situation, in our humble opinion, the A.O. cannot invoke Exp.(3) to Section 43(1) of the Act. In our considered opinion, this requirement has been specified in Explanation (3) to take care of various situations where the assessee may be forced to pay extra consideration for acquiring an asset or anything else for business purpose. Such extra consideration may be required to be paid for many reasons such as, scarcity of that particular item, inability of the assessee to make timely payment out of own funds or out of borrowed funds and, therefore, he may be forced to purchase the machine/the asset on credit and for this reason also, he may be required to pay extra consideration. There may be other reasons also and because of this, legislature had thought it fit and proper to put this restriction in Explanation (3) to Section 43(1) and only where the A.O. is satisfied that the main purpose of transfer of an asset is the reduction of liability to income tax by claiming extra depreciation on enhanced cost, then only the A.O. can determine the actual cost of the assets of the assessee for the purpose of allowing deprecation to the assessee and unless this condition is fulfilled by the A.O., in our considered opinion, the A.O. cannot invoke this explanation.’
3.5 In the present case, we have gone through the entire assessment order dated 23.03.2006 passed by the A.O. u/s143(3) read with section 147 of the Income tax Act, 1961 but there is no mention that the main purpose of this transfer of asset in question was for claiming extra depreciation and the A.O. has simply discussed about the valuation of this asset in question without making any mention as to what was the main purpose for transfer of this asset. On page 24 of the assessment order, the A.O. has stated that the main purpose of transfer of this asset was to reduce the tax liability of the assessee and he has further stated that the detailed observation in this regard are given in the following paras and thereafter, in para 14.1 to 14.13, the A.O. has discussed about the various valuation reports but there is no mention about any basis on which he is alleging this that main purpose of transfer of this asset was to reduce the tax liability of the assessee. Even if the A.O.’s allegation has some force that some extra price had been paid by the assessee for acquiring this asset, this is not sufficient in order to invoke Exp.(3) to Section 43(1), and the A.O. has to establish that the main purpose of this transfer of asset to the assessee was to reduce tax liability of the assessee and in our considered opinion, the A.O. has miserably failed on this aspect. Even if all the allegations of the A. O. are accepted, in the absence of any allegation supported by cogent material to the effect that business use of the asset in question was not even one of the main purposes, it has to be accepted that business use of the asset was at least one of the main purposes even if not the only main purpose and hence, the allegation of the A.O. that main purpose of transfer of this asset was to reduce the tax liability of the assessee can be at the best one of the main purposes but it certainly cannot be main purpose. This is not sufficient to invoke this Explanation (3) to Section 43 (1). In fact, in the present case, the A.O. has not even made any attempt or allegation on this aspect and nothing has been brought on record by the A.O. that the asset in question was not acquired by the assessee with main purpose being business purpose and, therefore, the main purpose of acquisition of this asset was to reduce the tax liability of the assessee. Hence, in our considered opinion, the A.O. did not fulfill the pre requirement of invoking Exp.(3) to Section 43(1) of the Income tax Act, 1961.
3.6 Moreover, while determining the value of the asset in question after invoking Exp.(3) to Section 43(1), the A.O. has ignored four valuation reports submitted by the assessee from various firms of the Chartered Accountants without getting a valuation done by any independent valuer. As per the judgement of Hon’ble Gujarat High Court, rendered in the case of Aswin Vanaspati Industries (supra), as has been cited by the Ld. A.R. in the brief written note, it was held by Hon’ble Gujarat High Court that since there is a report by the registered valuer, it is incumbent upon the authority to dislodge the same by bringing adequate material on record in the form of departmental valuation report because in the absence of the same, a technical expert’s opinion (registered valuer report) cannot be dislodged by any authority by merely ignoring the same . In the present case, the A.O. has not brought on record any valuation report from any independent valuer. When this aspect was confronted to Ld. D.R., it was submitted by him that the A.O. had proceeded on the same basis of valuation as has been done by the chartered accountant firm M/s. RSM & Co. and only change made by the A.O. is the rate of royalty which has been taken by him @ 0.5% of the turnover whereas, the same was considered by the C.A. firm @ 4% and the A.O. has also given various reasons for this in para 14.3 to 14.13 of the assessment order. In this regard, we find that the A.O. had proceeded on the basis of past history for valuation and even as per past history, the royalty rate was 1% but the A.O. has considered it @ .5% because the trade marks were assigned without goodwill of the business. The A.O. has totally ignored the terms and conditions for the trademark given to NL and NCCL i.e. Nirma Ltd. and Nirma Chemicals Ltd by NCWL as per which, royalty was payable by these two companies to NCWL @1% for the period from 01.04.1998 to 31.03.2000, @2% during 01.04.2000 to 31.03.2002 and @ 4% from 01.04.2002 onwards. In our considered opinion, for the purpose of valuing the asset, past royalty rate and past income cannot be the guiding factor and the guiding factor has to be the income expected in future from such asset i.e. the royalty in the present case. When the expected royalty is @2% during 01.04.2000 to 31.03.2002 and 4% from 01.04.2002 onwards, for the purpose of valuation of trademark in question, we do not find fault in adopting 4% rate of royalty being agreed rate of Royalty from 01.04.2002 for the purpose of valuation of Trade Mark as has been done by RSM & Co., Chartered Accountants. Regarding this allegation of the A.O. that goodwill was not transferred by NCWL to NCCL and NL, we are of the considered opinion that it has no bearing on the valuation of trade mark because we are considering the amount the assessee is paying for the asset and what income is expected from the asset. This is not the case of the A.O. that the sub license to NL and NCCL by NCWL was not acquired by the assessee company in full. Whatever has been sub-licensed to NL and NCCL, the same was acquired in full by the assessee company and, therefore, the royalty rate expected by the assessee company in future has to be accepted @ 4% as per the agreement between NCCL and NL with NCWL and even if the same is without goodwill, it makes no difference since the assessee company in future is assured of 4% royalty and the same has to be adopted for the purpose of valuation. Moreover, as per remaining three valuation reports also, the value worked out by these valuers was more than Rs. 500 Crores paid by the assessee. We also find that in one of these reports by Delloite, even the method adopted for valuation is different and still the value worked out is more than Rs. 500 Crores and no defect had been pointed out in the method adopted by Delloite and hence, for this reason also, the price paid by the assessee cannot be said to be excessive or unreasonable warranting any disallowance of depreciation.
3.7 In view of our above discussion, we find that the action of the A.O. is not justified for two reasons. The first reason is this that he has not fulfilled the pre requirement for invoking the provision of Exp.(3) to Section 43(1) of the Income tax Act, 1961. The second reason is this that even after invoking this Exp.(3) to Section 43(1) rightly or wrongly, the A.O. has not worked out the value of the asset in question in the proper manner. He has ignored the valuation report of various technical experts such as RSML & Co. C.A. and others and instead of obtaining the departmental valuation report or any other report of any other independent valuer, the A.O. has made his own exercise for valuation of the asset in question although it cannot be accepted that the A.O. is a technical expert for valuation of the asset in question. Moreover, the A.O. has adopted the royalty rate of past instead of expected royalty rate in future. Even from the past royalty rate, he has reduced 50% income on this basis that the goodwill was not transferred and sub-licensed by NCWL to NL and NCCL but he has forgotten that the income of the royalty is not being affected on this count and it is not material as to whether the same is with goodwill or without goodwill. Hence, we have seen that even the valuation done by the A.O. is not proper and therefore, the action of the A.O. is not justified.
3.8 Now, we consider the various judgements cited by the Ld. D.R. in his synopsis.
– Reliance has been placed by the Ld. D.R. only on one judgment of Hon’ble Gujarat high Court rendered in the casa of Aswin Vanaspati Industries v. CIT as reported in 255 ITR 26. We have gone through this judgements very carefully and find that in this judgment, issue was decided by Hon’ble Gujarat High Court in favour of the assessee and it was held that when there is no evidence that transfer was made with a view to claim the depreciation on enhanced cost, the assessee is entitled to depreciation on such enhanced cost. In our considered opinion, this judgment is in fact, covering the issue in dispute in favour of the assessee and it does not render any help to the revenue.
– Regarding other submissions of the Ld. D.R. in the synopsis and his arguments reproduced above, we find that he has laid much stress on this aspect that the purchase of trademark by the assessee is not at arms length and it has been done to avoid capital gain tax in the hands of sellers i.e. SKP and NCWL and deprecation was claimed by the assessee company at a higher value. We have already seen that in the present case, the A.O. could not satisfy the pre requirement for invoking the provisions of Exp.(3) to Section 43(1) of the Act and whether capital gain tax was paid by the sellers i.e. NCWL and SKP or not, cannot be the basis of our decision in the present case although it was pointed out to us in the course of hearing that in the hands of the sellers also, the capital gain tax was levied by the A.O. of the sellers and the matter is sub-judice. Be that as it may but this cannot be a basis for our decision in the present case regarding allowability of depreciation to the assessee and invoking of provisions of Exp.(3) to Section 43(1) in the present case by the A.O. We also find that even Ld. D.R. in his synopsis could not point out anything about the satisfaction of the A.O. that the main purpose of acquisitions of this asset by the assessee was to avoid tax by claiming extra depreciation on enhanced cost.
3.9 In view of our above discussion, we find that the action of the A.O. in the present case is not justified and the assessee deserves to succeed on these grounds on merit also and accordingly, Ground No.5 & 6 are also allowed.
4. Ground No.7 is regarding charging of interest u/s 234A, 234B and 234C of the Act and the same is consequential.
5. In the result, appeal of the assessee stands allowed.
6. Now, we take up the appeal filed by the revenue in I.T.A. No. 658/Ahd/2010.
6.1 Ground No.1 is as under:
“1. The Ld. Commissioner of Income tax (A) -II CC -l(l), Ahmedabad has erred in law and facts in restricting the addition made of Rs.55,87,50,000/- to Rs.43,38,87,500/- on account of disallowance of depreciation.”
6.1.1 On this aspect, it was agreed by both the sides that this issue is connected with various grounds raised by the assessee in its appeal and if the assessee succeeds in its appeal then this ground of the revenue will become infructuous.
6.1.2 We have seen that the A.O. has restricted the claim of the assessee regarding depreciation on trade mark from Rs.62.50 crores to only Rs.6.625 crores and made disallowance of Rs.55,87,80,000/-. Ld. CIT (A) had restricted this disallowance to Rs.43,38,87,500/- for which the revenue is in appeal but while deciding the appeal of the assessee, we have already held that assessee is eligible for entire deprecation as has been claimed by the assessee of Rs.62.50 crores and, therefore, this ground of the revenue does not survive and the same is rejected.
6.2 Ground No.2 is as under:
“2. The Ld. Commissioner of Income tax (A)-II CC-I(I), Ahmedabad has erred in law and facts in deleting addition of Rs.43,65,551/- as interest on Deemed Discount Bonds.”
6.2.1 Ld. D.R. supported the assessment order whereas the Ld. A.R. supported the order of Ld. CIT (A). He also submitted that this issue is now covered in favour of the assessee by the Tribunal decision rendered in the case of Nirma Ltd. v. DCIT and DCIT v. Nirma Industries Ltd. in I.T.A. No. 3725, 3946 and 3947/Ahd/2008 dated 03.07.2009, copy of which is available on pages 120-181 of the paper book. In particular, our attention was drawn to para 26 of this tribunal decision which is available on page 131 of the paper book.
6.2.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal decision cited by the Ld. A.R. We find that in those cases also, the ground raised before the Tribunal was regarding direction of Ld. CIT(A) confirming the disallowance of Rs.4072.70 lacs being interest relating to deep discount bonds series A & B and it was held by the Tribunal in that case that the assessee is entitled to proportionate claim of expenditure towards discount/interest of DDBs on actual basis in the year of appeal and the A.O. was directed to correctly work out the same and to allow deduction to the extent it relates to the year under appeal. In the present case, Ld. CIT (A) has decided this issue by following this very order of the tribunal cited before us and he has granted relief to the assessee with similar directions to the A.O. as has been given by the Tribunal in the case of Nirma Ltd. (supra). Hence, we do not find any reason to take a contrary view in the present case and since the order of Ld. CIT (A) is in line with the tribunal order in the case of Nirma Ltd., we decline to interfere in the order of Ld. CIT(A) on this issue. This ground is also rejected.
6.3 In the result, the appeal of the revenue is dismissed.
7. In the combined result, the appeal of the assessee in I.T.A. No. 386/Ahd/2010 is allowed and the appeal of the revenue in I.T.A. No. 658/Ahd/2010 is dismissed.
