TMI Blog2013 (1) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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. 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. Valuation of intangible asset i.e. the trademark acquired - held that: - A.O. did not fulfill the pre requirement of invoking Exp.(3) to Section 43(1) & 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 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 deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et. The depreciation has been claimed by the assessee company. One unit of the assessee company along with "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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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