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TMI Blog2013 (1) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 along with "brands/ trademarks" demerged with NL and NL started claiming depreciation on this inflated value of the intangible assets. The assessee was as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iring 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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