TMI Blog2016 (3) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... the telecast, but does not limit the telecast and is not essential for the operations of the assessee’s business and therefore cannot be termed as the tool of the trade. Thus, it fails the functional test adopted by the assessing officer. Therefore, we hold that the asset which consists of ‘Copyrighted Films and Programmes’ is an ‘Intangible Asset’ eligible for depreciation at the rate of 25%. - Decided against revenue Invoking Explanation 3 to Section 43(1) - order of the CIT u/s 263 adopting the WDV of the film software Library in the hands of the previous owner as the ‘Actual cost of the asset to the Assessee’ and allowed depreciation on that value only - Held that:- There is no dispute that the asset ‘Film Software Library’ was used by its previous owner i.e., Shri Ramoji rao (HUF) for the purpose of its business and also by the assessee herein before the transfer of the same to the assessee exclusively. Therefore, undisputedly the first condition is satisfied. CIT(A) has not referred to or verified the circumstances leading to the transfer of the asset to come to the conclusion but has granted relief on the ground that the A.O. has not recorded his satisfaction before i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. CIT(A) has erred in holding that the requirements of Section 43(1) are not met/or provisions are erroneously invoked. 2. Brief facts of the case are that the assessee is a company engaged in publishing of newspapers and also satellite television broad-casting. For the relevant assessment year i.e., A.Y. 2007-08, it filed its return of income on 31.10.2007 admitting income of ₹ 27,10,85,700 under normal provisions and book profit of ₹ 104,33,52,595 under the provisions of Section 115JB of the I.T. Act, 1961. Initially, the return was processed under section 143(1) of the I.T. Act on 19.03.2009. Subsequently, the assessment proceedings were completed under section 143(3) of the I.T. Act computing the taxable income at ₹ 163,38,26,535. 3. Thereafter, the Ld. CIT, under section 263 of the I.T. Act, held the assessment order to be erroneous and prejudicial to the interests of the Revenue. Therefore, the original assessment order passed under section 143(3) was set aside by the Commissioner vide his order dated 28.03.2012 under section 263 of the I.T. Act with a direction to re-do the assessment as per the directions given by him. The assessee challenged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user of the same, particularly, when the WDV of the asset is only ₹ 160,96,47,766 in the hands of Sri Ramoji Rao (HUF) as on 31.03.2006 for the A.Y. 2006-07. He held that in view of the above facts, the only possible conclusion that can be drawn is that the transfer of film software library was done at an enhanced cost of ₹ 775 crores from its group concern with the sole purpose of claiming higher depreciation at ₹ 96,87,50,000 by M/s. Ushodaya Enterprises Limited, thereby resulting in the reduction of income tax liability. Thus, holding that the conditions set-forth as per Explanation-3 to Section 43(1) of the I.T. Act, are satisfied, he has adopted the value of TV software business/film library in the hands of the assessee company at ₹ 160,96,47,766 (WDV in the hands of Sri Ramoji Rao (HUF) as on 31.03.2006). He accordingly, re-worked out the claim of depreciation of the assessee company. 5. Further, during the assessment proceedings, the A.O. also issued a detailed show cause notice dated 23.07.2012 requiring the assessee to produce the details of content rights with respect to films and programmes library which is transferred through negatives, discs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision proceedings under section 263, the Ld. CIT dropped the proposal to treat the film library as plant after being satisfied with the assessee s explanation and therefore, the A.O. did not have the mandate to deal with the issue once again. He, therefore, directed the A.O. to treat the film library as an intangible asset and allow depreciation on the acquisition cost @ 25%. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us. 7. The Ld. D.R, argued that the CIT under section 263 of the I.T. Act had directed the A.O. to re-do the assessment which includes the issue of the nature of the asset and the rate of depreciation allowable on such asset. Therefore, according to him, the Ld. CIT(A) has erroneously held that the A.O. has travelled beyond the mandate of the CIT and has further erred in directing the A.O. to adopt the rate of depreciation allowable on intangible assets i.e., @ 25%. Further, he relied upon the order of the A.O to argue that the asset was in the nature of a tool of the trade and therefore was rightly treated as plant and machinery and depreciation was rightly allowed at 15%. 8. The Ld. Counsel for the assessee, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibrary , he set aside the assessment order with a direction to the A.O. to re-do the assessment. Now, it is the contention of the Ld. Counsel for the assessee that the CIT was satisfied with assessee s contentions and therefore, has not discussed about the rate of depreciation in the subsequent paras of his order and therefore, has not set aside the assessment order to that extent and A.O. has travelled beyond his mandate in reconsidering the issue. But it is difficult to accept this contention of the assessee for the reason that the CIT has set aside the entire assessment and not only to the extent of valuation of the Film Software Library . We are of the opinion that if the CIT was satisfied with assessee s contention on the nature of the asset and the rate of depreciation allowable thereon, he might not have said so in detail in the revision order, but would have indicated so by setting aside the assessment order only to the extent he did not agree with the assessee. The Hon ble Gujarat High Court in the case of Addl CIT vs. Mukur Corporation reported in (1978) 111 ITR 312 (Guj) has held that there is nothing in section 263(1) of the Act to justify that before passing the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for intangible assets that are not specifically dealt with in any other accounting standard. Though, the said accounting standard is not binding on us unless it is notified by the Central Government u/s 145(2) of the Act, we may get some guidance on this issue from para 4 of the said accounting standard which reads as under : 4. Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software), legal documentation (in the case of a license or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under Ind AS 16, Property, Plant and Equipment, or as an intangible asset under this Standard, an entity uses judgment to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate computer software for a computer-controlled machine tool that cannot operate computer software for a computercontrolled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts acquired at more than the market value and can be applied only to those assets which are part of WDV block. He observed that if the assets are found to be part of WDV block of assets of the seller, the said Explanation cannot be invoked. He observed that even in respect of assets which are in the block of assets, the A.O. has to be satisfied that the main purpose of transfer of assets is to claim higher depreciation. He observed that in assessee s case, the A.O. has roped in Explanation-3 to Section 43(1), though all the films in the film library were not in the WDV basket of films. He observed that the films in the WDV basket are mostly other language films and not Telugu films, the cost of which was written off as revenue expenditure many years ago and that this is a patent mistake committed by the A.O. Further, he also examined as to whether the A.O. has recorded the requisite satisfaction before invoking the provisions of Explanation- 3 to Section 43(1) of the Act. He observed that the assessment record does not contain any such satisfaction and further that even if the A.O. had recorded reasons, those reasons would not have stood the test of scrutiny in as much as the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility by claiming higher depreciation on the same and reducing its tax liability. He has drawn our attention to page-22 of the assessment order to show that the WDV of the Film Software Library as on 31st March, 2006 for the A.Y. 2006-07 in the books of Shri Ramoji Rao (HUF) is only ₹ 160,96,47,766 whereas this library was valued by M/s. Ernst Young at ₹ 775 crores and based on such valuation, the film software library was transferred to the assessee at such an exorbitant rate and the depreciation was claimed @ 25% on such an enhanced value for taking undue benefit. Thus, according to him, this transaction attracts the provisions of Explanation-3 to Section 43(1) of the Income Tax Act. He submitted that though the issue of the applicability of Explanation-3 to Section 43(1) was very much part of the assessment order as well as the order of the Ld. CIT(A), the Revenue has inadvertently omitted to raise such ground at the time of filing of Form No.36 and prayed that the additional ground of appeal on this issue raised by the Revenue be admitted and adjudicated by this Tribunal. 14. The Ld. Counsel for the assessee, on the other hand, supported the order of the Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Explanation-3 to section 43(1), while the Ld. CIT(A) has held that the said provision is not applicable to the assessee s case. Therefore, we find that all the necessary facts are already part of the record. Therefore, we admit the additional ground of appeal and proceed to adjudicate the same. 16. For proper appreciation of the legal position and for the purpose of clarity and ready reference, the relevant provision is reproduced hereunder: 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the facts of the case before us, there is no dispute that the asset Film Software Library was used by its previous owner i.e., Shri Ramoji rao (HUF) for the purpose of its business and also by the assessee herein before the transfer of the same to the assessee exclusively. Therefore, undisputedly the first condition is satisfied. 18. It is now to be seen whether the second condition is satisfied for invoking the provisions of Explanation-3 to Section 43(1) of the I.T. Act ? For this purpose, it is necessary to go into the chronology of events. Brief facts relating to this issue are as under. 19. Shri Ramoji Rao (HUF) owns two business units viz., M/s. Ushakiran Movies ( UKM ) and M/s. Ushakiran Television ( UKTV ) and is also the chairman of the assessee herein and he and his family members are its shareholders. Thus, all the above parties are related to each other. All the assets and liabilities of UKM and UKTV are taken over by the assessee herein at book value as per the books of account of Shri Ramoji Rao (HUF) except the film software library which was taken over at ₹ 775 crores. In the TV telecast business circles, it is understood that content rights of fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desired to acquire the said asset from Shri Ramoji Rao (HUF) and for the said purpose, the valuation of the Film software Library was referred to M/s. Ernst Young, a reputed company having expertise in valuation of assets. Ernst Young recommended the value of the software library in the range of ₹ 746.41 crores to ₹ 814.27 crores taking into consideration the rights in all the films and programmes in the software library proposed for sale at that time by Shri Ramoji Rao (HUF). By virtue of acquiring the asset, the assessee had acquired the entire Film Software Library consisting of 47.95 lakh minutes of TV programmes and 3778 films with satellite rights for a period ranging from 5 to 50 years and for some films for a perpetual period. 19.2. M/s. Black Stone had agreed to invest a sum of ₹ 1217 crores for acquiring 26% stake in the assessee company by entering into necessary agreements, subject to the approval from Foreign Investment Promotion Board ( FIPB ), Government of India, as is required during that period. In anticipation of the said agreement going through, the assessee company had also obtained a loan from Standard Chartered Bank and acquired the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establishes the fact that the market value of the software library was at arms length. It was also submitted that Shri Ramoji Rao (HUF) had shown the entire sale value of software library in its return of income as income from business, but the department had assessed the sale consideration under the Head Long Term Capital Gain and Shri Ramoji Rao (HUF) had paid the taxes as demanded, though he appealed against the treatment of business income as income from capital gains before ITAT. Thus, it was submitted that there is no intention to reduce the tax liability particularly, as the outside investor invested a sum of ₹ 2604 crores in the assessee company by taking into account the value of various assets including software library. 20. The Ld. CIT, however, was not convinced with the assessee s submissions above and held that the A.O. has not considered the valuation report given by M/s. Ernst Young P. Ltd., and that it is also not available on the assessment record of the A.O. He further observed that there was a change of incumbent during the assessment proceedings and therefore, the successor A.O. did not examine the applicability of provisions of section 43(1) rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of the transfer was to reduce the tax liability. He further held that even if the A.O. had recorded reasons, those reasons would not have stood the test of scrutiny inasmuch as he erroneously believed the film library to comprise of only those films which formed part of WDV basket of films, completely overlooking the fact that the library consisted of 1596 telugu films also which were not part of WDV basket. He observed that the A.O. has applied the provision on the premise that the main purpose of transfer was reduction of tax liability while the main purpose was to sell equity of the company which materialized long after the acquisition of the film library by the assessee. Therefore, according to him, the provisions of Explanation-3 to Section 43(1) of the I.T. Act are not attracted. He accordingly deleted the disallowance made by the A.O. against which the Revenue is now in appeal before us. 22. The Ld. D.R. relied upon the orders of the A.O. and submitted that the assessee and all the other entities being related parties, the A.O. has rightly brought out that the intention for the transfer of the asset at an enhanced rate was to reduce the tax liability of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne is in no way connected to assessee company or to any of the business units of Shri Ramoji Rao (HUF). He submitted that M/s. Black Stone had entered into the agreement with the assessee and pending such agreement, the assessee company had obtained a loan from Standard Chartered Bank and acquired the Film Software Library from Shri Ramoji Rao (HUF) to facilitate the investment in the assessee company by M/s. Black Stone. He has drawn our attention to pages 214 of the paper book filed by the assessee to demonstrate that the proposed investor had stipulated that the software library should be owned by the assessee. He submitted that final approval was not granted by FIPB, due to which, the agreement could not be acted upon. Since the assessee had already taken a loan from Standard Chartered Bank, the assessee had to approach another private equity firm for investment in assessee firm i.e., M/s. Equator Trading Enterprise Pvt. Limited. He has submitted that the valuation of the film library has been carried out by a reputed company, M/s. Ernst Young and submitted that the said report had taken into consideration all the relevant facts and factors before arriving at the value. He su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated parties to claim higher depreciation or to reduce the tax liability. In support of his contention, he placed reliance on the following decisions. (i) Ashwin Vanaspati Industries vs. CIT (2002) 255 ITR 26 (Guj.) (HC) (ii) Chitra Publicity Co. P. Ltd., vs. ACIT (2010) 4 ITR 738 (Ahd.) (T.M.) (iii) CIT vs. Sekar Offset Press (1995) 214 ITR 516 (iv) Kungendi Industrial Works P. Ltd., vs. CIT 57 ITR 540 (A.P.) (v) CIT vs. Poulose Mathen P. Ltd., (1999) 236 ITR 416. 24. Having regard to the rival contentions and the material available on record, we find that the assessee had argued that the A.O. has not recorded a finding in the assessment order or before seeking the approval of JCIT that the intention of the assessee was to reduce the tax liability and CIT(A) has accepted this contention and thus, according to him, the disallowance and the consequential additions are not sustainable. According to him, the A.O. has to record his satisfaction in writing before proceeding further and in support of this contention, he placed reliance upon the judgment of Hon ble Gujarat High Court in the case of Aswin Vanaspati (cited supra). Before applying the said decision, we pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. Now, the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the IT authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But, if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to the IT authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual original cost was: See Pindi Kashmir Transport Co. Ltd. v. CIT (1954) 26 ITR 595 (Lah-Pak) : TC29R.253 and Kalooram Govindram vs. CIT (1965) 57 ITR 335 (SC) : TC29R.254. In this view of the matter it is open to the IT authorities to determine and to the assessee to show whether the goodwill of the business is or is not included in the consideration or the price paid for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial considerations. The capital cost has no doubt been inflated in the hands of the assessee to enable it to claim higher depreciation, etc. 12. We find that the term actual cost came up for consideration before the Supreme Court in the case of Guzdar Kajora C041 Mines Ltd. vs. CIT 1972 CTR (SC) 231; (1972) 85 ITR 599. It was observed that the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the I.T. authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purpose, it is open to the I.T. authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. These observations in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the main provision of the law can operate. They can by no stretch be treated as exhaustive or to otherwise limit the wide scope which the provision of law may embrace. Rather the incorporation of some of these Explanations by itself shows that the Legislature envisaged interference in given circumstances in the amount of purported actual cost. 16. We are further of opinion that the Tribunal was not justified in restricting the operation of the actuality of cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In these cases, the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost. This will be independent of the provisions contained in the IT Act. The provisions of this Act have not been introduced for this purpose. They have rather a special objective and is directed towards nullifying the malpractices, sometimes indulged in some quarters, of disproportionately inflating capital cost in order to earn high depreciation, and pass on in collusion substantial amounts to sister concerns or closely connected parties to whom those amounts may have little or negligible bearing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, was a subsidiary of another private limited company. The object of formation of the assesseecompany was to take over some oil and ginning mills, factories and land belonging to and used in its business by the present company. These assets were taken over by the assessee-company at a cost of ₹ 13,50,000. Their written down value for the parent company was only ₹ 2,21,412 while their original purchase cost to the parent company was ₹ 5,52,475. The assessee paid for the assets by issuing fully paid up shares of that value. The ITO applied the proviso to s. 10(5)(a) and, with the previous approval of the IAC, he fixed the actual cost of the assets to the assessee at their written down value in the books of the transferor plus the balancing charge arising under s. 10(2)(vii). The Tribunal rejected the contention of the assessee that the assets had been transferred to the assessee by the parent company after they had been got valued by valuers, because the material on the basis of which the value had been fixed by the valuers for the assets in question had been withheld by the witness who was examined on behalf of the valuers before the ITO and the nonproducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts at the time of dissolution was in accordance with what had been said in the case of A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) : TC 2R.453 wherein the Court approved the observation of this Court in the case of Md. Ussain vs. Abdul Gaffoor AIR 1950 Mad 758. Counsel submitted that the formation of the company was only due to the insistence of the lenders that the business of the company, namely, the running of the cotton mill should be by an incorporated company before the financial institutions could lend money to it. However, there is no material on record to substantiate that claim. 7. The fact that the assessee had adopted the market value at the time of dissolution even when such value is much higher than the written down value, would afford sufficient basis for invoking Expln. 3 to s. 43(1) when the surrounding circumstances indicate that the purpose of the transfer of the assets directly or indirectly to the assessee where the assets had suffered depreciation prior to such transfer is such as to indicate that the main purpose of transfer was to enable the assessee to gain higher depreciation by taking a higher figure as it s cost at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by assessee in the transaction to find out the true intention. These sections provide circumstances in which department can impute its judgment to the assessee s decision. The relevant provisions are to be found in section 40A(2), Explanation 3 to sec. 43(1), section 92C etc. But before these provisions can be invoked, legislature has required the AO to acquire necessary satisfaction in this regard which obviously has to be acquired judiciously and not arbitrarily. The AO should demonstrate that his satisfaction was rational and based on relevant factors. Explanation 3 to section 43(1) reads 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. 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 AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in determining the purchase price. The thresh hold condition is that the transfer should be with intent to get the benefit of enhanced value of asset. Therefore, before invoking Explanation 3, the AO is required to record his satisfaction that entire transaction was undertaken with a view to reduce the tax liability by claiming higher depreciation. Before we embark upon for detailed discussion regarding actual cost to the assessee in terms of Explanation 3, we first decide some objections of both the sides. The assessee s objection is that AO has not recorded his requisite satisfaction for invoking Explanation 3: we are not in agreement with ld. Sr. Counsel s argument because, as rightly pointed out by ld. DR, a holistic view is to be taken. The entire discussion by AO proceeds on the premise that assessee was trying to claim higher depreciation on enhanced cost. The next objection of ld. Sr. Counsel is that AO did not determine the actual cost as required in Explanation 3. We are not in agreement with this argument also of ld. Sr. Counsel because, as rightly demonstrated by ld. DR, AO had made all out efforts to find out the actual cost. We do not find any substance in this plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before date of acquisition. It was further held that merely because document in the nature of contract of purchase is entered into, denoting certain price, the same would not conclusively establish the correctness of the claim made by an assessee if the A.O. is of the opinion that the transaction is by way of subterfuge or device only to avoid tax which the assessee is otherwise liable to pay or that the transaction is an illusionary or colourable or that the assessee has acted fraudulently. It was further emphasized that the Explanation-3 does not require determination of market value at the hands of the A.O. but speaks of determination of actual cost by the A.O. with the prior approval of the JCIT having regard to all the circumstances of the case. 31.1. In the case of Chitra Publicity Co. P. Ltd., vs. ACIT reported in (2010) 4 ITR 738 (Ahd.) (T.M.) it was held that the A.O. under Explanation-3 to Section 43(1) has to determine the actual cost which can only mean arms length value or real value or worth of assets transferred and it is, therefore, not possible to totally reject the concept of market value of assets transferred as not relevant for determining the actual cost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces leading to the transfer of the asset in the assessee s submissions thereto. The A.O. has recorded his satisfaction in the assessment order that because the transaction is between related parties and the asset has been transferred at an exorbitant price, the provisions of Section 43(1) are attracted. In the entire assessment order, there is no whisper of the circumstances leading to the transfer of the asset i.e., the agreements with the third parties for investment of equity and the pre-condition set by them for such investment. 32.1. Similar circumstance existed in the assessee s own case for the subsequent A.Y. 2008-09 regarding the non-competing fee and this Tribunal has observed that the factual position has not been properly appreciated by the authorities below and has set aside the issue for reconsideration. In the case before us, the Ld. CIT(A) also has not referred to or verified the circumstances leading to the transfer of the asset to come to the conclusion that the above provisions are not applicable to the case on hand but has granted relief on the ground that the A.O. has not recorded his satisfaction before invoking the above provisions. Though, the Ld. D.R. h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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