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DCIT, Circle-16 (2) , Hyderabad Versus M/s. Ushodaya Enterprises

2016 (3) TMI 820 - ITAT HYDERABAD

Disallowance of depreciation - Addition towards Film Software Library as the same is not intangible asset and it is to be treated as Plant & Machinery - depreciation @ 15% or 25% - Held that:- an intangible asset can also be treated as plant, provided, it becomes an integral part of the tools used by the entity to carry on its business. In the case before us, the films and TV programmes are essential for the assessee company to carry on its business of telecasting of films and other programmes, .....

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the ‘Film Software Library’. The said library only assists in determining the content of 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 aga .....

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e 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 invoking the above provisions. Though, the Ld. D.R. has not been able to rebut the factual submissions of the assessee on the circumstances leading to the transfer of the asset, we find that the .....

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ve circumstances are not proved or are found to be not the reason/purpose for transfer of the asset, only then shall the A.O. invoke the above provision. But in such circumstances, we direct that if the A.O. is not satisfied with the valuation done by Ernst & Young, then after giving a speaking order for not accepting the same, the A.O. shall revalue the asset in accordance with the provisions of law and shall not adopt the WDV of the asset in the hands of the previous owner.- Decided in favour .....

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ght to have considered that value of Software Film Library WDV of the asset is only ₹ 160,96,47,766 in the hands of Sri Ch Ramoji Rao (HUF), instead of valuing at an exorbitant price of ₹ 775,00,00,000. 3. The Ld. CIT(A) ought to have confirmed the addition towards the Film Software Library as the same is not intangible asset and it is to be treated as Plant & Machinery and therefore a depreciation @ 15% has to be allowed instead of 25%. 4. Any other ground(s) that may be urged a .....

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7 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 .....

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2) and 142(1) of the Act and examined the return of income of the assessee. He observed that the Ld. CIT has sought to revise the assessment order on the grounds that (i) excess depreciation has been claimed on Film Software Library which was purchased by the assessee from Sri Ramoji Rao (HUF) and (ii) the depreciation on Film Software Library has been allowed at 25% as allowable on an intangible asset, though the asset was to be treated as plant and machinery and depreciation was to be allowed .....

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by M/s. Ushodaya Enterprises Limited and that the resultant revenue generated by M/s. Ushodaya Enterprises Limited from the sale of advertising spots and telecast of films and programmes is shared with M/s. Ushakiran Television and M/s. Ushakiran Movies. Therefore, he observed that it is M/s. Ushodaya Enterprises Limited which has been commercially exploiting the Film Software Library since F.Y. 1994-95 where production was exclusively done by M/s. Ushakiran Television and M/s. Ushakiran Movies .....

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family members, it is difficult to understand the purpose of M/s. Ushodaya Enterprises Limited buying the Film Software Library at an exorbitant price of ₹ 775 crores, from Sri Ramoji Rao (HUF), when it is the exclusive 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 .....

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60,96,47,766 (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 or tapes and as to why these assets should not be treated as tangible assets .....

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he A.Y. 2006-07, the department itself had allowed depreciation on software library @ 25% , considering it as an intangible asset in the hands of Sri Ramoji Rao (HUF) while brushing aside the claim for deduction under Rule 9A/9B as are applicable for rights of films, TV programmes etc., produced by it. It was submitted that the assessee has acquired rights over the library from the HUF and hence, it is not justified in stating that the copyrights are not intangible assets and are eligible for de .....

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e assessee company s business, CDs and other storage media are used to store the films and other TV programmes, without which the assessee company would not be in a position to telecast anything and therefore held that this is not just an asset but is a vital tool of trade for the assessee company and hence, falls within the definition of Plant and Machinery and is accordingly eligible for depreciation @ 15%. He accordingly, re-worked the depreciation and computed the taxable income. 6. Aggrieve .....

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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, .....

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, claimed it to be an intangible asset, while the A.O. treated it as Plant and Machinery . It is the case of the assessee that the assessment order, passed under section 143(3) was originally passed allowing the depreciation on this asset @ 25% as is allowable on an intangible asset while the asst order passed by the AO u/s 143(3) read with section 263 of the Act is only to give effect to the order of the CIT under section 263 of the Act and therefore the AO has to limit himself to the direction .....

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thereon ? The rate of depreciation allowable on an asset would depend on the nature of the asset. 10. To adjudicate this issue, we need to go into the facts of the case once again. We find that the assessment was initially completed under section 143(3) of the Act on 31.12.2009 allowing the depreciation on the film library @ 25% treating the same as an intangible asset. The CIT assumed jurisdiction under section 263 of the Act both on the ground of the valuation of the asset as well as on the gr .....

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the depreciation on software library @ 25% was claimed by the assessee and also allowed by the AO in the asst proceedings u/s143(3) of the Act. Thereafter, the Ld. CIT did not discuss anything further about the nature of the asset and the rate of depreciation allowable thereon in the revision order but after discussing at length on the correctness of the valuation of Film Software Library , he set aside the assessment order with a direction to the A.O. to re-do the assessment. Now, it is the con .....

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tion 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 th .....

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n ble Madras High Court in the case of CIT Vs Seshasayee Paper and Boards Ltd, reported in (2000) 242 ITR 490 (Mad). In the case before us, the fact that the CIT has set aside the whole of the assessment and directed the A.O. to re-do the assessment makes it clear that he was not satisfied with assessee s contentions even on the nature of the asset and the rate of depreciation allowable thereon. Therefore, we do not agree with the finding of the CIT(A) on this issue. 11. Even with regard to the .....

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while the reasoning given by the AO for treating the films as Plant and Machinery is that the asset Film Software Library is mostly contained in CDs and other storage media and that the assessee would not be in a position to telecast anything without the Film Software Library i.e., the films and TV programmes therein and therefore, they are the vital tools of trade for the assessee company and hence Plant and Machinery. We are not able to agree with this finding of the AO. As observed earlier, .....

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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. .....

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nnot 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 operating system of a computer. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset. 11.1. From a reading of the above accounting standard and also the judgments relied upon by the AO, we find that an intangible asset can also be treated as plant, provided, it becomes .....

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es or films on its channels. By purchasing the library, the assessee is gaining exclusive right over the asset but this library cannot be held as a tool for carrying on of its business as assessee can carry on its business even without the Film Software Library . The said library only assists in determining the content of 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, .....

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AO invoked the provisions of Sec.43(1) and explanation 3 thereto and adopted 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. On appeal, the Ld CIT(A) proceeded to consider whether the provisions of Explanation-3 to Section 43(1) of the I.T. Act are attracted in the case of the assessee. He observed that the Explanation-3 to Section 43(1) is intended to counteract the attempts of .....

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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 Explanati .....

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the A.O. did not record his satisfaction to invoke Explanation-3 to Section 43(1), the revaluation of the film library by the A.O. is not sustainable. He also observed that the A.O. has to determine the market value of the asset and not merely adopt the WDV of an asset in the hands of the previous owner. He observed that the A.O. has erred in assuming that the films in the film library bought by the assessee were all part of WDV of films and therefore, substitution of cost by the A.O. also is no .....

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nternational renowned expert valuer, as compared to the valuation of the A.O. having no method or erroneous method, the former has to be accepted as more appropriate and reliable. He therefore, held that the value adopted by the assessee for purchase of film library i.e., ₹ 775 crores is to be treated as the actual cost of entire film library to the assessee and depreciation thereon @ 25% is to be allowed. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us. 13. Th .....

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revious year, the assessee has purchased the film library from Shri Ramoji Rao (HUF) at an exorbitant cost in order to reduce its income tax liability 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 &am .....

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s 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. CIT(A) and extensively argued in favour of the assessee and drew our attention to the relevant material on record to demonstrate that the transfer of the as .....

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to record his satisfaction that the valuation of the asset is done at a higher rate in order to claim higher depreciation: i. Ashwin Vanaspati Industries vs CIT reported in 255 ITR 26 ii. Chitra Publicity Company (P) Ltd., vs Assisstant CIT reported in (2010) 4 ITR(T) 738 (Ahmedabad) (T.M.) iii. CIT VS Sekar Offset Press reported in 214 ITR 516 14.1. He submitted that as rightly brought out by the Ld. CIT(A), there is no such satisfaction recorded by the A.O. which is part of the assessment reco .....

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and reasonable method and that in assessee s case, the A.O. has failed to carry out this exercise. According to him, the WDV of the asset as adopted by the A.O. to be the actual cost to the assessee is not sustainable when the film software library consisted also of films not included in the WDV basket of films. He therefore, urged that the order of the Ld. CIT(A) be confirmed as regards the valuation of the asset at ₹ 775 crores. The Ld. Counsel also filed detailed written submissions and .....

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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 .....

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ed for scientific research related to that business and a deduction has to be made under 1[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 wa .....

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ncing 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 re .....

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quired by the assessee: and 2. The A.O. is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of the liability to income tax (by claiming depreciation with reference to enhanced cost). 17. From 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 .....

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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 films consists of satellite rights of feature film .....

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o A.Y. 2002-03 and thereafter, from A.Y. 2006-07, depreciation was claimed by them on the software library treating it as an intangible asset. Once again from the A.Y. 2006-07, Shri Ramoji Rao (HUF), claimed deduction under Rule 9A or 9B on the film and TV programmes produced during the relevant previous year which was not accepted by the A.O. and the depreciation was allowed on the software library. In the case of films produced, once deduction is claimed under Rule 9A/9B of I.T. Rules, there w .....

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n full under Rule 9A/9B of the I.T. Act and therefore, though their value in the books was NIL , they possessed commercial value and have to be given a value when they are transferred. 19.1. During the relevant previous year, in order to expand its business and also withstand the competition in the market, the assessee company approached a private equity capital company, M/s. Black Stone FP capital partner, (Mauritius) V Limited, a foreign company, for investment in the equity shares of the asse .....

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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 an .....

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a loan from Standard Chartered Bank and acquired the software library from Shri Ramoji Rao (HUF) during the F.Ys. 2006- 07 and the purpose was only to facilitate the investment by M/s. Black Stone in assessee company. However, M/s. Black Stone could not invest in assessee company as approval from the FIPB could not be obtained before the due date and the deal did not materialize/was not executed. Therefore, the assessee company had approached another investor, a domestic company i.e., M/s Equato .....

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, M/s Equator Trading Enterprise Pvt. Limited, invested a sum of ₹ 2604 crores in assessee company for 39% of share capital and desired that the assessee company should be split into four companies and the software library was accordingly transferred to one of the companies at the value acquired from Shri Ramoji Rao (HUF). M/s. Equator Trading Enterprise Pvt. Limited had also paid non-compete fees of ₹ 670 crores subsequently to Ramoji Rao (HUF). 19.3. During the assessment proceedin .....

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nce the valuation of the software library for the purpose of claiming enhanced depreciation in the books of account of the assessee due to the above facts of investment of equity capital by unrelated parties and further that Shri Ramoji Rao (HUF) is also assessed to tax by the same A.O. and he was aware of the book value of the software library and accepted the sale consideration of software library in the assessment of Shri Ramoji Rao (HUF) which establishes the fact that the market value of th .....

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e 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 .....

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e acquired by the assessee during the previous year but the A.O. did not verify the details of films purchased by the assessee company from others in the market. The Ld. CIT observed that there is no evidence on record that the A.O. examined the applicability of Section 43(1) read with Explanation-3 of I.T. Act. He further observed that the valuation report of Ernst & Young contains several contradictions and the A.O. ought to have examined the contents of the valuation report closely. Thus, .....

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is difficult to understand the purpose of the assessee to buy the same film software library at an exorbitant price of ₹ 775 crores while the WDV of the asset is only ₹ 160,96,47,766 in the hands of Shri Ramoji Rao (HUF) as on 31.03.2006. He held that the only conclusion possible at this juncture is that the transfer of Film Software Library was done at an enhanced cost from its group concern with the sole purpose to claim higher depreciation by M/s. Ushakiran Enterprises Limited the .....

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which led him to his satisfaction that the main purpose 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 a .....

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ders 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 assessee by claiming higher depreciation. He has referred to the decisions relied upon by the A.O. to justify invoking of the Explanation-3 to Section 43(1) and also of making disallowance. The Ld. D.R. has also filed written submissions in support of the cont .....

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s not the requirement to record his satisfaction in a particular manner or reduce it into writing. He further relied upon the approval granted by the Addl. CIT dated 05.02.2013 to the A.O. to invoke the provisions of section 43(1) of the Act and finalise the proceedings accordingly. The copy of the approval is placed at page No.1 of the paper book filed by him. He also relied on the judgments referred to by the A.O. in the assessment order and the following other decisions : (i) Gujdar Kajoria C .....

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., Hyderabad vs. ACIT, Circle-16(2), Hyderabad ITA.No.26/H/2011 dated 22.10.2014 (Hyd.) (Tribu.) 23. The Ld. Counsel for the assessee, while reiterating the above submissions made before the authorities below as to the nature of the transaction, submitted that it was only to attract capital investment to expand its business, that the assessee had approached a private investor i.e., M/s. Black Stone who agreed to invest a sum of ₹ 1217 crores for acquiring 26% stake in the assessee company .....

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estment 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 inves .....

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the fact that assessee had taken loan from Standard Chartered Bank on the basis of the said agreement are all matter of record and not in dispute. He submitted that it is also not disputed that M/s. Equator Trading Enterprise Pvt. Limited is also a un-related party to the assessee and that this company has accepted the valuation of the Film Software Library by M/s. Ernst & Young. Thus, according to him, the value of the Film Software Library is at arms length and therefore, the A.O., having .....

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is to be accepted that the A.O. was satisfied that the transfer of the asset had taken place in order to enable the assessee to claim higher depreciation,, the A.O. is required to value the asset with the approval of the JCIT after taking into consideration of all the relevant circumstances. He has submitted that the A.O. has failed to carry out this exercise, but instead has taken the WDV of the asset in the hands of the previous owner as the value without taking into consideration the fact th .....

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Ramoji Rao (HUF) is in appeal before the ITAT against the above. He submitted that the fact that Shri Ramoji Rao (HUF) has offered the income in his hands also goes to prove that there was no intention on the part of any of the related 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 (20 .....

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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 proceed to consider the facts of the case as to whether the facts on record would sa .....

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agreement was acquisition of the Film Software Library and TV Programmes Library from M/s. Ushakiran Television, M/s. Ushakiran Movies and Shri Ramoji Rao (HUF). It is also not in dispute that the agreement could not be completed due to non-receipt of the approval from FIPB within the due date and it is for the purpose of the execution of the agreement that the assessee had got the Film Software Library valued by Ernst & Young. Thus, it is clear that the valuation of the asset was done with .....

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or that the higher valuation was not for claiming higher depreciation as the transaction was between related parties. However, the fact that the third parties have accepted the valuation goes to prove that the valuation is not entirely unreliable. The only ground on which the A.O. seems to have entertained the doubt is because both the seller as well as the purchaser are related parties. 25. Let us now examine the judicial precedents relied upon by both the parties. With regard to the citation .....

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. 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 o .....

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e paid for the acquisition of the asset. In other words, even if it is not expressly mentioned that goodwill has been sold, it can be shown and ascertained by evidence whether the same has been purchased or not by the assessee. The expression "goodwill" has been considered and explained by this Court in S.C. Cambatta & Co. P. Ltd. vs. CEPT (1961) 41 ITR 500 (SC), and nothing more need be said about it. The principles stated by us are by no means exhaustive and are mainly illustrati .....

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-3 to Section 43(1) of the Act has held as under : 11. We have heard the parties and given our utmost consideration to all the circumstances. As is clear from the narration of facts, in the books of Bhagwati Glass, the total expenditure incurred by it in the execution of the contract jobs was ₹ 3,11,954. As against that the assessee has paid ₹ 7,70,000 to it for execution of those jobs. This, on the face of it, appears to be a very high payment, specially when the Tribunal has noted .....

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ensued to it and the entire profit was wiped off against the large brought forward loss. At the same time, the assessee has claimed to be entitled to depreciation, etc., on the capital value of those works at ₹ 7,70,000. The I.T. authorities were, therefore, right in observing that there was considerable element of collusion in the entire affair which could not be treated as the result of normal commercial considerations. The capital cost has no doubt been inflated in the hands of the ass .....

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r 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 men .....

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ation of ₹ 6 lakhs paid by the assessee. Those assets included machinery, plants, stores, buildings, etc. The I.T. authorities found that some of the directors and shareholders of the assessee and the vendor-company were the same and connected, and there were certain inflations and deflations of the written down values of the assets. No provision had been made for goodwill of the business. The ITO, therefore, allocated part of ₹ 6 lakhs to goodwill. The value of the depreciable asset .....

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14. Similarly, the Calcutta High Court in Jogta Coal Co. Ltd. vs. CIT (1965) 55 ITR 89, observed that if the circumstances showed than an assessee had arranged to put a fictitious price on his assets in a contract or conveyance, it was open to the I.T. authorities to refuse to accept that price, go behind the contract or conveyance and ascertain what the original cost was. The Lahore High Court (Pakistan) has also in the case of Pindi Kashmir Transport Co. Ltd. (1954) 26 ITR 595 (Lah- Pak), obse .....

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he 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 conside .....

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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 on the incidence of tax. This is what appears to have happened in the present case. In our opinion, when the Legislature has prefixed the word "actual" to the word "cost", it was to lay emphasis on the reality and genuineness thereof and exclude collusive, inflated, deflated or fictitious .....

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of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act as defined under s. 43(6). Sec. 43(1) with Explanations thereof supersedes the general rule of law governing partnership, its assets and dissolution etc. The definition of actual cost contained in s. 43(1) read with Explanations thereof affords a mechanism by which reduce t .....

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he assets on dissolution of partnership firms and transfer of its assets. 16. Both the contesting parties, assessee as well as the Revenue, placed reliance on the decision of the Bombay High Court in Ginners & Pressers P. Ltd. vs. CIT 1978 CTR (Bom) 235 : (1978) 113 ITR 616 (Bom) : TC 29R.714, and the Tribunal said so in its impugned order. That was a case where s. 10(5)(a) of the 1922 Act corresponding to Expln. 3 to s. 43(1) of the present Act came up for discussion. The facts of that case .....

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heir 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 .....

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er the proviso to s. 10(5)(a) has been properly applied and the second question is, whether the Tribunal is justified in rejecting the valuation and drawing an adverse inference against the assessee. As far as the first question is concerned the Court found that the condition for attracting the proviso to s. 10(5)(a) was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee-company. On the second question the Court found .....

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ing charge arising under s. 10(2)(vii) of the Act. The Court further observed : "It cannot be disputed that this method, if adopted, would clearly give the actual cost of the assets transferred to the transferorcompany as on the date of transfer, the determination would be irrational or unreasonable. If the ITO adopted this method of determining the actual cost of the transferred assets with the approval of the IAC, it will be difficult to say that the method adopted was unreasonable or irr .....

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n ble Madras High Court has held as under : 6. The learned counsel for the assessee submitted that the value of the machineries which the assessee had adopted when it took over the assets 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 f .....

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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 of such transfer. Here the firm was dissolved within about 13 months of its formation. The two partners besides the asse .....

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The Coordinate Bench of Delhi Tribunal in the case of Bilt Power Ltd., New Delhi vs. Addl. CIT, Range- 2, New Delhi (cited supra), has held as under : 36. At the outset, we may observe that AO has not considered the entire scheme as demerger under the Income-tax Act as contemplated u/s 2(19AA) of the Income-tax Act. Therefore, we do not consider it necessary to examine the observations of AO, and ld. CIT(A) and the submissions of both the parties on this count as it would only be of academic int .....

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me was reduction of tax liability by claiming higher depreciation in respect of those assets which were earlier used by transferor company by escalating the cost of the assets. Explanation 3 has been incorporated in sec. 43(1) to counter the attempts of assessee to claim higher depreciation by purporting to purchase assets at more than their true or real cost. It is fundamental principle that department cannot question the wisdom of assessee in carrying out its business operations. Department ca .....

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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 &qu .....

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lity 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 AO may, with the previous approval of the [Joint Commissioner],determine having regard to all the circumstances of the case. " Thus, the basic ingredients of Explanation 3 are as under: - i) an asset was already in use in a business in the hands of one persons; ii) that person transfers the asset to assessee; iii) the A.O. is satisfied that the mai .....

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ious cost. As already pointed out that the AO is required to judiciously acquire the necessary satisfaction regarding the object of transfer. It is not to be understood that every case wherever assessee acquires a used asset from other person then the object would only be reduction of tax liability. There may be genuine cases also where the asset has appreciated in value since its original purchase and consequently, the market value on the date of the sale is greater than written down value in t .....

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ITR 335, the assets were allotted among the members at a valuation arrived at in a reasonable manner, there being no allegation of inflated cost by reason of fraud, collusion, subterfuge, devise or false transaction made with an ulterior purpose, the department was held to be precluded from going behind the agreement between the purchaser and the seller 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 .....

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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 .....

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ting in the business directly or indirectly for a period of five years from the date of agreement, has held as under : . . . . . .Therefore, considering the totality of the facts and circumstances we are of the view that as the impact of acquisition of 39% of equity shares by M/s Equator Trading Enterprises Pvt. Ltd. has not at all been examined by AO at the time of assessment proceeding or by the learned CIT(A) while disposing of assessee's appeal and further as the additional evidences pro .....

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n as well as the ratio laid down in the decisions referred to hereinabove and any other decision brought to his notice. It is needless to mention that AO must afford a fair opportunity of hearing to assessee in the matter before deciding the issue. This ground is considered to be allowed for statistical purposes. 31. With regard to the decisions relied upon by the Ld. Counsel for the assessee, we find that in the case of Ashwin Vanaspati Industries vs. CIT reported in (2002) 255 ITR 26 (Guj.) (H .....

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use 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 d .....

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not possible to totally reject the concept of market value of assets transferred as not relevant for determining the actual cost. 31.2. In the case of CIT vs. Sekar Offset Press reported in (1995) 214 ITR 516 it was held that the Explanation-3 to Section 43(1) of the I.T. Act, would be attracted only in cases where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purpose of business and the Income Tax Officer is satisfied that the mai .....

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e WDV in the hands of the previous owner and the reasons advanced for the change-over did not justify the increase in value of the assets. 31.4. With respect to the case of CIT vs. Poulose & Mathen P. Ltd., reported in 236 ITR 416, it was submitted that the A.O. has relied upon this decision for invoking the provisions of section 43(1). However, he has submitted that the facts of the case before us are distinguishable from the said case before the Hon ble Madras High Court. Thus, according t .....

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on the enhanced cost. We find that though the A.O. has extensively reproduced the findings of the Ld. CIT under section 263, his show cause notice to the assessee and also the assessee s submissions to the A.O, there is no mention of the applicability of Section 43(1) and the Explanation-3 thereto, to the facts of assessee s case in the show cause notice dated 04.12.2012, but the show cause notice is only referring to the inaccuracies or inconsistencies in the valuer s report and there is no me .....

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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 co .....

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