TMI Blog2020 (3) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... n the predecessor and successor in the ratio of the number of days for which the assets were used by them. In the present case the predecessor is the firm M/s Veeky Industries. The trade mark PIK standing in its books had a cost of ₹ 100/- It had a revaluation figure of ₹ 5.52 crores and the amount of revaluation was transferred to reserve account. As per the provisions of Law, the firm cannot claim depreciation on any revaluation figure. The depreciation has to be claimed on the cost incurred by it. By no stretch of imagination ₹ 5.52 crores less ₹ 100/- was the cost incurred by the assessee firm. Hence the assessee firm was not entitled to depreciation on the revaluation figure of ₹ 5.52 crores. Now the firm i.e. the predecessor has been succeeded by assessee company on 01-02- 1999 and the company has claimed depreciation on the value of trade mark in its books at ₹ 5.52 crores. If the succession had not taken place, there would not have been any depreciation allowance on the revaluation figure. In other words, the revaluation of ₹ 5.52 crores (less ₹ 100/-) cannot be taken into account for granting depreciation to the succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Revenue : Shri Somnath Wajale (D.R.) ORDER PER SHAMIM YAHYA, A.M. These are appeals by the assessee against the orders of learned CIT(Appeals) pertaining to the relevant assessment years. 2. In the case of ITA No. 2470/Mum/2017, there is delay of 1336 days. The reasonable cause for the delay has been attributed to the fact that the company is a sick company and to save time and cost of litigation it was advised to pursue a rectification petition u/s 154 of the Act for assessment year 2010-11 based on the order of ITAT if it was in its favour. However, since the final order from the Tribunal did not come and the statutory period of rectification of assessment order as per provision of section 154 expired on 31-03-2017 it was decided by the assessee company to file appeals for the concerned assessment years. 3. On consideration of the reasonable cause of delay, we condone the said delay. 4. Since the issues are common and connected, the appeals were heard together. These are being consolidated and hence disposed of together by this common order. 5. We note that for assessment years 1999-2000 to 2009-10 (except assessment year 2007- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax before substituting the value of brand acquired by the appellant while applying Explanation- 3 to section 43(1). 2. The Ld AO failed to appreciate that without obtaining the approval of the JCIT, he could not have substituted the value of brand as per Explanation-3 to section 43(1) as the mandatory condition of approval not being complied with the order passed by the AO substituting the cost is bad in law. 4. After considering the said additional grounds as well as the original grounds, the Tribunal set aside the issue relating to the allowability of the depreciation on the revalued cost of the trademark to the file of the CIT (A). Para 7 of the said Tribunal s order (supra) is relevant in this regard. In the additional grounds, extracted above, it is evident that the assessee questioned the applicability of Explanation-3 to section 43(1) of the Act. It is the claim of the assessee that the Assessing Officer has not obtained the approval of the JCIT, which is the statutory requirement specified in the said Explanation-3 the consequence of the same is that the assessee s claim of depreciation should be allowed without any substitution on the cost. In the set aside proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstituted by the AO without having taken the approval of the JCIT. On this issue, Ld Representatives of both the parties in the litigation submitted that this issue requires remanding of the matter to the file of the CIT (A) for second time for fresh adjudication by passing a speaking order. 8. Further, Ld Counsel for the assessee submitted that the Assessing Officer merely rejected the valuation report dated 17.11.1998 furnished by the assessee without referring the asset to the DVO for his valuation, if any, on the trademark. Assessing Officer is not an expert on this issue and therefore, the rejection of the valuation report furnished by the assessee is not correct. For this proposition, Ld Counsel for the assessee relied on the decision of the ITAT, Ahmedabad in the case of Unimed Technologies Ltd vs. DCIT [2000] 73 ITD 150 (Ahd.) and the judgment of the Hon ble Gujarat High Court in the case of Ashwin Vanaspati Industries vs. CIT [2002] 255 ITR 26 (Guj). These decisions suggest for accepting the valuation report furnished by the assessee and depreciation should be granted on the enhanced cost of the asset. 9. Further, Ld Counsel for the assessee brought our attention to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iginal grounds as well as additional grounds are allowed for statistical purposes. 11. In the result, appeal of the assessee for the AY 1999-2000 is allowed for statistical purposes. II I.T.A. No.7231/M/2012 (Assessment Year: 2000-2001) I.T.A. No.7232/M/2012Assessment Year: 2001-2002) I.T.A. No.7233/M/2012 (Assessment Year: 2002-2003) I.T.A. No.7234/M/2012 (Assessment Year: 2003-2004) I.T.A. No.7235/M/2012 (Assessment Year: 2004-2005) I.T.A. No.7236/M/2012 (Assessment Year: 2005-2006) I.T.A. No.4385/M/2013 (Assessment Year: 2008-2009) I.T.A. No.4384/M/2013 (Assessment Year: 2006-2007) I.T.A. No.4386/M/2013(Assessment Year: 2009-2010) 12. These 9 appeals are filed by the assessee and the common issue is raised in all the appeals relates to the quantification of allowable depreciation u/s 32 of the 6 Act. The same is dependent on the WDV of the asset, therefore, Block of Asset. If the value of the asset varies in the year of acquisition and in amount, the consequence shall be there in all the subsequent years. It is an admitted fact that the issue raised in the allowability of depreciation is always with reference to the WDV of the trademark at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Jt.C.I.T. for invocation of Explanation 3 to Section 43(1) of the Act. However, at no point of time, it has been conceded that approval has not b een taken from the Jt.CI.T. if at all the Explanation 3 to Section 43(1) has been invoked to disallow the depreciation on enhanced value of trade mark. iv. On the issue of applicability of judgment of Hon'ble Guj'arat High Court, in case of Ashw/n Vanaspati Industries (Supra), it has been distinguished by the CIT(A) as well as AO during earlier appellate proceedings or remand report. Thus, it does not have universal application. v. There is no requirement of the law that enhanced value of an asset during business re-organisation can be altered only by bringing another valuation report. The AO has elaborately examined and discussed the reasons for not accepting the valuation done by the appellant company in the order of A.Y.2001-02. vi The 5th Proviso to section 32(1)(ii) is clearly applicable in the instant case. This provision includes clause (xiii) of section 47 i.e. conversion of a Partnership firm into a company, which is the issue in instant appeal. vii. The 5th Proviso to section 32(1)(ii) has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only to the extent as if no transfer h taken place, ft is absolutely clear that under 5th Proviso to section 32(1 )(ii), the appellant company is not eligible for depreciation on enhanced value of trade mark. Once the claim of depreciation is restricted under the 5th Proviso to section 32(1)(ii) of the Act, then, valuation as per Explanation to Section 43(1) becomes irrelevant It is therefore, held that AO's have justifiably disallowed the claim of depreciation on revalued trade marks in the Asstt.year 1999-2000 to 2006-0 and 2008-09 and 2009-10 and thus the disallowances are confirmed and the appeals filed by the appellant company on this ground are dismissed. Similar orders by learned CIT(Appeals) for other assessment years are also in appeal before us. 8. Against the above order the assessee has filed appeals before us. The submissions of the learned counsel of the assessee in this regard are as under : Proposition and case laws : 1) Circular No. 762 dated 18th February, 1998 (1998) 230 ITR (St) 26 explaining the amendment specifies in paragraph 23.2 as under (Refer page 109 of Paper Book): 23.2 The third proviso to sub-section (I) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 2B to section 43(6) provides that the written down value of the assets in the hands of resulting company would be the same as that would have been in the hands of the demerged company. In absence of similar provisions in case of conversion of a firm into a company u/s. 47(xiii), the firm can revalue its assets and the company would be entitled to depreciation on revalued figures. iii. Explanation 12 to section 43(1) provides that where a capital asset is acquired under a scheme of corporatization of recognized stock exchange, he actual cost shall be demed to be the amount which would have been regarded as actual cost had there been no such corporatization. In absence of a similar provision in case of conversion u/s. 47(xiii), the value at which the asset is taken over would be the actual cost. 5) Thus, if the 5th Proviso to Section 32(1) provided for determination of actual cost then there was no need of Explanation 7,7A, 2B and 12 to section 43(1). 6) Hence, if the A.O. disputes the actual cost being the revalued amount of the Asset then the only option available with the A.O. is to dispute the value by invoking Explanation 3 to Section 43(1). 7)) Thus, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .O. 4) Unimed Technologies Ltd. vs. Dy. CIT (2000) 73 ITD 150 (Ahd.)(Trib.). Valuation report submitted by the assessee must be accepted. 5) Ashwin Vanaspati Ind. Vs. CIT (2002) 255 ITR 26 (Guj.)(HC) (37) Pg. No. 93-99 Valuation was on the basis of approval valuer - Entitled depreciation on enhanced value. D) Case Laws. 1) In following cases of succession of firm by a company as per Section 47(xiii), depreciation has been allowed on revalued amount: a) DCIT v Suyash Laboratories Ltd (2016) 65 taxmann.com 217(Mum)(Trib) follow Gujrat High Court 255 ITR 26 Pg. No. 100-105 b) Modular Infotech (P.) Ltd. v. DCIT (2010) 131 TTJ (Pune)(Trib) 172 Pg. No. 106-112. c) Chitra Publicity Co (P) Ltd v ACIT (2010) 127 TTJ 1 (Ahd)(Trib) (TM) (Pg. No.113-144 (120) Para 6.1 d) Ashwin Vanaspati Industries v. CIT [2002] 255 ITR 26 (GUJ)(HC). 2) In the following cases, it has been held that depreciation is allowable on revalued figures : a) CIT v. Mira Exim Ltd. (2013) 359 ITR 70 (Del) - there is transfer on amalgamation. Hence, assesse entitled to depreciation on asset acquired under amalgamation, though depreciation was not allowable to amalgamating company. b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 3 to section 43(1) was applied. As the hon'ble Commissioner of Income Tax (Appeals) has held that AO was not justified in disallowing depreciation applying Explanation 3 to section 43(1), this decision has not relevance to the facts of the appellant's case. d) In Jogta Coal Co. Ltd. v. CIT (1965) 55 ITR 89 (Cal) the assets transferred were inflated. It was in this circumstances the hon'ble Court held that Income Tax Authorities could look into the value. In the present case, there is no allegation that the trademark does not exist or its value is inflated. Hence, this decision does not apply to the facts of the case. e) The decision in CIT v. The Mazagaon Dock Ltd. (1938) 6 ITR 124 (Bom) was in the context of entirely different facts. In the said case, The Mazagaon Dock Ltd. was assessed on the income of the predecessor as Successor. While assessing the income of the predecessor, it was held that depreciation had to be valued on the value in the hands of the predecessor. As the facts of this case are totally different, the said case does not apply to the present case. f) The facts of Kamlapat Moti Lal (1939) 7 ITR 374 (All) was also in context of income of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its valuation report dated 17-11-1998 relevant for assessment year 1999-2000. The said amount was credited to the investment reserve account in the books of account of the said firm on 31-01-1999. The firm was then succeeded by this assessee company on 01-02-1999. The assessee company claimed depreciation u/s 32 of the Act on the said revalued trade mark worth ₹ 5.52 crores. The AO had denied the claim of depreciation on this figure. The matter had proceeded twice to the ITAT. In the latest remand by the ITAT, the matter was remanded for the following purposes : 1) Approval of JCIT which was required under Explanation 3 to section 43(1) of the Act. 2) Can the AO reject the valuation report without any further report from the DVO and the applicability of the judgment of Hon ble Gujarat High Court in the case of Ashwin Vanaspati Inds. (supra). 3) Applicability of the 5th proviso to section 32 of the Act. 13. The learned CIT(Appeals) has given a finding that the Revenue has not been able to produce the copy of approval from Joint CIT for invocation of Explanation 3 to section 43(1) of the Act. 14. In our considered opinion, once there is a categorical findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Law, the firm cannot claim depreciation on any revaluation figure. The depreciation has to be claimed on the cost incurred by it. By no stretch of imagination ₹ 5.52 crores less ₹ 100/- was the cost incurred by the assessee firm. Hence the assessee firm was not entitled to depreciation on the revaluation figure of ₹ 5.52 crores. Now the firm i.e. the predecessor has been succeeded by assessee company on 01-02- 1999 and the company has claimed depreciation on the value of trade mark in its books at ₹ 5.52 crores. Now the above said 5th proviso provides that depreciation in such case is to be computed at the prescribed rates as if the succession had not taken place. This means that the rate and amount of depreciation which was applicable for the predecessor be the amount of depreciation allowable on the said item. That it also means that the total amount of depreciation cannot exceed the depreciation which the assessee firm would be entitled as if the succession had not taken place. If the succession had not taken place, there would not have been any depreciation allowance on the revaluation figure. In other words, the revaluation of ₹ 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company the depreciation is to be provided as if the succession has not taken place. As the depreciation is to be allowed in the same manner as it would have been allowed in the hands of the predecessor firm. Since the predecessor firm was not entitled to depreciation on the amount of trade mark presented by revaluation reserve, depreciation to that extent is also not available in the hands of the assessee company also. The scheme of the Act in this regard does not require any valuation report to be obtained by the Revenue. As a matter of fact, learned counsel of the assessee in his submissions in item No. B above is mentioning that Thus for 5th proviso to be applicable both the predecessor and the successor company should be capable/eligible for claiming depreciation. In the facts of the present case, the predecessor company could not have claimed depreciation on the revalued amount. Hence 5th proviso to section 32(1) cannot apply. We find that the above is a distortion of the proviso. No where the proviso mentions that the predecessor has always to be a company. It specifically covers transfer under section 47(xiii). This section deals with succession of a firm by a com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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