TMI Blog2020 (10) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of capital asset or a intangible asset by a firm to a company as are result of succession of the firm by a company is a recognized mode of transfer. Admittedly, the assessee and the erstwhile partnership firm are different entities and there was transfer of intangible assets by the partnership firm to the assessee for a valuable consideration that is by way of allotment of shares. Thus, the aforesaid transaction is squarely covered under Section 47(xiii) of the Act and therefore, the assessee under Section 32(1) was entitled for depreciation with reference to actual cost incurred by it with reference to intangible assets. Accordingly, the second substantial question of law is answered in favour of the assessee and against revenue. Whether 5th proviso to Section 32(1) of the Act restricts the total depreciation which can be claimed in case of succession etc. to the depreciation which would have been allowable had there been no succession? - 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that unt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost incurred by it? (iii) Whether on the facts and in the circumstances of the case, the Honourable ITAT was right in law in upholding the action of the Learned Respondent in invoking 5th proviso to Section 32(1) of the IT Act in the assessment years subsequent to the assessment year in which the succession took place? (iv) Whether on the facts and in the circumstances of the case, the Honourable ITAT was right in law in upholding the action of the Learned Commissioner Appeals in invoking Explanation 3 to section 43(1)? 2. Facts leading to filing of this appeal in nut shell are that the assessee is a Private Limited Company engaged in the business of manufacturing, dealing and exporting of incense sticks and allied products. The assessee succeeded to, in the business of partnership firm viz., Padmini Products with effect from 01.02.2005. Before the firm was converted into private limited company, the partnership firm had revalued all its intangible assets and arrived at a value of ₹ 65,26,40,150/- using standard valuation methods. All assets and liabilities of Padmini Products i.e., the erstwhile partnership firm, including the aforesaid intangible as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 20.02.2013 dismissed the appeal. The assessee thereupon approached the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short) by filing an appeal. The Tribunal by an order dated 10.01.2013 inter alia held that transaction itself is not a transfer but is akin to succession and therefore, in view of sub-Clause (ii) to 5th proviso to Section 32(1), depreciation is not permissible. It was further held that Section 43(6) of the Act, defines the expression written down value and provides for both the acquisition of assets during the relevant Previous year and acquisition of assets before the relevant Previous year and both the clauses mention actual cost to the assessee. Therefore, the claim for depreciation can be examined even in the Assessment Years subsequent to the Assessment Year, in which succession has taken place. It was also held that Commissioner of Income Tax (Appeals) has not invoked the provisions of Explanation 3 to Section 43(1) of the Act but has only justified the action of the Assessing Officer in questioning the claim of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferred, the depreciation has to be apportioned between the transferor and transferee and therefore, the question of depreciation does not arise. It is further submitted that Section 43(6) of the Act defines the expression written down value and provides for acquisition of assets. However, in the instant case, is neither a case of acquisition nor transfer of intangible assets and notional valuation of intangible assets by the assessee is only a device to claim depreciation on non existent asset. It is further submitted that entire valuation has been done without any statutory provision and all the authorities have rightly found that the assessee is entitled to depreciation on intangible assets only with reference to written down value of transferred assets in the hands of predecessor firm. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of relevant provisions viz., Section 32(1), 5th proviso to Section 32(1) of the Act, Explanation 3 to Section 43(1) and Section 47(xiii) of the Act, which read as under: 32. (1) In respect of depreciation of- (i) buildin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. 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 reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Deputy Commissioner, determine having regard to all the circumstances of the case. 47. Transactions not regarded as transfer Nothing contained in section 45 shall apply to the following transfers:- (xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there was transfer of intangible assets by the partnership firm to the assessee for a valuable consideration that is by way of allotment of shares. Thus, the aforesaid transaction is squarely covered under Section 47(xiii) of the Act and therefore, the assessee under Section 32(1) of the Act was entitled for depreciation with reference to actual cost incurred by it with reference to intangible assets. Accordingly, the second substantial question of law is answered in favour of the assessee and against revenue. 8. It is noteworthy to mention here that 5th proviso to Section 32(1) of the Act restricts the total depreciation which can be claimed in case of succession etc. to the depreciation which would have been allowable had there been no succession. The 5th proviso (earlier 4th proviso) to Section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum to Finance Bill, 1996, which reads as under: In cases of succession in business and amalgamation of companies, the predecessor of the business and successor the amalgamating company and amalgamated company as the case may be, are entitled to depreciation all ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
