TMI Blog2022 (6) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... PER PRASHANT MAHARISHI, AM: 01. These are the three appeals filed by the learned Deputy Commissioner Of Income Tax 3 (3) (1) Mumbai (The Learned AO) against the order of the learned Commissioner Of Income Tax (Appeals) 8, Mumbai [ The Learned CIT [A]] for assessment year 2013 14, 2014 15 and 2016 17. 02. The learned AO has raised following grounds of appeal in ITA No. 3632/Mum/2018 for assessment year 2013 14 against the order of the learned CIT A dated 23/3/2018 1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs. 4,44,07,662/- claimed by the assessee in respect of Iron Ore rights, without appreciating the fact that the shareholders of RRS Minerals i.e., Mr. Bharat Bussa and Mrs. Rita Bussa who got 15.75 crores each as per the agreement dated 15.10.2009 were not having any right and the so called right for purchase of iron ore was with the company i.e. RRS and not with the shareholder and the assessee has never bought the business rights from RRS on which assessee is claiming depreciation? 2. Whether on the facts and in the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AO on 31/3/2016 wherein he disallowed depreciation amounting to Rs 4,44,07,662/ and computed the total income of the assessee at ₹ 132,394,070/ . 05. Against this order, assessee preferred an appeal before the learned CIT A, who by order dated 23/3/2018, deleted disallowance of depreciation of Rs 4,44,07,662/ . Aggrieved by that order, learned AO is in appeal before us. 06. Facts related to the disallowance of depreciation as culled out from assessment order is as Under:- 6. Depreciation on Iron Ore Rights 6.1 in the assessment proceedings, it is noticed that the assessee company has claimed depreciation of ₹ 65,940,884 on Iron Ore rights Under block of intangible asset . In the assessment proceedings, the assessee has been asked to furnish the details of the same and its explanation for allowability of the claim of depreciation on such rights. 6.2 In response, the assessee company vide its AR s letter dated 8/2/2016, 11/3/2016 and 21/3/2016 submitted the details and the explanation, as per which, the assessee company has taken over the company RRS minerals resources private limited which had exclusive Iron ore rights in respect of Iron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the company and not with the shareholder. iii. A latin saying nemo det quod non habit which basically mean you can t give what you do not have. Mr. Bharat Busa and Mrs. Rita Bussa were never having any intangible right in their individual capacity which can be transferred to the assessee. In fact, the mining rights were with MSGM and only purchase right were acquired by the assessee by paying amounts to MSGM. iv. Clearly, assessee has never bought the business a right from RRS on which assessee is claiming depreciation. As per normal accounting entry passed in the books of accounts of the assessee company, the investment in shares of RRS would have been cancelled after the High Court order of merger of RRS with the assessee company and consequently, no asset would be remaining on which assessee could claim depreciation. v. There is a clear difference between the amount paid to RRS and the shareholders of RRS. The amount paid to company is for the purchase of long-term intangible right to purchase Iron Ore at a predetermined rate from MSG are an amount paid to shareholder of RRS is to purchase the company. vi. Assessee submission regarding capitalization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 820. The appellant incurred further costs of Rs. 153,225,133 and capitalized total costs of Rs. 468,912,953 in respect of Iron Ore in FY 2010-11 as under S. No Description of Costs Amount (Rs.) 1. Cost of acquisition of RRS including payment of stamp duty 315,787,820/- Less: Face Value of Equity shares cancelled as per the Order passed by Hon'ble Bombay High Court permitting merger of RRS into the appellant company w.e.f. 15/10/2009 i.e., the day when it bought RRS from its promoters. 100,000 Net cost of acquisition of RRS (A) 315,687,820 3. Other costs including interest paid on funds borrowed for acquisition of RRS till the commencement of Iron Ore business. (B) 4. Total Costs capitalized as intangible Assets being in the nature of depreciable Commercial rights (A.Y. 2011-12) (A+B) 153,225,133 3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit that price paid for acquisition of RRS was essentially a price for acquisition of these rights as the said company does not have any other assets worth considering. We are submitting the balance sheet of RRS as at 31/03/2009 to show that the price has only been paid for acquisition of RRS and not for any other asset. Further, having allowed depreciation in earlier 2 years, the AO was not justified in disallowing the depreciation in this respect in this year. We most humbly pray your honour to kindly allow the assessee's claim. Decision 3.2.3 This ground pertains to disallowance of depreciation of Rs. 4,44,07,662/ claimed by the appellant on Iron Ore rights as Intangible assets. The Assessing officer has discussed this issue at para 6 of his order. During the assessment proceedings, the assessing officer observed that the assessee company has claimed depreciation on the Iron ore rights under the Block Intangible Assets'. On being asked about the allowability of the claim of the same, the assessee company contended before the assessing officer that it had taken over the company RRS Mineral Resources Pvt. Ltd. (RRS) which had exclusive Iron Ore rights in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as per normal accounting entry passed in books of account of the assessee company, the investment in the shares of RRS should have been cancelled after the order of Hon'ble Bombay High Court is received and consequently, no asset would be remaining on which assessee could claim depreciation. Thus, the AO has disallowed the depreciation in respect of the amount of Rs. 31.50 Crores paid to the owners of RRS to buy the company plus expenditures incurred on stamp duty and transfer charges. 3.2.5 In the course of appellate proceedings, Authorized representative( AR) of the appellant company submitted that the appellant company has bought the company RRS only for acquiring the valuable intangible business rights held by the said company RRS. The AR placed photo copies of all agreements on records and Submitted that the intent for buying the company RRS is quite evident from the covenants specified clause (i) and clause (j) of the agreement dated 14/10/2009 which are reproduced as under:- (i): In the premises M/s. RRS Minerals Resources Pvt. Ltd (the company) is holding buying and selling rights in respect of Iron Ore/ Fines extracted out of mines known as Garco M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89 Crores have been accepted in earlier assessments and the depreciation has been denied for the first time in respect of the part of the WDV in AY 2013- 14 by breaking up the opening WDV as on 01/04/2012 in the proportions of costs so capitalized. 3.2.9 I have perused the submissions filed by the appellant company and the assessment order. It is noticed that the dispute is only in respect of the payment of Rs. 31.50 Crores made by the appellant company to the shareholders for buying the company and associated costs of stamp duty and transfer of Rs. 687,820. As regards other payments as well as the costs of borrowing obtained by the appellant for entire amount of investments, the AO has allowed depreciation and has recognized existence of intangible assets. It is further noticed that in earlier year - AY 2012- 13, scrutiny assessment has been made and the Intangible rights have been recognized as such and full amount of depreciation as claimed by the appellant has been allowed. Same was the case for AY 2011-12, where the assessment was although completed under section 143(1) of the Income Tax Act, 1961. 3.2.10 The AO while making the disallowance was primarily of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. v. CIT 1976 (105) ITR 642, the Supreme Court has observed that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place An overall view of the above said authorities shows that the very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time It is well-settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sell of iron Ore extracted from the mines at Goa. The appellant has also exercised its dominion over these rights and has been using these rights and procuring Iron Ore by exercising its exclusive rights to buy the Iron Ore extracted from the Garco Mines, Goa and is exporting the same. 3.2.14 In the matter of Surana Pharmaceuticals Pvt. Ltd V. CIT 243 ITR 218 (Karnataka), Hon'ble Karnataka High Court while relying on the decision of Hon'ble Apex Court in the case of Mysore Mineral Vs CIT held that where the appellant has bought a property through acquisition of shares without having registered a sale deed in favour of the company, the company is entitled to depreciation in respect of the property so purchased. Hon'ble High Court appreciated that the ownership of the property was vested by acquiring shares in a society. According to section 2(47)(vi) of the Income Tax Act, 1961, transfer in relation to the capital asset includes any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons, or by way of any agreement or in any other manner whatsoever). This has the effect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares of the individual members of the AOP are not determinate. Thus, the impugned order is in breach of natural justice being a non-speaking order. It is true that Principle of res judicata does not apply in matters pertaining to tax. However, when there is no change in facts or law, Hon'ble Courts have consistently held that a decision taken in an earlier year shall be binding for a subsequent year unless it is established that the decision taken earlier was per incuriam. Applying the same principle to the facts of this appellant, it is seen that the Appellant has claimed depreciation in respect of such mining Iron Ore rights for the first time in AY 2011-12 and furnished all relevant details of its claim in its return of income including the tax audit report. The appellant then claimed depreciation in respect of such rights for AY 2012-13 and its claim has been allowed after conducting scrutiny assessment. The AO has not pointed out that the orders passed in earlier years are per incuriam or could be distinguished for valid reasons. 3.2.16 In the matter of CIT V. Smifs Securities Limited [2012] 24 taxmann.com 222(SC), the Supreme Court has held that depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done due diligence as regards the use of loan and whether the goods or rights being bought with bank's money were worth it. Obviously, the factum of payment is not in doubt. AO too has not doubted it. He has only raised technical objections. 3.2.18 It is also found that around 20% of shareholding of the appellant company is held by Hindalco Industries, a prestigious Birla Group company. The business intentions of the appellant company cannot be suspected. Denying depreciation on the main cost of the business on a technical ground, though that is a misplaced decision alright, is being unnecessarily harsh, particularly when the factum of payment and its sources, being 100% bank loan, are not in doubt even by the present AO. 3.2.19 In view of the facts and discussion in the above paragraphs, I am of the considered view that the AO has denied depreciation by taking a far-fetched view that the payment of Rs. 31.50 Crores is merely to buy shares of the company RRS and thus, no assets eligible for depreciation have been created, which is not a proper view on the basis of facts and the evidence on record as discussed above. Therefore, the AO is directed to delete the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of shares holding it to be intangible assets. 011. The learned authorised representative vehemently supported the order of the learned CIT A. He first referred to the paper book filed by the assessee containing 165 pages. He first referred to page number 163 165 of the paper book wherein the complete payment made by the assessee for acquisition of iron ore rights of ₹ 468,912,953 is made. It was stated that a sum of ₹ 315,000,000/ is paid to the shareholders of RRS mineral resources private limited in terms of the agreement dated 14/10/2009 for acquiring the shares of RRS minerals Ltd. On that stamp duty of ₹ 787,820/ was also paid and therefore total payment is ₹ 315,787,820/ which is incurred by the assessee for purchase of shares through which assessee has acquired commercial right over the iron ore extraction rights. He submitted that assessee has purchased shares of RRS Minerals and Resources Pvt Ltd and that company was having intangible assets in the form of Purchase rights of Iron ore. Therefore, assessee in substances did not acquire shares but intangible assets in form of purchase rights of Iron ore. He stated that the dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee but has been subsequently reopened by issue of notice u/s 147 and disallowance of depreciation was made. He therefore submitted that assessee has acquired mining rights passed by purchasing the right to purchase the iron ore extracted at an agreed price and further thereafter acquired the shares of the company, which was having those rights. He therefore submitted that by these complete acts, what assessee has acquired is an intangible asset on which depreciation u/s 32 (1) (ii) of the act is allowed. He extensively referred to the order of the learned CIT A and relied on the same. He also extensively quoted the decisions relied upon by the learned CIT A. He further referred to the decision of coordinate bench in case of Mehta equities limited ITA number 570/M/2015 for assessment year 2010 11 dated 21/9/2016 referring to paragraph number 18 stating that where an assets has already entered into a block of assets and is brought forward as opening written down value, there cannot be any question for not allowing the depreciation on the opening amount of WDV of the asset, so long as it continues to be used for the business of the assessee. He further referred to the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d selling right in respect of iron ore from Garco Mines acquired by it as per contract agreement dated 9/8/2006. Assessee, purchaser, acquired those shares of RRS Minerals Resources Private Limited at a consideration of ₹ 315,000,000. Thus, the shares of RRS Mineral Resources Pvt Ltd were acquired by assessee from shareholders of that company at Rs 31.50 crores. Property acquired by assessee is shares in RRS Mineral Resources Pvt ltd whose underlying values is derived from the right of purchase with RRS Mineral Resources P Ltd. 015. With effect from 15/10/2009 [ effective date] , RRS minerals resources private limited got amalgamated with the assessee company by order dated 15 October 2010 [ date of order] of Honourable Bombay High Court in Companies petition number 372 of 2010. 016. On 24/11/2009, (prior to the date of order of the honourable High Court but after the effective date) an agreement was entered into between various Members of Gharse family being members of an AOP and RRS minerals resources private limited, (now the assessee) wherein ₹ 11 crore were paid as nonrefundable advance for purchase of Iron Ore. the agreement is also known as agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned even in assessment year 2011 12 also. Therefore, it cannot be said that the assessing officer has allowed depreciation to the assessee for that year. Thus for AY 2011-12 also, ld AO did not examine whether cost of shares of a pvt ltd company of Rs 31.58 crores, included in intangible assets of Purchase rights of iron ore is eligible for depreciation at the rate of 25 % as intangible assets. 022. On careful examination of the assessment order for assessment year 2011 12, the depreciation schedule has narration of Intangible Assets Iron Ore Mining Rights. There is no evidence that the assessing officer examined that in block of intangible assets, assessee has included shares also. 023. Therefore, LD AO has not formed any view on allowability of depreciation on shares. Therefore, there cannot be any question of violation to principles of consistency by LD AO. In fact the shares cannot be classified as intangible assets u/s 32 (1) (ii) of the act. Thus, LD CIT (A) for allowing claim of assessee on principles of consistency is devoid of any merits. 024. The learned CIT A has also accepted the plea of the assessee with respect to the consistency as in asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer depreciation under section, 32 could be claimed only by the owner and as the sale deed had not been registered, the claim of the assessee was rejected holding that assessee is not an owner . The honourable High Court relying on the decision of the honourable Supreme Court held that assessee is owner of the asset though sale deed is not registered in its favour. We also find that this decision also do not deal with the fact that whether the shares purchased by a company can be classified as intangible asset or not. Therefore, reliance on that decision does not help the case of the assessee. 028. The issue before us is not the satisfaction of user test or the fate of the asset, which already entered into a block of assets. The issue before us is simple that whether the shares purchased by the assessee can be held to be at depreciable intangible asset or not. None of the judicial precedents cited before us up or the case of the assessee. 029. In the result, we reverse order of learned CIT A and restore the order of the learned assessing officer disallowing depreciation of Rs 4,44,07,662/- on shares purchased by the assessee holding that it is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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