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TMI Blog2024 (7) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case, the action of initiating revisionary proceedings is without jurisdiction and is not permissible either in law or on facts. 2. The Id. PCIT has grossly erred in law and on facts in assuming jurisdiction u/s. 263 of the Act on the erroneous ground that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue. 3. The ld. PCIT grossly erred in not appreciating that in order to invoke S.263, two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue. In the present case, ld. AO has passed the reasoned assessment order after analyzing all details and therefore there was no error in the impugned assessment order so as to justify action w/s. 263 of the Act. Under the circumstances, the very assumption of power u/s. 263 of the Act is unjustified and bad in law and therefore, order u/s. 263 of the Act deserves to be quashed. 4. The subject order u/s. 263 passed by Id. PCIT holding the impugned assessment order as erroneous is illegal and bad in law particularly when there is no requirement of carrying out the valuation of self-gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the returned income. 3. On examination of case records, it is noticed that the company claimed depreciation of Rs 83,87,835/- @25% on Rs 3,64,42,319/- in respect of intangible assets acquired during the year. It is also seen that the A.O. had vide notice u/s 142(1) dated 13.12.2019 asked for the need of intangible assets for the business and to provide the valuation report of the intangible asset carried out by professional valuer for F.Y. 2017-18 or earlier years, and in case of non-availability of valuation report, to submit third party valuation report of intangible asset for the F.Y. 2017- 18.The A.O. again vide notice u/s 142(1) dated 12.03.2021 sought third party valuation report by professional valuer but the same was not submitted nor any corroborative documents/evidence which could be relied upon for determining cost of the intangible assets. Despite issuing various notices by the A.O., it was contested that the company is following AS-26 to recognize the intangible assets and the accounting standards does not refer to valuation anywhere, though para 6.11 of AS- 26 speaks about Fair Market Value and Arms length Transaction. 4. Further, from the replies submitted, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abad" 5. Referring to the same, ld. Counsel for the assessee pointed out that, as per ld. PCIT, the assessment order was noted to be erroneous on account of the claim of depreciation on intangible assets, amounting to Rs. 83,87,835/- having been allowed to the assessee without making proper inquiry on the issue. Referring to paragraph No.3 of the show-cause notice, ld. Counsel for the assessee pointed out that, as per the ld. PCIT, the inadequacy of inquiry by the Assessing Officer and the incorrect allowance of claim of deprecation by the Assessing Officer was revealed from the case records on account of the fact that despite repeated insistence by the Assessing Officer to file a valuation report of the intangible assets, no valuation report had been submitted by the assessee, nor any corroborative evidences or documents filed which could be relied upon for evidencing the cost of intangible assets. That, on the contrary, the assessee had contented that it was following AS-26 for valuing the intangible which did not refer to valuation anywhere. The ld. PCIT has pointed out that AS-26 does speak of Fair Market Value (FMV) and Arms Length transaction at paragraph No.6.11. 6. Ld.Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of paragraph 23 is the sum of expenditure incurred from the time when the intangible asset first meets the recognition criteria in paragraphs 20-21 and 44. Paragraph 58 prohibits reinstatement of expenditure recognised as an expense in previous annual financial statements or interim financial reports. 53. The cost of an internally generated intangible asset comprises all expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and making the asset ready for its intended use. The cost includes, if applicable: (a) expenditure on materials and services used or consumed in generating the intangible asset; (b) the salaries, wages and other employment related costs of personnel directly engaged in generating the asset; (c) any expenditure that is directly attributable to generating the asset, such as fees to register a legal right and the amortisation of patents and licences that are used to generate the asset; and (d) overheads that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset (for example, an allocation of the depreciation of fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Standard AS-26 to the facts of the case to hold that the internally created intangible asset of the assessee by way of designs was to be valued by a third party valuer and the Assessing Officer having not got this valuation done, his acceptance of the value of intangible asset was incorrect and accordingly allowance of claim of depreciation thereon to the assessee. 12. Going forward he took us again to para 4 of the show cause notice and pointed out that the case of error in the assessment order made out therein is that as per the method followed by the assessee for valuing its intangible on the basis of actual cost incurred by bit on developing it , it was difficult to determine expenses exclusively incurred for development of the intangible(design) and therefore the AO had wrongly accepted the valuation of the assessee and allowed depreciation thereon. Para 4&5 of the notice are reproduced again for clarity: 4. Further, from the replies submitted, it is seen that the company has not purchased any intangible assets during the year relevant to A.Y. 2018-19, whereas it is developing its own designs and transferring the relevant expenses incurred to the designated account in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and having carefully gone through the contents of the show-cause notice as also the documents, being AS-26, referred to by the ld. Counsel for the assessee before us, we are inclined to agree with the ld. Counsel for the assessee that the very basis for assumption of jurisdiction by the ld. PCIT in the present case exercising revisionary jurisdiction over the assessment order passed by the Assessing Officer was flawed. 16. As is evident from the notice issued by the ld. PCIT for initiating proceedings under Section 263 of the Act, the reason for revising the assessment order was, as per the ld. PCIT, the incorrect allowance of claim of depreciation of the assessee on intangible assets and the show-cause notice reveals that the basis for arriving at this finding by the ld. PCIT was that while the accounting standard "AS-26" of the Institute of Chartered Accountants of India (ICAI) dealing with the accounting for intangible assets required intangible assets to be valued at FMV, i.e. Fair Market Value, the assessee had failed to produce any valuation report of its intangible assets despite repeated notices issued by the Assessing Officer in this regard. She has relied on paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the entire proceedings conducted by the ld. PCIT, we hold, was not valid. 19. Going forward from here, we also agree with the ld. Counsel for the assessee that the only error noted by the ld. PCIT was vis-à-vis the valuation of intangible assets, resulting in incorrect allowance of deprecation to the assessee. As noted above, the ld. PCIT was aware that the assessee has valued the intangible assets based on actual expenses incurred for the same. The case of the ld. PCIT being that the assessee had incorrectly valued the intangible assets; it only means that the expenses incurred by the assessee were not to be included in the valuation of intangible assets. These expenses otherwise not being doubted by the ld. PCIT either with regard to their genuineness or with respect to the fact that they were incurred for the purpose of the business of the assessee; therefore, any change in the valuation of the intangible assets by way of reduction in its value would only have resulted in the portion not included in its value to be allowed as expenses of the assessee under Section 37(1) of the Act, and as rightly pointed out by the assessee, it would tantamount to putting the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need of the intangible assets 56-57 27.02.2020 Assessee, vide letter dated 27.02.2020, made the following submissions before AO: * Assessee is engaged in the business of manufacturing laboratory and medical equipment such as centrifuges, stirrer, shakers, etc.. Assessee is researching various details for developing its own products for manufacturing. * Procedure adopted since inception by the assessee was made known to AO and the same is as follows: _ Assessee procures material and engages its technical personnel for designing and developing its products in-house. _ All the costs incurred in relation to development (including but not limited to salary of Director and R&D Staff) is transferred to 'Work-in-progress a/c '. _ During the year, there was opening balance of Rs. 3,81,55,994/- in "Design development a/c (WIP) ' (Pg. 111 ofP/B). _ Based on usage of material and time spent by technical personnel on development of design related costs are allocated to each such product. _ At any point of time during the year, if the product is tested and found ready for issuing the design for production of goods, all the costs incurred from the beginning of the development till th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following details / documents: _ Whether any valuation of intangible assets was carried out by any professional valuer for FY 2017-18 or for any earlier year. _ If yes, copy of valuation report, was called for. _ If no, assessee was called upon to state as to why assessee's case should not be referred to a Government Approved Valuer for valuation of intangible assets or assessee may submit a third party valuation report of intangible assets for FY 2017-18. 15.03.2021 Assessee, vide letter dated 15.03.2021, submitted before AO as follows: _ It is mentioned in Audited Financial Statements that "intangible assets " are recognized in accordance with "AS- 26 - Intangible assets", as issued by IC AI. _ "AS-26" does not state that "valuation" is to be carried out by an entity for "designs developed internally within the organization ", _ Reference was made to following Para of AS-26 (Pgs.517-561 of P/B) @ 521, 532 -533): Para 6.1 defining the term "intangible assets" (Pg.521 of P/B). Para 52 & 53 specifically dealing with concept of "cost of an internally generated intangible assets" (Pgs.532-533 of P/B). _ "Actual cost" incurred by assessee has been accepted. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n acquired by them during the year and, therefore, no question for its valuation arose. That it was developed its own designs and transferring all relevant expenses incurred for this activity to the designated account. A sample working of the costing of a design developed during the year with the working of cost allocation was also furnished and the assessee pointed out that it had been consistently following such method in respect of all designs developed in- house. The assessee was specifically asked whether it had got the valuation of intangible assets carried out by any professional valuer either during the year or in any earlier year and if not, as to why the assessee's case should not be referred to the Government Approved Valuer for valuation. To which the assessee replied that it had valued its intangible assets as per method prescribed in AS-26, as per the accounting standard issued by the ICAI. The assessee has also pointed out that as per AS-26, for intangible assets developed internally within the organization, there was no requirement of any valuation. Reference was made to the relevant paragraphs of AS-26. The assessee has also pointed out that any change in tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find, has in a very cryptic order dismissed all the detailed and voluminous contentions raised by the assessee as above at paragraph No. 4.3 of the order as under: "4.3 Also, it is noticed from the submission of the assessee that valuation of intangible assets has not been done in the instant case. No third-party valuation has been done in the case of the assessee for the assets on which depreciation has been claimed by the assessee. The Assessing Officer has not made proper inquiries in regard to the valuation of intangible assets for which the assessee has claimed depreciation." 27. In view of the above, we are unable to concur with the ld. PCIT on her findings that due to absence of inadequate inquiry by the Assessing Officer on the issue of valuation of intangible assets, the order passed by the Assessing Officer was in error causing prejudice to the Revenue. The Ld.PCIT 's finding of error in the assessment order, we find, is based on a completely incorrect premise. There is, we hold, no error in the assessment order vis a vis acceptance of valuation of intangible assets and claim of depreciation thereon. 28. That even for the sake of argument the Ld.PCIT's error is accep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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