2013 (1) TMI 654 - AT - Income Tax

Reopening of assessment - assessee has claimed deprecation on non compete territory right - Held that - As seen that not only query was raised by the A.O. in the course of original assessment proceeding but reply was also submitted by the assessee and, thereafter, in the assessment order also, it is noted by the A.O. that assessee has made claim of depreciation on these intangible assets @ 12.5% and he did not make any disallowance and under these facts, we are of the considered opinion that in the present case, the reopening done by the A.O. is on mere change of opinion and, therefore, the same is not valid as per this judgement rendered in the case of Gujarat power Corporation Ltd. (2012 (9) TMI 69 - GUJARAT HIGH COURT) and also CIT v. Kelvinator of India Limited (2010 (1) TMI 11 - SUPREME COURT OF INDIA) - in favour of assessee. Applicability of Explanation 3 to section 43(1) to assessee s case - Held that - As per this explanation 3 to section 43(1) the A.O. can determine the original cost of the assets for allowing depreciation to the assessee only if he is satisfied that the main purpose of transfer of such asset, directly or indirectly to the assessee, was the reduction of liability to income tax by claiming extra depreciation with reference to an enhanced cost. This is the first prerequisite that the A.O. has to establish that the main purpose of transfer of such asset was the reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish this, it has to be established that apart from claiming additional deprecation on enhanced cost, there is no other main purpose for acquiring the asset in question. Valuation of intangible asset i.e. the trademark acquired - held that - A.O. did not fulfill the pre requirement of invoking Exp.(3) to Section 43(1) & even after invoking this Exp.(3) to Section 43(1) rightly or wrongly, the A.O. has not worked out the value of the asset in question in the proper manner. - He has ignored the valuation report of various technical experts such as RSML & Co. C.A. and others and instead of obtaining the departmental valuation report or any other report of any other independent valuer, the A.O. has made his own exercise for valuation of the asset in question although it cannot be accepted that the A.O. is a technical expert for valuation of the asset in question. - the valuation done by the A.O. is not proper and therefore, the action of the A.O. is not justified - in favour of assessee. Addition as interest on Deep Discount Bonds - Held that - Assessee is entitled to proportionate claim of expenditure towards discount/interest of DDBs on actual basis in the year of appeal and the A.O. was directed to correctly work out the same and to allow deduction to the extent it relates to the year under appeal.

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income-tax Act, 1961.
2. Application of Explanation 3 to Section 43(1) of the Income-tax Act, 1961.
3. Determination of the actual cost of assets for depreciation purposes.
4. Charging of interest under Sections 234A, 234B, and 234C of the Income-tax Act, 1961.
5. Disallowance of depreciation on the trade mark.
6. Addition of interest on Deemed Discount Bonds.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:
The assessee contended that the reopening of the assessment was based on a mere change of opinion, which is not justified. The original assessment was completed under Section 143(3), and various queries regarding the acquisition of the trade mark were raised and answered during the original assessment proceedings. The Tribunal found that since the Assessing Officer (A.O.) had already examined the claim during the original assessment and no new material was brought on record, the reopening was indeed based on a mere change of opinion. The Tribunal cited the judgment of the Hon'ble Gujarat High Court in the case of Gujarat Power Corporation Ltd. v. ACIT, which supports the assessee's contention. Thus, the reopening was held to be invalid, and grounds No. 2-4 of the assessee's appeal were allowed.

2. Application of Explanation 3 to Section 43(1):
The A.O. invoked Explanation 3 to Section 43(1) to determine the actual cost of the trade mark, alleging that the main purpose of the transfer was to reduce tax liability by claiming depreciation on an enhanced cost. The Tribunal noted that for Explanation 3 to apply, the A.O. must establish that the main purpose of the transfer was tax reduction. The Tribunal found that the A.O. failed to establish this prerequisite and merely disputed the valuation without proving that the primary purpose was not business-related. Consequently, the invocation of Explanation 3 was deemed unjustified.

3. Determination of Actual Cost of Assets:
The A.O. reduced the claimed cost of the trade mark from Rs. 500 crores to Rs. 152.89 crores, arguing that the valuation was inflated. The Tribunal observed that the A.O. ignored multiple valuation reports submitted by the assessee and did not obtain an independent valuation. The Tribunal emphasized that as per the Gujarat High Court's judgment in Ashwin Vanaspati Industries, the A.O. must dislodge the valuation report with adequate material, which was not done in this case. The Tribunal also found fault with the A.O.'s method of valuation, which relied on past royalty rates instead of future expected rates. Therefore, the Tribunal held that the assessee's claimed cost of Rs. 500 crores was justified, and grounds No. 5-6 of the assessee's appeal were allowed.

4. Charging of Interest under Sections 234A, 234B, and 234C:
The issue of charging interest under Sections 234A, 234B, and 234C was deemed consequential and dependent on the outcome of the primary issues. Since the primary issues were decided in favor of the assessee, this ground was also allowed.

5. Disallowance of Depreciation on the Trade Mark:
The A.O. had restricted the depreciation claim from Rs. 62.50 crores to Rs. 6.625 crores. The CIT(A) had partially allowed the claim, reducing the disallowance. However, the Tribunal, having found the reopening invalid and the cost determination unjustified, allowed the full depreciation claim of Rs. 62.50 crores, rendering the revenue's appeal on this ground infructuous.

6. Addition of Interest on Deemed Discount Bonds:
The CIT(A) deleted the addition of Rs. 43,65,551/- as interest on Deemed Discount Bonds, following the Tribunal's earlier decision in the case of Nirma Ltd. The Tribunal upheld the CIT(A)'s decision, finding no reason to deviate from the precedent. Therefore, this ground of the revenue's appeal was dismissed.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the revenue was dismissed. The Tribunal found the reopening of the assessment invalid, justified the assessee's claimed cost and depreciation on the trade mark, and upheld the deletion of the addition related to Deemed Discount Bonds.

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