2017 (3) TMI 1705 - AT - Income Tax

Invalid notice u/s 143(2) - notice was issued pursuant to the original return of income and not on the basis of the revised return of income dated 12/12/2012 - Held that - Argument of the assessee is not correct as there is no status to revised return in the eye of law merely to rectify any omission or wrong statement made in the original return. It is clear from the notice u/s 143(2) that the AO noted down the filing of revised return on 12/12/2012, therefore, it cannot be said that notice was issued without considering the revised return. In our view, this contention of the assessee is baseless and is required to be dismissed. Reasoning given by CIT(A) is the correct reasoning as the notice was issued by the AO within a period of limitation and there is no delay in issuing notice. Accordingly, the ground No.1 is decided against the assessee. Depreciation claim - Revaluation of assets as getting converted into a private limited company - Held that - The erstwhile company ceases to exist and a new company comes into existence. In the case on hand also, on account of conversion, the erstwhile partnership firm ceased to exist while the company has come into existence. Therefore, the assets come to vest in the hands of the company and there is no cost of assets to the company on such vesting. When the transaction itself has been treated to be not a transfer, but is akin to succession, in our opinion the 5th proviso to sub-clause (ii) of sec. 36(1) applies and the depreciation has to be calculated as if there is no transfer. Further, as there is no transfer, there is no cost to the assessee. Depreciation is allowable on the WDV of the asset and WDV has been defined u/s 43(6) to mean in the case of assets acquired in the previous year, the actual cost to the assessee. As actual cost to the assessee was Nil , the WD value of the assets in the hands of the predecessor firm shall be considered for the allowance of depreciation. Year of assessment - Sub-sec(6) of sec. 43 defines Written Down Value and it 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 . In the second circumstance i.e where the assets are acquired before the previous year as in the case of the assessee before us, the WDV shall be the actual cost to the assessee less all depreciation actually allowed to him under the Income-tax Act. Therefore, it is clear that the claim of depreciation can be examined even in the assessments years subsequent to the assessment year in which the succession has taken place. CIT-A has not invoked the provisions of Explanation 3 to sec. 43(1) of the IT Act but has only justified the action of the AO in questioning the claim of depreciation by citing the provision of sec. 43(1) and Explanation 3 thereof. - Decided against assessee

Summary

Issues:
Assessment validity based on notice u/s 143(2) and revised return, Depreciation disallowance on intangible assets, Interpretation of conversion of partnership firm into a company for depreciation claim.

Assessment Validity:
The appeal challenged the assessment order for the assessment year 2012-13. The assessee argued that the assessment proceedings were invalid as the notice u/s 143(2) was issued based on the original return, not the revised return. However, the tribunal found that the notice was issued after considering the revised return and within the limitation period. The contention of the assessee was deemed baseless, and the ground was decided against the assessee.

Depreciation Disallowance on Intangible Assets:
The AO disallowed depreciation on intangible assets leading to a loss declaration by the assessee. The CIT(A) upheld the AO's order. The tribunal referred to a previous judgment in the assessee's case for earlier years, which discussed the revaluation of assets upon conversion of a partnership firm into a company. The tribunal held that depreciation on intangible assets is allowable under specific conditions, and in cases of conversion, the assets vest in the new company without transfer, affecting the depreciation calculation. The tribunal dismissed the appeal based on the precedent and the legal provisions governing depreciation claims.

Interpretation of Partnership Firm Conversion for Depreciation Claim:
The tribunal analyzed the conversion of a partnership firm into a company regarding depreciation claims on assets. It considered the legal implications of succession, amalgamation, or demerger on depreciation calculations. The tribunal highlighted the distinction between partnership firm assets and company assets upon conversion, emphasizing that depreciation is allowable based on the actual cost to the assessee. The tribunal rejected the arguments of the assessee regarding the timing of examination of depreciation claims post-conversion and the authority of the CIT(A) to question depreciation claims. The tribunal upheld the CIT(A)'s order based on the powers granted under the IT Act, concluding that the appeal was to be dismissed following the precedent set in the assessee's case.

In conclusion, the tribunal dismissed the appeal filed by the assessee, upholding the orders of the lower authorities regarding assessment validity, depreciation disallowance on intangible assets, and the interpretation of partnership firm conversion for depreciation claims. The decision was pronounced on 3rd March 2017 by the tribunal.