2016 (3) TMI 820 - AT - Income Tax

Disallowance of depreciation - Addition towards Film Software Library as the same is not intangible asset and it is to be treated as Plant & Machinery - depreciation @ 15% or 25% - Held that - an intangible asset can also be treated as plant, provided, it becomes an integral part of the tools used by the entity to carry on its business. In the case before us, the films and TV programmes are essential for the assessee company to carry on its business of telecasting of films and other programmes, but there is no caveat that the assessee company has to telecast only these films and programmes and none other for assessee s business. Further, not only the films and programmes in the Film Software Library , but the assessee may also telecast any other programmes or films on its channels. By purchasing the library, the assessee is gaining exclusive right over the asset but this library cannot be held as a tool for carrying on of its business as assessee can carry on its business even without the Film Software Library . The said library only assists in determining the content of the telecast, but does not limit the telecast and is not essential for the operations of the assessee s business and therefore cannot be termed as the tool of the trade. Thus, it fails the functional test adopted by the assessing officer. Therefore, we hold that the asset which consists of Copyrighted Films and Programmes is an Intangible Asset eligible for depreciation at the rate of 25%. - Decided against revenue Invoking Explanation 3 to Section 43(1) - order of the CIT u/s 263 adopting the WDV of the film software Library in the hands of the previous owner as the Actual cost of the asset to the Assessee and allowed depreciation on that value only - Held that - There is no dispute that the asset Film Software Library was used by its previous owner i.e., Shri Ramoji rao (HUF) for the purpose of its business and also by the assessee herein before the transfer of the same to the assessee exclusively. Therefore, undisputedly the first condition is satisfied. CIT(A) has not referred to or verified the circumstances leading to the transfer of the asset to come to the conclusion but has granted relief on the ground that the A.O. has not recorded his satisfaction before invoking the above provisions. Though, the Ld. D.R. has not been able to rebut the factual submissions of the assessee on the circumstances leading to the transfer of the asset, we find that the same needs verification by the authorities below. In view of the same, we deem it fit and proper to remand this issue to the file of the A.O. for the limited purpose of verification of the facts and circumstances stated to be the cause of transfer of the asset to the assessee herein which are reproduced in the above paragraphs and we hold that if the said circumstances are proved to have existed, then the provisions of Explanation-3 to Section 43(1) are clearly not attracted. However, if the above circumstances are not proved or are found to be not the reason/purpose for transfer of the asset, only then shall the A.O. invoke the above provision. But in such circumstances, we direct that if the A.O. is not satisfied with the valuation done by Ernst & Young, then after giving a speaking order for not accepting the same, the A.O. shall revalue the asset in accordance with the provisions of law and shall not adopt the WDV of the asset in the hands of the previous owner.- Decided in favour of revenue for statistical purposes.

Issues Involved:
1. Whether the Film Software Library should be treated as an intangible asset or as Plant & Machinery for depreciation purposes.
2. Whether the Assessing Officer (A.O.) rightly invoked Explanation 3 to Section 43(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Nature of the Asset and Rate of Depreciation:
The primary contention was whether the Film Software Library should be classified as an intangible asset or as Plant & Machinery, which determines the applicable rate of depreciation. The A.O. argued that the Film Software Library, consisting of CDs and other storage media, is a vital tool of trade for the assessee company and should be treated as Plant & Machinery, thus eligible for 15% depreciation. Conversely, the assessee contended that the Film Software Library should be treated as an intangible asset eligible for 25% depreciation, as it was treated in the hands of the previous owner, Shri Ramoji Rao (HUF).

The Tribunal found that the asset was treated as an intangible asset in the hands of the previous owner, and the CIT(A) had directed the A.O. to treat it similarly. The Tribunal agreed with the CIT(A) that the Film Software Library, consisting of copyrighted films and programs, is an intangible asset eligible for 25% depreciation. The Tribunal held that the asset assists in determining the content of the telecast but is not essential for the operations of the assessee's business and thus fails the functional test adopted by the A.O.

2. Invocation of Explanation 3 to Section 43(1):
The second issue was whether the A.O. rightly invoked Explanation 3 to Section 43(1) of the Income Tax Act, which allows the A.O. to re-determine the actual cost of an asset if it was transferred with the main purpose of reducing tax liability by claiming depreciation on an enhanced cost. The A.O. adopted the WDV of the Film Software Library in the hands of the previous owner as the actual cost to the assessee, suspecting that the transfer was done at an enhanced cost to claim higher depreciation.

The CIT(A) held that the A.O. did not record the requisite satisfaction before invoking Explanation 3 to Section 43(1) and that the A.O. erroneously believed the library to comprise only those films in the WDV basket, overlooking other valuable films. The CIT(A) also noted that the A.O. failed to determine the market value of the asset and instead merely adopted the WDV of the asset in the hands of the previous owner.

The Tribunal found that the A.O. did not consider the circumstances leading to the transfer of the asset, such as the agreements with third parties for equity investment and the pre-condition set by them. The Tribunal remanded the issue to the A.O. for verification of the facts and circumstances stated to be the cause of the transfer. If the stated circumstances are proved, the provisions of Explanation 3 to Section 43(1) are not attracted. However, if not proved, the A.O. should revalue the asset in accordance with the law and not adopt the WDV of the asset in the hands of the previous owner.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal directed the A.O. to treat the Film Software Library as an intangible asset eligible for 25% depreciation and remanded the issue of invoking Explanation 3 to Section 43(1) for further verification and revaluation if necessary.

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