2018 (9) TMI 1458 - AT - Income Tax

Disallowance of depreciation on intangible assets - conversion of partnership firm into a company - Held that - 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. 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. Therefore, we do not see any reason to interfere with the orders of the authorities below. 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. This argument is accordingly rejected. - Decided against the assessee

Summary

Issues involved:
1. Disallowance of depreciation on intangible assets.
2. Non-allowance of carried over losses for previous assessment years.

Issue-wise detailed analysis:

1. Disallowance of depreciation on intangible assets:

The primary contention of the assessee was against the disallowance of depreciation amounting to ?1,07,19,468/- on intangible assets, specifically brand names and trademarks valued at ?65,26,40,150/-. The assessee argued that the revaluation of these intangible assets was conducted by the erstwhile firm prior to its succession, and thus, it should not be subjected to disallowance under Section 47(xiii) of the IT Act. The assessee contended that the lower authorities failed to appreciate the transfer of assets, including intangible assets, as contemplated under Section 47(xiii), which exempts such transactions from being considered as transfers for capital gains purposes. The assessee also pointed out that there is no stipulation in Section 47(xiii) or elsewhere in the IT Act that prohibits revaluation of assets prior to succession or mandates that transfers must occur at book value.

The assessee also highlighted that the existence and valuation of the intangible assets were certified by a valuer and not disputed by the Assessing Officer. Furthermore, it was argued that the depreciation on these assets was allowed in the assessee's own case for the Assessment Year 2013-14 by the ITAT, and the disallowance in the current year was unjustified as it was based merely on the disallowance in earlier years, which is currently under appeal before the Karnataka High Court.

The revenue, represented by the DR, argued that the issue was already decided against the assessee in its own case for Assessment Year 2012-13 and earlier years (2005-06 to 2008-09). The Tribunal had previously held that the revaluation of assets upon conversion from a partnership firm to a company did not constitute a transfer, and hence, the depreciation should be calculated as if no transfer had occurred, with the written down value (WDV) of the assets in the hands of the predecessor firm being considered for depreciation purposes.

The Tribunal, upon reviewing the submissions and previous orders, found no reason to deviate from its earlier decisions. It reiterated that the conversion of the partnership firm into a company did not result in a transfer of assets, and therefore, the depreciation should be calculated based on the WDV of the assets in the hands of the predecessor firm. Consequently, the Tribunal dismissed the assessee's appeal on this ground.

2. Non-allowance of carried over losses for previous assessment years:

The assessee also contested the non-allowance of carried over losses for Assessment Years 2011-12 (?3,54,897/-), 2012-13 (?2,52,90,640/-), and 2013-14 (?32,14,291/-) by the Assessing Officer while determining the tax liability for Assessment Year 2014-15. The Tribunal, however, did not provide a detailed analysis or ruling on this issue within the provided judgment text.

Conclusion:

The appeal filed by the assessee was dismissed by the Tribunal. The disallowance of depreciation on intangible assets was upheld based on the precedent set in the assessee's own case in previous years, where it was determined that the conversion of a partnership firm into a company did not constitute a transfer, and depreciation should be calculated based on the WDV of the assets in the predecessor firm. The issue of non-allowance of carried over losses was mentioned but not elaborated upon in the judgment.