2018 (10) TMI 1089 - AT - Income Tax

Revision u/s 263 - exercise of jurisdiction by the Commissioner under section 263 - allowability of depreciation on know-how trademarks and patents - Held that - The issue of claim of depreciation on know-how trademarks and patents has thus been decided by the Tribunal in favour of assessee by deliberations in the appeal relating to assessment years 2004-05 and 2005-06 vide consolidated order dated 12.12.2017. The issue thus on merits stands decided in favour of assessee. Once the issue has been decided in favour of assessee then on merits the order of Commissioner under section 263 of the Act cannot be upheld. Coming to the second aspect of the order of Commissioner in invoking the jurisdiction under section 263 the Tribunal has taken a view that where bifurcation of assets had taken place in assessment year 2003-04 and depreciation had been allowed on the assets i.e. tangible assets and know-how trademarks patents and balance value attributed to goodwill; Assessing Officer had allowed the depreciation on tangible assets and the value attributed to know-how trademarks and patents while completing assessment for assessment year 2003-04 which cannot be disturbed. AO denied the depreciation on goodwill which was allowed by the Tribunal vide separate order. The assets thus entered into the block of assets and depreciation was claimed on the WDV from assessment year 2004-05 onwards. Commissioner in the year under appeal vide order passed under section 263 had held the order passed by the AO in allowing the aforesaid depreciation on know-how trademarks and patents as erroneous and prejudicial to the interest of Revenue. AO had allowed the depreciation on WDV of intangible assets of know-how trademarks and patents since the same was allowed to the assessee since the year of first claim and it had entered into the block of assets. Tribunal vide order dated 12.12.2017 in assessment years 2004-05 and 2005-06 has held that once the assets entered into block of assets then depreciation on WDV on such assets cannot be disturbed in the subsequent orders. AO could not have tinkered with the claim of depreciation on know-how trademarks and patents in the subsequent years and hence the order passed by the Assessing Officer allowing the same cannot be said to be erroneous and hence not prejudicial to the interest of Revenue. Consequently there is no merit in the exercise of jurisdiction by the Commissioner under section 263 of the Act. Thus we hold the order passed by the Commissioner under section 263 is both invalid and bad in law both on jurisdictional issue and even on merits - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction under Section 263 of the Income-tax Act.
2. Allowability of depreciation on know-how, trademarks, and patents.
3. Determination of actual cost and written down value (WDV) of assets.
4. Allocation of value to intangible assets.
5. Use of know-how for business purposes.
6. Ownership and purchase of know-how from ICI.
7. Fairness and reasonableness of value allocation to intangible assets.
8. Valuation of land at Panki and Taloja.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Act:
The primary issue is whether the Commissioner rightly assumed jurisdiction under Section 263 of the Act. The Tribunal noted that the Commissioner held the assessment order erroneous and prejudicial to the interest of Revenue due to lack of enquiry by the Assessing Officer (AO). However, the Tribunal found that the issue of depreciation on know-how, trademarks, and patents was already decided in earlier years, and the AO could not disturb the depreciation once the assets had entered the block of assets. Therefore, the Tribunal concluded that the order passed by the Commissioner under Section 263 was invalid and bad in law.

2. Allowability of Depreciation on Know-how, Trademarks, and Patents:
The Tribunal observed that the assessee claimed depreciation on know-how, trademarks, and patents starting from assessment year 2003-04, which was allowed and not disturbed. The Commissioner’s order under Section 263 for assessment year 2007-08 was based on the premise that no depreciation should be allowed on these assets. However, the Tribunal reiterated its earlier decision allowing the depreciation, thus deciding the issue in favor of the assessee.

3. Determination of Actual Cost and WDV of Assets:
The Commissioner held that the AO failed to determine the actual cost of the assets every year, leading to excessive depreciation. The Tribunal, however, emphasized that once the assets entered the block, their WDV could not be disturbed. The Tribunal relied on the concept of "block of assets" under Section 43(6) and related judgments, asserting that the WDV brought forward from earlier years is sacrosanct and cannot be re-evaluated.

4. Allocation of Value to Intangible Assets:
The Commissioner questioned the allocation of value to various intangible assets, suggesting it was not done fairly. The Tribunal reviewed the valuation reports and found no fallacy in the allocation process. It held that the allocation done in assessment year 2003-04 was systematic and accepted, thus depreciation on these values should continue.

5. Use of Know-how for Business Purposes:
The Commissioner argued that there was no evidence showing the use of know-how for business purposes. The Tribunal, however, found that the know-how, trademarks, and patents were indeed used by the assessee for its business, as evidenced by various agreements and operational arrangements.

6. Ownership and Purchase of Know-how from ICI:
The Commissioner contended that the assessee did not purchase any know-how from ICI. The Tribunal reviewed the Business Transfer Agreement (BTA) and other related documents, concluding that the assessee had acquired the know-how, trademarks, and patents from ICI and was the rightful owner.

7. Fairness and Reasonableness of Value Allocation to Intangible Assets:
The Commissioner held that the values allocated to intangible assets were not fair or reasonable. The Tribunal, however, upheld the valuation done by an independent valuer, considering it fair and reasonable, and thus the values allocated were accepted.

8. Valuation of Land at Panki and Taloja:
The Commissioner valued the land at Panki at ?174.36 crores and Taloja at ?13 crores. The Tribunal found that the land at Panki was not part of the slump price and was not transferred under the BTA. Similarly, the land at Taloja was leasehold and not owned by ICI, hence not transferable. Therefore, the Tribunal rejected the Commissioner’s valuation and conclusions.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the Commissioner’s order under Section 263 was invalid both on jurisdictional grounds and on the merits of the case. The Tribunal directed the AO to allow the claim of depreciation on tangible and intangible assets, including know-how, trademarks, patents, goodwill, and non-compete fee, with a reduction in the value of intangible assets by ?13 crores for the Panki land. The appeal was thus decided in favor of the assessee.

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