2020 (3) TMI 576 - AT - Income Tax

Allowability of depreciation on the actual cost of the assets arrived at by virtue of revaluation of the trade mark - firm is succeeded by a company falling u/s 47(xiii) - Revenue has not been able to produce the copy of approval from Joint CIT for invocation of Explanation 3 to section 43(1) - HELD THAT - Once there is a categorical finding in this regard, the invocation of Explanation 3 to section 43(1) fails. Accordingly we hold that that the disallowance of depreciation by invocation of Explanation 3 to section 43(1) in this regard fails on account of lack of jurisdiction. Applicability of 5th proviso to section 32(1) - Even in case as the present one where the firm is succeeded by a company falling u/s 47(xiii), the Act mandates that the aggregate deduction in respect of the concern asset shall not exceed in any previous year, the deduction calculated at the prescribed rates as if the succession has not taken place and such deduction shall be apportioned between the predecessor and successor in the ratio of the number of days for which the assets were used by them. In the present case the predecessor is the firm M/s Veeky Industries. The trade mark PIK standing in its books had a cost of ₹ 100/- It had a revaluation figure of ₹ 5.52 crores and the amount of revaluation was transferred to reserve account. As per the provisions of Law, the firm cannot claim depreciation on any revaluation figure. The depreciation has to be claimed on the cost incurred by it. By no stretch of imagination ₹ 5.52 crores less ₹ 100/- was the cost incurred by the assessee firm. Hence the assessee firm was not entitled to depreciation on the revaluation figure of ₹ 5.52 crores. Now the firm i.e. the predecessor has been succeeded by assessee company on 01-02- 1999 and the company has claimed depreciation on the value of trade mark in its books at ₹ 5.52 crores. If the succession had not taken place, there would not have been any depreciation allowance on the revaluation figure. In other words, the revaluation of ₹ 5.52 crores (less ₹ 100/-) cannot be taken into account for granting depreciation to the successor i.e. the assessee company. As per the plain reading of the Law, the 5th Proviso to section 32(1) debars the assessee company to claim depreciation on the amount which was represented by revaluation in the books of the predecessor. The various arguments given by the learned counsel of the assessee are not at all sustainable on the plain meaning of the provision of the statute. In situation such as in the present case where a firm has been successed by the company the depreciation is to be provided as if the succession has not taken place. As the depreciation is to be allowed in the same manner as it would have been allowed in the hands of the predecessor firm. Since the predecessor firm was not entitled to depreciation on the amount of trade mark presented by revaluation reserve, depreciation to that extent is also not available in the hands of the assessee company also. The scheme of the Act in this regard does not require any valuation report to be obtained by the Revenue. As a matter of fact, learned counsel of the assessee in his submissions in item No. B above is mentioning that Thus for 5th proviso to be applicable both the predecessor and the successor company should be capable/eligible for claiming depreciation. In the facts of the present case, the predecessor company could not have claimed depreciation on the revalued amount. Hence 5th proviso to section 32(1) cannot apply. We find that the above is a distortion of the proviso. No where the proviso mentions that the predecessor has always to be a company. It specifically covers transfer under section 47(xiii). This section deals with succession of a firm by a company. When learned counsel of the assessee is himself admitting that the predecessor could not have claimed on the revalued amount, there is no question of the assessee company getting depreciation on the revalued amount. In the present case as the facts indicated that the said trade mark was acquired at a cost of ₹ 100/-, no further addition on account of revaluation for the purpose of depreciation is allowable in the hands of the assessee. - Decided against assessee

Issues Involved:
1. Delay in filing the appeal.
2. Allowability of depreciation on revalued trademark.
3. Approval of JCIT under Explanation 3 to Section 43(1) of the Act.
4. Rejection of valuation report without referring to DVO.
5. Applicability of the 5th proviso to Section 32(1) of the Act.

Detailed Analysis:

1. Delay in Filing the Appeal:
The assessee filed an appeal with a delay of 1336 days, attributing the delay to the company being a sick company and opting to pursue a rectification petition under Section 154 of the Act. The Tribunal condoned the delay after considering the reasonable cause presented by the assessee.

2. Allowability of Depreciation on Revalued Trademark:
The core issue was the allowability of depreciation on the revalued cost of the trademark "PIK," which was acquired for ?100 and revalued to ?5.52 crores. The Tribunal had previously remanded the matter to the CIT(A) to examine the allowability of depreciation on this revalued amount. The CIT(A) concluded that the depreciation should be calculated as if no succession had taken place, meaning the depreciation should be based on the original cost of ?100, not the revalued amount.

3. Approval of JCIT under Explanation 3 to Section 43(1) of the Act:
The Tribunal found that the Revenue failed to produce the approval from the JCIT, which is a statutory requirement under Explanation 3 to Section 43(1). Consequently, the invocation of Explanation 3 failed due to lack of jurisdiction.

4. Rejection of Valuation Report without Referring to DVO:
The CIT(A) noted that there is no legal requirement for the AO to obtain another valuation report to reject the assessee's valuation. The AO had elaborately examined and discussed the reasons for not accepting the valuation done by the appellant company.

5. Applicability of the 5th Proviso to Section 32(1) of the Act:
The Tribunal held that the 5th proviso to Section 32(1) applies to the case, which states that the aggregate deduction for depreciation should not exceed the amount calculated as if the succession had not taken place. Therefore, the depreciation should be based on the original cost of the trademark in the hands of the predecessor firm, which was ?100. The Tribunal rejected the assessee's argument that the 5th proviso does not apply, affirming that the depreciation cannot be claimed on the revalued amount.

Conclusion:
The Tribunal dismissed the appeals, affirming that the depreciation should be calculated based on the original cost of the trademark, not the revalued amount. The Tribunal also found that the Revenue's failure to obtain JCIT's approval invalidated the invocation of Explanation 3 to Section 43(1). The Tribunal upheld the CIT(A)'s decision that the 5th proviso to Section 32(1) applies, restricting the depreciation to the original cost of the trademark.

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