2020 (10) TMI 424 - HC - Income Tax

Depreciation on intangibles - trademarks owned wholly or partly by the assessee - assessee succeeded to the business of the partnership firm, which had trademarks registered in its name - whether absence of any tangible material but merely on the basis of additions made in subsequent assessment year 2007- 08? - eligibility to claim depreciation only with reference to the written down value of transferred assets in the hands of predecessor firm and not with reference to actual cost incurred by it - HELD THAT - Intangible asset of the assessee has a real money value. The aforesaid trademark viz., the intangible assets were transferred to the assessee for a valuable consideration. Section 32(1) provides for depreciation in respect of trademarks owned wholly or partly by the assessee. In the instant case, the assessee succeeded to the business of the partnership firm, which had trademarks registered in its name - assessee u/s 32(1) was entitled for depreciation. It is also pertinent to note that under Section 47 of the Act, any transfer of capital asset or a intangible asset by a firm to a company as are result of succession of the firm by a company is a recognized mode of transfer. Admittedly, the assessee and the erstwhile partnership firm are different entities and there was transfer of intangible assets by the partnership firm to the assessee for a valuable consideration that is by way of allotment of shares. Thus, the aforesaid transaction is squarely covered under Section 47(xiii) of the Act and therefore, the assessee under Section 32(1) was entitled for depreciation with reference to actual cost incurred by it with reference to intangible assets. Accordingly, the second substantial question of law is answered in favour of the assessee and against revenue. Whether 5th proviso to Section 32(1) of the Act restricts the total depreciation which can be claimed in case of succession etc. to the depreciation which would have been allowable had there been no succession? - 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. Accordingly, the third substantial question of law is answered in favour of the assessee and against the revenue. Invoking Explanation 3 to Section 43(1) - It has to be established that apart from claiming additional depreciation on enhanced cost there is no other main purpose for acquiring the asset in question and the AO has to obtain the previous approval of the joint commissioner to disregard the enhanced price. AO in the instant case, in the order of assessment has neither complied with the aforesaid conditions nor has recorded any finding in this regard. CIT (Appeals) however, failed to appreciate the aforesaid aspect. Therefore, the Tribunal committed an error of law in upholding the order of Commissioner of Income Tax (Appeals) in invoking Explanation 3 to Section 43(1) - Decided in favour of the assessee.

Issues Involved:
1. Re-opening of assessment under Section 147 of the IT Act.
2. Eligibility to claim depreciation based on the written down value of transferred assets.
3. Applicability of the 5th proviso to Section 32(1) of the IT Act.
4. Invocation of Explanation 3 to Section 43(1) of the IT Act.

Detailed Analysis:

Issue 1: Re-opening of Assessment under Section 147 of the IT Act
The appellant's counsel did not press this issue. Therefore, it was not considered in detail by the court.

Issue 2: Eligibility to Claim Depreciation Based on Written Down Value
The court examined whether the appellant could claim depreciation on intangible assets transferred from a partnership firm to a private limited company. The appellant argued that the valuation of intangible assets was genuine and done by the firm before its conversion into a company. The court noted that the Assessing Officer found the partnership firm was the registered owner of various trademarks and that the valuation was done according to accounting standards. The court held that the intangible assets had real money value and were transferred for valuable consideration, making the appellant eligible for depreciation under Section 32(1) of the IT Act. Thus, the second substantial question of law was answered in favor of the appellant.

Issue 3: Applicability of the 5th Proviso to Section 32(1) of the IT Act
The court analyzed the 5th proviso to Section 32(1), which restricts the total depreciation claimable in cases of business succession. The court noted that this proviso applies only to the aggregate deduction in the year of succession and not in subsequent years. Since the proviso restricts the aggregate deduction both by the predecessor and the successor, it does not apply if there is no aggregate deduction in a particular year. Therefore, the third substantial question of law was also answered in favor of the appellant.

Issue 4: Invocation of Explanation 3 to Section 43(1) of the IT Act
The court scrutinized the prerequisites for invoking Explanation 3 to Section 43(1), which requires the Assessing Officer to establish that the main purpose of the asset transfer was to reduce income tax liability by claiming extra depreciation on an enhanced cost. The court found that the Assessing Officer did not comply with these conditions or obtain the necessary approval from the Joint Commissioner. Consequently, the Tribunal erred in upholding the Commissioner of Income Tax (Appeals)' decision to invoke Explanation 3. Hence, the fourth substantial question of law was answered in favor of the appellant.

Conclusion:
The court quashed the order passed by the Income Tax Appellate Tribunal dated 10.01.2014 and allowed the appeal, answering the second, third, and fourth substantial questions of law in favor of the appellant.

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