2023 (9) TMI 483 - AT - Income Tax

Disallowance of depreciation on Edible Oil Brand - AO observed that no edible oil brands were shown in the books of accounts of the demerged company - As value of edible oil brands just before the merger was NIL. Therefore, there is no block of intangible assets in the balance sheet - Assessee explained that the transfer of edible oil brands and the demerger of edible oil undertaking were two separate and independent transactions duly approved by the Hon'ble High Court - HELD THAT - As the meaning of the term demerger is not to be construed as per the scheme of arrangement worked out by the assessee company. It is true that as per Explanation 1, undertaking can be a part of an undertaking or a unit or division of an undertaking or even a business activity. Therefore, the contention of the assessee that transfer of edible oil brands is independent to the transfer of edible oil undertaking is accepted. It is true that the brand was transferred prior to the transfer of undertakings and it is equally true that separate considerations have been determined and paid in respect of transfer of brands and transfer of undertaking we find that on the date of transfer of brand, its value in the books of transferor company was NIL The assessee has determined the brand value at Rs. 7.24 crores to be paid to the transferor company. This consideration was discharged by the assessee by way of issue of 1640037 equity shares of Rs. 10/- each fully paid up at a premium of 34.20 totaling to Rs. 7,24,98,000/-. This value has been put subsequent to the demerger of edible oil brand. Explanation 3 to section 2(19AA) clearly says that for determining the value of property, any change in the value of assets, consequent to their revaluation shall be ignored. Therefore, since the value of edible oil brand in the books of transferor company was NIL, any change in its value subsequently, has to be ignored. Assessee can transfer a unit or a division of an undertaking or a business activity and has rightly transferred the edible oil brand independently to the transfer of edible oil undertaking. But since the book value of edible oil brand on the date of the merger was NIL, therefore, any subsequent change in its value has to be ignored. Therefore, the claim of depreciation is not justified on the facts of the case r.w. relevant provisions of the Act. Findings of the ld. CIT(A) are erroneous and deserve to be set aside and that of the Assessing Officer are restored. Ground Nos 1 to 5 taken together or allowed. Disallowance of royalty paid on brand Gagan - since there was a total merger of Amrit Corp Ltd, brand Gagan also stood transferred to the assessee and, therefore, there is no question of paying royalty to itself - HELD THAT - A perusal of the scheme of arrangement shows that while edible oil brands and edible oil undertaking were transfered on the merger, Gagan brand was retained by Amrit Corp Ltd and this retention of brand by the transferor company was part of scheme of the merger. Assessing Officer has not disputed the fact that Gagan brand was used by the assessee. No error in payment of royalty by the assessee for use of Gagan brand. We decline to interfere with the findings of the ld. CIT(A). Ground Nos. 6 and 7 stand dismissed. Addition made on account of G.P. rate - fall in GP rate for the year under consideration by below 0.44% as compared to the immediately preceding A.Y. - AO has rejected the books of accounts on the basis of allegations alleged by the Special Auditor - HELD THAT - The assessee has explained each and every step / stage from bargaining/receipt of material till the dispatch of finished goods is fully recorded in the books of account. The assessee has also successfully explained the basis on which manufacturing data is fed into the SAP accounting system of the assessee. Actual quantity manufactured is fed in SAP. Thus, monitoring of production and consumption is inbuilt into the accounting system being followed. Complete details of valuation of closing stock were furnished and such data was also prepared from exhaustive accounting of the assessee. The observations of the AO were very general in nature and are purely based on assumptions and surmises without bringing any comparable case on record. We, therefore, do not find any reason to interfere with the findings of the ld. CIT(A). Ground No. 8 is accordingly dismissed.

Summary

Issues Involved:
1. Disallowance of depreciation on Edible Oil Brand.
2. Disallowance of royalty paid on brand "Gagan."
3. Addition on account of Gross Profit (G.P.) rate.

Summary:

1. Disallowance of Depreciation on Edible Oil Brand:
The Revenue's appeal concerns the deletion of an addition of Rs. 1,81,24,500/- for disallowance of depreciation on the Edible Oil Brand. The Special Auditors reported that the transfer of "Edible Oil Brands" should have been at NIL value as per the demerger scheme, making the depreciation claimed inadmissible. The Assessing Officer (AO) agreed, noting that the brand's value was NIL in the demerged company's books, thus disallowing the depreciation. The CIT(A) disagreed, stating that the transfer was part of a scheme involving separate transactions and that the assessee was eligible for depreciation. However, the Tribunal found that since the book value of the brand was NIL at the time of transfer, any subsequent revaluation should be ignored, thus restoring the AO's disallowance and setting aside the CIT(A)'s findings.

2. Disallowance of Royalty Paid on Brand "Gagan":
The Revenue challenged the deletion of an addition of Rs. 10,27,867/- for disallowance of royalty paid on the "Gagan" brand. The AO argued that the brand was transferred during the merger, thus no royalty should be paid. However, the Tribunal found that the "Gagan" brand was retained by the transferor company as part of the merger scheme, and the AO did not dispute its use by the assessee. Consequently, the Tribunal upheld the CIT(A)'s decision to allow the royalty payment, dismissing the Revenue's grounds.

3. Addition on Account of Gross Profit (G.P.) Rate:
The Revenue contested the deletion of an addition of Rs. 20,16,369/- based on a fall in the G.P. rate. The AO applied an ad-hoc rate, alleging undervaluation of the closing stock. The CIT(A) found that the assessee maintained a comprehensive accounting system and that the AO's rejection of the books was unjustified. The Tribunal agreed, noting that the fall in G.P. was marginal and adequately explained by the assessee. The Tribunal found no reason to interfere with the CIT(A)'s findings, thus dismissing the Revenue's grounds.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, restoring the AO's disallowance of depreciation on the Edible Oil Brand while upholding the CIT(A)'s decisions on royalty payment and G.P. rate. The order was pronounced on 11.09.2023.