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2024 (7) TMI 494 - AT - Income TaxRevision u/s 263 - valuation of intangible assets - Cost of an Internally Generated Intangible Asset - inadequacy of inquiry by the Assessing Officer and the incorrect allowance of claim of deprecation by the AO - as per CIT, no valuation report had been submitted by the assessee, nor any corroborative evidences or documents filed which could be relied upon for evidencing the cost of intangible assets - HELD THAT - As going through AS-26 as heavily relied upon by the ld. PCIT to form her belief that the AO without conducting proper inquiry, accepted the assessee s valuation of intangible assets and we concur with assessee that the relevant paragraph to which the ld. PCIT refers to in the notices of AS-26, is merely a definition paragraph which defines Fair Market Value only. Paragraph 6.11. does not prescribe Fair Market Valuation method to be adopted for arriving at the value of intangible assets. PCIT has relied on a definition in the AS-26 for stating the method prescribed by the Standard for valuation of intangible asset and then gone on to find error in the valuation method adopted by the assessee, which method has been suitably demonstrated before us to be in accordance with that prescribed by the Accounting Standard. Assessee has pointed out to us that the accounting standard AS-26 prescribes the historical cost basis for accounting for intangible assets which are developed by the entities by incurring expenditure. That the ld. PCIT has noted in her notice that the assessee did develop the intangible assets itself by way of developing designs relating to machinery and had valued the intangible assets on the basis of cost incurred for developing designs. Therefore, we find, that even as per the facts noted by the ld. PCIT, the assessee s basis of valuation of the intangible assets was as per that prescribed by AS-26 and the ld. PCIT s belief that the assessee had not followed AS-26 was an incorrect and completely flawed understanding of the Accounting Standard. We completely agree with assessee that the very basis, therefore, for assumption of jurisdiction under Section 263 of the Act by the ld. PCIT was flawed, based on wrong premises, and therefore, the entire proceedings conducted by the ld. PCIT, we hold, was not valid. Erroneous claim of depreciation allowed to the assessee on intangible assets - CIT was aware that the assessee has valued the intangible assets based on actual expenses incurred for the same. The case of the ld. PCIT being that the assessee had incorrectly valued the intangible assets; it only means that the expenses incurred by the assessee were not to be included in the valuation of intangible assets. These expenses otherwise not being doubted by the ld. PCIT either with regard to their genuineness or with respect to the fact that they were incurred for the purpose of the business of the assessee; therefore, any change in the valuation of the intangible assets by way of reduction in its value would only have resulted in the portion not included in its value to be allowed as expenses of the assessee u/s 37(1) and as rightly pointed out by the assessee, it would tantamount to putting the assessee in a beneficial position, since otherwise the assessee had been allowed only a portion of the expense as depreciation. Therefore, the stand taken by the ld. PCIT regarding erroneous claim of depreciation allowed to the assessee on intangible assets by no way has caused any prejudice to the Revenue. Thus, the order passed u/s 263 of the Act, we hold, is not sustainable in law and is directed to be set aside. It is sad to note that despite such detailed submissions made by the assessee during the assessment proceedings, which records were duly perused by the Ld.PCIT before issuing notice under Section 263 and despite the assessee submitting the same during revisionary proceedings also, the ld. PCIT has not addressed the contentions of the assessee on any aspect at all. She has not pointed out as to why the inquiry by the Assessing Officer was inadequate or improper; she has neither pointed out as to how the explanation of the assessee that the accounting of intangible assets was as per AS-26 was incorrect. On the contrary, on a completely flawed understanding of the Accounting Standard the Ld.PCIT has found the assessee s valuation of intangible assets to be not in accordance with AS-26. The ld. PCIT, we find, has in a very cryptic order dismissed all the detailed and voluminous contentions raised by the assessee - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of PCIT under Section 263 of the Income-tax Act, 1961. 2. Alleged error in the assessment order regarding depreciation on intangible assets. 3. Whether the Assessing Officer conducted proper inquiry. 4. Application and interpretation of Accounting Standard 26 (AS-26). Detailed Analysis: 1. Jurisdiction of PCIT under Section 263 of the Income-tax Act, 1961: The assessee contended that the PCIT initiated proceedings under Section 263 against an amalgamating company that was not in existence on the date of initiation. The PCIT's action was challenged as being without jurisdiction and not permissible in law or on facts. The Tribunal found that the PCIT's assumption of jurisdiction was based on a flawed understanding of AS-26 and therefore, the entire proceedings conducted by the PCIT were not valid. 2. Alleged Error in the Assessment Order Regarding Depreciation on Intangible Assets: The PCIT noted that the assessment order was erroneous due to the incorrect allowance of depreciation on intangible assets amounting to Rs. 83,87,835/-. The PCIT argued that the AO failed to make proper inquiries and relied on an incorrect valuation method. However, the Tribunal found that the PCIT misunderstood AS-26, which does not mandate third-party valuation for internally generated intangible assets. The Tribunal held that the assessee followed the correct method as per AS-26, which includes all expenditure directly attributable to creating the intangible asset. 3. Whether the Assessing Officer Conducted Proper Inquiry: The PCIT claimed that the AO did not conduct a proper inquiry regarding the valuation of intangible assets. However, the Tribunal noted that the AO had issued multiple notices and received detailed replies from the assessee explaining the process of creating and valuing intangible assets. The assessee had provided all necessary documentation, including ledgers and supporting evidence for the expenses incurred. The Tribunal concluded that the AO had conducted a thorough inquiry and that the PCIT's claim of inadequate inquiry was unfounded. 4. Application and Interpretation of Accounting Standard 26 (AS-26): The PCIT's basis for revising the assessment order was her belief that AS-26 required intangible assets to be valued at Fair Market Value (FMV) by a third-party valuer. The Tribunal found this understanding to be incorrect. AS-26 prescribes the historical cost basis for internally generated intangible assets, which includes all directly attributable expenditure. The Tribunal noted that the PCIT had relied on a definition of FMV in AS-26, which is applicable in different contexts, such as when intangible assets are acquired in exchange for shares or securities. The Tribunal held that the assessee's method of valuing intangible assets was in accordance with AS-26 and that the PCIT's interpretation was flawed. Conclusion: The Tribunal set aside the order passed under Section 263 of the Act, holding that the PCIT's assumption of jurisdiction was based on incorrect premises. The Tribunal found no error in the assessment order regarding the valuation of intangible assets and the claim of depreciation. The appeal of the assessee was allowed, and the order of the PCIT was set aside.
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