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TMI Blog2009 (9) TMI 957X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 101 - ITAT COCHIN] wherein it was held that in a case when a limited company has taken over the assets of a partnership firm at revalued figures as recorded in the balance sheet then a company is entitled for claim of depreciation on the revalued or enhanced cost of assets. Likewise in the case of Bombay Household Industrial Plastic Mfg. Co. (P) Ltd. vs. ITO [ 1981 (11) TMI 73 - ITAT BOMBAY-D] the assessee company took over under an agreement certain assets of its sister concern and for that purpose the takeover took place in accordance with the report of a valuer. In that case as well the price paid for the transfer was far more than the book value in the transferor's accounts. The respected Co-ordinate Bench has concluded that once there was no other material to suggest that the transfer was made for the purpose of deduction of income-tax liability of the transferee hence Expln. 3 to s. 43(1) could not be applied and the actual consideration paid should be taken as the cost. In the light of the foregoing discussion and the law settled by several Courts, we can draw a conclusion that there was no fallacy in the verdict of learned CIT(A) who has considered the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled for eligible claim of depreciation. So held that it was not tenable either in facts or in law. Further in the case of Bharatbhai J. Vyas vs. ITO [ 2005 (8) TMI 279 - ITAT AHMEDABAD-C] , the respected Bench has held that while deciding allowability of depreciation on goodwill one has to take recourse to specified provisions. Following these two decisions and specially when no other decisions is cited from the side of the assessee we find no force in this ground of the assessee and dismiss the same. Payment for enhancement - expenses on upgrading existing softwares - nature of capital expenditure - eligible for depreciation @ 60 - The issue is now very well-settled by the decision of the respected Special Bench in the case of Amway India Enterprises vs. Dy. CIT [ 2008 (2) TMI 454 - ITAT DELHI-C] , so as to decide whether the expenditure in question can be said to be capital in nature or revenue in nature. The decision which has been cited by the learned CIT(A) has been considered by the Special Bench therefore at this juncture there is no question of re-adjudication on this issue. Therefore we hereby follow the guidelines and decide the nature of expenditure de novo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Modular Systems. It was noticed by the AO on perusal of the balance sheet of the said firm drawn as on 31st March, 2000 that the value of several tangible assets was to the tune of ₹ 18,39,034. However, for the purpose of transfer of assets from erstwhile firm to the assessee company there was an addition of value of IPR by an amount of ₹ 4,27,00,000. Therefore, the observation of the AO was that the assets were revalued just before taking over by the company to a total value of ₹ 4,45,39,034. The respective chart which was mentioned in the assessment order is worth reproduction : Sl. No. Particulars Asset WDV of firm (Rs.) Assets takeover price (Rs.) 1. Computers 3,36,638.00 3,36,638.00 2. Computer peripherals 2,26,859.50 2,26,859.50 3. Electrical fittings 13,673.00 13,673.00 4. Factory building 4,62,744.00 4,62,744.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was merely the accounting jugglery. The said revaluation was with a purpose to inflate the value of the assets of the firm and consequently the successor company has claimed higher depreciation. The AO was of the view that the impugned asset i.e., IPR had no value associated with it because of the reason that the said firm had never incurred any cost to acquire such rights. On the other hand the submission of the assessee was that it had purchased the tangible as well as intangible assets of the firm including IPR, therefore, entitled for the claim of depreciation. There was a reference of s. 32 in support of the claim that as per the statute depreciation is allowable on intangible assets. Since the company had succeeded the business of the firm by taking over all the assets and liabilities, therefore, the assessee company had become the owner of all the assets, whether tangible or intangible. On the basis of the ownership of the copyrights in the softwares and fonts the assessee had conducted the business of licensing of software and fonts to the end-users and thus derived economic benefits. Further, there was a reference of s. 43(6) of IT Act to define the terms WDV . It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings the learned AO directed the company to justify the basis for claim of depreciation on IPRs and amount thereof. 1.4 The appellant company vide its various letters filed during the course of assessment with the learned AO made detailed submissions which are summarized hereinbelow : (a) M/s Modular Systems (hereinafter referred to as the 'firm') was formed in 1982 by a group software professionals (engineers) having a strong R D background. The firm was the first to develop in-house facility to digitize and rasterize Indian language typefaces. (b) The firm developed 1,700 Indian language fonts like decorative fonts, text fonts, symbol fonts, which are copyrighted. (c) The firm had largest font library and was leading Indian language font developer. The firm marketed the fonts developed by it in the form of software package named 'Shree-lipi' and other software packages. (d) The firm had successfully developed softwares on project basis for municipal corporation Election Commission of India, companies, firms etc. The firm had developed management softwares. (e) The Manufacturers Association of Information Technology in its report stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant has pointed out that the amount of ₹ 4.27 crores included composite consideration in respect of all the intangible assets of the firm namely IPRs and the goodwill. The appellant thereafter admitted the position and submitted a fresh valuation of the assets including that of the goodwill as per letter dt. 22nd March, 2004 and a copy of which is given as an Annex. 2 to this appellate order. The valuation of goodwill at ₹ 79,50,000 has also been accepted by the AO in the remand report dt. 24th March, 2004 sent by the Addl. CIT, Range 1, Pune, vide letter dt. 29th March, 2004. 5. In the background of the above discussion, I have carefully examined the facts of the case along with the legal position in this regard. The valuation of assets, as has been done during the appellate proceedings reduces the value of IPRs by an amount of ₹ 79,50,000 and is thus reduced to ₹ 3,45,85,000. The depreciation is accordingly to be decided at a lower figure than has been claimed by the appellant. Coming to the claim of the appellant that these assets namely IPRs have later been valued at a higher figure by a third person namely M/s TVS Electronics Ltd. has also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed authorities. With the view to restructure the business activity of the firm it was decided to convert the ownership into a corporate organisation. Certain benefits were stated to be available to a corporate company such as limited liability, easy finance and better recognition. Keeping in view those benefits there was a decision to restructure the firm by converting into a corporate i.e., company hence the value of the assets of the firm including IPR, was done through two valuation reports obtained viz., M/s D.G. Kurundwadkar and another firm M/s N.M. Raiji Co. Once the valuation report was obtained, thereafter it was decided to enter into an agreement with the assessee company. The amount of consideration settled between the parties was duly paid by the firm in the form of allotment of equity shares to the partners of the firm. One of the important features of the taking over of the business was that apart from the directors an independent concern namely M/s TVS Electronics had also joined hands in taking over the business of the firm. That concern has independently got valued the assets of the firm including intangible assets. In the backdrop of above facts onething is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce an actual cost was incurred by the assessee therefore there was no reason not to claim the depreciation being prescribed under s. 32(ii) of IT Act. We find force in this plank of argument. It may not be out of place to mention that even the statute has prescribed the definition of actual cost as per s. 43(1) which means, the actual cost of the assessee if any, as has been met directly. Nevertheless Expln. 3 to the section prescribes an authority to the AO to have satisfaction about the cost of the asset and in case he is satisfied that the main purpose of the transfer of such an asset is to reduce the liability of income-tax by claiming higher depreciation on the enhanced cost then the actual cost to the assessee shall be such an amount as the AO determined having regard to all the circumstances of the case but with a rider that a previous approval of the Jt. CIT is essentially required. In the present case the argument of the learned Authorised Representative is that no such satisfaction has ever been recorded by the AO and even it is not in the knowledge of the assessee that whether such an approval as prescribed was obtained by the AO. Apart from this the submission before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm to the company and thus prescribes that such transfer shall not be regarded as transfer to attract levy of capital gains, needless to say subject to certain conditions prescribed therein. 9. Before we conclude we have examined few case law which were relied upon by learned CIT(A) and one of them is R.B. Bansilal Abirchand Spinning Weaving Mills Ltd. vs. CIT (supra) for the proposition that there must be a finding of the AO about unacceptability of the method adopted by the assessee and to demonstrate the irregularity in the said method. In the absence of such a finding the method as adopted by the assessee could not be brushed aside. There is a direct decision of respected Co-ordinate Bench, Cochin reported as Season Rubbers Ltd. vs. Dy. CIT (supra) wherein it was held that in a case when a limited company has taken over the assets of a partnership firm at revalued figures as recorded in the balance sheet then a company is entitled for claim of depreciation on the revalued or enhanced cost of assets. Likewise in the case of Bombay Household Industrial Plastic Mfg. Co. (P) Ltd. vs. ITO (supra) the assessee company took over under an agreement certain assets of its sister ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereupon affirm the verdict of the learned CIT(A). It has also been observed that the question of assessment of goodwill was not before the valuers and they only valued the IPR. It has also been observed that the goodwill depends upon the past performance of going concern; on the other hand, the IPR depends upon the probability of the future performance. Therefore both have independent and divergent directions of valuation. Since the learned CIT(A) has taken the due cognizance of the total consideration which had passed from one hand to another therefore he had no option but to reduce the amount of the goodwill which was so valued by the assessee himself on the basis of the relevant information as placed on record before learned CIT(A). We hereby uphold the reasoning of learned CIT(A) which results into dismissal of these grounds. 14. The next ground is ground No. (ii) reproduced below : 1.2 He erred in not appreciating that the aforesaid ₹ 4,27,00,000 constituted in itself the valuation of the IPR comprising of trade marks and copyrights acquired from the firm as a result of succession of the firm by the appellant company in the business carried on by the firm and thus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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