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TMI Blog2022 (6) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... ani, DR ORDER PER PRASHANT MAHARISHI, AM: 01. These are the three appeals filed by the learned Deputy Commissioner Of Income Tax - 3 (3) (1) Mumbai (The Learned AO) against the order of the learned Commissioner Of Income Tax (Appeals) - 8, Mumbai [ The Learned CIT [A]] for assessment year 2013 - 14, 2014 - 15 and 2016 - 17. 02. The learned AO has raised following grounds of appeal in ITA No. 3632/Mum/2018 for assessment year 2013 - 14 against the order of the learned CIT - A dated 23/3/2018 "1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs. 4,44,07,662/- claimed by the assessee in respect of Iron Ore rights, without appreciating the fact that the shareholders of RRS Minerals i.e., Mr. Bharat Bussa and Mrs. Rita Bussa who got 15.75 crores each as per the agreement dated 15.10.2009 were not having any right and the so called right for purchase of iron ore was with the company i.e. RRS and not with the shareholder and the assessee has never bought the business rights from RRS on which assessee is claiming depreciation? 2. Whether on the facts and in the circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed depreciation amounting to Rs 4,44,07,662/- and computed the total income of the assessee at ₹ 132,394,070/-. 05. Against this order, assessee preferred an appeal before the learned CIT - A, who by order dated 23/3/2018, deleted disallowance of depreciation of Rs 4,44,07,662/-. Aggrieved by that order, learned AO is in appeal before us. 06. Facts related to the disallowance of depreciation as culled out from assessment order is as Under:- "6. Depreciation on Iron Ore Rights 6.1 in the assessment proceedings, it is noticed that the assessee company has claimed depreciation of ₹ 65,940,884 on Iron Ore rights Under block of 'intangible asset'. In the assessment proceedings, the assessee has been asked to furnish the details of the same and its explanation for allowability of the claim of depreciation on such rights. 6.2 In response, the assessee company vide its AR's letter dated 8/2/2016, 11/3/2016 and 21/3/2016 submitted the details and the explanation, as per which, the assessee company has taken over the company RRS minerals resources private limited which had exclusive Iron ore rights in respect of Iron ore extracted from the mines owned by Messer's M S G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saying " nemo det quod non habit' which basically mean you can't give what you do not have. Mr. Bharat Busa and Mrs. Rita Bussa were never having any intangible right in their individual capacity which can be transferred to the assessee. In fact, the mining rights were with MSGM and only purchase right were acquired by the assessee by paying amounts to MSGM. iv. Clearly, assessee has never bought the business a right from RRS on which assessee is claiming depreciation. As per normal accounting entry passed in the books of accounts of the assessee company, the investment in shares of RRS would have been cancelled after the High Court order of merger of RRS with the assessee company and consequently, no asset would be remaining on which assessee could claim depreciation. v. There is a clear difference between the amount paid to RRS and the shareholders of RRS. The amount paid to company is for the purchase of long-term intangible right to purchase Iron Ore at a predetermined rate from MSG are an amount paid to shareholder of RRS is to purchase the company. vi. Assessee submission regarding capitalization of the amount paid to shareholder of RRS is not acceptable and not found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,953 in respect of Iron Ore in FY 2010-11 as under S. No Description of Costs Amount (Rs.) 1. Cost of acquisition of RRS including payment of stamp duty 315,787,820/- Less: Face Value of Equity shares cancelled as per the Order passed by Hon'ble Bombay High Court permitting merger of RRS into the appellant company w.e.f. 15/10/2009 i.e., the day when it bought RRS from its promoters. 100,000 Net cost of acquisition of RRS (A) 315,687,820 3. Other costs including interest paid on funds borrowed for acquisition of RRS till the commencement of Iron Ore business. (B) 4. Total Costs capitalized as intangible Assets being in the nature of depreciable Commercial rights (A.Y. 2011-12) (A+B) 153,225,133 3. The AO has accepted in principle accepted acquisition of Commercial business rights in the form of rights to procure Iron Ore at a pre-determined price for a period upto the year 2027. The AO has also accepted that these rights are Intangible Assets and has allowed depreciation in respect of Furthers costs of Rs. 153,225, 133 incurred. The AO however has disallowed depreciation in respect of costs of Rs. 315,787,820 incurred to acquire RRS from its promoters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We most humbly pray your honour to kindly allow the assessee's claim. Decision 3.2.3 This ground pertains to disallowance of depreciation of Rs. 4,44,07,662/ claimed by the appellant on Iron Ore rights as Intangible assets. The Assessing officer has discussed this issue at para 6 of his order. During the assessment proceedings, the assessing officer observed that the assessee company has claimed depreciation on the Iron ore rights under the Block Intangible Assets'. On being asked about the allowability of the claim of the same, the assessee company contended before the assessing officer that it had taken over the company RRS Mineral Resources Pvt. Ltd. (RRS) which had exclusive Iron Ore rights in respect of Iron Ore extracted from some Iron Ore mines at Goa, owned by one M/s M.S. Gharse Minerals (MSGM.) Brief facts of the case are that through an agreement dated 09.08.2006 entered into by RRS and mine owners MSGM, RRS acquired exclusive rights for a long term in respect of purchase of iron ore extracted by MSGM for a consideration of Rs.11.30 crores. Thereafter, vide agreement dated 14.10.2009, the assessee company acquired shares of RRS thereby becoming wholly own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer charges. 3.2.5 In the course of appellate proceedings, Authorized representative( AR) of the appellant company submitted that the appellant company has bought the company RRS only for acquiring the valuable intangible business rights held by the said company RRS. The AR placed photo copies of all agreements on records and Submitted that the intent for buying the company RRS is quite evident from the covenants specified clause (i) and clause (j) of the agreement dated 14/10/2009 which are reproduced as under:- "(i): In the premises M/s. RRS Minerals Resources Pvt. Ltd (the company) is holding buying and selling rights in respect of Iron Ore/ Fines extracted out of mines known as Garco Mines at ZamblimolachoSoddo' situated at Muguli and CostiSarvoderm, Goa, as per the terms of Memorandum of Agreement dated 28 July 2006 and an agreement dated 9 August, 2006. (i): The purchasers being interested to acquire the business and the aforesaid rights of the company (i.e. RRS) of buying and selling rights in respect of Iron Ore/ Fines extracted out of mines known as Garco Mines at Zamblimolacho Soddo! situated at Muguli and Costi Sarvoderm, Goa, is required to acquire the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated costs of stamp duty and transfer of Rs. 687,820. As regards other payments as well as the costs of borrowing obtained by the appellant for entire amount of investments, the AO has allowed depreciation and has recognized existence of intangible assets. It is further noticed that in earlier year - AY 2012- 13, scrutiny assessment has been made and the Intangible rights have been recognized as such and full amount of depreciation as claimed by the appellant has been allowed. Same was the case for AY 2011-12, where the assessment was although completed under section 143(1) of the Income Tax Act, 1961. 3.2.10 The AO while making the disallowance was primarily of the view that the shareholders of the company did not have any intangible right with them and therefore they could not have sold those rights. The AO was predominantly of the View that the payment to shareholders of RRS was made for making investment in shares of RRS and not for buying any intangible rights from them. 3.2.11 It is however observed from the agreement dated 14/10/2009 that the said agreement was a tripartite agreement wherein the company RRS was also a party to this agreement. In that agreement, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset, is utilizing the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time It is well-settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings, for the purpose of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession. We do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught a property through acquisition of shares without having registered a sale deed in favour of the company, the company is entitled to depreciation in respect of the property so purchased. Hon'ble High Court appreciated that the ownership of the property was vested by acquiring shares in a society. According to section 2(47)(vi) of the Income Tax Act, 1961, "transfer" in relation to the capital asset includes any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons, or by way of any agreement or in any other manner whatsoever). This has the effect of transferring or enabling the enjoyment of immovable property. The ratio of this judgment could also be applied to the case at hand where valuable rights have been acquired through acquisition of shares of the company RRS. 3.2.15 in the matter of Madhukar C. Ashar v. Union of India [2016] 69 taxmann.com 221 (Bombay), Hon'ble Bombay High Court has held that where there is no change in facts and in law, past practice followed and accepted by the revenue cannot be allowed to be changed. Same was the position of law declared by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant, it is seen that the Appellant has claimed depreciation in respect of such mining Iron Ore rights for the first time in AY 2011-12 and furnished all relevant details of its claim in its return of income including the tax audit report. The appellant then claimed depreciation in respect of such rights for AY 2012-13 and its claim has been allowed after conducting scrutiny assessment. The AO has not pointed out that the orders passed in earlier years are per incuriam or could be distinguished for valid reasons. 3.2.16 In the matter of CIT V. Smifs Securities Limited [2012] 24 taxmann.com 222(SC), the Supreme Court has held that depreciation on similar facts is to be allowed. In this case, one 'YNS Shares and securities Pvt. Ltd. was merged with the assessee company. The assessee paid consideration over and above the net value of assets acquired and claimed the amount so paid in excess of value as Intangible assets in form of Goodwill and claimed depreciation in that regard. The Supreme Court of India in para 6 of the order has affirmed the findings of lower authorities that the difference between cost of an asset and the amount paid constituted goodwill and that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is a misplaced decision alright, is being unnecessarily harsh, particularly when the factum of payment and its sources, being 100% bank loan, are not in doubt even by the present AO. 3.2.19 In view of the facts and discussion in the above paragraphs, I am of the considered view that the AO has denied depreciation by taking a far-fetched view that the payment of Rs. 31.50 Crores is merely to buy shares of the company RRS and thus, no assets eligible for depreciation have been created, which is not a proper view on the basis of facts and the evidence on record as discussed above. Therefore, the AO is directed to delete the disallowance of depreciation of Rs 4,44,07.662/- claimed by the appellant in respect of Iron Ore rights These grounds of appeal are allowed." 09. Thus, LD AO is aggrieved with the order of the learned CIT - A is in appeal before us. 010. The learned department representative referred to paragraph number 6.3 of the assessment order. He submitted that there were two payments made by the assessee. There is no dispute on allowability of depreciation on a sum of ₹ 11.30 crores paid by the assessee to MSMG for buying the rights of purchasing iron ore. The dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 for acquiring the shares of RRS minerals Ltd. On that stamp duty of ₹ 787,820/- was also paid and therefore total payment is ₹ 315,787,820/- which is incurred by the assessee for purchase of shares through which assessee has acquired commercial right over the iron ore extraction rights. He submitted that assessee has purchased shares of RRS Minerals and Resources Pvt Ltd and that company was having intangible assets in the form of Purchase rights of Iron ore. Therefore, assessee in substances did not acquire shares but intangible assets in form of purchase rights of Iron ore. He stated that the dispute is whether depreciation is allowable on this sum or not. He further stated that assessee has also paid ₹ 11 crores on 24/11/2009 for acquiring the commercial right [of exclusive purchase of iron ore from Gharse Mines] from Gharse family who were owners of the mine and there is no dispute of depreciation on the same. He also referred to several other payments made by the assessee on processing fees, stamp duty charges and interest paid which resulted into a total payment of ₹ 469,012,953/- for acquisition of iron ore rights. From the above sum nominal value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the same. He also extensively quoted the decisions relied upon by the learned CIT - A. He further referred to the decision of coordinate bench in case of Mehta equities limited ITA number 570/M/2015 for assessment year 2010 - 11 dated 21/9/2016 referring to paragraph number 18 stating that where an assets has already entered into a block of assets and is brought forward as opening written down value, there cannot be any question for not allowing the depreciation on the opening amount of WDV of the asset, so long as it continues to be used for the business of the assessee. He further referred to the decision of the honourable Bombay High Court in case of CIT versus Sonic Biochem Extractions Private Limited In Income Tax Appeal Number 2088 of 2013 dated 17th number 2015 to substantiate that the 'user test' is required to be satisfied only at the time of the purchase of plant and machinery when it first becomes the part of the block of the assets for the first time and not subsequently. He therefore submitted that the claim of the assessee has been correctly allowed by the learned CIT - A. accordingly, the appeal filed by the learned assessing officer deserves to be dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date] , RRS minerals resources private limited got amalgamated with the assessee company by order dated 15 October 2010 [ date of order] of Honourable Bombay High Court in Companies petition number 372 of 2010. 016. On 24/11/2009, (prior to the date of order of the honourable High Court but after the effective date) an agreement was entered into between various Members of Gharse family being members of an AOP and RRS minerals resources private limited, (now the assessee) wherein ₹ 11 crore were paid as nonrefundable advance for purchase of Iron Ore. the agreement is also known as agreement for sale and purchase of Iron Ore. 017. There are certain other expenses incurred by the assessee or Other parties with which we are not concerned. 018. The undisputed facts show that there is no dispute between the parties on allowability of depreciation on payment of ₹ 11 crores as per agreement dated 24/11/2009. 019. The only dispute is whether the depreciation is allowable to the assessee on payment of ₹ 31.58 crores made by the assessee for purchase of shares of RRS mineral resources Ltd as an intangible asset or not. 020. Provisions of Section 32 of The Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er examined that in block of intangible assets, assessee has included "shares' also. 023. Therefore, LD AO has not formed any view on allowability of depreciation on shares. Therefore, there cannot be any question of violation to principles of consistency by LD AO. In fact the 'shares' cannot be classified as intangible assets u/s 32 (1) (ii) of the act. Thus, LD CIT (A) for allowing claim of assessee on principles of consistency is devoid of any merits. 024. The learned CIT - A has also accepted the plea of the assessee with respect to the consistency as in assessment year 2011 - 12 depreciation has been allowed. We find that in the guise of consistency, it can never be held that 'shares' are intangible asset on which depreciation can be allowed u/s 32(1) (ii) of the Act. Such is also not the mandate of the decision of the honourable Bombay High Court relied upon by the learned CIT - A in 69 taxmann.com 24. 025. Section 32 (1) (ii) defines intangible assets as ' know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature' . Even otherwise shares are financial assets classified as tangible assets because they deriv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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