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TMI Blog2024 (7) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... ets. 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... er and, • even otherwise no prejudice was caused to the Revenue even on the basis of the alleged incorrect error noted by the ld. PCIT. 4. Our attention was drawn to the show-cause notice issued by the ld. PCIT under Section 263 of the Act, placed before us at page Nos. 80 & 81of the paper-book, which reads as under:- "No. Pr.CIT-3/HQ/263/NTPL/2022-23 Date: 21.03.2023 PAN: AADCN4650M To, Neuation Technologies Pvt Ltd, Plot No15, GIDC Electronic Park SEZ, Sector-26, Gandhinagar Sub: Revisional proceedings u/s.263 of the I.T. Act 1961 for A.Y. 2018-19- Show Cause Notice - reg.- Please refer to the above. 2. On verification of case records, it is seen that you have filed return of income for A.Y. 2018-19 on 29.11.2018 declaring total income of Rs. (-)125,09,735/-. Your case was selected for scrutiny to verify the issue of investment in intangible assets. The assessment was finalized u/s.143(3) of the Act on 17.03.2021 by accepting the returned income. 3. On examination of case records, it is noticed that the company claimed depreciation of Rs 83,87,835/- @25% on Rs 3,64,42,319/- in respect of intangible assets acquired during the year. It is also seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se why the disallowance of the amount of Rs. 83,87,835 should not be made by passing appropriate revisional order u/a 263 of the Act in your case. 7. In case, you have any objection to the action proponed above, you are requested to furnish your written submission to the proposed action by 27.03.2022 through e- filing portal or at my office at Room No.411, C-Wing. Pratyakshkar Bhavan, Ambawadi, Ahmedabad. Personal appearance is not compulsory and furnishing of written submission completed in all respect on the above issues shall be treated as sufficient compliance. 8. The proposed proceedings is time barring on 31.03.2023. Hence, you are requested to comply with this notice by the given date and time, failing which, the revision proceedings u/s.263 of the Act shall be finalized on the basis of the material available on record and on the merits of the case which may please be noted. Sd/- (RITA KUMARI DOKANIA) Pr. Commissioner of Income Tax-3, Ahmedabad" 5. Referring to the same, ld. Counsel for the assessee pointed out that, as per ld. PCIT, the assessment order was noted to be erroneous on account of the claim of depreciation on intangible assets, amounting to Rs. 83,87,83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributed to it was on account of expenses incurred in the course of creation or development of the design. He thereafter pointed out thatthe ld. PCIT had incorrectly appreciated AS-26 ("Accounting Standard 26") to be stating that the value to be attributed to the intangible assets was to be determined by a third party valuer. He drew our attention to AS-26 (copy of which was placed before us) and pointed out that the cost of an internally generated intangible asset as per the said Standard comprisedall expenditure that could be directly attributed, or allocated on a reasonable and consistent basis, to creating, producingand making the asset ready for its use. In this regard, he drew our attention to AS-26 placed before us at page nos. 517 to 561 of the paper-book, more particularly to paragraph nos. 52 and 53 of the same which reads as under:- "Cost of an Internally Generated Intangible Asset 52. The cost of an internally generated intangible asset for the purpose of paragraph 23 is the sum of expenditure incurred from the time when the intangible asset first meets the recognition criteria in paragraphs 20-21 and 44. Paragraph 58 prohibits reinstatement of expenditure recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the assessee pointed out that the term "Fair Market Value (FMV)" has been used in paragraph 26 of the AS where it states that if an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is to be recorded at its Fair Market Value, or the fair value of the securities issued, whichever is more clearly evident. Para 26 of the AS26 was pointed out to us as under; "26. If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value , or the fair value of the securities issued, whichever is more clearly evident." 11. He stated that the reference to fair market value in AS-26 is in totally different facts and circumstances, where an intangible asset is acquired in exchange of shares and securities. He stated, therefore, that it is clearly evident from the above that the ld. PCIT had misunderstood and wrongly applied the Accounting Standard AS-26 to the facts of the case to hold that the internally created intangible asset of the assessee by way of designs was to be valued by a third party valuer and the Assessing Officer having not got this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way bogus. He pointed out that her only contention or belief was that the intangible assets had been incorrectly valued by the assessee resulting in incorrect depreciation being claimed by the assessee. That there was no claim by the ld. PCIT that the expenses incurred by the assessee on account of creation of the intangible assets were in any way bogus. He, therefore, contended that in the facts of the issue noted by the ld. PCIT herself, there could not be any prejudice caused to the Revenue. That, on the contrary, if the contention of the ld. PCIT is found to be correct, the assessee would be entitled to claim more expenditure, i.e. 100% of the expenditure incurred on designs as opposed to only depreciation claimed by the assessee on it. 14. The ld. DR, however, stated that there was no infirmity in the assumption of jurisdiction by the ld. PCIT to revise the order of the Assessing Officer and it was a valid assumption of jurisdiction. 15. Having heard both the parties and having carefully gone through the contents of the show-cause notice as also the documents, being AS-26, referred to by the ld. Counsel for the assessee before us, we are inclined to agree with the ld. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18. We completely agree with the ld. Counsel for the 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. 19. Going forward from here, we also agree with the ld. Counsel for the assessee that the only error noted by the ld. PCIT was vis-à-vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment proceedings chronologically, referring to the relevant paper-book page number where the documents referred to in the details, were placed. The same are reproduced hereunder:- "Details of 'notices' issued by AO &'replies' furnished by assesseeat the 'original assessment stage' Date Particulars Pgs. Of P/B 28.09.2019 28.09.2019 Assessee's case was selected for scrutiny by issuance of statutory notice dated 28.09.2019 u/s 143(2) of the Act and the issue identified for selecting the case for scrutiny was "investment in intangible assets 54-55 13.12.2019 AO, vide notice dated 13.12.2019 u/s 142(1), called upon the assessee to furnish the following details in relation to "addition to intangible assets"'. • Nature of intangible assets added to the block. • Details of party from whom assets have been acquired. • Agreement for purchase of intangible assets. • Details of mode of payment. • Valuation report of intangible assets. • Business need of the intangible assets 56-57 27.02.2020 Assessee, vide letter dated 27.02.2020, made the following submissions before AO: • Assessee is engaged in the business of manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not arise at all. _ Assessee is developing its own designs and transferring all the relevant expenses incurred for this activity to the designated account. At the year end, if any designs are considered ready for production, the same are transferred to design account and "depreciation" is claimed thereon 61-64 23.11.2020 Assessee, vide letter dated 23.11.2020, made following submissions before AO: _ Attention was invited to following contents of earlier reply dated 27.02.2020: • Explanation in respect of entire process of researching a particular product / design undertaken by assessee. • Documentary evidences furnished in support of the issue on hand. _ Sample working of costing of a design (I-Fuge M18) developed during the year under consideration with working of cost allocation was furnished (Pg.70 of PB). _ Assessee has been consistently following such method in respect of all designs developed in-house. 65-70 12.03.2021 AO, vide notice dated 12.03.2021 u/s 142(1), called upon the assessee to furnish following details / documents: _ Whether any valuation of intangible assets was carried out by any professional valuer for FY 2017-18 or for any earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion report and business meet for intangible assets. That the assessee submitted all details asked for, explaining how the intangible asset is created and also the need for creation of the intangible asset pointing that being engaged in the business of manufacturing laboratory and medical equipment, the assessee is continuously researching various designs for developing its own products for manufacturing and the creation cost of every new product involving testing expenses, purchase of material from various sources and salary to staff are debited to the intangible asset account. The assessee had also pointed out that it had created 66 such designs incurring the total cost of Rs. 3,64,42,319/- and on which deprecation was being claimed. The details of depreciation on intangible assets was submitted and the assessee had also evidenced the cost incurred on creation of such designs by providing ledgers of all expenses incurred in the process along with supporting evidences. The assessee had pointed out that no intangible assets had been acquired by them during the year and, therefore, no question for its valuation arose. That it was developed its own designs and transferring all releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any way, not a possible view. In fact, we find that even the ld. PCIT has not pointed out as to why the view taken by the Assessing Officer was incorrect considering all the replies and explanation furnished by the assessee. 26. 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 as above at paragraph No. 4.3 of the order as u ..... 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