2017 (6) TMI 340 - AT - Income Tax

Tribunal validates reassessment, disallows depreciation on non-compete fees, instructs goodwill calculation.

The Tribunal upheld the validity of reassessment proceedings under Sections 147/148, citing misrepresentation by the assessee. Depreciation on 'Government ... Reopening of assessment - reasons to believe - depreciation on Government Authorization - Held that:- We find that after the submission of the assessee that no fixed assets more than ₹ 10 lakh was acquired by the company during the year, no further query was raised by the Assessing Officer on the issue of depreciation on Government Authorization and thus no question of failure in applying the legal provisions on the facts arises.The fact whether the assessee claimed depreciation on the Government Authorization, was not stated truly by the assessee to the Assessing Officer and thus issue of application of law did not arise. In the instant case the Assessing Officer was prevented to examine the issue because of hiding the information by the assessee, we cannot say that Assessing Officer applied his mind and formed opinion to allow the depreciation on the Government Authorization. Discovery of the facts that the assessee claimed depreciation on government authorization constitute an information, and this information came to the Assessing Officer after the original assessment by fresh facts revealed later on. In such circumstances the issue of change of opinion in the reassessment proceedings cannot arise, when no opinion was framed on the issue of depreciation on government authorization in the original assessment proceeding. Whether the Government authorization/approvals falls under the category of intangible assets mentioned in section 32(1)(ii)? - Held that:- Government authorization/approvals are neither license nor the rights of business or commercial nature in the hands of M/s. KOAL, which could be transferred to the assessee and therefore no depreciation on the value assigned to government organizations/approvals by the assessee, could be allowed to the assessee. The ground of appeal is accordingly dismissed. Depreciation disallowed on non-compete fee - Held that:- As relying on Sharp business system versus Commissioner of income tax-III, (2012 (11) TMI 324 - DELHI HIGH COURT) and issue is covered in favour of the Revenue as held Every species of right spelt-out expressly by the Statute - i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit - Decided against assessee. Disallowance of depreciation on goodwill - Held that:- The claim of the depreciation on goodwill cannot be allowed in the year under consideration. The alternative plea for allocating the value of government authorization towards goodwill is not accepted as the valuation has been carried out by the assessee from a valuer and the assessee is claiming the same as independent valuer, the assessee is bound to accept the value assigned to government authorizations. This alternative plea of the assessee, is accordingly rejected. The ground of the assessee is dismissed. Validity of assessment proceeding under section 147 - for AY 2006-07 - Held that:- The requirement of any fresh tangible material for reasons to believe, where return is processed under section 143(1) of the Act, is no longer required. In the instant case, the return is processed under section 143(1) of the Act and thus it is not necessary to have a fresh tangible material to form “reason to believe” that income has escaped. Thus assessment has been reopened validly. Accordingly, we uphold the finding of the Ld. CIT-(A) on the issue of dispute and the ground of the appeal is dismissed. Issues Involved:1. Validity of Reassessment Proceedings under Section 147/148.2. Disallowance of Depreciation on Government Authorizations.3. Disallowance of Depreciation on Non-Compete Fee.4. Disallowance of Depreciation on Goodwill.Detailed Analysis:1. Validity of Reassessment Proceedings under Section 147/148:The reassessment proceedings were initiated based on the discovery that the assessee's claim for depreciation on 'Government Authorizations' and non-compete fee was not allowable. The assessee argued that there was no failure to disclose material facts fully and truly. However, the Tribunal upheld the validity of the reassessment, reasoning that the original assessment was completed under Section 143(3) and the reassessment was initiated within four years. The Tribunal noted that the assessee misrepresented facts by stating no fixed assets above Rs. 10 lakhs were acquired, which justified the reassessment under Section 147.2. Disallowance of Depreciation on Government Authorizations:The assessee claimed depreciation on 'Government Authorizations' acquired from KOAL under a Business Transfer Agreement (BTA). The Assessing Officer disallowed this, stating that 'Government Approvals/Authorization' do not form part of specified assets eligible for depreciation under Section 32. The Tribunal upheld this view, noting that the approvals were not assets in the hands of KOAL and thus could not be transferred to the assessee. The Tribunal concluded that these authorizations were neither licenses nor business or commercial rights of similar nature.3. Disallowance of Depreciation on Non-Compete Fee:The Tribunal had previously upheld the non-compete fee as a capital expenditure. The assessee argued that non-compete fees should be treated as intangible assets eligible for depreciation under Section 32(1)(ii). However, the Tribunal, following the decision in Sharp Business System (India) Ltd., held that non-compete fees do not qualify as intangible assets similar to know-how, patents, copyrights, trademarks, licenses, or franchises. The Tribunal concluded that non-compete fees are personal rights and not transferable, thus not eligible for depreciation.4. Disallowance of Depreciation on Goodwill:The assessee claimed depreciation on goodwill for the first time in appellate proceedings. The Tribunal noted that the BTA did not mention goodwill, and the valuation report did not assign any value to goodwill. However, relying on the Supreme Court decision in Smifs Securities Ltd., the Tribunal acknowledged that goodwill is an intangible asset eligible for depreciation under Section 32(1)(ii). The Tribunal directed that the value of goodwill should be computed by reducing the value of all liabilities, tangible assets, and other assigned values from the slump sale consideration.Conclusion:- The reassessment proceedings were upheld as valid.- Depreciation on 'Government Authorizations' was disallowed.- Depreciation on non-compete fees was disallowed.- Depreciation on goodwill was allowed in principle but required computation based on the value of transferred assets and liabilities.