2018 (1) TMI 12 - AT - Income Tax

Tribunal allows depreciation on assets, adjusts intangible asset value, dismisses claim on share capital expenses

The Tribunal partly allowed the appeals of the assessee, directing the Assessing Officer to allow depreciation on tangible assets, know-how, trademarks, ... Depreciation on assets acquired under slump sale - allocation of slump consideration between tangible and intangible assets - ownership and use as conditions for allowance of depreciation - written down value of block of assets - non-inclusion of non-depreciable land in valuation of intangibles - power to enhance assessment where earlier valuation is found incorrect - allowability of depreciation on goodwill and non-compete feesAllocation of slump consideration between tangible and intangible assets - depreciation on assets acquired under slump sale - allowability of depreciation on goodwill and non-compete fees - Whether the assessee was entitled to depreciation on tangible assets, know how, trademarks, patents and goodwill (and non compete) acquired under the slump sale - HELD THAT: - The Tribunal accepted that the assessee acquired the Indian business and business IP under the BTA and novation and that the assessee produced independent valuation reports allocating the lump sum consideration to identifiable tangible assets and to intangibles (know how, trademarks, patents and goodwill). The CIT(A)'s conclusion that Panki and Taloja lands were part of the slump consideration and that, therefore, no amount remained for intangibles, was rejected in part: the Tribunal held on the contractual record (BTA, TCA, novation and schedules) that neither Panki nor Taloja land passed to the assessee as owner on completion, and that the Toll Conversion Agreement evidenced transfer of IP/technical information rights to the assessee (subject to limited use by ICI). The Tribunal found the assessee's independent valuation to be a proper basis for bifurcation and, after correcting the over statement of Panki land value (reducing intangible allocation by Rs. 13 crores), directed recomputation allowing depreciation on tangible assets, know how, trademarks, patents, goodwill and on the non compete fee. The Tribunal relied on accounting practice (AS 10) and authorities holding slump consideration may be apportioned where valuation evidence exists, and rejected the CIT(A)'s wholesale denial of bifurcation in this purchaser's case. [Paras 54, 56, 63, 69, 73]Assessee entitled to depreciation on tangible assets and on intangibles (know how, trademarks, patents and goodwill) and on non compete; Assessing Officer to recompute values after reducing intangible allocation by the determined Panki land adjustment.Written down value of block of assets - ownership and use as conditions for allowance of depreciation - depreciation on assets once entered into block of assets - Whether authorities could disturb the opening WDV and deny depreciation in the subsequent year once assets had entered the block of assets and depreciation had been allowed earlier - HELD THAT: - The Tribunal held that following the amendment introducing the 'block of assets' regime, the opening aggregate WDV of a block determined in an earlier year (and on which depreciation was allowed) cannot be lightly disturbed in subsequent years. The statutory scheme in section 43(6) contemplates computation at block level and, absent proof of a valid basis to rework the opening WDV, authorities may not reopen the accepted WDV to deny depreciation in later years. The Tribunal relied on the jurisdictional High Court precedent emphasising the sacrosanct nature of the opening WDV brought forward and held that the CIT(A)'s attempt to re open valuations accepted in earlier year was not sustainable; having decided entitlement on merits, the Tribunal did not adjudicate enhancement power as it became academic. [Paras 70, 71, 72, 73]Opening WDV of the block as accepted in earlier year cannot be disturbed; assessee entitled to claim depreciation on the brought forward WDV.Non inclusion of non depreciable land in valuation of intangibles - allocation of slump consideration between tangible and intangible assets - Whether value of Panki and Taloja lands was required to be attributed from the slump consideration and whether the CIT(A)'s valuations of those lands were correct - HELD THAT: - On the contractual terms the Tribunal found that Panki assets and certain Panki land were part of 'Excluded Assets' and had not been transferred to the assessee as owner on completion; Taloja land was held under leave and license from HLL and not owned by ICI and could not have been transferred as owner on the BTA date. The CIT(A)'s broad allocation treating full market value of all lands as absorbed by the slump consideration was therefore unsustainable. The Tribunal accepted that a more realistic allocation would attribute a limited value to Panki (applying site specific area) and rejected the CIT(A)'s valuation that left virtually no amount for intangibles; it directed the Assessing Officer to recompute with Panki land value reduced (the Tribunal indicated Rs.13 crores adjustment) so as to preserve the independent valuer's bifurcation largely intact. [Paras 49, 50, 51, 69, 73]CIT(A)'s finding that full market value of Panki and Taloja lands was part of slump price is reversed; Assessing Officer to recompute allocations with adjusted land values (reducing intangible allocation accordingly).Power to enhance assessment where earlier valuation is found incorrect - depreciation on assets acquired under slump sale - Whether the CIT(A) properly exercised enhancement powers to disallow depreciation previously allowed by the Assessing Officer - HELD THAT: - The Tribunal observed that because it had decided on the merits that the assessee was entitled to depreciation (subject to the land value adjustment), the question of the CIT(A)'s enhancement exercise became academic and was not further adjudicated. The Tribunal noted the CIT(A) had attempted to enhance on the ground that earlier allocation/valuation was incorrect, but having accepted the valuer's bifurcation (with the specified adjustment) the enhancement is not sustained in the respects set out by the CIT(A). [Paras 16, 36, 73]Enhancement by CIT(A) is not sustained to the extent it disallowed depreciation which the Tribunal has directed be allowed after recomputation; enhancement issue rendered academic by the Tribunal's substantive conclusions.Corporate expenditure on increase in share capital - capital nature of expenses - Whether expenditure on filing fees and stamp duty paid to Registrar of Companies in relation to increase in share capital is deductible - HELD THAT: - The Tribunal followed settled law that expenses incurred in relation to increasing share capital are capital in nature. Having found the costs are incidental to raising share capital, the Tribunal held they are not allowable as revenue deductions under section 37 and rejected the assessee's claim. [Paras 74, 75]Expenditure pertaining to increase in share capital is capital expenditure and not allowable as deduction; ground of appeal dismissed.Final Conclusion: The appeals are partly allowed: the Tribunal directs recomputation and allowance of depreciation on tangible assets, know how, trademarks, patents, goodwill and non compete (subject to a reduction in intangible allocation to reflect adjusted Panki land value); the Assessing Officer to give effect to the recomputation; the claim for share capital related expenses is dismissed. Issues Involved:1. Depreciation on various assets purchased for lump sum consideration.2. Power of enhancement by CIT(A).3. Rule of consistency.4. Disallowance of depreciation once the asset has entered the block of assets.5. Incorrect appreciation of facts leading to disallowance of depreciation.6. Value of land at Taloja and Panki.7. Valuation of trade-marks, patents, and know-how.8. Depreciation on non-compete payment.9. Depreciation on goodwill.10. Expenses pertaining to increase in share capital.11. Initiation of penalty under section 271(1)(c) of the Act.Detailed Analysis:1. Depreciation on Various Assets Purchased for Lump Sum Consideration:The assessee claimed depreciation on tangible and intangible assets acquired from ICI India Ltd. as part of a slump sale. The CIT(A) disallowed the depreciation, arguing that the assets were acquired as part of an undertaking and not individually. The Tribunal found that the assessee had acquired both tangible and intangible assets, including know-how, trademarks, and patents, and was entitled to claim depreciation on these assets. The Tribunal also noted that the valuation of these assets was done by an independent valuer and was in accordance with AS-10 of the Accounting Principles.2. Power of Enhancement by CIT(A):The CIT(A) issued a notice of enhancement to disallow depreciation on know-how, trademarks, and patents, arguing that these were neither owned nor used by the assessee. The Tribunal held that the CIT(A) could not disturb the WDV of assets once they had entered the block of assets and depreciation had been allowed in the preceding year.3. Rule of Consistency:The Tribunal emphasized the rule of consistency, stating that the legal position accepted in preceding assessment years should be followed if there is no change in the facts in subsequent assessment years. The Tribunal cited the Hon'ble Bombay High Court in Director of Income Tax (IT) Vs. HSBC Asset Management (I) (P.) Ltd. (2014) 47 taxmann.com 286 (Bom) to support this view.4. Disallowance of Depreciation Once the Asset Has Entered the Block of Assets:The Tribunal held that once assets have entered the block of assets and depreciation has been allowed, the WDV of such assets should not be disturbed in subsequent years. The Tribunal cited the Hon'ble Bombay High Court in Director of Income Tax (IT) Vs. HSBC Asset Management (I) (P.) Ltd. (2014) 47 taxmann.com 286 (Bom) to support this view.5. Incorrect Appreciation of Facts Leading to Disallowance of Depreciation:The CIT(A) argued that the valuation of intangible assets was incorrect as no value was attributed to the land at Taloja and Panki. The Tribunal found that the land at Taloja was leasehold land and not owned by ICI India Ltd., and the land at Panki was not transferred to the assessee. Therefore, the valuation by the independent valuer was correct.6. Value of Land at Taloja and Panki:The CIT(A) attributed a value of Rs. 174.36 crores to the land at Panki and Rs. 13 crores to the land at Taloja. The Tribunal found that the land at Taloja was leasehold land and not transferred to the assessee, and the land at Panki was not transferred to the assessee. Therefore, the CIT(A)'s valuation was incorrect.7. Valuation of Trade-marks, Patents, and Know-how:The CIT(A) disallowed depreciation on trademarks, patents, and know-how, arguing that these were not acquired or used by the assessee. The Tribunal found that the assessee had acquired these assets as part of the slump sale and was entitled to claim depreciation on them.8. Depreciation on Non-compete Payment:The CIT(A) disallowed depreciation on non-compete payment, arguing that it was not an intangible asset. The Tribunal found that non-compete payment is an intangible asset and the assessee is entitled to claim depreciation on it.9. Depreciation on Goodwill:The CIT(A) disallowed depreciation on goodwill, arguing that it was not an intangible asset. The Tribunal found that goodwill is an intangible asset and the assessee is entitled to claim depreciation on it. The Tribunal cited the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) to support this view.10. Expenses Pertaining to Increase in Share Capital:The CIT(A) disallowed expenses pertaining to the increase in share capital, arguing that these were capital expenses. The Tribunal upheld the CIT(A)'s decision, stating that expenses on share capital are capital expenses and not allowable as deductions.11. Initiation of Penalty Under Section 271(1)(c) of the Act:The CIT(A) initiated penalty proceedings under section 271(1)(c) of the Act, arguing that the assessee had submitted wrong particulars of income. The Tribunal's decision on this issue is not explicitly mentioned in the summary.Conclusion:The Tribunal partly allowed the appeals of the assessee, directing the Assessing Officer to allow depreciation on tangible assets, know-how, trademarks, patents, goodwill, and non-compete fees. The Tribunal also directed the Assessing Officer to re-compute the value of intangible assets by reducing Rs. 13 crores on account of the value of Panki land. The Tribunal dismissed the claim of the assessee regarding expenses pertaining to the increase in share capital.