2018 (12) TMI 315 - AT - Income Tax

Tribunal Upholds Disallowance of Depreciation on Intangible Assets

M/s. Padmini Products Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle – 5 (1) (2), Bangalore.

The Tribunal dismissed the appeal filed by the assessee regarding the non-granting of depreciation on intangible assets. The Tribunal held that the ... Depreciation on intangible assets - case of conversion of partnership firm into a company - determination of WDV / cost of acquisition - binding force of contradictory decision of ITAT for earlier years - Held that:- In all the three circumstances above, the erstwhile company ceases to exist and a new company comes into existence. In the case on hand also, on account of conversion, the erstwhile partnership firm ceased to exist while the company has come into existence. Therefore, the assets come to vest in the hands of the company and there is no cost of assets to the company on such vesting. When the transaction itself has been treated to be not a transfer, but is akin to succession, in our opinion the 5th proviso to subclause (ii) of sec. 36(1) applies and the depreciation has to be calculated as if there is no transfer. Further, as there is no transfer, there is no cost to the assessee. Depreciation is allowable on the WDV of the asset and WDV has been defined u/s 43(6) to mean in the case of assets acquired in the previous year, the actual cost to the assessee. As actual cost to the assessee was ‘Nil’, the WD value of the assets in the hands of the predecessor firm shall be considered for the allowance of depreciation. Therefore, we do not see any reason to interfere with the orders of the authorities below. Although in Assessment Year 2013-14, the Tribunal has stated in para no. 10 of that Tribunal order which has been reproduced above that the Tribunal finds no reason to take a contrary view in this appeal and therefore, following the Tribunal order for earlier years, the AO was directed to allow depreciation on intangible assets. When the issue was decided by the Tribunal against the assessee for Assessment Years 2005-06 and 2008-09 and also for Assessment Year 2012-13, this Tribunal order for Assessment Year 2013-14 in which, it is stated that the earlier tribunal orders are being followed, it cannot be considered as binding precedence and hence, by respectfully following the earlier Tribunal orders for Assessment Years 2005-06, 2008-09 and 2012-13, the issue in dispute is decided against the assessee.- decided against assessee. Issues Involved:1. Non-granting of depreciation on intangible assets amounting to Rs. 1,64,95,840.Issue-wise Detailed Analysis:1. Non-granting of Depreciation on Intangible Assets:The primary grievance of the assessee revolves around the disallowance of depreciation on intangible assets, specifically brand names and trademarks valued at Rs. 65,26,40,150. The assessee challenges the order of CIT(A)-5, Bangalore, dated 13.05.2018, which upheld the action of the Assessing Officer (AO) in denying the depreciation claim.The assessee's arguments are multifaceted:- The revaluation of intangible assets was conducted by the erstwhile firm before its succession into the appellant company. The assets, including intangibles, were transferred under Section 47(xiii) of the IT Act, which exempts such transactions from capital gains tax, implying that transfers can occur at values higher than book value.- There is no stipulation under Section 47(xiii) or elsewhere in the IT Act that assets cannot be revalued before succession or must be transferred at book value. The appellant argues that the revaluation and subsequent transfer should be recognized for depreciation purposes.- The appellant references Board Circulars and Schedule VI of the Companies Act, 1956, which acknowledge the allotment of shares for consideration other than cash, supporting their claim that actual cost need not necessarily involve cash transactions.- The appellant also highlights that the existence and valuation of the intangible assets were certified by a valuer and not disputed by the AO. Furthermore, in the appellant's own case for AY 2013-14, the ITAT had allowed the depreciation claim.In response, the revenue supports the CIT(A)'s order, emphasizing that the Tribunal, in the assessee's own case for AY 2012-13, had decided against the assessee, dismissing the appeal.The Tribunal's analysis:- The Tribunal reviewed the relevant paras from the CIT(A)'s order, noting that the firm was converted into a private limited company on 30.01.2004, and the intangible assets were revalued at that time. The AO observed that these intangibles were valued based on the assessee's estimation without any actual cost incurred, thus disallowing the depreciation claim for the pre-conversion period while allowing it for the post-conversion period.- The Tribunal also revisited its orders for AY 2012-13 and AY 2013-14. For AY 2012-13, the Tribunal had dismissed the appeal, stating that the assets' revaluation did not involve any actual cost, and thus, depreciation was not allowable. However, for AY 2013-14, an apparent mistake was noted where the Tribunal incorrectly stated that the issue was decided in favor of the assessee based on earlier years' orders.- Correcting this mistake, the Tribunal clarified that the earlier orders for AY 2005-06, 2008-09, and 2012-13 had consistently dismissed the assessee's appeals on similar grounds. Therefore, the Tribunal decided to follow these precedents and dismissed the appeal for the current assessment year as well.Conclusion:The Tribunal concluded that the issue of non-granting of depreciation on intangible assets is covered against the assessee by its own earlier orders for AY 2005-06, 2008-09, and 2012-13. Consequently, the appeal filed by the assessee was dismissed. The Tribunal emphasized that the revaluation of assets without actual cost does not entitle the assessee to claim depreciation, thus upholding the CIT(A)'s order and the AO's disallowance.