2024 (7) TMI 494 - AT - Income Tax

CIT revision order under section 263 set aside for incorrect interpretation of AS-26 on intangible asset valuation

Accumax Lab Devices Pvt. Ltd., (Formerly known as Neuation Technologies Private Limited) Versus Principal Commissioner of Income-tax-3, Ahmedabad

Accumax Lab Devices Pvt. Ltd., (Formerly known as Neuation Technologies Private Limited) Versus Principal Commissioner of Income-tax-3, Ahmedabad - TMI Issues Involved:1. Jurisdiction of PCIT under Section 263 of the Income-tax Act, 1961.2. Alleged error in the assessment order regarding depreciation on intangible assets.3. Whether the Assessing Officer conducted proper inquiry.4. Application and interpretation of Accounting Standard 26 (AS-26).Detailed Analysis:1. Jurisdiction of PCIT under Section 263 of the Income-tax Act, 1961:The assessee contended that the PCIT initiated proceedings under Section 263 against an amalgamating company that was not in existence on the date of initiation. The PCIT's action was challenged as being without jurisdiction and not permissible in law or on facts. The Tribunal found that the PCIT's assumption of jurisdiction was based on a flawed understanding of AS-26 and therefore, the entire proceedings conducted by the PCIT were not valid.2. Alleged Error in the Assessment Order Regarding Depreciation on Intangible Assets:The PCIT noted that the assessment order was erroneous due to the incorrect allowance of depreciation on intangible assets amounting to Rs. 83,87,835/-. The PCIT argued that the AO failed to make proper inquiries and relied on an incorrect valuation method. However, the Tribunal found that the PCIT misunderstood AS-26, which does not mandate third-party valuation for internally generated intangible assets. The Tribunal held that the assessee followed the correct method as per AS-26, which includes all expenditure directly attributable to creating the intangible asset.3. Whether the Assessing Officer Conducted Proper Inquiry:The PCIT claimed that the AO did not conduct a proper inquiry regarding the valuation of intangible assets. However, the Tribunal noted that the AO had issued multiple notices and received detailed replies from the assessee explaining the process of creating and valuing intangible assets. The assessee had provided all necessary documentation, including ledgers and supporting evidence for the expenses incurred. The Tribunal concluded that the AO had conducted a thorough inquiry and that the PCIT's claim of inadequate inquiry was unfounded.4. Application and Interpretation of Accounting Standard 26 (AS-26):The PCIT's basis for revising the assessment order was her belief that AS-26 required intangible assets to be valued at Fair Market Value (FMV) by a third-party valuer. The Tribunal found this understanding to be incorrect. AS-26 prescribes the historical cost basis for internally generated intangible assets, which includes all directly attributable expenditure. The Tribunal noted that the PCIT had relied on a definition of FMV in AS-26, which is applicable in different contexts, such as when intangible assets are acquired in exchange for shares or securities. The Tribunal held that the assessee's method of valuing intangible assets was in accordance with AS-26 and that the PCIT's interpretation was flawed.Conclusion:The Tribunal set aside the order passed under Section 263 of the Act, holding that the PCIT's assumption of jurisdiction was based on incorrect premises. The Tribunal found no error in the assessment order regarding the valuation of intangible assets and the claim of depreciation. The appeal of the assessee was allowed, and the order of the PCIT was set aside.