TaxTMI 
TaxTMI 
2017 (7) TMI 416
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....nally, the assessment was completed u/s 143(3) of the Act vide order dated 29/12/2009 at a loss of Rs. 35,86,32,378/-. While doing so, the Assessing Officer (AO) has disallowed the claim for depreciation on the value of intangible asset known as "distribution network" of Rs. 5,53,72,500/- and depreciation on other fixed assets was disallowed Rs. 9,53,09,059/- invoking the provision of Explanation 3 to Section 43(1) of the Act. 3. Facts leading to the addition are as under: The assesseecompany was formed as a joint venture of M/s.Sanyo Electric Company Ltd., Japan and M/s.BPL Sanyo Ltd., on 50:50 basis. The assessee-company acquired business of manufacture and trading of colour television from M/s.BPL Ltd., on a slump purchase basis in terms of business transfer agreement dated 14/12/2005 for a consideration of Rs. 360 crores. This purchase consideration was accounted in the books of assessee-company as per values assigned by M/s.Chowdhary & Associates, an independent registered Valuer, among various assets including the distribution network on the basis of market value. As per depreciation schedule, the total value of intangible assets was Rs. 188,34,00,000/- and addition of Rs. 2....
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.... Intangible asset In the form of market know how comprising the valuable customer base at the time of acquisition of CTV division of BPL. The amounts arrived at by us as the fair value of the customer base works out to Rs. 442.98 million (Rs. 44.98 crores). 7.3 Before going any further, it is important to note the following - What is transferred in only the CTV division. The other divisions of BPL like Automation, Printed Circuit Boards, Soft Cell division, Medical appliances Division, Tool room and Electrical appliances Division continues to be with the BPL Ltd. The BPL Ltd is one of the leading companies engaged in the Indian Consumer Electronics and house hold goods sector for a number of years having established 'BPL' brand, distribution and service network and manufacturing facilities in India. - For the purpose of valuation of distribution network only 'dealers and distributors' are considered. - But 'dealers and distributors' are dealers and distributors for all the BPL brand goods including electrical appliances and they are 'not exclusive dealers of CTV's'. Further more, these dealers and distributors are not brand, specific only....
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.... fair value based on valuer's report. A perusal of 'schedule of fixed assets', the land measuring 4000 sq mtrs or 43,040 sq ft at no. 24, Block C, Phase II, Noida Gautham Budh is valued at only Rs. 92,00,000/- which is certain on lower side. As per this valuation, the value per sq ft works out to Rs. 213/- which is unimaginable in area like Noida. Even in the schedule of fixed assets of M/s BPL Ltd., which is part of the record, the land at Noida at cost is shown at Rs. 1.57 crores. Besides, there existed a structure measuring 5000 sq ft. As per the sale deed dated 14-12-2005, the sale consideration paid by the assessee company to M/s BPL Ltd., was Rs. 1.04.40,000/- for this land whereas the stamp duty paid was Rs. 1,47,40,360/-. The stamp duty is generally 10% of the guidance value. This clearly shows that there is undervaluation of the land. Thus when the asset is revalued there cannot reduced cost of land which is ever appreciating by leaps and bounds. Thus it is clear that the assessee has undervalued the value of almost an acre of land in prime area like 'Noida'. Similarly, the land at Bangalore, Sy.no.s 23/1.23/2.24,25/2, 26/2 at Avalahalli, Old Madras Roa....
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.... search on the conclusion of search as recorded in the last panchanama drawn in relation to any person in whose case the warrant of authorisation has been issued. In regard to requisition under section 132A of the Income Tax Act, the authorisation would be deemed to have been executed on actual receipt of books of account or other documents or assets by the authorised officer. The above amendments will take effect retrospectively from 1st July, 1995 and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. The Act has amended section 158BB of the Income Tax Act to clarify that the deduction of salary, interest, commission, bonus or remuneration, by whatever name called, in Explanation (b),in sub-section (1) of section 158BB is in relation to any partner not being a working partner. This amendment is effective from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. 7.6 A plain reading of the circular no.772 dated 23-12-1998 makes it clear that the circular is not about 'intangible asset' but regarding the procedure of block assessment. Thus the assessee by reference to a cir....
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....e assessment order which is as under: 8. Depreciation of the acquired assets - Fixed assets: 8.1 As said earlier, the assessee company has acquired the CTV division and has taken over all the assets. Thus the opening WDV of fixed asset should be that of dosing WDV in the books of M/s BPL Ltd., as on 31-3-2006. Whereas the 'Accountants report on valuation', states that "The fair value of the fixed assets of the CTV division has been assessed by M Choudhary and Associates, Registered valuer at Rs. 810.94 million as on December 15, 2005 vide their report". 8.2 In other words, the opening WDV for the FY 2005-06 as shown in the schedule of fixed assets is not the closing WDV in the books of M/s BPL. 8.3 Thus the valuer has revalued the WDV and the same is taken in the books of the assessee company and depreciation is claimed. In 'Significant Accounting Policies and Notes to accounts as on 31-3-2006' also, it is stated that 'Fixed assets taken over on re valued costs'. 8.4 During the course of assessment proceedings, the same was questioned and the assessee vide letter dated 15-12-2009 submitted that the assets were purchased by an independent entity Sanyo....
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....actual cost of the assets to the assessee reduced by that portion of cost thereof, if any, as has been met, directly or indirectly by any other person or authority. In the case of assets, which were put to use, before the acquisition by the assessee, the explanation 3 is applicable which reads as under Explanation 3 : Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the [Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the [Joint] Commissioner, determine having regard to all the circumstances of the case. 8.7 In the light of the above and for the sake of clarity, the following facts are enumerated The assessee company is engaged in the business of manufacture and trade of colour television and accessories. Vide agreement dated 14-12-2005 between BPL ltd and M/s Sanyo E....
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.... and increased the value of other fixed assets. This is obvious from the following table Particulars Closing WDV in books of BPL Ltd., As per valuation report Difference Buildings 3,77,41,417 11,12,50,000 7,35,08,583 Plant & machinery 7,70,89,627 40,59,44,996 32,88,55,369 Dies/tools/moulds 2,20,85,296 15,60,58,136 13,39,72,840 Electrical installations 13,43,226 2,46,36,909 2,32,93,683 Air conditioning 18,60,191 1,18,92,082 1,00,31,891 Canteen equipments 1,856 1,856 Fire fighting equip 1,62,557 16,79,233 15,16,676 Office equipments 3,95,998 15,06,952 11,10,954 Computers 9,50,588 76,17,438 66,66,850 Furniture/fixtures 1,58,33,733 1,77,85,358 19,51,625 Total 15,74,64,490 73,83,71,104 58,09,06,614 8.8 It is not clear, how the value of depreciable items such as plant & machinery, dies, tools and moulds, electrical installations, air-conditioning, fire fighting equipments, computers; furniture and fixtures can be increased from Rs. 15.75 crores to Rs. 73.83 crores. Even if we consider, the cost of installation of any second hand machinery and time lag for that purpose and rate of cannot be more than 25% of the closing WDV of the----....
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....ot allowing the depreciation on one of the intangible asset of the Appellant i.e. "Distribution Network". 3. "The CIT(A) has erred on the facts and law in not considering that for the intangible asset namely "Distribution Network", the Appellant has paid sales consideration and the same was valued as per the valuation report prepared by the independent registered valuer (s) and was reflected under the category of intangible assets by the Appellant. 4. "The CIT(A) has erred on the facts and law in not considering that the intangible asset namely "Distribution Network" is duly covered under the provisions of section 32(1) (ii) of the Income Tax Act,1961. 5. "The CIT(A) has erred on the facts and law in confirming the disallowance of Rs. 9,53,09,059/-made by the AO while not allowing the depreciation claimed by the Appellant on the revalued value of the fixed assets. 6. "The CIT(A) has erred on the facts and law in not considering that the Appellant has not overvalued the value of the fixed assets as the value of the fixed assets was determined on the basis of on the valuation report obtained from an Independent Registered Valuer. 7. "The CIT(A) has erred on the facts and la....
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....r commercial rights. 10. We heard rival submissions and perused the material on record. This issue can also considered from another angle. Even assuming that there is no intangible assets as distribution network as claimed by the assessee, excess of consideration paid over assets taken over constitutes goodwill as per judicial precedents in the light of the decision of the Hon'ble Delhi High Court in the case of Triune Energy Services (P) Ltd. In ITA Nos.40 & 189 of 2015. Intangible assets qualifying for depreciation in terms of the law laid down by the Hon'ble Supreme Court in the case of CIT vs. Snifs Securities Ltd.(348 ITR 302). Thus the law is fairly settled to the extent that excess of consideration paid over assets taken over assets constitutes goodwill and the same is eligible for depreciation. But the matter does not end there. Valuation of goodwill is also the bone of contention between the assessee and the revenue. Depreciation is admissible on the actual cost as the actual cost is required to be determined. The term 'actual cost' has been defined u/s 43(1) which reads as under: "43. In sections 28 to 41 and in this section, unless the context otherwise requires- (....
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....9 . It was observed that the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the Income-tax authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purpose, it is open to the Income-tax authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. These observations in our view render the approach adopted by the Tribunal in the present case as unsustainable when it observed that collusion and inflation would not entitle the Income-tax authorities to substitute their own figure of actual cost. In the case of Guzdar Kajora Coal Mines Ltd. [1972] 85 ITR 599 (SC), the deed of conveyan....
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....nvisaged interference in given circumstances in the amount of purported actual cost. We are further of opinion that the Tribunal was not justified in restricting the operation of the actuality of cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In these cases, the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost. This will be independent of the provisions contained in the Income-tax Act. The provisions of this Act have not been introduced for this purpose. They have rather a special objective and is directed towards nullifying the malpractices, sometimes indulged in some quarters, of disproportionately inflating capital cost in order to earn high depreciation, and pass on in collusion substantial amounts to sister concerns or closely connected parties to whom those amounts may have little or negligible bearing on the incidence of tax. This is what appears to have happened in the present case. In our opinion, when the Legislature has prefixed the word "actual" to the word "cost", it was to lay emphasis on the reality and genuineness thereof and exclude collusive, inflate....
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....t, excess price paid for acquisition of the business should be treated as goodwill which is eligible for depreciation in the light of decision of the Hon'ble Supreme Court in the case of (340 ITR 302). Learned counsel for assessee further submitted that excess consideration paid for assets taken over is nothing but depreciation in terms of law laid down by the Hon'ble Delhi High Court in the case of Truine Energy Services Pvt. Ltd. in ITA Nos.40 & 189/15. The sum and substance of the argument of learned counsel for assessee is that even assuming that no intangible assets are acquired on account of acquisition of erstwhile BTV Manufacturing of BRI Ltd., The excess of consideration should be treated as a goodwill which is eligible for depreciation in terms of law laid down by the Hon'ble Supreme Court in the case of CIT vs. Snifs Securities Ltd.(340 ITR 302). On the other hand, learned CIT(DR) placed reliance on the orders of the lower authorities. 13. We heard rival submissions and perused material on record. In the present appeal, the issue involved is whether the AO was justified in invoking Explanation 3 to section 43(1) for the purpose of determining the actual cost to allow d....
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....ability and therefore, invoked the provisions of Explanation 3 to section 43(1) of the Act. While doing so, the AO accepted that higher value of 25% over and above closing WDV in the hands of M/s.BPL Ltd. i.e. transferor. Permission as envisaged under provisions of Explanation 3 to section 43(1) from higher authorities was also obtained. The only objection of the assessee-company seems to be that except subjective opinion of Assessing Officer, there was no material referred by the AO indicating overvaluation of the assets of the assessee-company. Thus, it was contended that the AO should not have invoked the provisions of Explanation 3 to section 43(1) of the Act. 14. It is needless to mention that depreciation is admissible only on actual cost incurred by the assessee-company. When the assessee-company purchased as a going concern at a slump price, identification of the actual cost in respect of different assets poses certain problems. It is an accepted practice that consideration paid for acquisition of business allocation towards various assets based on report of expert. In the instant case, the assessee-company exactly did the same thing but the report of the expert in this ca....