M/s. Sogefi MNR Filtration India Pvt Lld, Bangaluru V. Deputy Commissioner of Income Tax, Circle-12(2), Bangaluru

ITA 2076/BANG/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4441 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 24-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation
• Section: 32; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER ITA No. and Assessment Year Appellant Respondent 2074/Bang/2018 2009-10 M/s. Sogefi MNR Filtration India Private Limited, No.54/3/B, Ejipura Main Road, Viveknagar Post, Bengaluru-560 047. PAN : AAFCM 6821 K DCIT, Circle – 12(2), Bengaluru. 2075/Bang/2018 2010-11 -do--do- 2076/Bang/2018 2011-10 -do-DCIT, Circle – 12(3), Bengaluru. Assessee by :None Revenue by:Shri.Priyadarshi Mishra, Addl. CIT(DR)(ITAT), Bengaluru. Date of hearing:05.04.2022 Date of Pronouncement:19.04.2022 O R D E R Per N. V. Vasudevan, Vice President : These are appeals by the Assessee against three orders all dated 5.3.2018 of CIT(A)-6, Bengaluru, relating to AY 2009-10 to 2011-12. 2. Common issue to be decided in these appeals is as to whether the Revenue authorities were justified in restricting the claim of the Assessee for depreciation on the value of the building as revalued prior to conversion of the erstwhile partnership firm into a private limited company and which ITA Nos.2074 to 2076/Bang/2018 Page 2 of 9 asset was transferred by the erstwhile partnership firm to the private limited company i.e., the Assessee on it’s becoming a private limited company. 3. The facts and circumstances giving raise to the above common issue are that the Assessee is engaged in the business of manufacture of Air, Oil and Diesel Filters for Automotive Industries and Industrial Filters for various industries leading to clean room technologies & pollution control environment. The Assessee was originally incorporated in the name of M/s.M.N.Ramarao and Filters Private Limited on 22n d July 2008 under the provisions of Chapter IX of the Companies Act, 1956 on conversion of a partnership firm M/s.M.N.Ramarao and company. Prior to conversion of partnership into a private limited company on 22n d July 2008, during the financial year ended 31 st March 2008, the firm revalued its Land and Building based on the valuation report of Chartered Engineers and Valuers and the entire revaluation reserve of Rs.39477500/- (of which Rs.120,00,000/- related to Building) was credited to partners' capital/ current accounts. After such revaluation credit, the partners' capital accounts stood at Rs.1,00,00,000/- and current accounts were at Rs.8,87,95,347/-. 4. On the date of conversion of partnership into a private limited company on 22n d July 2008, all the assets and liabilities of the firm were transferred to the company at a book value and the entire current balance was treated as Un-Secured loans of partners in the books of the company. The total un-secured loans of partners stood at Rs.13,13,13,508/-. 5. The Assessee entered into a business transfer agreement with one M/s.Filtrauto, SA, France wherein the later had agreed to acquire 60% of the equity shares of the Assessee subject to due — diligence as per details below. ITA Nos.2074 to 2076/Bang/2018 Page 3 of 9 a)Allotment of fresh issue of 589348 equity shares of Rs.10 each for a premium of Rs.213.96 per share from the company. b)Acquiring equity shares 364,261 from the existing share holders at a premium of Rs.213.96 per share. 6. On 27th Nov 2008, M/s.Filtrauto, SA France had transferred a sum of Rs.13.20 Crores as part of consideration towards fresh issue of 589348 equity shares and Rs.8.16 Crores to one of the partner's account towards consideration for transfer of 364,261 shares by all other partners after necessary clearance from appropriate authorities. 7. On receipt of the money towards the fresh issue of shares, the Assessee repaid all its un-secured loans that stood in the name of the partners in the books of the Assessee. 8. On acquiring 60% stake in the company, the name of the company was changed to M/s. Sogefi MNR Filtration India Private Limited. The Assessee had filed its first income tax return for the year ended 31 st March 2009 related to the assessment year 2009-2010 after claiming depreciation on the re-valued value of building showing the total income of Rs.85,91,757/- under the normal provisions of the act. The assessing officer concluded the assessment under section 143(3) and communicated the same vide order in original dated 30th Nov 2011 made the following additions in para 3 of this order under the caption — Incorrect claim of depreciation. "Para 3(c) Firstly, it is to be noted that depreciation as per the Act is provided only on the actual cost of the asset. In the instant case the assessee has not been able to produce any evidence to prove that additional sum of Rs.1.2 Crores was paid towards the building so as to consider the revalued asset for the purpose of depreciation. Therefore excess claim of depreciation amounting to Rs.28.45.304 is hereby disallowed" ITA Nos.2074 to 2076/Bang/2018 Page 4 of 9 9. Aggrieved by the said order of assessment passed under section 143(3) of the Act, dated 30,11,2011 the Assessee preferred appeal before the learned CIT(A)-6, Bengaluru. The learned CIT(A) upheld the order of the AO and dismissed the appeal preferred by the Assessee. 10. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A), the Assessee contended that the depreciation claimed by the Assessee was according to the valuation of the assets in the books of the firm as on the date of transfer of the assets and liabilities to the Assessee. Since building was revalued in the books of the firm to an extent of Rs 1.2 crores the same value was adopted in the books of the Assessee after conversion into company and deprecation was claimed on the revalued asset. The Assessee has not claimed additional depreciation of Rs 2,80,450 in terms of section 32 (1) (iia) in the case of new plant and machinery acquired and installed after 22.7.2008 and the depreciation was reworked and only for the period starting from 22.7.2008 to 31.3.2009 as against the entire year. 11. The CIT(A), however, upheld the order of the AO. She held that depreciation as per the Act is provided only on the actual cost of the asset. She held that the Assessee has not been able to produce any evidence to prove that additional sum of Rs 1.2 crores was paid towards the building so as to consider the revalued asset for the purposes of depreciation. Hence the assessee is not entitled to depreciation on revalued building. The Assessee had claimed additional depreciation of Rs 2,80,450 in terms of section 32 (1) (iia) for new plant and machinery acquired and installed after 22.7.2008. In support of the claim the Assessee produced bills in respect of the additions made to the plant and machinery. After examination of the facts and the submissions made by the Assessee the claim of additional deprecation of Rs.2,80,450/- was allowed by the CIT(A). Accordingly, the ITA Nos.2074 to 2076/Bang/2018 Page 5 of 9 eligible depreciation for the year including the additional depreciation was taken at Rs.30,40,278/- as against the claim of Rs.58,85,582/- as per the return of income. Therefore, excess claim of depreciation amounting to Rs.23,45,304/- was disallowed. 12. Aggrieved by the order of the CIT(A), the Assessee has preferred these appeals before the Tribunal. The appeal for AY 2009-10 is the previous year in which the partnership firm got converted into a private limited company and the disallowance of depreciation in AY 2010-11 & 2011-12 is consequential to the disallowance of depreciation in AY 2009-10. 13. Several opportunities were given to the learned counsel for the Assessee to argue the appeal. On 5.4.2022, none appeared for the Assessee despite the fact that in the earlier hearings the appeals were adjourned to 5.4.2022 at the request of the learned counsel for the Assessee. In such circumstances, we proceed to decide these appeals on the basis of the material available on record after hearing the submissions of the learned DR, who relied on the order of the AO/CIT(A). 14. We have considered the orders of the revenue authorities. The disputed disallowance of depreciation in the all the three AYs is consequent to the revaluation of the building and enhancing the cost of the building by Rs.1.20 crores when the partnership firm was converted into a private limited company. The question is whether the sum of Rs.1.20 crores can be considered as actual cost on which depreciation is to be allowed. In terms of Section 32(1) of the Act, depreciation should be computed at the prescribed percentage on the Written Down Value (WDV) of the asset. In terms of Sec.43(6)(a) "written down value" in the case of assets acquired in the previous year is to be regarded the actual cost to the assessee. Therefore, when an assessee acquires an asset in the previous year then the ITA Nos.2074 to 2076/Bang/2018 Page 6 of 9 actual cost becomes the WDV. The actual cost as far as the Assessee is concerned includes the sum of Rs.1.20 crores being the enhanced cost of the building on revaluation in the hands of the firm. If at all the AO wants to revisit this value, the only provision he can invoke is Explanation 3 to Sec.43(1) of the Act, which defines the expression actual cost. The said provision reads thus: “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 3 [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. 15. The AO in the order of assessment has not invoked the aforesaid provisions. Even the CIT(A) has not invoked those provisions. On almost identical facts, the Hon’ble Karnataka High Court held that the Assessee is entitled to depreciation on enhanced cost consequent to revaluation prior to conversion of the partnership firm into a private limited company, in the case of Padmini Products Pvt. Ltd. Vs. DCIT ITA No.154 of 2014 judgment dated 5.10.2020. The Assessee in that case was a private limited company that got converted from partnership firm to a company. The Assessee in that case was a company, engaged in the business of manufacturing, dealing and exporting of incense sticks and allied products. The Assessee succeeded a partnership firm (firm) w.e.f. 1 February 2005. Before the firm was converted into private limited company, the firm had revalued all its intangible assets using standard valuation methods. All assets and liabilities (including the intangible assets) of the firm were transferred to the taxpayer and in consideration, the taxpayer allotted its ITA Nos.2074 to 2076/Bang/2018 Page 7 of 9 shares (at a premium) to the partners of the firm. The taxpayer claimed depreciation on the intangible assets. The Assessing Officer disallowed the Assessee’s claim of depreciation on the basis that the Intangible assets valued in the hands of the Assessee at the time of succession had no basis and there was no passing of any actual consideration and that the Assessee neither purchased / acquired intangible assets from any third party nor incurred any actual cost. Therefore, the value of the assets partook the nature of notional value and not the real value and Depreciation was allowable as per the fifth proviso (now sixth proviso) to section 32(1) of the ITA, which was actually existing in the earlier concern viz. the firm. Therefore, the original assets, which were added to the company, at the time of succession, could not be considered for the purposes of depreciation. As per the sixth proviso to section 32(1) of the ITA, the aggregate deduction, in respect of depreciation in respect of tangible or intangible assets allowable to the predecessor and the successor cannot exceed in any previous year the deduction calculated at the prescribed rates as if the succession had not taken place. Further, the deduction is required to be apportioned between the predecessor and the successor in the ratio of the number of days for which the assets were used by them. 16. The order of the AO was confirmed by the first appellate authority as well as by the Tribunal. On further appeal by the Assessee, the Hon’ble Karnataka High Court held that as per section 43(1) "actual cost" means the actual cost of the assets to the taxpayer, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority Explanation 3 to section 43(1) of the Act provides that 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 ITA Nos.2074 to 2076/Bang/2018 Page 8 of 9 and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly was to claim depreciation with reference to an enhanced cost, the AO shall with the previous approval Deputy Commissioner shall determine the actual cost. As per section 47(xiii) transfer of a capital asset or intangible asset by a firm to a company because of succession of the firm by a company in the business carried on by the firm, shall not be regarded as transfer on satisfaction of certain conditions. The Court first found that intangible asset of the Assessee intangible assets, were transferred to the taxpayer for a valuable consideration. The Court found that authorities had neither questioned the valuation of the intangible assets nor did they doubt the genuineness of the transactions. Since the Assessee had succeeded the business of the firm, which had trademarks registered in its name and therefore, was entitled for depreciation. The Court held that the prerequisite for invoking explanation 3 to Section 43(1) of the ITA was that the AO had to establish that the main purpose of the transfer of such asset was to reduce the income-tax liability by claiming extra depreciation on enhanced cost. The Court held that the AO had not recorded any finding in this regard. Accordingly, the Court held that the Assessee was entited to claim depreciation on the intangible assets. Therefore where a partnership firm revalues its intangibles (being eligible for depreciation) prior to succession into a company, the company is entitled to depreciation on such assets as per the revalued figures. 17. We are of the view that since neither the AO nor the CIT(A) had the benefit of the aforesaid decision of the Hon’ble High Court, we deem it fit and proper to direct the AO to examine the issue afresh in the light of the aforesaid decision after affording the Assessee opportunity of being heard. We therefore allow these appeals for statistical purpose. ITA Nos.2074 to 2076/Bang/2018 Page 9 of 9 18. In the result, all the appeals of the assessee are allowed for statistical purposes. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (PADMAVATHY S) (N. V. VASUDEVAN) Accountant MemberVicePresident Bangalore, Dated: 19.04.2022. /NS/* Copy to: 1.Appellants2.Respondent 3.CIT4.CIT(A) 5.DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.