Accumax Lab Devices Private Limited, Kalol V. The Pr. CIT - 3, , Ahmedabad

ITA 336/AHD/2023

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 4667 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 19-09-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 07-05-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Depreciation; Business expenditure; Fair market value; Corroborative evidences; Valuation report; Set aside
• Section: 263; 143(3); 142(1); 37(1); 143(2)

Judgement Text

आयकरअपील यअ धकरण,अहमदाबाद यायपीठ‘A’अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFOREMRS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No. 336/Ahd/2023 नधा रणवष /Assessment Year: 2018-19 Accumax Lab Devices Pvt. Ltd., (Formerly known as Neuation Technologies Private Limited), 228-1-4, Dantali Industrial Owners Association, Gota Vadsar Road, Dantali Gam, Kalol, Gujarat-382721 PAN : AABCF 3671 L Vs. Principal Commissioner of Income-tax-3, Ahmedabad अपीलाथ / (Appellant) यथ / (Respondent) Assessee by : Shri Tushar Hemani, Sr. Advocate & Shri Parimalsinh B. Parmar, AR Revenue by : Shri Akhilendra Pratap Yadav, CIT-DR स ु नवाई क तार ख/Da te of Hear ing : 20. 09. 202 3 घोषणा क तार ख /Da te of Pro noun ce men t: 1 5.1 2.2 023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order passed by the learned Principal Commissioner of Income-Tax-3, Ahmedabad [hereinafterreferred to as “PCIT”] dated 30.03.2023, in exercise of his revisionary powers under Section 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the Assessment Year 2018-19. 2. The assessee has raised the following grounds:- “1. The Id. PCIT has grossly erred in law and on facts of the case in initiating proceedings u/s. 263 of the Act against the amalgamating company not in existence on the date of initiation of such proceedings. Under the facts and 2 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 circumstances of the case, the action of initiating revisionary proceedings is without jurisdiction and is not permissible either in law or on facts. 2. The Id. PCIT has grossly erred in law and on facts in assuming jurisdiction u/s. 263 of the Act on the erroneous ground that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue. 3. The ld. PCIT grossly erred in not appreciating that in order to invoke S.263, two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue. In the present case, ld. AO has passed the reasoned assessment order after analyzing all details and therefore there was no error in the impugned assessment order so as to justify action w/s. 263 of the Act. Under the circumstances, the very assumption of power u/s. 263 of the Act is unjustified and bad in law and therefore, order u/s. 263 of the Act deserves to be quashed. 4. The subject order u/s. 263 passed by Id. PCIT holding the impugned assessment order as erroneous is illegal and bad in law particularly when there is no requirement of carrying out the valuation of self-generated intangible assets under accounting standards or under provisions of income tax. 5. The subject order u/s. 263 passed by ld. PCIT isillegal and bad in law in the absence of any findingof the ld. PCIT as to how the alleged error of theAO has resulted in loss of revenue particularly when depreciation has rightly been claimed on the cost of intangible assets derived in accordance with "Accounting Standard-26 Intangible Assets" and as per the rate of depreciation prescribed under the income tax. 6.The Id. PCIT has further erred in law in not coming to any concrete conclusion and without conducting any inquiry or investigating the issue, merely directed the AO to frame the assessment order afresh. Without there being any positive finding about order being erroneous and prejudicial to the interest of the revenue, the action of Id. PCIT is without jurisdiction and illegal and hence deserves to be deleted. 7.Ld. PCIT has erred in not considering various facts and in not appreciating the facts and law in their proper perspective.” 3. The first argument of the ld. Counsel for the assessee before us against the order passed under Section 263 of the Act challenged the jurisdiction 3 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 assumed by the ld. PCIT under the said section to revise the order of the Assessing Officer stating that: • The jurisdiction assumed was based on wrong premises leading to incorrect belief of error in the order of the Assessing Officer and, • even otherwise no prejudice was caused to the Revenue even on the basis of the alleged incorrect error noted by the ld. PCIT. 4. Our attention was drawn to the show-cause notice issued by the ld. PCIT under Section 263 of the Act, placed before us at page Nos. 80 & 81of the paper-book, which reads as under:- “No. Pr.CIT-3/HQ/263/NTPL/2022-23 Date: 21.03.2023 PAN: AADCN4650M To, Neuation Technologies Pvt Ltd, Plot No15, GIDC Electronic Park SEZ, Sector-26, Gandhinagar Sub: Revisional proceedings u/s.263 of the I.T. Act 1961 for A.Y. 2018-19- Show Cause Notice - reg.- Please refer to the above. 2. On verification of case records, it is seen that you have filed return of income for A.Y. 2018-19 on 29.11.2018 declaring total income of Rs. (- )125,09,735/-. Your case was selected for scrutiny to verify the issue of investment in intangible assets. The assessment was finalized u/s.143(3) of the Act on 17.03.2021 by accepting the returned income. 3. On examination of case records, it is noticed that the company claimed depreciation of Rs 83,87,835/- @25% on Rs 3,64,42,319/- in respect of intangible assets acquired during the year. It is also seen that the A.O. had vide notice u/s 142(1) dated 13.12.2019 asked for the need of intangible assets for the business and to provide the valuation report of the intangible asset carried out by professional valuer for F.Y. 2017-18 or earlier years, and in case of non-availability of valuation report, to submit third party valuation report of intangible asset for the F.Y. 2017- 18.The A.O. again vide notice u/s 142(1) dated 12.03.2021 sought third party valuation report by professional 4 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 valuer but the same was not submitted nor any corroborative documents/evidence which could be relied upon for determining cost of the intangible assets. Despite issuing various notices by the A.O., it was contested that the company is following AS-26 to recognize the intangible assets and the accounting standards does not refer to valuation anywhere, though para 6.11 of AS- 26 speaks about Fair Market Value and Arms length Transaction. 4. Further, from the replies submitted, it is seen that the company has not purchased any intangible assets during the year relevant to A.Y. 2018-19, whereas it is developing its own designs and transferring the relevant expenses incurred to the designated account in the books. At the end of the year, designs and moulds considered ready for production use are transferred to design account and depreciation on the same is claimed treating it as intangible assets. In this case though exchange of assets does not take place, it is obvious that expenses incurredwhich are capitalized as intangible assets is hard to differentiate that it is exclusively incurred on the development of design for the purpose of calculation of amount to be transferred to design account. 5.Since the replies submitted during assessment proceedings in not satisfactory and since no corroborative documents in support of the claim was submitted, the claim of depreciation of Rs 83,87,835/- in respect of intangible assets is required to be disallowed and added to the total income. 6. The above facts prima facie reveal that the A.O, has failed to pass assessment order without making proper enquiry and required addition in respect of above mentioned issue It is thus, apparent that order passed by the then AO in your case for AY 2018-19 u/s. 143(3) of the Act in erroneous in so far as it is prejudicial to the interest of revenue to above extent. You are therefore, requested to show cause why the disallowance of the amount of Rs. 83,87,835 should not be made by passing appropriate revisional order u/a 263 of the Act in your case. 7. In case, you have any objection to the action proponed above, you are requested to furnish your written submission to the proposed action by 27.03.2022 through e- filing portal or at my office at Room No.411, C-Wing. Pratyakshkar Bhavan, Ambawadi, Ahmedabad. Personal appearance is not compulsory and furnishing of written submission completed in all respect on the above issues shall be treated as sufficient compliance. 8. The proposed proceedings is time barring on 31.03.2023. Hence, you are requested to comply with this notice by the given date and time, failing which, the revision proceedings u/s.263 of the Act shall be finalized on the 5 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 basis of the material available on record and on the merits of the case which may please be noted. Sd/- (RITA KUMARI DOKANIA) Pr. Commissioner of Income Tax-3, Ahmedabad” 5. Referring to the same, ld. Counsel for the assessee pointed out that, as per ld. PCIT, the assessment order was noted to be erroneous on account of the claim of depreciation on intangible assets, amounting to Rs.83,87,,835/- ,having been allowed to the assessee without making proper inquiry on the issue. Referring to paragraph No.3 of the show-cause notice, ld. Counsel for the assessee pointed out that, as per the ld. PCIT, the inadequacy of inquiry by the Assessing Officer and the incorrect allowance of claim of deprecation by the Assessing Officer was revealed from the case records on account of the fact that despite repeated insistence by the Assessing Officer to file a valuation report of the intangible assets, no valuation report had been submitted by the assessee, nor any corroborative evidences or documents filed which could be relied upon for evidencing the cost of intangible assets. That, on the contrary, the assessee had contented that it was following AS-26 for valuing the intangible which did not refer to valuation anywhere. The ld. PCIT has pointed out that AS-26 does speak of Fair Market Value (FMV) and Arms Length transaction at paragraph No.6.11. 6. Ld.Counsel for the assessee pointed out, therefore, that the error in the assessment order as per the Ld.PCIT was the accepting the value of intangible assets recorded by the assessee in its Books of accounts which was against the method prescribed by the Institute of Chartered Accountants of India (ICAI) for valuation of Intangible Assets , i.e Accounting Standard -26 (AS-26).That AS-26 required valuation of intangible assets to be done by independent valuers , but the assessee had 6 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 not done so. The AO , therefore according to the Ld.PCIT , had erred in accepting this incorrect valuation of intangible assets and allowing depreciation thereon. 7. He, thereafter, drew our attention to paragraph No.4 of the order and pointed out therefrom that the ld. PCIT noted from the replies filed by the assessee that the manner of creation of intangible assets had been on account of development of its own designs and its value being arrived at by transferring relevant expenses incurred in developing the designs. She had noted that the designs and moulds considered ready for production use were transferred to design account and depreciation on the same was claimed treating it as intangible assets. 8. Ld. Counsel for the assessee stated that it is evident from the show- cause notice that the Ld.PCIT was aware of the fact that the intangible assets created by the assessee was on account of designs developed by it. The value being attributed to it was on account of expenses incurred in the course of creation or development of the design. He thereafter pointed out thatthe ld. PCIT had incorrectly appreciated AS-26 (“Accounting Standard 26”) to be stating that the value to be attributed to the intangible assets was to be determined by a third party valuer. He drew our attention to AS-26 (copy of which was placed before us) and pointed out that the cost of an internally generated intangible asset as per the said Standard comprisedall expenditure that could be directly attributed, or allocated on a reasonable and consistent basis, to creating, producingand making the asset ready for its use. In this regard, he drew our attention to AS-26 placed before us at page nos. 517 to 561 of the paper-book, more particularly to paragraph nos. 52 and 53 of the same which reads as under:- 7 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 “Cost of an Internally Generated Intangible Asset 52. The cost of an internally generated intangible asset for the purpose of paragraph 23 is the sum of expenditure incurred from the time when the intangible asset first meets the recognition criteria in paragraphs 20-21 and 44. Paragraph 58 prohibits reinstatement of expenditure recognised as an expense in previous annual financial statements or interim financial reports. 53. The cost of an internally generated intangible asset comprises all expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and making the asset ready for its intended use. The cost includes, if applicable: (a) expenditure on materials and services used or consumed in generating the intangible asset; (b) the salaries, wages and other employment related costs of personnel directly engaged in generating the asset; (c) any expenditure that is directly attributable to generating the asset, such as fees to register a legal right and the amortisation of patents and licences that are used to generate the asset; and (d) overheads that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset (for example, an allocation of the depreciation of fixed assets, insurance premium and rent). Allocations of overheads are made on bases similar to those used in allocating overheads to inventories (see AS 2, Valuation of Inventories). AS 16, Borrowing Costs, establishes criteria for the recognition of interest as a component of the cost of a qualifying asset. These criteria are also applied for the recognition of interest as a component of the cost of an internally generated intangible asset.” 9. He further pointed out that the belief of the ld. PCIT that a third party valuer needed to be valued the intangible assets was based on paragraph 6.11 of AS-26 which finds mention in her show cause notice reproduced above. He pointed out that the said paragraph only defines Fair Market Value for the purpose of theAccounting Standard and he drew our attention 8 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 to paragraph no. 6, more specifically para 6.11 of the AS, which is definition portion of the Standard reading as under: 6. The following terms are used in this Standard with the meanings specified. 6.1 An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purpose. ..... ..... ..... 6.11 Fair value of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.” 10. Learned Counsel for the assessee pointed out that the term “Fair Market Value (FMV)” has been used in paragraph 26 of the AS where it states that if an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is to be recorded at its Fair Market Value, or the fair value of the securities issued, whichever is more clearly evident. Para 26 of the AS26 was pointed out to us as under; “26. If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value , or the fair value of the securities issued, whichever is more clearly evident.” 11. He stated that the reference to fair market value in AS-26 is in totally different facts and circumstances, where an intangible asset is acquired in exchange of shares and securities. He stated, therefore, that it is clearly evident from the above that the ld. PCIT 9 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 had misunderstood and wrongly applied the Accounting Standard AS-26 to the facts of the case to hold that the internally created intangible asset of the assessee by way of designs was to be valued by a third party valuer and the Assessing Officer having not got this valuation done, his acceptance of the value of intangible asset was incorrect and accordingly allowance of claim of depreciation thereon to the assessee. 12. Going forward he took us again to para 4 of the show cause notice and pointed out that the case of error in the assessment order made out therein is that as per the method followed by the assessee for valuing its intangible on the basis of actual cost incurred by bit on developing it , it was difficult to determine expenses exclusively incurred for development of the intangible(design) and therefore the AO had wrongly accepted the valuation of the assessee and allowed depreciation thereon. Para 4&5 of the notice are reproduced again for clarity: 4. Further, from the replies submitted, it is seen that the company has not purchased any intangible assets during the year relevant to A.Y. 2018-19, whereas it is developing its own designs and transferring the relevant expenses incurred to the designated account in the books. At the end of the year, designs and moulds considered ready for production use are transferred to design account and depreciation on the same is claimed treating it as intangible assets. In this case though exchange of assets does not take place, it is obvious that expenses incurredwhich are capitalized as intangible assets is hard to differentiate that it is exclusively incurred on the development of design for the purpose of calculation of amount to be transferred to design account. 5.Since the replies submitted during assessment proceedings in not satisfactory and since no corroborative documents in support of the claim was submitted, the claim of depreciation of Rs 83,87,835/- in respect of intangible assets is required to be disallowed and added to the total income. 10 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 13. Ld Counsel for the assessee contended that even if the contention of ld. PCIT is taken to be correct that the assessee had incorrectly capitalized expenses for creation of intangible assets and claimed depreciation thereon but it still does not take away the fact she was aware and accepted that the expenses capitalized were incurred by the assessee on creating designs .And if not resulting in creation of intangible assets, the expenses were otherwise allowable as business expenses under Section 37(1) of the Act to the assessee since it was not the claim/ contention of the PCIT that these expenses were in any way bogus. He pointed out that her only contention or belief was that the intangible assets had been incorrectly valued by the assessee resulting in incorrect depreciation being claimed by the assessee. That there was no claim by the ld. PCIT that the expenses incurred by the assessee on account of creation of the intangible assets were in any way bogus. He, therefore, contended that in the facts of the issue noted by the ld. PCIT herself, there could not be any prejudice caused to the Revenue. That, on the contrary, if the contention of the ld. PCIT is found to be correct, the assessee would be entitled to claim more expenditure, i.e. 100% of the expenditure incurred on designs as opposed to only depreciation claimed by the assessee on it. 14. The ld. DR, however, stated that there was no infirmity in the assumption of jurisdiction by the ld. PCIT to revise the order of the Assessing Officer and it was a valid assumption of jurisdiction. 15. Having heard both the parties and having carefully gone through the contents of the show-cause notice as also the documents, being AS-26, referred to by the ld. Counsel for the assessee before us, we are inclined to agree with the ld. Counsel for the assessee that the very basis for assumption of jurisdiction by the ld. PCIT in the present case exercising revisionary 11 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 jurisdiction over the assessment order passed by the Assessing Officer was flawed. 16. As is evident from the notice issued by the ld. PCIT for initiating proceedings under Section 263 of the Act, the reason for revising the assessment order was, as per the ld. PCIT, the incorrect allowance of claim of depreciation of the assessee on intangible assets and the show-cause notice reveals that the basis for arriving at this finding by the ld. PCIT was that while the accounting standard “AS-26” of the Institute of Chartered Accountants of India (ICAI) dealing with the accounting for intangible assets required intangible assets to be valued at FMV, i.e. Fair Market Value, the assessee had failed to produce any valuation report of its intangible assets despite repeated notices issued by the Assessing Officer in this regard. She has relied on paragraph 6.11 of AS-26 for her understanding as aforesaid regarding the valuation of intangible assets prescribed in AS-26. According to the ld. PCIT, therefore, since the assessee had not substantiated the basis of valuation of its intangible assets in accordance with the prescribed accounting standard issued by the ICAI, the Assessing Officer had erred in accepting the valuation adopted by the assessee and allowing depreciation on the value so arrived of its intangible assets. 17. We have gone through AS-26 which has been heavily relied upon by the ld. PCIT to form her belief that the Assessing Officer, without conducting proper inquiry, accepted the assessee’s valuation of intangible assets and we concur with the ld. Counsel for the assessee that the relevant paragraph to which the ld. PCIT refers to in the notices of AS-26, i.e. paragraph 6.11, is merely a definition paragraph which defines Fair Market Value only. Paragraph 6.11. does not prescribe Fair Market Valuation method to be adopted for arriving at the value of intangible assets. The Ld.PCIT has relied 12 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 on a definition in the AS-26 for stating the method prescribed by the Standard for valuation of intangible asset and then gone on to find error in the valuation method adopted by the assessee, which method has been suitably demonstrated before us to be in accordance with that prescribed by the Accounting Standard. Learned Counsel for the assessee has pointed out to us that the accounting standard AS-26 prescribes the historical cost basis for accounting for intangible assets which are developed by the entities by incurring expenditure. That the ld. PCIT has noted in her notice that the assessee did develop the intangible assets itself by way of developing designs relating to machinery and had valued the intangible assets on the basis of cost incurred for developing designs. Therefore, we find, that even as per the facts noted by the ld. PCIT, the assessee’s basis of valuation of the intangible assets was as per that prescribed by AS-26 and the ld. PCIT’s belief that the assessee had not followed AS-26 was an incorrect and completely flawed understanding of the Accounting Standard. 18. We completely agree with the ld. Counsel for the assessee that the very basis, therefore, for assumption of jurisdiction under Section 263 of the Act by the ld. PCIT was flawed, based on wrong premises, and therefore, the entire proceedings conducted by the ld. PCIT, we hold, was not valid. 19. Going forward from here, we also agree with the ld. Counsel for the assessee that the only error noted by the ld. PCIT was vis-à-vis the valuation of intangible assets, resulting in incorrect allowance of deprecation to the assessee. As noted above, the ld. PCIT was aware that the assessee has valued the intangible assets based on actual expenses incurred for the same. The case of the ld. PCIT being that the assessee had incorrectly valued the intangible assets; it only means that the expenses incurred by the assessee 13 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 were not to be included in the valuation of intangible assets. These expenses otherwise not being doubted by the ld. PCIT either with regard to their genuineness or with respect to the fact that they were incurred for the purpose of the business of the assessee; therefore, any change in the valuation of the intangible assets by way of reduction in its value would only have resulted in the portion not included in its value to be allowed as expenses of the assessee under Section 37(1) of the Act, and as rightly pointed out by the assessee, it would tantamount to putting the assessee in a beneficial position, since otherwise the assessee had been allowed only a portion of the expense as depreciation. Therefore, the stand taken by the ld. PCIT regarding erroneous claim of depreciation allowed to the assessee on intangible assets by no way has caused any prejudice to the Revenue. Therefore, the twin conditions of there being an error in the order of the Assessing Officer which causes prejudice to the Revenue are not satisfied even at the stage of assumption of jurisdiction by the ld. PCIT by issuing notice under Section 263 of the Act. 20. For the above reason alone, the order passed under Section 263 of the Act, we hold, is not sustainable in law and is directed to be set aside. 21. Be that so, we find that even on the aspect of the Assessing Officer having conducted complete inquiry on the issue during the assessment proceedings itself by raising relevant queries and the assessee having submitted detailed replies with respect to the creation of intangible assets and its valuation, there cannot be a case of either an inadequate inquiry or no inquiry conducted by the Assessing Officer as contended by the ld. PCIT for holding the assessment order erroneous causing prejudice to the Revenue. 14 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 22. The ld. Counsel for the assessee submitted a detail before us in Annexure-A to its brief submission filed before us listing the entire inquiry conducted by the Assessing Officer during the assessment proceedings chronologically, referring to the relevant paper-book page number where the documents referred to in the details, were placed. The same are reproduced hereunder:- “Details of ‘notices’ issued by AO &‘replies’ furnished by assesseeat the ‘original assessment stage’ Date Particulars Pgs. of P/B 28.09.2019 Assessee’s case was selected for scrutiny by issuance of statutory notice dated 28.09.2019 u/s 143(2) of the Act and the issue identified for selecting the case for scrutiny was “investment in intangible assets”. 54-55 13.12.2019 AO, vide notice dated 13.12.2019 u/s 142(1), called upon the assessee to furnish the following details in relation to “addition to intangible assets”'. • Nature of intangible assets added to the block. • Details of party from whom assets have been acquired. • Agreement for purchase of intangible assets. • Details of mode of payment. • Valuation report of intangible assets. • Business need of the intangible assets. 56-57 27.02.2020 Assessee, vide letter dated 27.02.2020, made the following submissions before AO: • Assessee is engaged in the business of manufacturing laboratory and medical equipment such as centrifuges, stirrer, shakers, etc.. Assessee is researching various details for developing its own products for manufacturing. • Procedure adopted since inception by the assessee was made known to AO and the same is as follows: Assessee procures material and engages its technical personnel for designing and developing its products in-house. All the costs incurred in relation to development 61-64 15 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 (including but not limited to salary of Director and R&D Staff) is transferred to ‘Work-in-progress a/c ’. During the year, there was opening balance of Rs.3,81,55,994/- in "Design development a/c (WIP) ’ (Pg.111 ofP/B). Based on usage of material and time spent by technical personnel on development of design related costs are allocated to each such product. At any point of time during the year, if the product is tested and found ready for issuing the design for production of goods, all the costs incurred from the beginning of the development till the time it passes internal benchmark for production are transferred to Design a/c under the head “intangible assets”. There are mainly three types of expenses as follows which have been incurred in “designing”'. • Testing expenses. • Purchase of material. • Salary of staff. Total costs aggregating to Rs.2,04,68,397/- was incurred on aforesaid activities during AY 18-19 (Pg.111 of P/B). Ledgers of material procured during the year with supporting evidences and salary expenses for development of designs were furnished (Pgs.112-480 ofP/B). Out of designs under development from beginning of operations, around “66 designs” were found ready for the production of goods. Accordingly, “total costs” aggregating to “Rs. 3,64,42,319/-” was transferred to design a/c for 66 designs which were developed in-house by the assessee. List showing status of design accounts at the beginning of year, designs developed during the year and transferred to various designs a/c was furnished (Pg.481 ofP/B). Details of “depreciation on intangible assets” are duly disclosed in financial statements. Depreciation has been claimed on such ready to use designs. “No intangible assets” have been “acquired” by the assessee during the year. Accordingly, question of identifying the persons selling the intangible assets to the assessee and its “valuation” does not arise at all. Assessee is developing its own designs and 16 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 transferring all the relevant expenses incurred for this activity to the designated account. At the year end, if any designs are considered ready for production, the same are transferred to design account and “depreciation” is claimed thereon. 23.11.2020 Assessee, vide letter dated 23.11.2020, made following submissions before AO: Attention was invited to following contents of earlier reply dated 27.02.2020: • Explanation in respect of entire process of researching a particular product / design undertaken by assessee. • Documentary evidences furnished in support of the issue on hand. Sample working of costing of a design (I-Fuge M18) developed during the year under consideration with working of cost allocation was furnished (Pg.70 of PB). Assessee has been consistently following such method in respect of all designs developed in-house. 65-70 12.03.2021 AO, vide notice dated 12.03.2021 u/s 142(1), called upon the assessee to furnish following details / documents: Whether any valuation of intangible assets was carried out by any professional valuer for FY 2017-18 or for any earlier year. If yes, copy of valuation report, was called for. If no, assessee was called upon to state as to why assessee’s case should not be referred to a Government Approved Valuer for valuation of intangible assets or assessee may submit a third party valuation report of intangible assets for FY 2017-18. 71-72 15.03.2021 Assessee, vide letter dated 15.03.2021, submitted before AO as follows: It is mentioned in Audited Financial Statements that “intangible assets ” are recognized in accordance with “AS- 26 - Intangible assets”, as issued by IC AI. “AS-26” does not state that “valuation” is to be carried out by an entity for “designs developed internally within the organization ”, Reference was made to following Para of AS-26 (Pgs.517-561 of P/B) @ 521, 532 -533): Para 6.1 defining the term “intangible assets” (Pg.521 of P/B). Para 52 & 53 specifically dealing with concept of “cost of an internally generated intangible assets” (Pgs.532-533 of P/B). “Actual cost” incurred by assessee has been accepted. Hence, as against the treatment of capitalizing a part of such costs, assessee could have claimed such expenses as “revenue expenses” in its entirety. 73-77 17 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 • During the year, assessee has earned profit of Rs.30.39 lacs before taxes (Pg.36 of P/B). • Any change in treatment of recognizing the underlying expenses will result into higher claim of expenditure which has been, hitherto, capitalized by assessee. • Such a change will result into loss and will certainly change tax liability of assessee. Assessee has followed norms prescribed under AS-26 for recognizing the “intangible assets” and AS-26 does not refer to valuation (of internally generated assets) at all. Accordingly, there is no requirement for valuation of intangible assets in the present case. 23. A bare perusal of the above would reveal that the case of the assessee was selected for scrutinizing investment in intangible assets. The purpose of scrutiny was the investment made by the assessee in intangible assets. Vide various notices issued to the assessee during the assessment proceedings, the Assessing Officer called upon the assessee to furnish all information relating to the intangible assets vis-à-vis the nature and details of parties to whom they were acquired, the mode of payment, the agreement for purchase of intangible assets, and even the valuation report and business meet for intangible assets. That the assessee submitted all details asked for, explaininghow the intangible asset is created and also the need for creation of the intangible asset pointing that being engaged in the business of manufacturing laboratory and medical equipment, the assessee is continuously researching various designs for developing its own products for manufacturing and the creation cost of every new product involving testing expenses, purchase of material from various sources and salary to staff are debited to the intangible asset account. The assessee had also pointed out that it had created 66 such designs incurring the total cost of Rs.3,64,42,319/- and on which deprecation was being claimed. The details of depreciation on intangible assets was submitted and the assessee had also evidenced the cost incurred on creation of such designs by providing ledgers of all expenses incurred in the process along with supporting evidences. The 18 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 assessee had pointed out that no intangible assets had been acquired by them during the year and, therefore, no question for its valuation arose. That it was developed its own designs and transferring all relevant expenses incurred for this activity to the designated account. A sample working of the costing of a design developed during the year with the working of cost allocation was also furnished and the assessee pointed out that it had been consistently following such method in respect of all designs developed in- house. The assessee was specifically asked whether it had got the valuation of intangible assets carried out by any professional valuer either during the year or in any earlier year and if not, as to why the assessee’s case should not be referred to the Government Approved Valuer for valuation. To which the assessee replied that it had valued its intangible assets as per method prescribed in AS-26, as per the accounting standard issued by the ICAI. The assessee has also pointed out that as per AS-26, for intangible assets developed internally within the organization, there was no requirement of any valuation. Reference was made to the relevant paragraphs of AS-26. The assessee has also pointed out that any change in treatment of recognizing underlying expenditure would result into higher claim of expenditure capitalized by it. 24. It is amply evident from the above that the Assessing Officer had inquired into all probable aspects of the valuation of the intangible assets and the consequent claim of depreciation thereon by the assessee. All due replies had been furnished by the assessee explaining the process of creation of intangible assets, the method of valuation of the same adopted by the assessee on actual cost basis and also as to why the valuation could not be referred to a valuer as per the Accounting Standard prescribed by the ICAI itself. The assessee had sufficiently demonstrated that this valuation of intangible assets was in accordance with AS-26 of the ICAI. It is evident, 19 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 therefore, that on the issue raised now by the ld. PCIT of the valuation of the intangible asset not having been got done by a valuer, the assessee has sufficiently explained the reason why it was not required and substantiated it with the method prescribed in AS-26 itself, which we have noted above to be correct. 25. Considering all the above, there is no possibility of holding that there was any inadequacy in the inquiry conducted by the Assessing Officer on the issue of valuation of intangible assets and also for that matter the view of the Assessing Officer was, by any way, not a possible view. In fact, we find that even the ld. PCIT has not pointed out as to why the view taken by the Assessing Officer was incorrect considering all the replies and explanation furnished by the assessee. 26. It is sad to note that despite such detailed submissions made by the assessee during the assessment proceedings, which records were duly perused by the Ld.PCIT before issuing notice under Section 263 and despite the assessee submitting the same during revisionaryproceedings also, the ld. PCIT has not addressed the contentions of the assessee on any aspect at all. She has not pointed out as to why the inquiry by the Assessing Officer was inadequate or improper; she has neither pointed out as to how the explanation of the assessee that the accounting of intangible assets was as per AS-26 was incorrect. On the contrary, on a completely flawed understanding of the Accounting Standard the Ld.PCIT has found the assessee’s valuation of intangible assets to be not in accordance with AS-26. The ld. PCIT, we find, has in a very cryptic order dismissed all the detailed and voluminous contentions raised by the assessee as above at paragraph No. 4.3 of the order as under: 20 ITA No. 336/Ahd/2023 Accumax Lab Devices Pvt Ltd Vs. PCIT AY : 2018-19 “4.3 Also, it is noticed from the submission of the assessee that valuation of intangible assets has not been done in the instant case. No third-party valuation has been done in the case of the assessee for the assets on which depreciation has been claimed by the assessee. The Assessing Officer has not made proper inquiries in regard to the valuation of intangible assets for which the assessee has claimed depreciation.” 27. In view of the above, we are unable to concur with the ld. PCIT on her findings that due to absence of inadequate inquiry by the Assessing Officer on the issue of valuation of intangible assets, the order passed by the Assessing Officer was in error causing prejudice to the Revenue. The Ld.PCIT ‘s finding of error in the assessment order, we find, is based on a completely incorrect premise. There is, we hold, no error in the assessment order vis a vis acceptance of valuation of intangible assets and claim of depreciation thereon. 28. That even for the sake of argument the Ld.PCIT’s error is accepted to be correct, yet, we find, it does not result in any prejudice to the Revenue. The basic prerequisites for exercising powers of revision u/s 263 of the Act are not fulfilled in the present case. The order of the ld. PCIT is, therefore, set aside and the appeal of the assessee is allowed. 29. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 15/12/2023 at Ahmedabad. Sd/- Sd/- Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad;Dated 15/12/2023 **bt/vk