ACIT CIR 7(2), MUMBAI V. SUYASH LABAORATORIES LTD, MUMBAI

ITA 4003/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2905 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 03-11-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 07-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Keywords: Capital asset; Depreciation; Valuation report
• Section: 143(3); 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL E BE NCH, MUMBAI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER / I .T.A. NOS.4003 & 4004/MUM/2012 ( / ASSESSMENT YEARS:2005-06 & 2006-07 THE DCIT-7(2), M.K. ROAD, MUMBAI-400 020 / VS. M/S. SUYASH LABORATORIES LTD., GROUND FLOOR, MAHENDRA INDUSTRIAL ESTATE, ROAD NO. 29, SION (E), MUMBAI-400 029 ./ ./ PAN/GIR NO. :AAECA 7424H ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI PREMANAND J / RESPONDENT BY: SHRI VIJAY MEHTA / DATE OF HEARING : 01.10.2015 ! / DATE OF PRONOUNCEMENT : 14.10.2015 '# / O R D E R PER N.K. BILLAIYA, AM: THESE TWO APPEALS BY THE REVENUE ARE PREFERRED AGAI NST TWO SEPARATE ORDERS OF THE LD. CIT(A)-13, MUMBAI DATED 13.03.2012 PERTAINING TO ASSESSMENT YEARS 2005-06 & 2006-07. BOTH THESE APPEALS HAVE COMMON GRIEVANCE THEREFORE, THEY WERE HEARD TOGETHER AND DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA. NOS.4003 & 4004/M/2012 2 2. AT THE VERY OUTSET, THE REPRESENTATIVES OF BOTH SIDES AGREED THAT FACTS OF 2005-06 MAY BE CONSIDERED AS THE FACTS IN ISSUES ARE IDENTICAL FOR A.Y. 2006-07 ALSO THOUGH QUANTUM MAY DEFER. 3. THE ASSESSEE COMPANY IS IN THE BUSINESS OF MANUF ACTURING OF CHEMICALS AND BULK DRUG. RETURN FOR THE YEAR WAS F ILED ON 29.10.,2005 DECLARING LOSS OF RS. 1,30,85,355/-. T HE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURS E OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER CAME TO KNOW THAT M/S. SUYASH CHEMICALS, A PARTNERSHIP FIRM WAS SUCCE EDED IN ITS BUSINESS BY THE ASSESSEE COMPANY ON 31.3.2004 BY WH ICH ALL THE ASSETS AND LIABILITIES OF THE PARTNERSHIP FIRM WERE TRANSFERRED TO THE ASSESSEE COMPANY. 3.1. THE AO FURTHER NOTICED THAT ERSTWHILE PARTNER SHIP FIRM HAD REVALUED ITS ASSETS DURING THE FINANCIAL YEAR 2003- 04 BY WHICH THE ASSETS VALUE WERE INCREASED BY RS. 29,18,45,075/-. THE AO FURTHER NOTICED THAT THE ASSESSEE COMPANY HAS CLAIMED DEPRE CIATION ON THE REVALUED ASSETS TAKEN OVER FROM THE ERSTWHILE PARTN ERSHIP FIRM. ON THE BASIS OF THIS INFORMATION, THE ASSESSMENTS WERE REOPENED WITHIN THE MEANING OF SEC. 147 OF THE ACT AND ACCORDINGLY STATUTORY NOTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. 3.2. VIDE ORDER SHEET ENTRY DATED 23.11.2010, ASSES SEE WAS ASKED TO SHOW CAUSE WHY THE DEPRECIATION CLAIMED ON REVALUED ASSETS ACQUIRED ON SUCCESSION BE NOT DISALLOWED. THE ASS ESSEE FILED A DETAILED REPLY STATING THAT THE ENTIRE TRANSACTION IS COVERED BY THE PROVISIONS OF SEC. 47(XIII) OF THE ACT. IT WAS BRO UGHT TO THE NOTICE OF ITA. NOS.4003 & 4004/M/2012 3 THE AO THAT THE DEPRECIATION HAS BEEN CLAIMED BY TH E ASSESSEE COMPANY ON COST INCURRED BY IT FOR PURCHASE OF ASSE TS AND THEREFORE THE DEPRECIATION SHOULD BE ALLOWED AS PER THE PROVI SIONS OF THE LAW. THE EXPLANATION DID NOT FIND ANY FAVOUR WITH THE AO . THE AO WAS OF THE FIRM BELIEF THAT THE TRANSACTION DOES NOT CONST ITUTE TRANSFER IN TERMS OF SEC. 2(47) OF THE ACT. ACCORDING TO THE A O, THE REVALUATION OF THE ASSETS WAS ONLY AN INCREASE IN THE VALUE ON PAP ER AND DEPRECIATION ON THE REVALUED ASSETS CANNOT BE ALLOW ED AS PER THE PROVISIONS OF THE ACT. 3.3. ACCORDING TO THE AO, THE ASSETS OF THE FIRM AR E TO BE TRANSFERRED AT THE ACTUAL VALUE IN THE BOOKS AND NOT AT A REVAL UED PRICE. FURTHER, THE CLAIM OF DEPRECIATION IS ALLOWED TO THE ACQUIRE R ON THE COST THAT IS PAID BY THE ACQUIRER. THE AO WAS OF THE OPINION TH AT IN THE PRESENT CASE NO COST HAS BEEN PAID TO THE FIRM BY THE ASSES SEE COMPANY AND ONLY THE SHARES HAVE BEEN ISSUED TO THE PARTNERS IN THE ERSTWHILE FIRM IN THEIR PROFIT SHARING RATIO. 3.4. ANOTHER REASON GIVEN BY THE AO IS THAT THE PAR TNERSHIP FIRM HAS REVALUED TWO INTANGIBLE ASSETS IN FINANCIAL YEAR 20 03-04 WHICH ARE TRADE NAME AND TECHNICAL KNOW-HOW WHICH ASSETS WERE NOT IN EXISTENCE IN THE BOOKS OF THE FIRM. THESE ASSETS W ERE CREATED IS ONLY FOR THE PURPOSE OF CLAIMING HIGHER DEPRECIATION. H EAVILY RELYING UPON EXPLANATION-1 TO SEC. 43(6) OF THE ACT, THE AO DISA LLOWED THE CLAIM OF DEPRECIATION. 4. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATT ER BEFORE THE LD. CIT(A) AND EXPLAINED THE TRANSACTION BETWEEN TH E ERSTWHILE FIRM ITA. NOS.4003 & 4004/M/2012 4 AND THE ASSESSEE COMPANY. BEFORE THE FIRST APPELL ATE AUTHORITY, IT WAS STRONGLY CONTENDED THAT THE SUCCESSION OF THE F IRM BY THE ASSESSEE COMPANY HAS BEEN ACCEPTED AS A GENUINE TRA NSACTION IN THE HANDS OF THE PARTNERSHIP FIRM THEREFORE THE AO SHOU LD NOT HAVE TAKEN DIFFERENT VIEW IN THE CASE OF THE ASSESSEE-COMPANY. AFTER VERIFYING THE FACTS, THE LD. CIT(A) WAS CONVINCED THAT THE AO HAS GRANTED EXEMPTION U/S. 47(XIII) ON TRANSFER OF CAPITAL ASSE TS TO THE ERSTWHILE FIRM AND THEREFORE THE FACTS OF THE CASE ARE COVERE D BY THE DECISION OF THE TRIBUNAL IN THE CASE OF MODULAR INFOTECH PVT. LTD. 40 DTR 172 AND CHITRA PUBLICITY CO. PVT. LTD 127 TTJ 01 WHEREI N THE TRIBUNAL HAS TAKEN A VIEW THAT IN CASES COVERED BY SECTION 47(XI II), THE SUCCESSOR COMPANY OUGHT TO BE ENTITLED TO DEPRECIATION BASED ON THE COST INCURRED BY IT. THE LD. CIT(A) ACCORDINGLY DIRECT ED THE AO TO ALLOW THE CLAIM OF DEPRECIATION. 5. AGGRIEVED BY THIS, THE REVENUE IS BEFORE US. 6. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUP PORTED THE FINDINGS OF THE AO. 7. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 8. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND HAVE CAREFULLY PERUSED THE ORDERS O F THE AUTHORITIES BELOW. THE UNDISPUTED FACT IS THAT BY AN AGREEMENT FOR ASSIGNMENT OF BUSINESS, THE ENTIRE ASSETS AND LIABILITIES OF M/S. SUYUSH CHEMICALS, A PARTNERSHIP FIRM REGISTERED UNDER THE PROVISIONS OF INDIAN PARTNERSHIP ACT 1932 HAVE BEEN ASSIGNED TO THE ASSE SSEE COMPANY. IT ITA. NOS.4003 & 4004/M/2012 5 IS ALSO AN UNDISPUTED FACT THAT THE ASSESSMENT OF T HE FIRM M/S. SUYUSH CHEMICALS WAS MADE U/S. 143(3) OF THE ACT AND VIDE ORDER DATED 29.11.2006, THE AO HAS ACCEPTED THE TRANSACTION BET WEEN THE FIRM AND THE ASSESSEE COMPANY U/S. 47(XIII) OF THE ACT. IT IS ALSO AN UNDISPUTED FACT THAT THE FIRM HAS REVALUED ITS ASSE TS IN THE FINANCIAL YEAR 2003-04 PERTAINING TO ASSESSMENT YEAR 2004-05 WHEREAS THE IMPUGNED ASSESSMENT YEARS BEFORE US ARE A.Y. 2005-0 6 & 2006-07. WE FAILED TO UNDERSTAND HOW THE OBJECTIONS RAISED B Y THE AO RE RELEVANT IN THE CASE OF THE ASSESSEE WHEN THE TRANS ACTION HAS BEEN ACCEPTED IN THE HANDS OF THE ERSTWHILE PARTNERSHIP FIRM. 8.1. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT T HE AO HAS HEAVILY RELIED UPON EXPLANATION-1 TO SEC. 43(6) OF THE ACT. THE RELEVANCE OF THE APPLICABILITY OF EXPLANATION-1 TO SEC. 43(6) OF THE ACT IS HIGHLY QUESTIONABLE IN THE HANDS OF THE PRESENT ASSESSEE INASMUCH AS THE SAID EXPLANATION REFERS TO THE PROVISIONS OF SEC. 170(2) OF THE ACT WHICH IS RELEVANT WHEN THE PREDECESSOR CANNOT B E FOUND THEN THE ASSESSMENT OF THE INCOME OF THE PREVIOUS YEAR IN WH ICH THE SUCCESSION TOOK PLACE UPTO THE DATE OF SUCCESSION A ND OF THE PREVIOUS YEAR PRECEDING THAT YEAR SHALL BE MADE ON THE SUCCE SSOR IN LIKE MANNER AND TO THE SAME EXTENT AS IT WOULD HAVE BEEN MADE ON THE PREDECESSOR. THE FACTS OF THE CASE IN HAND DO NOT WARRANT ANY RELEVANCE TO THE AFORESAID PROVISION OF THE ACT. 8.2. IT WOULD NOT BE OUT OF PLACE TO MENTION HERE T HAT THE REVALUATION OF THE ASSETS IS SUPPORTED BY THE CERTI FICATE OF A REGISTERED VALUOR AND THE AO HAS NOT APPOINTED HIS OWN VALUOR FOR VALUATION OF DISPUTED ASSETS NOR THE AO HAS DISPUTE D THE VALUATION ADOPTED BY THE ASSESSEE, THIS RULES OUT THE APPLICA BILITY OF ITA. NOS.4003 & 4004/M/2012 6 EXPLANATION-3 TO SEC. 43 OF THE ACT. THE HONBLE HIGH COURT OF GUJARAT IN THE CASE OF ASHWIN VANASPATI INDUSTRIES VS CIT 255 ITR 26 HAS MADE THE FOLLOWING OBSERVATIONS: THE VALUATION REPORT IS BY A REGISTERED VALUER. NE ITHER IN THE ASSESSMENT ORDER NOR IN THE TRIBUNALS ORDER IS THERE ANY WHISPER THAT THE VALUATION REPORT BY THE REGIST ERED VALUER IS INCORRECT IN ANY MANNER WHATSOEVER. ONCE THERE I S A REPORT BY THE REGISTERED VALUER IT IS ENCUMBENT UPON THE A UTHORITY TO DISLODGE THE SAME BY BRINGING ADEQUATE MATERIAL ON RECORD IN THE FORM OF A DEPARTMENTAL VALUATION REPORT, BECAUS E IN THE ABSENCE OF THE SAME A TECHNICAL EXPERTS OPINION (R EGISTERED VALUERS REPORT) CANNOT BE DISLODGED BY ANY AUTHORI TY BY MERELY IGNORING THE SAME. IN THE PRESENT CASE THAT IS WHAT HAS HAPPENED. NEITHER THE ASSESSING OFFICER THE TRI BUNAL HAVE EVEN ATTEMPTED TO STATE THAT THE VALUATION REPORT A ND THE VALUES PUT ON THE ASSETS ARE INCORRECT IN ANY MANNE R WHATSOEVER. THEY HAVE SIMPLY IGNORED THE VALUATION REPORT. THE ASSESSEE HAVING MADE A CLAIM FOR DEPRECIATION O N ENHANCED COST, WHICH IS THE ACTUAL COST IN ITS HAND S, IT WAS NECESSARY FOR THE AUTHORITY WHO WANTED TO DETERMINE THE ACTUAL COST (AS REQUIRED BY EXPLANATION 3 TO SECT ION 43 OF THE ACT) TO PLACE SOME EVIDENCE ON RECORD. IT COULD NOT HAVE SUBSTITUTED ITS OPINION AND ADOPTED THE BOOK VALUE OR THE WRITTEN DOWN VALUE IN THE HANDS OF THE ASSESSEE-COM PANY. AS CAN BE SEEN FROM EXPLANATION 3 TO SECTION 43(1) OF THE ACT, THE INCOME-TAX OFFICER IS REQUIRED TO DETERMINE THE ACTUAL COST TO THE ASSESSEE HAVING REGARD TO ALL THE CIRCU MSTANCES OF THE CASE AND IF IN HIS OPINION THE WRITTEN DOWN VAL UE WAS THE ACTUAL COST, HE OUGHT TO HAVE SUPPORTED THE SAME BY PLACING SUFFICIENT EVIDENCE SO AS TO DISLODGE THE VALUATION REPORT OF THE REGISTERED VALUER. ON HIS HAVING FAILED TO DO S O, EVEN IF THE EARLIER PORTION OF THE PROVISION, VIZ., THE CON DITION OF THE ASSETS HAVING BEEN USED BY ANOTHER PERSON BEFORE TH E DATE OF ACQUISITION STANDS FULFILLED THE PROVISION CANNOT B E APPLIED. 8.3. THIS DECISION OF THE HONBLE HIGH COURT OF GU JARAT DIRECTLY APPLY ON THE FACTS OF THE CASE AND STRENGTHENS THE CLAIM OF DEPRECIATION BY THE ASSESSEE . ITA. NOS.4003 & 4004/M/2012 7 8.4. ONE MORE ALLEGATION BY THE AO THAT THE ASSESSE E HAS NOT INCURRED ANY COST IN ACQUIRING THE ASSETS AS THE CO NSIDERATION HAS BEEN PAID BY THE ALLOTMENT OF SHARES. THE AO IS TO TALLY MISDIRECTED IN NOT UNDERSTANDING THE PROVISIONS OF SEC. 47(XIII) O F THE ACT WHICH READ AS UNDER: ANY TRANSFER OF A CAPITAL ASSET OR INTANGIBLE ASSE T BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM, OR ANY TRANSFER OF A CAPITAL ASSET TO A COMPANY IN THE COU RSE OF DEMUTUALISATION OR CORPORATISATION OF A RECOGNISED STOCK EXCHANGE IN INDIA AS A RESULT OF WHICH AN ASSOCIATI ON OF PERSONS OR BODY OF INDIVIDUALS IS SUCCEEDED BY SUCH COMPANY. PROVIDED THAT (A) ALL THE ASSETS AND LIABILITIES OF THE FIRM 6OR OF THE ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS RELAT ING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION BECOME T HE ASSETS AND LIABILITIES OF THE COMPANY ; (B) ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE THE SUCCESSION BECOME THE SHAREHOLDERS OF THE COMPANY I N THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STO OD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION ; (C) THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CON SIDERATION OR BENEFIT, DIRECTLY OR INDIRECTLY, IN ANY FORM OR MANNER, OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY ; AND (D) THE AGGREGATE OF THE SHAREHOLDING IN THE COMPAN Y OF THE PARTNERS OF THE FIRM IS NOT LESS THAN FIFTY PER CEN T. OF THE TOTAL VOTING POWER IN THE COMPANY AND THEIR SHAREHOLDING CONTINUES TO BE AS SUCH FOR A PERIOD OF FIVE YEARS FROM THE D ATE OF THE SUCCESSION ; (E) THE DEMUTUALISATION OR CORPORATISATION OF A REC OGNISED STOCK EXCHANGE IN INDIA IS CARRIED OUT IN ACCORDANC E WITH A SCHEME FOR 8DEMUTUALISATION OR CORPORATISATION WHIC H IS APPROVED BY THE SECURITIES AND EXCHANGE BOARD OF IN DIA ESTABLISHED UNDER SECTION 3 OF THE SECURITIES AND E XCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992). ITA. NOS.4003 & 4004/M/2012 8 8.5. THUS IT CAN BE SEEN FROM CLAUSE (C) ABOVE THAT THE PARTNERS OF THE FIRM SHOULD NOT RECEIVE ANY CONSIDERATION OR BE NEFIT DIRECTLY OR INDIRECTLY IN ANY FORM OR MANNER OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY. CONSIDERING THE ENTIRE FACT S IN TOTALITY IN THE LIGHT OF THE JUDICIAL DECISIONS REFERRED TO ABOVE, WE COULD NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CI T(A). 9. IN THE RESULT, THE APPEALS FILED BY THE REVENUE FOR BOTH THE YEARS UNDER CONSIDERATION ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH OCTOBER, 2015 SD/- SD/- (SANJAY GARG ) (N.K. BILLAIYA) $% ' /JUDICIAL MEMBER ' / ACCOUNTANT MEMBER & ' MUMBAI; (' DATED : 14 TH OCTOBER, 2015 . % . ./ RJ , SR. PS !' #' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ) ( ) / THE CIT(A)- 4. ) / CIT 5. *+, %%-. , -.! , & ' / DR, ITAT, MUMBAI 6. ,/0 1 / GUARD FILE. $ / BY ORDER, * % //TRUE COPY// % / $& ' (DY./ASSTT. REGISTRAR) , & ' / ITAT, MUMBAI