M/s Padmini Products Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 527/BANG/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8492 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 22-03-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: O P YADAV
• Keywords: Depreciation; Period of limitation; Wholly owned subsidiary; Revised return
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH, B, BANGALORE BEFORE SHRI INTURI RAMA RAO ACCOUNTANT MEMBER SHRI LALIET KUMAR, JUDICIAL MEMBER ITA NO.527/BAN G/2016 (ASST. YEAR 2012-13) M/S PADMINI PRODUCTS PVT. LTD., #157, K KAMARAJ ROAD, BENGALURU-560 042. . APPELLANT VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-12(2) BENGALURU. . RESPONDENT APPELLANT BY : SHRI TATAKRISHNA, ADVOCATE RESPONDENT BY : SHRI O.P YADAV, CIT DATE OF HEARING : 1-3-2017 DATE OF PRONOUNCEMENT : -3-2017 O R D E R PER LALIET KUMAR, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) -5, BANGAL ORE DATED 27 TH JAN, 2016 FOR THE ASSESSMENT YEAR 2012-13. ITA NO.527/ /B/16 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS O F APPEAL: ITA NO.527/ /B/16 3 2.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY FILED RETURN OF INCOME DECLARING A LOSS OF RS.6,91,37,352 /- AND LATTER THE ASSESSEE FILED REVISED RETURN OF INCOME ON 12/12/20 01 DECLARING TOTAL LOSS OF RS.7,20,76,759/-. THE CASE WAS SELECTED FOR SC RUTINY ASSESSMENT AND NOTICE U/S 143(2) WAS ISSUED ON 8/8/2013. THE NOTI CE STIPULATES AS UNDER: ITA NO.527/ /B/16 4 3. IN RESPONSE TO THE NOTICE, THE AUTHORIZED REPRE SENTATIVE FILED REPLY AND PRODUCED THE BOOKS OF ACCOUNT AND THE AO WAS NO T CONVINCED WITH THE REASONS GIVEN BY THE ASSESSEE AND, THEREFORE, THE A O ASSESSED THE INCOME BY DISALLOWING THE DEPRECIATION OF INTANGIBLE TO TH E EXTENT OF 3,91,32,683/- VIDE ORDER DATED 13/11/2014. 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A), WHO IN TURN UPHELD THE ORDER OF THE AO. HENCE, THE ASSESSEE IS BEFORE US. 5. BEFORE US, THE AR SUBMITTED THAT THE ASSESSMENT PROCEEDINGS WERE NOT VALID AS NOTICE U/S 143(2) WAS ISSUED PURSUANT TO THE ORIGINAL RETURN OF ITA NO.527/ /B/16 5 INCOME AND NOT ON THE BASIS OF THE REVISED RETURN O F INCOME DATED 12/12/2012. 6. IN FACT, ARGUMENT OF THE ASSESSEE IS NOT CORREC T AS THERE IS NO STATUS TO REVISED RETURN IN THE EYE OF LAW MERELY TO RECTI FY ANY OMISSION OR WRONG STATEMENT MADE IN THE ORIGINAL RETURN. IT IS CLEAR FROM THE NOTICE U/S 143(2) THAT THE AO NOTED DOWN THE FILING OF REVISED RETURN ON 12/12/2012, THEREFORE, IT CANNOT BE SAID THAT NOTICE WAS ISSUED WITHOUT CONSIDERING THE REVISED RETURN. IN OUR VIEW, THIS CONTENTION OF THE ASSESSEE IS BASELESS AND IS REQUIRED TO BE DISMISSED. 7. WE FIND THAT THE REASONING GIVEN BY THE LEARNED CIT(A) IN PARAGRAPH 5 IS THE CORRECT REASONING AS THE NOTICE WAS ISSUED BY THE AO WITHIN A PERIOD OF LIMITATION AND THERE IS NO DELAY IN ISSUING NOTICE. ACCORDINGLY, THE GROUND NO.1 IS DECIDED AGAINST THE ASSESSEE. 8. WITH RESPECT TO GROUND NO.2, IT IS POINTED OUT BY THE LEARNED DR THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE IN THE ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS FROM 2005-06 TO 2008-09 I N ITA NOS.429 TO 430/BANG/2013 DATED 10/1/2014, WHEREIN AT PARAGRAPH 16 TO 25 IT HAS BEEN HELD AS UNDER: ITA NO.527/ /B/16 6 16. THE FIRST QUESTION FOR ADJUDICATION BEFORE US IS WHETHER THE EARLIER PARTNERSHIP FIRM WAS REQUIRED UNDER LAW TO REVALUE THE ASSETS BEFORE ITS CONVERSI ON INTO A COMPANY. AS RIGHTLY POINTED OUT BY THE LEAR NED COUNSEL FOR THE ASSESSEE, WHEN A PARTNERSHIP FIRM IS DISSOLVED, IT NEEDS TO REVALUE ITS ASSETS AS THE PARTNERS ARE ENTITLED TO RECEIVE THE VALUE OF THE ASSETS AS ON THE DATE OF DISSOLUTION IN THE RATIO OF THEIR CONTRIBUT ION OF CAPITAL AND, THEREFORE, TO ARRIVE AT THE VALUE OF T HE ASSETS AS ON THE DATE OF DISSOLUTION THE REVALUATION OF AS SETS AND LIABILITIES IS REQUIRED TO BE DONE. SIMILAR I S THE CASE WHERE ANY OF THE PARTNERS RETIRES OR ANY NEW PARTNER IS INDUCTED. BUT WHAT HAPPENS WHEN THERE I S NO INDUCTION OF A NEW PARTNER OR RETIREMENT OF ANY PAR TNER OR DISSOLUTION OF PARTNERSHIP FIRM? THE REQUIREMEN T OF REVALUATION OF THE ASSETS AND LIABILITIES ARISES ON LY IN THE CIRCUMSTANCES MENTIONED ABOVE. IN THE CASE ON HAND , THE ASSESSEE HAD REVALUED ITS ASSETS ON THE GROUND THAT IT WAS GETTING CONVERTED INTO A PRIVATE LIMITED COMPAN Y. THE LEARNED COUNSEL FOR THE ASSESSEE HAD PLACED RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF KARTIKEYA A.V SARABHAI (CITED SUPRA) IN SUPPORT OF HIS CONTENTION THAT THE SHAREHOLDERS WHO BUY SHARES WILL NOT HAVE ANY INTER EST IN THE PROPERTY OF THE COMPANY WHICH IS ENTIRELY D ISTINCT FROM THE SHAREHOLDER AND THE TRUE POSITION OF THE SHAREHOLDER IN A COMPANY ON BUYING THE SHARES IS TH AT HE BECOMES ENTITLED TO A PERCENTAGE IN THE PROFITS OF THE ITA NO.527/ /B/16 7 COMPANY IF AND WHEN COMPANY DECLARES, SUBJECT TO MEMORANDUM OF ASSOCIATION THAT THE PROFITS OR ANY PORTION THEREOF SHOULD BE DISTRIBUTED AS DIVIDEND AMONGST THE SHAREHOLDERS AND HE HAS FURTHER RIGHT T O PERCENTAGE IN THE ASSETS OF THE COMPANY WHICH WOULD BE LEFT-OVER AFTER WINDING UP. THUS, HE TRIED TO BRIN G OUT DISTINCTION BETWEEN THE RIGHTS OF THE PARTNERS IN A PARTNERSHIP FIRM WHICH IS JOINT AND SEVERAL IN CON TRAST TO THE RIGHTS AND LIABILITIES OF THE SHAREHOLDERS I N A COMPANY. HE HAS ALSO RELIED UPON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS REPORTED IN 341 ITR 1 (SC) TO BRING OUT DISTINCTION BETWEEN THE HOLDING COMPANY A ND WHOLLY OWNED SUBSIDIARY IN WHICH THE HONBLE SUPREM E COURT HAS HELD THAT THE LEGAL RELATIONSHIP BETWEEN THE HOLDING COMPANY AND WHOLLY OWNED SUBSIDIARY IS THAT THEY ARE TWO LEGALLY DISTINCT PERSONS AND HOLDING COMPANY DOES NOT OWN THE ASSETS OF A SUBSIDIARY AND IN LAW THE MANAGEMENT OF THE BUSINESS OF THE SUBSIDIAR Y ALSO LIES WITH ITS DIRECTORS. THUS, ACCORDING TO HIM, THE PARTNERSHIP FIRM AND THE ASSESSEE COMPANY ARE TWO DIFFERENT AND DISTINCT LEGAL ENTITIES AND IT CANNOT BE SAID THAT THE ASSESSEE COMPANY HAS NOT ACQUIRED ANY ASSE TS FROM THE ERSTWHILE PARTNERSHIP FIRM. TO APPRECIATE THESE CONTENTIONS OF THE ASSESSEE, WE HAVE TO EXAMINE THE PROCEDURE AND EFFECT OF CONVERSION OF A PARTNERSHIP FIRM INTO A COMPANY. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TEXSPIN ENGG AND MANUFACTURING ITA NO.527/ /B/16 8 WORKS REPORTED IN (2003) 263 ITR 345 (BOM) HAS CONSIDERED THE EFFECT OF CONVERSION OF A PARTNERSHI P FIRM INTO A LIMITED COMPANY BY VIRTUE OF SEC. 575 OF THE COMPANIES ACT AND HAS HELD THAT UNDER PART IX OF TH E COMPANIES ACT, WHEN A PARTNERSHIP FIRM IS CONVERTED TO A LIMITED COMPANY, THE PROPERTIES OF THE ERSTWHILE FIRM VESTS IN THE LIMITED COMPANY. IT WAS OBSERVED THAT THERE IS A DIFFERENCE IN VESTING OF THE PROPERTY AND DISTRIBUTION OF THE PROPERTY. IT WAS HELD THAT ON VESTING IN THE LIMITED COMPANY UNDER PART IX OF THE COMPANI ES ACT, THE PROPERTIES VEST IN THE COMPANY AS THEY EXI ST WHILE DISTRIBUTION OF PROPERTY ON DISSOLUTION PRE- SUPPOSES DIVISION, REALIZATION, ENCASHMENT OF ASSET S AND APPROPRIATION OF THE REALIZED AMOUNT AS PER THE PRI ORITY AND THAT THIS DIFFERENCE IS VERY IMPORTANT. HAVING OBSERVED THUS, THE HONBLE HIGH COURT HELD THAT THE RE IS NO TRANSFER OF PROPERTY AND NO CAPITAL GAINS ARISE FROM SUCH A TRANSACTION. THE HONBLE HIGH COURT WAS DEALING WITH THE CASE OF THE PARTNERSHIP FIRM WHILE IN THE CASE ON HAND, WE ARE DEALING WITH THE CASE OF THE COMPANY. IN THE CASE OF TEXSPIN, THE QUESTIONS CONSIDERED WERE - (1) WHETHER CAPITAL GAINS AROSE IN THE HANDS OF THE PARTNERSHIP FIRM ON CONVERSION OF THE FIRM INTO THE COMPANY, AND (2) WHETHER THE FIRM WAS ENTITLED TO DEPRECIATION O N THE ASSETS OWNED BY IT TILL THE DATE OF TRANSFER. ITA NO.527/ /B/16 9 17. THE CASE ON HAND IS A REVERSE CASE. THE COMPAN Y IS CLAIMING THE DEPRECIATION ON THE VALUE OF THE AS SETS IN ITS BOOKS OF ACCOUNTS. THE CLAIM OF DEPRECIATION I S ON TRADEMARKS WHICH ARE INTANGIBLE ASSETS AND DEPRECIA TION THEREON IS ALLOWABLE U/S 32(1)(II) OF THE IT ACT. THE TWO CONDITIONS MENTIONED IN SEC. 32 ARE THAT THE ASSETS SHOULD BE OWNED BY THE ASSESSEE AND SHOULD HAVE BEE N USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION OF THE ASSESSEE. THE SUB-CLAUSES THERETO ENUMERATE THE DEDUCTIONS ALLOWABLE U/S 32. SUB-CLAUSE (II) THERE OF PROVIDES FOR A DEDUCTION AT A PRESCRIBED PERCENTAGE OF THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS. 5 TH PROVISO THERETO PROVIDES THAT IN RESPECT OF CIRCUMSTANCES S UCH AS SUCCESSION, AMALGAMATION OR DEMERGER, THE AVERAGE DEDUCTION ON ACCOUNT OF DEPRECIATION ON TANGIBLE OR INTANGIBLE ASSETS SHALL NOT EXCEED, IN ANY PREVIOUS YEAR, THE DEDUCTION CALCULATED AT THE PRESCRIBED RATES AS IF THE SUCCESSION, AMALGAMATION OR DEMERGER HAS NOT TAKEN PLACE AND SUCH DEDUCTION SHALL BE APPORTIONED BETWE EN THE PREDECESSOR AND THE SUCCESSOR, OR THE AMALGAMAT ING COMPANY AND AMALGAMATED COMPANY OR THE DEMERGED COMPANY AND THE RESULTING COMPANY AS THE CASE MAY B E, IN THE RATIO OF DAYS FOR WHICH THE ASSETS WERE USED BY THEM. 18. IN ALL THE THREE CIRCUMSTANCES ABOVE, THE ERSTW HILE COMPANY CEASES TO EXIST AND A NEW COMPANY COMES INT O EXISTENCE. IN THE CASE ON HAND ALSO, ON ACCOUNT OF ITA NO.527/ /B/16 10 CONVERSION, THE ERSTWHILE PARTNERSHIP FIRM CEASED T O EXIST WHILE THE COMPANY HAS COME INTO EXISTENCE. THEREFORE, THE ASSETS COME TO VEST IN THE HANDS OF THE COMPANY AND THERE IS NO COST OF ASSETS TO THE COMPA NY ON SUCH VESTING. WHEN THE TRANSACTION ITSELF HAS B EEN TREATED TO BE NOT A TRANSFER, BUT IS AKIN TO SUCCES SION, IN OUR OPINION THE 5 TH PROVISO TO SUB-CLAUSE (II) OF SEC. 36(1) APPLIES AND THE DEPRECIATION HAS TO BE CALCUL ATED AS IF THERE IS NO TRANSFER. 19. FURTHER, AS THERE IS NO TRANSFER, THERE IS NO C OST TO THE ASSESSEE. DEPRECIATION IS ALLOWABLE ON THE WDV OF THE ASSET AND WDV HAS BEEN DEFINED U/S 43(6) TO MEA N IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEAR , THE ACTUAL COST TO THE ASSESSEE. AS ACTUAL COST TO THE ASSESSEE WAS NIL, THE WD VALUE OF THE ASSETS IN T HE HANDS OF THE PREDECESSOR FIRM SHALL BE CONSIDERED F OR THE ALLOWANCE OF DEPRECIATION. 20. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFER E WITH THE ORDERS OF THE AUTHORITIES BELOW. 21. THE LEARNED COUNSEL FOR THE ASSESSEE HAD PLACED RELIANCE UPON THE DECISION OF ITAT AT AHMEDABAD IN THE CASE OF PRAKASH CHEMICAL AGENCIES PVT. LTD. REPORTE D IN (2012) 136 ITD 222 (AHD) BUT WE FIND THAT IT IS THE CASE OF A TAKEOVER OF THE BUSINESS OF A PARTNERSHIP FIRM BY THE ASSESSEE COMPANY THEREIN WHEREAS IN THE CASE BEFORE US, ITA NO.527/ /B/16 11 IT IS THE CASE OF CONVERSION OF PARTNERSHIP FIRM IN TO A COMPANY. THEREFORE, THE SAID DECISION IS NOT APPLI CABLE TO THE CASE ON HAND. 22. THE OTHER OBJECTION OF THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT THE CONVERSION HAS TAKEN PLACE IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2004-05 A ND HENCE IT CAN BE EXAMINED ONLY IN A.Y 2004-05 AND NO T IN SUBSEQUENT YEAR. WE ARE UNABLE TO ARGUE WITH THIS CONTENTION OF THE ASSESSEE. SUB-SEC(6) OF SEC. 43 DEFINES WRITTEN DOWN VALUE AND IT PROVIDES FOR BOTH THE ACQUISITION OF ASSETS DURING THE RELEVANT PREVIOUS YEAR AND ACQUISITION OF ASSETS BEFORE THE RELEVANT PREVI OUS YEAR AND BOTH THE CLAUSES MENTION ACTUAL COST TO T HE ASSESSEE. IN THE SECOND CIRCUMSTANCE I.E WHERE TH E ASSETS ARE ACQUIRED BEFORE THE PREVIOUS YEAR AS IN THE CASE OF THE ASSESSEE BEFORE US, THE WDV SHALL BE TH E ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATION A CTUALLY ALLOWED TO HIM UNDER THE INCOME-TAX ACT. THEREFORE , IT IS CLEAR THAT THE CLAIM OF DEPRECIATION CAN BE EXAM INED EVEN IN THE ASSESSMENTS YEARS SUBSEQUENT TO THE ASSESSMENT YEAR IN WHICH THE SUCCESSION HAS TAKEN PLACE. THIS ARGUMENT IS ACCORDINGLY REJECTED. 23. THE OTHER OBJECTION OF THE ASSESSEE IS THAT THO UGH ONLY THE AO IS ENTITLED TO INVOKE THE PROVISIONS OF EXPLANATION 3 TO SEC. 43(1) OF THE IT ACT, THE CIT( A) HAS INVOKED THE SAME WHICH IS IMPERMISSIBLE. ON PERUSA L OF ITA NO.527/ /B/16 12 THE ORDER OF THE CIT(A), WE FIND THAT HE HAS NOT IN VOKED THE PROVISIONS OF EXPLANATION 3 TO SEC. 43(1) OF TH E IT ACT BUT HAS ONLY JUSTIFIED THE ACTION OF THE AO IN QUESTIONING THE CLAIM OF DEPRECIATION BY CITING THE PROVISION OF S EC. 43(1) AND EXPLANATION 3 THEREOF. THEREFORE, WE SEE N NO STRENGTH IN THIS ARGUMENT OF THE ASSESSEE. 24. FURTHER, U/S 251 OF THE IT ACT, THE POWERS OF T HE CIT(A) ARE CO-TERMINUS WITH THAT OF THE AO MEANING THAT HE CAN DO WHAT THE AO COULD DO AND CAN ALSO DI RECT THE LATTER TO DO WHAT THE LATTER FAILED TO DO AS L AID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. KANPUR COAL SYNDICATE (1964) 53 ITR 225 (SC). THEREFORE, WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE CIT(A) WHICH NEEDS INTERFERENCE. THEREFORE, THIS ARGUMENT OF THE ASSESSEE IS ALSO REJECTED. 25. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E FOR ALL THE ASSESSMENT YEARS ARE DISMISSED. 9. RESPECTFULLY FOLLOWING THE DECISION OF COORDINA TE BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE, WE DEEM IT APP ROPRIATE TO DISMISS THIS GROUND OF THE ASSESSEE AS WELL. ITA NO.527/ /B/16 13 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 3RD MARCH, 2017 . SD/- SD/- (INTURI RAMA RAO) (L ALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE DATED : 3/03/2017 VMS COPY TO :1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTR AR, ITAT, BANGALORE.