DCIT, CHENNAI V. Shriram EPC Limited, CHENNAI

ITA 734/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8701 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 24-03-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: R SIVARAMAN
• Keywords: Depreciation; Scheme of amalgamation
• Section: 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI . . . , . !' , # $ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NO.734, 736, 737 & 738/MDS/2016 / ASSESSMENT YEARS : 2008-09, 2005-06, 2006-07 & 2007-08 THE DY. COMMISSIONER OF INCOME-TAX CORPORATE CIRCLE 6(1) CHENNAI VS. M/S SHRIRAM EPC LTD 18/3, RUKMANI LAKSHMIPATHY ROAD 1 ST FLOOR, RAJAH ANNAMALAI BUILDING EGMORE, CHENNAI 08 [PAN AAFCS 1410 C ] ( &' / APPELLANT) ( ()&' /RESPONDENT) / APPELLANT BY : SHRI SHIVA SRINIVAS, JCIT /RESPONDENT BY : SHRI R. SIVARAMAN, ADVOCATE / DATE OF HEARING : 31 - 05 - 2016 ! / DATE OF PRONOUNCEMENT : 24 - 0 8 - 2016 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER ALL THE APPEALS OF THE REVENUE ARE DIRECTED AGAIN ST THE COMMON OF THE COMMISSIONER OF INCOME-TAX (APPEALS) -15, CHENNAI, DATED 24.9.2015 FOR ASSESSMENT YEARS 2005-06, 2006- 07, 2007-08 AND 2008-09. SINCE COMMON ISSUE ARISES FOR CONSIDERAT ION IN ALL THE APPEALS, WE HEARD THEM TOGETHER AND DISPOSING OF TH E SAME BY THIS COMMON ORDER. ITA NO. 734/16 ETC :- 2 -: 2. SHRI SHIVA SRINIVAS, LD. DEPARTMENTAL REPRESENTATIV E SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERAT ION IS DEPRECIATION CLAIMED BY THE ASSESSEE @ 25% ON THE SO CALLED IN TANGIBLE ASSET ON ACCOUNT OF AMALGAMATION OF M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD WITH ASSESSEE-COMPANY. 3. ACCORDING TO THE LD. DR, M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD. WAS AMALGAMATED WITH THE ASSE SSEE-COMPANY WITH EFFECT FROM 1.4.2004. THE ENTIRE BUSINESS OF THE ASSESSEE AS A GOING CONCERN WAS TAKEN OVER BY THE ASSESSEE-COMPAN Y. THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT DUE TO AMALGAMATION, THE ASSESSEE-COMPANY ACQUIRED THE INT ANGIBLE ASSET IN THE FORM OF TECHNICAL KNOWHOW. THE ASSESSING OFFI CER FOUND THAT M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD. AT THE TI ME OF AMALGAMATION HAS NO TECHNICAL KNOWHOW IN THEIR POSSESSION AND IN FACT NO DEPRECIATION WAS CLAIMED BY M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD AT ANY POINT OF TIME IN THE EARLIER ASSESSMENT YEARS. IN THE ABSENCE OF ANY TECHNICAL KNOWHOW POSSESSED BY M/S S HRIRAM ENGINEERING CONSTRUCTION CO. LTD., THE ASSESSEE CA NNOT HAVE ACQUIRED ANY TECHNICAL KNOWHOW FROM THE SAID COMPANY. IN TH E ABSENCE OF ANY TECHNICAL KNOWHOW POSSESSED BY M/S SHRIRAM ENGINEER ING CONSTRUCTION CO. LTD, THE ASSESSEE-COMPANY WOULD NO T HAVE GOT ANY ITA NO. 734/16 ETC :- 3 -: SUCH TECHNICAL KNOWHOW HENCE, THERE IS NO QUESTION OF ANY DEPRECIATION ON THE NON-EXISTING TECHNICAL KNOWHOW. REFERRING TO THE ORDER OF THE CIT(A), THE LD. DR SUBMITTED THAT THE CIT(A) FOUND THAT M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD HAS EX PERTISE IN THE FIELD OF EXECUTION OF WATER RELATED PROJECTS DURING THE L AST FIVE YEARS PRIOR TO AMALGAMATION. SUCH AN EXPERTISE IS DEFINITELY AN I NTANGIBLE ASSET WHEN THE SAID COMPANY WAS ACQUIRED BY THE ASSESSEE- COMPANY. THE NUMBER OF TECHNICAL PERSONS EMPLOYED BY M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD BECAME THE EMPLOYEES OF THE AS SESSEE-COMPANY. AFTER AMALGAMATION THE EXPERIENCE POSSESSED BY THE EMPLOYEES OF THE ERSTWHILE M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD HAS TO BE AN ASSET OF THE ASSESSEE-COMPANY, THEREFORE, THE SAME HAS TO BE CONSTRUED AS AN INTANGIBLE ASSET. MERELY BECAUSE T HERE WAS NO INTANGIBLE ASSET SHOWN IN THE BOOKS OF ACCOUNT OF M /S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD., THE CIT(A) FOUND THAT IT CANNOT BE SAID THAT THERE WAS NO INTANGIBLE ASSET. ACCORDING TO THE LD. DR, THE MANPOWER AND EXPERTISE OF THE ERSTWHILE M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD CANNOT BE CONSTRUED AS AN INTA NGIBLE ASSET IN THE HANDS OF THE ASSESSEE-COMPANY. IT CANNOT BE CONSTR UED AS TECHNICAL KNOWHOW AS WELL. THEREFORE, THE CIT(A) IS NOT JUSTI FIED IN ALLOWING THE DEPRECIATION AS CLAIMED BY THE ASSESSEE. ITA NO. 734/16 ETC :- 4 -: 4. ON THE CONTRARY, SHRI R. SIVARAMAN, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE VALUE OF THE INTANGIBLE ASSET OF ERSTWHILE M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD. WAS V ALUED BY AN INDEPENDENT VALUER AT ` 500 LAKHS. HOWEVER, THE SAME WAS NOT REFLECTED IN THE FIXED ASSETS AND DEPRECIATION SCHE DULE OF THE AMALGAMATING COMPANY M/S SHRIRAM ENGINEERING CONSTR UCTION CO. LTD. EVEN THOUGH THE INTANGIBLE ASSET WAS NOT TAKEN ON T HE BOOKS OF M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD., THE EXPE RIENCE OF PROVIDING WATER SUPPLY FACILITY IN MANY MUNICIPAL TOWNS WOULD DEFINITELY BE A TECHNICAL KNOWHOW POSSESSED BY M/S SHRIRAM ENGINEER ING CONSTRUCTION CO. LTD. THE PERFORMANCE AND DEVELOPM ENT OF M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD IN EXECUTI NG THE PROJECT OVER A PERIOD OF FIVE YEARS WOULD SHOW THAT M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD EARNED GOODWILL DURING THE COU RSE OF ITS BUSINESS ACTIVITY. THE STATUS OF M/S SHRIRAM ENGINEERING CO NSTRUCTION CO. LTD AS A DEVELOPER AND ITS INFRASTRUCTURE FACILITY WAS RECOGNIZED BY MANY OF THE LOCAL BODIES IN THE COUNTRY. AT THE TIME OF AM ALGAMATION, THE INTANGIBLE ASSET IN THE FORM OF TECHNICAL KNOWHOW/G OODWILL WAS VALUED AT ` 500 LAKHS. ON A QUERY FROM THE BENCH WHETHER THE EXPERIENCE OF THE FORMER M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD OR THE TECHNICAL EXPERTISE OF ITS EMPLOYEES CAN BE CONSTRU ED AS TECHNICAL KNOWHOW IN THE HANDS OF THE ASSESSEE, THE LD. COUN SEL CLARIFIED THAT ITA NO. 734/16 ETC :- 5 -: WHEN THE ASSESSEE ACQUIRED THE GOODWILL TOGETHER W ITH ITS ASSETS, TECHNICAL EXPERTISE AND EXPERIENCE POSSESSED BY THE ERSTWHILE M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD., IT HAS T O BE NECESSARILY CONSIDERED AS TECHNICAL KNOWHOW IN THE HANDS OF THE ASSESSEE- COMPANY, HENCE, IT IS AN INTANGIBLE ASSET ALLOWABLE FOR DEPRECIATION U/S 32 OF THE ACT. THE TECHNICAL KNOWHOW/GOODWILL WAS NOT ACQUIRED BY M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD FOR A COST. IN FACT, IT WAS GENERATED OVER A PERIOD OF TIME DURING THE COUR SE OF ITS BUSINESS ACTIVITY. AS PER THE SCHEME OF AMALGAMATION AS APP ROVED BY THE HIGH COURT, THE ENTIRE ASSETS WERE TAKEN OVER BY THE ASS ESSEE-COMPANY INCLUDING THE EXPERTISE AND EXPERIENCE POSSESSED BY ITS EMPLOYEES. THE VALUATION WAS DONE BY AN INDEPENDENT VALUER M/S NS PRABHAKAR & CO., CHARTERED ACCOUNTANTS. THE LD. COUNSEL FURTHE R SUBMITTED THAT THE ASSESSEE-COMPANY HAS NOT UNDERTAKEN ANY PROJECT IN THE FIELD OF WATER TREATMENT PLANTS, WATER SUPPLY PIPELINE WORK, RESERVOIR CONSTRUCTION, UNDERGROUND SEWAGE COLLECTION SYSTEMS , SEWAGE TREATMENT PLANTS, EFFLUENT TREATMENT PLANTS ETC. TO HELP THE ASSESSEE- COMPANY AFTER AMALGAMATION. THE EXPERTISE AND EXPE RIENCE OF THE WORKFORCE OF THE ERSTWHILE M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD WOULD HELP THE ASSESSEE IN CARRYING OUT SUCH A CTIVITIES AFTER AMALGAMATION. THE EXPERTISE AND INTELLECTUAL OF TH E EMPLOYEES IN THE DOMAIN AREA IS AN ASSET OF THE AMALGAMATED COMPANY I.E ASSESSEE- ITA NO. 734/16 ETC :- 6 -: COMPANY, THEREFORE, THE VALUE OF THE SAME WAS RIGHT LY DETERMINED BY THE INDEPENDENT VALUER AT ` 500 LAKHS. HENCE, THE CIT(A) HAS RIGHTLY FOUND THAT TECHNICAL KNOWHOW DID EXIST IN THE FORM OF EXPERTISE AND EXPERIENCE OF THE WORKFORCE OF THE AMALGAMATING COM PANY, THEREFORE, THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION @ 25%. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. TH E QUESTION ARISES FOR CONSIDERATION IS WHETHER THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION ON THE SO CALLED EXPERTISE AND EXPERIENCE OF THE EMPLO YEES OF ERSTWHILE M/S SHRIRAM ENGINEERING CONSTRUCTION CO. LTD. THE CIT(A) BY PLACING RELIANCE ON EXPLANATION 3(B) TO SEC. 32(1) OF THE A CT FOUND THAT THE TECHNICAL KNOWHOW OF THE AMALGAMATING COMPANY PER S E TAKES THE CHARACTER OF INTANGIBLE ASSET, THEREFORE, ELIGIBLE FOR DEPRECIATION. WE HAVE GONE THROUGH THE PROVISIONS OF SEC. 32(1) OF T HE ACT. EXPLANATION 3(B) TO SEC. 32(1) OF THE ACT READS AS FOLLOWS: EXPLANATION 3 FOR THE PURPOSES OF THIS SUB- SECTION,[THE EXPRESSION ASSETS] SHALL MEAN (A) .. (B) INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATU RE. ITA NO. 734/16 ETC :- 7 -: EXPLANATION 3 TO SEC. 32(1) DEFINES INTANGIBLE ASSE T. IT DOES NOT SAY ANYTHING ABOUT EXPERIENCE AND EXPERTISE OF THE EMPL OYEES OF THE AMALGAMATING COMPANY. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT WHETHER THE EXPERTISE AND EXPERIENCE O F THE ERSTWHILE COMPANY WHICH WAS AMALGAMATED WITH THE ASSESSEE-CO MPANY IS A TECHNICAL KNOWHOW WITHIN THE MEANING OF EXPLANATION 3(B) TO SEC. 32(1) OF THE ACT OR NOT NEEDS TO BE EXAMINED. THI S ASPECT WAS NOT CONSIDERED BY ANY OF THE LOWER AUTHORITIES. THEREF ORE, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ENTIRE ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL REEXAMINE THE ISSUE AFRESH AND FIND OUT WHETHER EXPERIENCE AN D EXPERTISE OF THE AMALGAMATING COMPANY WOULD AMOUNT TO TECHNICAL KNOW HOW WITHIN THE MEANING OF EXPLANATION 3(B) TO SEC. 32(1) OF THE AC T AND DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER GIVING A REASONABLE OPPOR TUNITY TO THE ASSESSEE. 6. IN THE RESULT, ALL THE APPEALS OF THE REVENUE ARE A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH AUGUST, 2016, AT CHENNAI. SD/- SD/- ( . !' ) (A. MOHAN ALANKAMONY) # / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 24 TH AUGUST, 2016 RD ITA NO. 734/16 ETC :- 8 -: &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF