Depreciation on revalued assets allowed to successor if same was allowed to predecessor

Premanand J. for the Appellant. Vijay Mehta for the Respondent.

ORDER

N.K. Billaiya, Accountant Member – These two appeals by the Revenue are preferred against 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.

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 manufacturing of chemicals and bulk drug. Return for the year was filed on 29.10.,2005 declaring loss of Rs. 1,30,85,355/-. The return was selected for scrutiny assessment. During the course of the assessment proceedings, the Assessing Officer came to know that M/s. Suyash Chemicals, a partnership firm was succeeded in its business by the assessee company on 31.3.2004 by which all the assets and liabilities of the partnership firm were transferred to the assessee company.

3.1. The AO further noticed that erstwhile partnership 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 depreciation on the revalued assets taken over from the erstwhile partnership 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, assessee was asked to show cause why the depreciation claimed on revalued assets acquired on succession be not disallowed. The assessee filed a detailed reply stating that the entire transaction is covered by the provisions of Sec. 47(xiii) of the Act. It was brought to the notice of the AO that the depreciation has been claimed by the assessee company on cost incurred by it for purchase of assets and therefore the depreciation should be allowed as per the provisions 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 constitute transfer in terms of Sec. 2(47) of the Act. According to the AO, the revaluation of the assets was only an increase in the value on paper and depreciation on the revalued assets cannot be allowed as per the provisions of the Act.

3.3 According to the AO, the assets of the firm are to be transferred at the actual value in the books and not at a revalued price. Further, the claim of depreciation is allowed to the acquirer on the cost that is paid by the acquirer. The AO was of the opinion that in the present case no cost has been paid to the firm by the assessee 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 partnership firm has revalued two intangible assets in financial year 2003-04 which are “trade name” and “Technical Know-how” which assets were not in existence in the books of the firm. These assets were created is only for the purpose of claiming higher depreciation. Heavily relying upon Explanation-1 to Sec. 43(6) of the Act, the AO disallowed the claim of depreciation.

4. Aggrieved by this, the assessee carried the matter before the Ld. CIT(A) and explained the transaction between the erstwhile firm and the assessee company. Before the First Appellate authority, it was strongly contended that the succession of the firm by the assessee company has been accepted as a genuine transaction in the hands of the partnership firm therefore the AO should 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 assets to the erstwhile firm and therefore the facts of the case are covered by the decision of the Tribunal in the case of Modular Infotech (P.) Ltd. v. Dy. CIT [2010] 131 TTJ (Pune) 243 and Chitra Publicity Co. (P.) Ltd. v. Asstt. CIT [2010] 127 TTJ (Ahd.) 1 TM wherein the Tribunal has taken a view that in cases covered by Section 47(xiii), the successor company ought to be entitled to depreciation based on the cost incurred by it. The Ld. CIT(A) accordingly directed the AO to allow the claim of depreciation.

5. Aggrieved by this, the Revenue is before us.

6. The Ld. Departmental Representative strongly supported 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 of 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 assessee company. It is also an undisputed fact that the assessment of the 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 between 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 assets in the financial year 2003-04 pertaining to assessment year 2004-05 whereas the impugned assessment years before us are A.Y. 2005-06 & 2006-07. We failed to understand how the objections raised by the AO relevant in the case of the assessee when the transaction has been accepted in the hands of the erstwhile partnership firm.

8.1 A perusal of the assessment order shows that the 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 be found then the assessment of the income of the previous year in which the succession took place upto the date of succession and of the previous year preceding that year shall be made on the successor 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 that the revaluation of the assets is supported by the certificate of a registered valuor and the AO has not appointed his own valuor for valuation of disputed assets nor the AO has disputed the valuation adopted by the assessee, this rules out the applicability of Explanation-3 to Sec. 43 of the Act. The Hon’ble High Court of Gujarat in the case of Ashwin Vanaspati Industries v CIT [2002] 255 ITR 26 has made the following observations:

“The valuation report is by a registered valuer. Neither in the assessment order nor in the Tribunal’s order is there any whisper that the valuation report by the registered valuer is incorrect in any manner whatsoever. Once there is a report by the registered valuer it is encumbent upon the authority to dislodge the same by bringing adequate material on record in the form of a departmental valuation report, because in the absence of the same a technical expert’s opinion (registered valuer’s report) cannot be dislodged by any authority by merely ignoring the same. In the present case that is what has happened. Neither the Assessing Officer the Tribunal have even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever. They have simply ignored the valuation report.

The assessee having made a claim for depreciation on enhanced cost, which is the actual cost in its hands, it was necessary for the authority who wanted to determine the “actual cost” (as required by Explanation 3 to section 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-company. 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 circumstances of the case and if in his opinion the written down value 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 so, even if the earlier portion of the provision, viz., the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied”.

8.3 This decision of the Hon’ble High Court of Gujarat directly apply on the facts of the case and strengthens the claim of depreciation by the assessee .

8.4 One more allegation by the AO that the assessee has not incurred any cost in acquiring the assets as the consideration has been paid by the allotment of shares. The AO is totally misdirected in not understanding the provisions of Sec. 47(xiii) of the Act which read as under:

“any transfer of a capital asset or intangible asset 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 course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company.

Provided that

8.5 Thus it can be seen from clause (c) above that the partners of the firm should not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. Considering the entire facts 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. CIT(A).

9. In the result, the appeals filed by the Revenue for both the years under consideration are dismissed.