Padmini Products (P) Ltd. v. Dy. CIT [ITA No. 154
of 2014, dt. 5-10-2020] : 2020 TaxPub(DT) 4179 (Karn-HC)
Depreciation on revalued intangible trademarks post
conversion of Partnership firm into Company under section 47(xiii) --
Applicability of section 43(1) Explanation 3 read with 5th proviso to section
32(1).
Facts:
A firm Padmini Products was into selling incense sticks and
allied products. On 1-2-2005 they converted their firm into a Private Limited
company prior to which all intangible assets were duly valued and surplus
credited to partners capital accounts. The said capital accounts were converted
into shares of Rs. 1000 each at a premium of Rs. 13500 each and shares were
duly allotted.
The Assessee Private company formed as a result of the
conversion returned losses for assessment year 2005-06 and 2007-08 and NIL
income for assessment year 2006-07 and 2008-09. Assessment year 2005-06 was
reopened by revenue under section 147 alleging that the company had wrongly
claimed depreciation on self-created intangible assets which was not existing
in erstwhile firm. Since there being no cost incurred for these intangible
assets no depreciation is allowable under section 32(1)(ii) and depreciation be
restricted vide proviso 5 to section 32(1). Since no intangible existed in the
firm's books no depreciation becomes allowable. The assessing officer did not
invoke section 43(1) Explanation 3 as well is to be noted. On appeal ITAT held
that section 43(6) mentions "actual cost to assessee" which was absent
in hands of erstwhile firm thus no depreciation is allowable on the intangible
assets.
Aggrieved assessee went in appeal to High Court --
Held in favour of the assessee that --
1. They were entitled to
depreciation on the intangible asset which arose out of revaluation in the
hands of the erstwhile firm.
2. Proviso 5 to section 32(1)
talks only of splitting of depreciation in the hands of predecessor and
successor and is applicable only in 1st year of succession and no such
splitting need has risen or has been claimed in this case. There was no
depreciation on intangibles in hands of firm so no invocation of proviso 5 to
section 32(1) is possible.
3. None of the tax authorities
have invoked section 43(1) Explanation 3 either questioning the asset valuation
or the imputed cost of the intangibles in the hands of the company being
allegedly used only to avoid income-tax without which denial of
depreciation is incorrect.
4. Section 47(xiii) conditions
are also found to be met by assessee.