Modular Infotech (P.) Ltd. v. Deputy Commissioner of Income Tax

SUBSCRIBE FOR FULL CONTENT


The Tax PublishersIT Appeal Nos. 962 (PUNE) of 2004 and 221 and 891 (PUNE) of 2006 2010 TaxPub(DT) 1015 (Pune-Trib) : (2010) 131 TTJ 0243 Modular Infotech (P.) Ltd. v. Deputy Commissioner of Income Tax INCOME TAX ACT, 1961 Depreciation- Allowability-Intellectual Property Right A firm had developed certain softwares decided to convert ownership into a corporate organization. Hence, the value of the assets of the firm including IPR (Intellectual Property Right), was obtained through two valuation reports. Once the valuation report was obtained, thereafter it decided to enter into an agreement with assessee company. The consideration settled between the parties was duly paid by firm in the form of allotment of equity shares to the partners of firm. AO was of view that assets were revalued just before taking over by the company. AO was held that effectively it was a conversion of a firm into limited company without any change in the pattern of ownership and those very partners had become the directors of the new company. AO was not agreed and in his view it was merely an accounting jugglery. As per him, the said revaluation was done with purpose to inflate value of assets of the firm and, consequently, the successor company had claimed higher depreciation. AO was held that the impugned asset, i.e., IPR had no value associated with it because of the reason that said firm had never incurred any cost to acquire such rights. The main objection of AO was that the value was assigned to an asset which was non-existent. He had concluded that since no cost had ever been incurred by the firm on IPR, the asset did not exist and the cost of which was inflated merely to claim the higher depreciation. Therefore, With the claim of depreciation was disallowed. *Held:* The position was that the value so determined and made part of agreement was the cost of consideration passed on from one party, i.e., the company to the other party, i.e., the firm and the cost so determined was the real amount, then it was wrong to presume that there was a notional amount which was transacted between the parties. It could be a device to claim higher depreciation but such method was duly recognized in statute as also is an established legal position. Hence, disallowance of depreciation on IPR was not justified. Income-tax Act, 1961 Section 32 Case Law Analysis:Amway India Enterprises v. Dy. CIT [2008] 114 TTJ (Delhi)(SB) 476 :[2008] 4 DTR (Delhi)(SB)(Trib) 1 :[2008] 111 ITD 112 (Delhi)(SB), CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) and R.B. Bansilal Abirchand Spinning & Weaving Mills Ltd. v. CIT [1970] 75 ITR 260 (Bom.). SUBSCRIBE FOR FULL CONTENT

The Tax PublishersIT Appeal Nos. 962 (PUNE) of 2004 and 221 and 891 (PUNE) of 2006
2010 TaxPub(DT) 1015 (Pune-Trib) : (2010) 131 TTJ 0243

Modular Infotech (P.) Ltd. v. Deputy Commissioner of Income Tax

INCOME TAX ACT, 1961

Depreciation- Allowability-Intellectual Property Right

A firm had developed certain softwares decided to convert ownership into a corporate organization. Hence, the value of the assets of the firm including IPR (Intellectual Property Right), was obtained through two valuation reports. Once the valuation report was obtained, thereafter it decided to enter into an agreement with assessee company. The consideration settled between the parties was duly paid by firm in the form of allotment of equity shares to the partners of firm. AO was of view that assets were revalued just before taking over by the company. AO was held that effectively it was a conversion of a firm into limited company without any change in the pattern of ownership and those very partners had become the directors of the new company.

AO was not agreed and in his view it was merely an accounting jugglery. As per him, the said revaluation was done with purpose to inflate value of assets of the firm and, consequently, the successor company had claimed higher depreciation. AO was held that the impugned asset, i.e., IPR had no value associated with it because of the reason that said firm had never incurred any cost to acquire such rights. The main objection of AO was that the value was assigned to an asset which was non-existent. He had concluded that since no cost had ever been incurred by the firm on IPR, the asset did not exist and the cost of which was inflated merely to claim the higher depreciation. Therefore, With the claim of depreciation was disallowed.

Held: The position was that the value so determined and made part of agreement was the cost of consideration passed on from one party, i.e., the company to the other party, i.e., the firm and the cost so determined was the real amount, then it was wrong to presume that there was a notional amount which was transacted between the parties. It could be a device to claim higher depreciation but such method was duly recognized in statute as also is an established legal position.

Hence, disallowance of depreciation on IPR was not justified.

Income-tax Act, 1961 Section 32

Case Law Analysis:Amway India Enterprises v. Dy. CIT [2008] 114 TTJ (Delhi)(SB) 476 :[2008] 4 DTR (Delhi)(SB)(Trib) 1 :[2008] 111 ITD 112 (Delhi)(SB), CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) and R.B. Bansilal Abirchand Spinning & Weaving Mills Ltd. v. CIT [1970] 75 ITR 260 (Bom.).