We find that contents of the above letter manifest that the Department of post had approved specific Electronic Franking Machine of Pitney Bowes, Inc., USA. . The Approvals were granted separately for four machines between 03/10/1996 to 03/09/1999. These Franking machines were utilised for sales of the stamp papers, and thus the Department of post approved models with the technical specifications, having rigid quality control during the process of manufacturing and also ensured that machines are tamperproof and free from all defects. The assessee has not produced before us copies of these approvals to verify as to whom those approvals were addressed. The assessee has also not produced copy of letter sent by the Department of post addressed to M/s KOAL. The letter reproduced above has been issued by the Department of Post on the request of the assessee and first para makes that clear. The middle part of letter contains list of machines approved and bottom part contains certain obligations on the assessee. If we presume that similar letter would have been issued to M/s KOAL, then, similar obligations or duties must have been cast on M/s KOAL through that letter. In our opinion, issuing the letter of approval of machines of “Pitney Bowes Inc, USA”to M/s KOAL if any, cannot create any rights in favour of M/s KOAL. The letter, if any issued communicating approvals of machines of Piteny Bowes to M/s KOAL, was not because of any kind of eligibility criteria of said company. The letter issued to M/s KOAL would be in its agent status and compliance of which was dependent on supply of machines by the Pitney Bowes Inc, USA to M/s KOAL. The moment, the Pitney Bowes Inc USA, terminates the agreement of distribution of its machines, the letter issued by the Department of post in the name of M/s KOAL also loses its sanction. The KOAL has not got any rights to sale in favour due to letter issued by the Department of Post. M/s KOAL got letter for sale of machines of M/ s Pitney Bowes Inc, USA because it was distributor of said company and thus it got right to sale of those machines in India because of its distribution rights. We do not find any material which could suggest that M/s KOAL was having right of transferring such “letter communicating approvals by the Department of Post”to any person of its choice. The Department of post has conveyed approval of the machines of “Pitney Bowes Inc. USA”and imposed certain obligations on the assessee to perform. In view of our discussion, we are of the opinion that the above referred letter communicating government authorization/ approval, was neither a license or business or commercial rights in the hands of M/s KOAL nor it was having any right to transfer those Approvals to any person of its choice. It is the Department of post, who was having authority to approve Electronic franking Machines in India and approval of machines of Pitney Bowes Inc USA, has not created any kind of rights in the hands of M/s KOAL , which could be transferred to any third party. On the contrary, in view of the approval of Machines by Department of post, certain obligations of maintaining records and ensuring of no tampering, have been imposed on the assessee. The right to sale those franking machine India was as a result of distribution rights granted by M/s Pitney Bowes Inc , USA, and not due to Government Approvals. In the case of M/s Sharp Business System 254 CTR 0233, Hon’ble, Delhi High Court has held that for any right to be in the “nature of business or commercial right”as laid down in section 32(1)(ii) of the Act, two criteria should be met. First that it should be “right in rem”and the second it should be alienable or transferable.
ORDER
Per O.P. KANT, A.M.:
These five appeals by the assessee are directed against separate order of the Ld. Commissioner of Income-tax (Appeals)-XVII, New Delhi [In short ‘the CIT-(A)’] for assessment year 2005- 06, 2006- 07, 2007- 08, 2008- 09 and 2009- 10 respectively. In all these appeals common issues are involved and thus same were heard together and disposed off by this consolidated order for convenience.
ITA No. 289/Del/2013 for AY: 2005- 06
2. First we take up the appeal in ITA No. 289/Del/2013 for assessment year 2005- 06. Grounds raised in the appeal are reproduced as under:
1) That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) {“Ld. CIT(A)”} erred in concluding that assessment proceedings under Section 147/148 of the Act were initiated correctly by learned Assessing Officer (“Ld. AO”) beyond the period of 4 years and from the end of the assessment year.
2) That on the facts and circumstances of the case & in law, the learned CIT(A) has grossly erred in upholding the dis allowance of depreciation amounting to Rs.56,54,840/- on the intangible asset of “Government Authorizations”which was acquired by the appellant under a Business Transfer Agreement with the Kilburn Officer Automation Limited.
3) That the Learned CIT(A) has erred in upholding the dis allowances of depreciation on the business or commercial rights acquired in the form of non- compete rights under Section 32 of the Act having treated the said non-compete fee as capital expenditure in nature.
4) That the Learned CIT(A) has grossly erred in not allowing depreciation on Goodwill being an intangible asset on which depreciation is mandatorily allowable.
That the above grounds of appeal are without prejudice to each other.
That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.
3. The facts in brief of the case are:
(i) that during relevant period, the assessee company was subsidiary of M/s Pitney Bowes International holding Ins USA (PBIH), who manufactures franking machines and tax metres. Prior to formation of the assessee company, the machines manufactured by PBIH, were marketed in India by M/s. Kilburn Office Automation Limited (KOAL). After formation, the assessee company entered into a business transfer agreement (BTA) with M/s. KOAL, which was executed on 15/10/2004 and by virtue of said BTA, the assessee company took over the mailing business of M/s KOAL on slum sale basis. The business took over was mainly comprises of selling franking machines to end- users.
ii) that for the year under consideration, the original return of income was filed on 23/03/2006 declaring loss of Rs. 2,59,84,980/-. The assessment under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) was completed on 28/12/2007 assessing the total income at Rs.3,34,62,310/-. In the assessment completed, the Assessing Officer rejected the claim of the assessee for allowance of non-compete fee of Rs. 5,94,84,980/-as revenue expenditure. This dis allowance was contested by the assessee and the Tribunal in its order dated 12/11/2010 in ITA No. 1428/Del/2009 and CO No. 178/Del/2009, reversing the order of the Ld. CIT-A held that non- compete fee paid to the assessee was a capital expenditure and not allowable as revenue expenditure, however on the issue of allow ability of depreciation on the expenditure, the matter was remanded back to the Assessing Officer. The order of the Tribunal has been confirmed by the Hon’ble Delhi High Court and later by the Hon’ble Supreme Court.
(iii) that subsequent to the assessment u/s 143(3) of the Act for the year under consideration, the Assessing Officer in the assessment proceeding for assessment year 2007- 08, noted that under the ‘BTA’ one of the items acquired by the assessee company was “Government Authorization/Approvals”. The assessee assigned these “Government Approvals”a value of Rs. 4,51,66,708/- and claimed depreciation of Rs. 56,54,840/- thereon under section 32 of the Act . According to the Assessing Officer, depreciation under section 32 of the Act was available on the specified assets and “Government Approvals/ Authorization”do not form part of the specified asset, therefore, the claim of the depreciation by the assessee on “Government Approvals”was not as per the provisions of the law. Thus, according to the Assessing Officer, excessive depreciation amounting to Rs. 56,54,840/- was allowed to the assessee and income to that extent was under assessed in the assessment order dated 28/12/2007 . Accordingly, the Assessing Officer recorded reasons to believe that income escaped assessment and reopened the assessment proceedings under section 147 of the Act after obtaining approval of the competent authority and issued notice under section 148 of the Act on 25/03/2011. A copy of reasons recorded was also provided to the assessee along with notice under section 148 of the Act. In response, the assessee company filed return of income on 03/05/2011 declaring total income of Rs. 2,15,72,860/-. The Assessing Officer issued statutory notices under section 143(2) and 142(1) of the Act which were duly complied. The assessee objected initiation of reassessment proceedings after the expiry of four years from the end of relevant assessment year and contended that there was no failure on the part of the assessee to disclose all material facts fully and truly necessary for the assessment. The Assessing Officer was not convinced with the explanation of the assessee and after disposing the objections of the assessee, disallowed the claim of depreciation on the “Government Approvals”amounting to Rs. 56,54,840/- in the reassessment completed. Regarding the direction of the Tribunal for examining the depreciation on non-compete fee, the Assessing Officer was of the view that non- compete fee was not in the nature of business or commercial rights of similar nature mentioned in section 32(1)(ii) of the Act and accordingly, he denied the depreciation on the non- compete fee. The reassessment was completed under section 143(3) read with section 147 and 254 of the Act on 09/12/2011 ,assessing the total income at Rs. 3,91,17,150/- against the returned income of Rs. 2,15,72,860/- (in response to notice under section 148 of the Act).
(iv) that on appeal, the Ld. CIT-(A), upheld the validity of reassessment proceedings as well as sustained the dis allowance made by the Assessing Officer. Before Ld. CIT- (A), the assessee made a claim for allowing depreciation on goodwill for the first time in the form of additional ground raised before the Ld. CIT-(A), which was also rejected by him.
3.1 Aggrieved, the assessee in appeal before the Tribunal raising the grounds as reproduced above.
4. In the ground No. 1, the assessee has challenged reassessment proceeding initiated under section 147/148 of the Act, beyond a period of four years from the end of the relevant assessment year.
4.1 The facts in respect of issue in dispute are that, according to the assessee, in respect of depreciation on the “Government Authorization/ Approvals”, it has made complete disclosure during assessment in the Audited Annual Financial statements (Balance Sheets and Profit and loss account) and Tax Audit Reports, filed along with the return of income as under :
(i) In the “fixed asset”Schedule- II of Audited financials, under the category of Intangible Assets, Government Authorization
addition of Rs. 4,51,66,708/- has been shown.
addition of Rs. 4,51,66,708/- has been shown.
(ii) In Point No. 4 significant accounting policies and point No. 2 to notes of account reported in Audited Annual Financial statements, which talks about Government Authorization and its treatment in books of accounts.
(iii) In Tax audit report along with depreciation schedule, the depreciation claimed of Rs. 56,45,639/- @ 25% on Government Authorizations Of Rs. 4,41,66,706/- was shown.
4.2 According to the Assessing Officer above disclosure was not sufficient to meet the requirement of law (i.e. proviso to section 147 of
the Act) that the assessee should have disclosed ‘fully and truly’ all material facts necessary for the assessment, due to following reasons:
the Act) that the assessee should have disclosed ‘fully and truly’ all material facts necessary for the assessment, due to following reasons:
(i) The assessee did not disclose the claim of depreciation on government approvals in the return of income or in the original assessment proceeding except mentioning the claim in the depreciation chart filed along with the original return of income.
(ii) The assessee neither in the return of income nor in the assessment proceeding disclosed any fact with regard to ineligibility of assets on which depreciation was claimed and had been allowed.
(iii) In assessment proceedings, by stating that “no asset valuing above Rs. 10 lakhs”was acquired by the assessee during the year, the assessee misrepresented the facts.
4.3 According to the Assessing Officer, the reassessment was not due to change of opinion but it was due to infusion of certain new facts, which were not available while framing the original assessment, for example;
(i) no payment was made by M/s KOAL to Government for obtaining those approvals,
(ii) no payments was made by the assessee to M/s KOAL specifically for these Government Authorization/ Approvals,
(iii) assigning value to these Government Authorizations/ Approvals hypothetically by the valuer and that too after a period of more than one year,
(iv) the transfer of these Government Authorization/ Approval
(v) approvals from M/s KOAL to the assessee was subject to obtaining no objection certificate from the government etc
4.4 The Ld. CIT-A verified the assessment record and observed that information was furnished as part of depreciation statement in the return of income as follows:
