DCIT Vs Sanjana Cryogenics Storages Ltd. (ITAT Mumbai)
Shares are financial assets classified as tangible assets because they derive value from contractual claims. Hence, the same is not depreciable u/s 32 (1) (ii) of The Act.
Facts-
The assessee is a company engaged into the business of running of ammonia storage terminal, generation of power, dealing in ammonia, and trading/investing in shares, mutual funds, and derivatives. During scrutiny assessment, AO disallowed depreciation amounting to Rs 4,44,07,662/– and computed the total income of the assessee at ₹ 132,394,070/–.
The CIT (A) deleted the disallowance. Being aggrieved, Revenue filed an appeal before ITAT.
Conclusion-
Held that Section 32 (1) (ii) defines intangible assets as ‘know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. Even otherwise shares are financial assets classified as tangible assets because they derive value from contractual claims. Hence, the same is not depreciable u/s 32 (1) (ii) of The Act.
Held that we reverse order of learned CIT – A and restore the order of the learned assessing officer disallowing depreciation of Rs 4,44,07,662/- on shares purchased by the assessee holding that it is not a depreciable intangible asset.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. These are the three appeals filed by the learned Deputy Commissioner Of Income Tax – 3 (3) (1) Mumbai (The Learned AO) against the order of the learned Commissioner Of Income Tax (Appeals) – 8, Mumbai [ The Learned CIT [A]] for assessment year 2013 – 14, 2014 – 15 and 2016 – 17.
02. The learned AO has raised following grounds of appeal in ITA No. 3632/Mum/2018 for assessment year 2013 – 14 against the order of the learned CIT
– A dated 23/3/2018
“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs. 4,44,07,662/- claimed by the assessee in respect of Iron Ore rights, without appreciating the fact that the shareholders of RRS Minerals i.e., Mr. Bharat Bussa and Mrs. Rita Bussa who got 15.75 crores each as per the agreement dated 15.10.2009 were not having any right and the so called right for purchase of iron ore was with the company i.e. RRS and not with the shareholder and the assessee has never bought the business rights from RRS on which assessee is claiming depreciation?
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs. 4,44,07,662/- claimed by the assessee in respect of Iron Ore rights, without appreciating the fact that the decision of the Hon’ble Supreme Court in the case of Mysore Minerals Ltd. vs. CIT (1199) 101 Taxman 166 (SC) is distinguishable from the facts of the instant case under consideration as the assessee has never bought the business rights from RRS on which assessee is claiming depreciation?
3. (a) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs.4,44,07,662/-claimed by the assessee in respect of Iron Ore rights by taking cognizance of the previous assessment year i.e. AY 2011-12 which was only processed u/s. 143(1)?
3.(b) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs.4,44,07,662/-claimed by the assessee in respect of Iron Ore rights by taking cognizance of the previous assessment year i.e. A. Y. 2012-13 where the issue was not examined and it is the impugned assessment year only that the facts in respect of depreciation in respect of Iron Ore Rights disallowed by AO were verified and brought on record by the AO?
3.c) Whether in view of the above facts the decision of the Hon’ble Bombay High Court in the case of Madhukar C. Ashar vs. Union of India [2016] 69 taxmann.com 221 (Bombay), is correctly applied and relied on by the CIT(A)?
4. The appellant craves leave to amend, alter, delete or add grounds which may be necessary.”
03. Brief facts of the case shows that assessee is a company engaged into the business of running of ammonia storage terminal, generation of power, dealing in ammonia and trading/investment in shares, mutual funds and derivatives. It filed its return of income on 30/9/2013 declaring a total income of ₹ 87,984,410/– and computing book profit u/s 115JB of the act at ₹ 93,484,751/–. Assessee has also shown a speculation loss of ₹ 7,32,376/-and claimed the same to be carried forward.
04. Return of the assessee was selected for scrutiny. Consequently the assessment order u/s 143 (3) of The Income Tax Act, 1961 (The Act) was passed by the learned AO on 31/3/2016 wherein he disallowed depreciation amounting to Rs 4,44,07,662/– and computed the total income of the assessee at ₹ 132,394,070/–.
05. Against this order, assessee preferred an appeal before the learned CIT – A, who by order dated 23/3/2018, deleted disallowance of depreciation of Rs 4,44,07,662/–. Aggrieved by that order, learned AO is in appeal before us.
06. Facts related to the disallowance of depreciation as culled out from assessment order is as Under:-
“6. Depreciation on Iron Ore Rights
6.1 in the assessment proceedings, it is noticed that the assessee company has claimed depreciation of ₹ 65,940,884 on Iron Ore rights Under block of
‘intangible asset’. In the assessment proceedings, the assessee has been asked to furnish the details of the same and its explanation for allowability of the claim of depreciation on such rights.
6.2 In response, the assessee company vide its AR’s letter dated 8/2/2016, 11/3/2016 and 21/3/2016 submitted the details and the explanation, as per which, the assessee company has taken over the company RRS minerals resources private limited which had exclusive Iron ore rights in respect of Iron ore extracted from the mines owned by Messer’s M S Gharse minerals ( MSMG). The assessee submitted agreement dated 9/8/2006 and entered into by the erstwhile mine owners MSMG through which RRS acquired exclusive right on a long-term in respect of purchase of Iron Ore extracted by MSMG. The assessee had paid ₹ 11.30 crores to MSG M for acquiring the long-term rights to purchase the Iron ore extracted by MSG M at a predetermined rate until the year 2027. The assessee further submitted that vide agreement dated 14/10/2009, the assessee company acquired shares of the promoters of RRS. By Virtue of 100 % holding of RRS, it becomes wholly owned subsidiary. The assessee company thereafter approached honourable Bombay High Court for merger of its wholly owned subsidiary and court has passed an order on 15/10/2010 permitting merger with effect from 15/10/2009 and on merger, all these deposits and preoperative expenses incurred by RRS along with payment made by the company to the promoter of RRS for acquiring 100 % ownership of RRS and other expenses aggregating to ₹ 46.89 crores have been capitalized as ‘Iron ore rights’ during the assessment year 2011 – 12. The assessee submitted that these rights are valuable commercial rights through which assessee is exclusively entitled to buy Iron ore extracted by the owners of the mine at predetermined price of ₹ 155 per metric ton till the year 2027. Therefore, the claim of treating said rights as intangible assets and subsequent claim of depreciation at the rate of 25% is correct and shall be allowed.
6.3 The above submission of the assessee company, all the agreements, order of the honourable Bombay High Court and other facts of the case of been examined carefully. On such examination, the assessee submission is found to be not tenable on the basis of the following:-
i. Assessee has shown Iron Ore rights and claimed depreciation by capitalising various amounts out of which two major payments are ₹ 11.30 crores paid to MSG M for buying the right of purchasing Iron Ore and ₹ 31.58 crores paid to shareholders of RRS for purchase of shares in RRS
ii. Clearly the shareholding of RRS minerals i.e. Mr. Bharat Busa and Mrs. Rita Busa who got ₹ 15.75 crores each as per the agreement dated 15/10/2009 were not having any right and the so-called right for purchase of tyrants order was with the company and not with the shareholder.
iii. A latin saying “ nemo det quod non habit’ which basically mean you can’t give what you do not have. Mr. Bharat Busa and Mrs. Rita Bussa were never having any intangible right in their individual capacity which can be transferred to the assessee. In fact, the mining rights were with MSGM and only purchase right were acquired by the assessee by paying amounts to MSGM.
iv. Clearly, assessee has never bought the business a right from RRS on which assessee is claiming depreciation. As per normal accounting entry passed in the books of accounts of the assessee company, the investment in shares of RRS would have been cancelled after the High Court order of merger of RRS with the assessee company and consequently, no asset would be remaining on which assessee could claim depreciation.
v. There is a clear difference between the amount paid to RRS and the shareholders of RRS. The amount paid to company is for the purchase of long-term intangible right to purchase Iron Ore at a predetermined rate from MSG are an amount paid to shareholder of RRS is to purchase the company.
vi. Assessee submission regarding capitalization of the amount paid to shareholder of RRS is not acceptable and not found to be tenable as no asset is created apart from investment in shares and on such assets no depreciation can be claimed or allowed.”
7. Accordingly, the learned assessing officer computed the disallowance on proportionate basis on ₹ 31.58 crores. He computed that Total Depreciation claimed is ₹ 65,940,884/– on total expenditure incurred of ₹ 46,89,12,953/–. Ld AO computed that expenditure on which depreciation is not allowable is ₹ 315,787,820 and therefore proportionate depreciation of Rs 4,44,07,662/– [ 6,59,40,884/-*31,57,87.820/ 46,89,12,953] is disallowed.
8. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A who dealt with the whole issue as Under:-
“3.2.1 Both the grounds no. 2 & 3 pertain to disallowance of Rs. 4,44,07,662/- on account of a part of total depreciation claimed on mining rights. Hence, dispose off the same at one go herein below.
Facts and contentions filed by the assessee
3.2.2 During the course of appellate proceedings, the authorized representative of the appellant discussed the grounds and written submissions on record. The relevant extract of the same corresponding to the above ground is reproduced as following:
1. The appellant resolved to venture into a new line of business of procuring and Exporting of Iron Ore during FY 2009-10. In the search process to carry out this business effectively, the appellant came to know that RRS Minerals Pvt Ltd (RRS’) had acquired sole long term buying rights for Iron-ore from a mine owner at Goa. Those rights entitled RRS to procure Iron Ore at a predetermined price from Mahabaleshwar Gharse& Associates till the year 2027 Accordingly, RRS was sole owner of commercial rights to but entire Iron Ore extracted from the mines of Mahabaleshwar Gharse & Associates at Goa till the year 2027 at a pre-determined price.
2. In order to acquire these rights from RRS, the appellant resolved to acquire the said RRS from its promoters for a total consideration of Rs. 31.50 Crores. In addition to the price agreed for acquisition, the appellant incurred costs of Rs. 787,820 in respect of stamp duty for transfer of shares and accordingly total costs of acquisition of RRS by the appellant stood at Rs. 315,787,820. The appellant incurred further costs of Rs. 153,225,133 and capitalized total costs of Rs. 468,912,953 in respect of Iron Ore in FY 2010-11 as under
