Case Law Details

Case Name : M/s. Pitney Bowes India (P) Ltd. Vs DCIT (ITAT Delhi)
Appeal Number : ITA Nos. 289 to 293/Del/2013
Date of Judgement/Order : 29/05/2017
Related Assessment Year : 2005- 06
Courts : All ITAT (4230) ITAT Delhi (929)
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.
(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:
(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:
S.

No.

 

Description  Of asset/ Block of asset Additions for less than 180 days

 

Rate % Depreciation during the year for 180 days

 

WDV as on 31.03.2005

 

1. Intangible assets

Govt. authorization

 

45166708/- 25% 5645839/- 39520869
4.4.1 The learned CIT-A further said that in the significant accounting policies and notes to account, there was a vague mention of government authorization. He reproduced the point No. 4 of significant account policies and point no. 2 of notes to account as under:
“Point No. 2 Fixed Assets and Depreciation
…………………. Assets acquired from Kilburn Office Automation Limited, consequent to acquisition of mailing business are being
depreciated over the remaining useful life of the asset……………….
Point No. 4 Other Intangible Assets and related amortization
Other intangible assets comprising of government authorizations and non compete clause are capitalized at fair values on the date of
acquisition.
Amortization of these intangibles is provided on a straight line basis over their respective useful lives as follows:
  • Non Complete; over a period of 5 years
  • Government Authorizations; over a period of 385 days.”

4.4.2 The Ld. CIT-(A) further observed that the Assessing Officer asked for documentary evidence of acquisition of assets about Rs. 10 lakh with evidence of putting to use, however, the assessee company replied that it had not acquired any fixed assets above Rs. 10 crores, during the relevant financial year. It was evident that the assessee had not produced any evidence to substantiate its claim of depreciation on Government Authorization and thus the Assessing Officer also did not examine the said claim of depreciation.

4.4.3 According to the Ld. CIT-(A), the assessee had not furnished any information regarding fixed assets during the original assessment proceeding including intangible assets and thus the claim of the assesses that it had furnished all the requisite information and same were examined by the Assessing Officer, was false and not based on evidences. In view of the Ld. CIT(A) , since the Assessing Officer had not examined the claim of depreciation amounting to Rs. 56,54,840/- during the assessment proceeding, there was no question of any “change of opinion”while reopening assessment under section 147 of the Act.

4.4.4 According to the Ld. CIT-(A), the assessee had not disclosed fully and truly all material facts necessary for their assessment and, therefore, the Assessing Officer was correct in reopening the assessment under section 147 of the Act.

4.4.5 According to the Ld. CIT-(A), the excess depreciation of Rs. 56,45,839/- has been claimed and allowed to the assessee on the
Government Authorization, and thus income had escaped assessment in view of the deeming provisions of sub clause (iv) of clause (c) of Explanation-2 to section 147 of the Act, which reads as under:

“Explanation 2:- For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-

(c) where an assessment has been made, but –

………………………………………………………………………

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.”

4.4.6 In view of above, the Ld. CIT-(A) held that Assessing Officer had reopened the assessment correctly and accordingly, he upheld the validity of the reassessment.

4.5 Before us, the Ld. counsel of the assessee referred to copy of “reasons re coded”by the Assessing Officer, which is available on page
39 of Volume-2 of the paper book, wherein the Assessing Officer has mentioned that due to failure of the assessee to disclose the material fact of non- admissibility of depreciation claim, the depreciation of Rs. 56,54,839/- had wrongly been allowed to the assessee. The Ld. counsel further drawn our attention to page-10 of the Volume- 2 of the paper book, which is profit and loss account for the relevant period containing depreciation and amortization amount of Rs. 1,95,20,013/- in Schedule – II. He drawn our attention to the Scheduled – II available on page 12 of the Volume 2 of the paper book, containing detail of government authorizations amounting to Rs. 4,51,66,708/- and depreciation of Rs. 1,22,00,877/- claimed as per companies Act. He further referred to page 14 of the volume 2 of the paper book, which contained details of acquisition of mailing business from M/s KOAL and summary of identified assets, liabilities acquired and goodwill arising on the same. The identified intangible assets contained non- compete agreements of Rs. 5,94,47,290/- and Government Authorization of Rs. 4,51,66,708/-. He further referred to page 23 of volume 2 of the paper book, depreciation chart as per Income Tax Act, 1961, which forms part of the tax Audit Report and submitted that this chart contained Government Authorization as intangible assets having written down value as Rs. 4,51,66,708/- and depreciation thereon at the rate of 25%, computed as Rs. 56,45,839/-.

4.5.1 The Ld. counsel submitted that all the information in respect of the depreciation on Government Authorization was fully disclosed in the return of income filed along with financial statements and Tax Audit Report (TAR) and all the claims of the assessee were accepted by the Assessing Officer during the original assessment proceeding, other than that of non- compete fee.

4.5.2 He further submitted that the question of any failure or omission on the part of the assessee to disclose fully and truly all material facts which were necessary for its assessment, does not and cannot arise as all primary and material facts were already made available to the Assessing Officer and were considered while finalizing the assessment.

4.5.3 The Ld. counsel further submitted that while passing the original assessment order, the Assessing Officer referred to the ‘BTA’ and disallowed the non-compete fees, so it cannot be said that the assessee has failed to disclose the material evidence as both non-compete fee and Government Authorization were reported under the same ‘BTA’. Regarding the finding of the Assessing Officer that details related to fixed asset were not furnished in the original assessment proceeding, when called for, the Ld. counsel submitted that the Assessing Officer has singled out one question from various questions asked from the assessee, during the original assessment proceeding and tried to create a picture, which was not the correct one.

4.5.4 According to the Ld. counsel, the assessee did not hide or misrepresent any information in relation to Government Authorization
and it had disclosed every relevant information in its financial statements as well as in the submission made before the Assessing Officer during the original assessment proceedings.

4.5.5 The Ld. counsel submitted that the requirement of law is that the assessee should have failed or omitted to make full disclosure of material facts and it is not required to disclose, state or explain the law. In support of the contention, the Ld. counsel placed reliance on the case of Atmaram Properties (Pvt.) Ltd Vs. DCIT (2011) 343 ITR 141 (Del), wherein it is held that if the Assessing Officer has failed to apply legal provisions/ section of the Act, fault cannot be attributed to the assessee. Further the Ld. counsel submitted that the reassessment notice was issued on the basis of the same material as was previously available with the Assessing Officer, and merely change of opinion or having second thought on the same material cannot be a ground to commence proceeding for reassessment under section 147 of the Act. In support of the contention, the Ld. counsel relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd (2010) 322 ITR 561 (SC).

4.5.6 The Ld. counsel submitted that in the reasons recorded the Assessing Officer has not specified, which document or the evidence the assessee failed to disclose before the Assessing Officer in original assessment proceedings, which amounted to not a full and true disclosure of material facts on the part of the assessee for completion of the assessment and thus the reassessment proceedings are invalid in itself and need to be quashed.

4.6 Ld. Senior DR, on the other hand, submitted that if any information has come to the Assessing Officer after the original assessment by fresh facts revealed later on in subsequent assessments, then reassessment proceedings does not amount to change of opinion. In support of the contention, he relied on the decision of the Hon’ble Supreme Court in the case of Kalyanji Mavji and Company Vs. Commissioner of Income Tax, (1976) 102 ITR 287. He further relied on the order of the Assessing Officer and Ld. CIT-(A) and submitted that the assessee has not fully disclosed the facts in respect of depreciation on Government Authorizations and even misled the Assessing Officer by representing wrong facts that no asset more than Rs. 10 lakhs were acquired by the assessee during the relevant year. He submitted that it is specifically mentioned in Explanation-1 under section 147 of the Act that production
of books of accounts or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer, will not necessarily amount to disclosure within the meaning of the proviso below section 147 of the Act.

4.7 In the rejoinder, the Ld. counsel submitted that the assessee had made full disclosure in respect of depreciation on Government Authorizations in the return of income and the assessee was not required to explain in the return of income that particular claim is justified or not.

4.8 We have heard the rival submission and perused the relevant material on record. We find that the assessee has challenged the validity of the reassessment proceeding on two grounds. According to the first ground, the assessment has been reopened beyond the period of four years from the relevant assessment year and the assessee has made full and true disclosure of material facts in respect of depreciation on Government Authorization in the return of income and documents appended along with accordingly, the case of the assessee could not be reopened invoking proviso to section 147 of the Act. According to the second ground, the Assessing Officer has reopened the assessment on the basis of same material which was available before him in original assessment proceeding, and therefore it amounts to change of opinion on same set of facts, and reopening on mere change of opinion is not permitted as held by the jurisdictional High Court in the case of CIT versus Kelvinator of India Ltd (2002) 256 ITR1, which has been further upheld by the Hon’ble Supreme Court in CIT versus Kelvinator of India Ltd (supra).

4.8.1 Before we proceed to adjudicate on these two issues raised, it is relevant to reproduce the proviso under section 147 of the Act as under:

“147………………………………………………………………………..

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

4.8.2 Thus, it is evident that for reopening the assessment of particular assessment year, invoking the proviso to section 147 of the Act, following conditions should be fulfilled:

1. the original assessment should have been completed under section 143(3) or under section 147 of the Act and

2. the period of four years should have been expired from the end of the relevant assessment year and

3. income chargeable to tax has escaped assessment for such assessment year by reason of failure on the part of the assessee

(a) to make a return under section 139 or in response to a notice issued under section 142(1) or section 148 of the Act or

(b) to disclose fully and truly all material facts necessary for his assessment for that assessment year.

4.8.3 Thus, whenever assessment is completed under section 143(3) or section 147 of the Act and four years have already elapsed from the end of the relevant assessment year, the assessment can be reopened only in the case there was a failure on the part of the assessee to either file return of income under section 139/142(1)/148 or disclose fully and truly all material facts necessary for the assessment.

4.8.4 In the instant case, the original assessment was completed under section 143(3) of the Act and four years have already elapsed on the date of reopening of the assessment i.e. 25/03/2011, the prerequisite for reopening of the assessment was failure on the part of the assessee to fully and truly disclose material facts necessary for the assessment.

4.8.5 On perusal of the orders of the lower authorities and the submission of the Ld. counsel of the assessee, we find that in the return of income filed along with financial statements and tax audit reports, the assessee has disclosed the fact of depreciation on government authorization/ approvals as under:

Paper book page

 

Relevant page Information

 

Page- 12 volume 2 of the assesses paper book

 

Scheduled –II forming the part of the accounts for the year ended on 31st, March 2005

 

In the schedule , the fixed assets are distributed in categories of intelligible asset and intangible assets. The Government Authorization have been added during the year amounting to Rs. 4,51,66,708/- as reflected under intangible assets along with goodwill (Rs. 5,70,03,830/-) and non- compete agreement (Rs. 5,94,47,290/-).
Page-14 volume 2 of the assesses paper book

 

Schedule-XV of notes notes to account for the year ended on 31/03/2005.

 

Information related to acquisition of mailing business from M/s KOAL which contained identified intangible assets (non-compete agreement amounting to Rs. 5,94,47,290/- and government acquisition amounting to Rs. 4,51,66,708/-
Page -23 volume 2 of the paessee’s paper book

 

Depreciation chart enclosed to the Tax Audit Report

 

Under the intangible assets category, the assessee has computed depreciation at the rate of 25% on the ‘Government Authorizations’ of Rs. 4,51,66,708/- added during the year, which amounted to Rs. 56,45,839/-

4.8.6 Further, after commencement of assessment proceeding, the Assessing Officer raised queries asking the assessee to reply. One of such queries related to depreciation, was as under:

Pl submit “documentary evidence of acquisition of fixed asset above Rs. 10,00,000/- with documentary evidence of putting to use.”

4.8.7 The assessee filed reply of the above query in its submission dated 20/11/2007, which is available on page 56-57 of the volume 2 of the assesses paper book, which reads as under:

“in this regard, we submit that company has not acquired any fixed asset above Rs.10,00,000/-during the financial year 2004- 05.”

4.8.8 According to the Ld. senior DR, it is this information which stopped, the Assessing Officer from making any further inquiry in respect of depreciation on Government Authorization.

4.8.9 According to Ld. counsel, the ‘BTA’ was available with Assessing Officer and he made queries in respect of non-compete fee and, thus, he could have raised queries in respect of depreciation on Government Authorization from the ‘BTA’ and making above statement to the Assessing Officer that company had not acquired any fixed asset above rubies 10,00,000/-was immaterial. We are not convinced with this argument of the Ld. counsel of the assessee. In the books of accounts or financial statement, a company might treat particular expenditure as capital expenditure or revenue expenditure according to its suitability to disclose profitability before the shareholders, however in the return of income filed before the tax authorities, the treatment of any expenditure is to be decided as per the provisions of the income tax Act and therefore it has to be reported accordingly. Therefore, mentioning of Government Authorization as intangible assets in audited financials, significant accounting policies or notes to account is not relevant for the purpose of Income Tax Act. What is material and relevant is, how it was claimed in the return of income filed by the assessee. Thus, it cannot be said that mentioning of Government Authorization in the said schedule automatically disclosed the fact of claim of depreciation on such Government Authorization in the return of income. The Assessing Officer made the specific query to ascertain the claim of depreciation and asked the assessee to furnish the documentary evidence of assets acquired having value more than Rs. 10 lakhs along with evidences of putting those to use. In our opinion, when the assessee replied in negative that it had not acquired any fixed asset above Rs. 10 Lacs during the relevant financial year, it prevented the Assessing Officer from making further inquiry on the issue of the depreciation on Government Authorization. In our considered opinion, this amounts to misrepresentation of facts by the assessee and cannot satisfy the condition of disclosure of material facts fully and truly, necessary for the assessment. Reporting of fact of Government Authorization as one of the intangible asset in the financial statement or tax audit report, might be a disclosure by the assessee, but when we see a false statement that no fixed assets more than Rs. 10 lakh was acquired by the assessee, in entirety of the facts, we find that the disclosure was not full and true and the reason of failure to disclose fully and truly all material is squarely attributed to the assessee. In the circumstances, we hold that reassessment proceeding have been validly initiated as far as the proviso to section 147 of the Act is concerned.

4.9 The another argument, which has been taken by the Ld. counsel is that reassessment proceedings amounted to change of opinion, and therefore same are invalid and not in accordance with law.

4.10 On perusal of the facts of the case, we find that after the submission of the assessee that no fixed assets more than Rs. 10 lakh was acquired by the company during the year, no further query was raised by the Assessing Officer on the issue of depreciation on Government Authorization and thus no question of failure in applying the legal provisions on the facts arises. The ratio in the case of Atmaram properties (P) Ltd. (supra) that if the Assessing Officer had failed to apply legal provisions/ sections of the Act, the fault cannot be attributed to the appellant, cannot be applied over the facts of the instant case . The fact whether the assessee claimed depreciation on the Government Authorization, was not stated truly by the assessee to the Assessing Officer and thus issue of application of law did not arise. In the instant case the Assessing Officer was prevented to examine the issue because of hiding the information by the assessee, we cannot say that Assessing Officer applied his mind and formed opinion to allow the depreciation on the Government Authorization. Discovery of the facts that the assessee claimed depreciation on government authorization constitute an information, and this information came to the Assessing Officer after the original assessment by fresh facts revealed later on. In such circumstances the issue of change of opinion in the reassessment proceedings cannot arise, when no opinion was framed on the issue of depreciation on government authorization in the original assessment proceeding. In similar facts, Hon’ble Supreme Court in the case of Kalyanji Mavji & Co. Versus CIT (supra) held as under:

“12. We might mention that it was submitted by Mr. Banerjee that in fact the amount sought to be deducted was paid towards the income-tax liability of the partners and this was done to protect the business itself and to improve the credit of the partners. Even this specific plea does not appear to have been taken before the ITO. We are, however, not concerned with this particular plea because we are given to understand by the counsel for the appellant that the appeals against the assessment orders for the years 1958- 59 and 1959-  60 are pending before the IT authorities. In these circumstances we are clearly of the opinion that the facts of the present case clearly fall within the tests and principles laid down by this Court in A. Raman & Co.’s case (supra), inasmuch as the ITO proceeded on the basis of the information which came to him after the original assessment by fresh facts revealed in the assessment for the year 1958- 59 and consisted of the conduct of the appellant itself in not adducing any evidence to support its plea. We are, therefore, Hon’ble to agree with the view of the Tribunal that this was a case of a mere change of opinion by the ITO on the materials which were already on the record.”

(Emphasis supplied externally)

4.11 The ratio of the Hon’ble Supreme Court in the case of CIT versus Kelvinator of India (supra) is not applicable over the facts of the instant case as there is no change of opinion observed by us in the instant case. Thus, the argument of the Ld. counsel on change of opinion also fails, and reassessment proceeding cannot be invalidated on the ground of change of opinion by the Assessing Officer.

4.12 In view of above, we uphold the finding of the Ld. CIT-A on the issue in dispute. The ground No. 1 of the appeal is accordingly dismissed.

5. In ground No. 2, the assessee has challenged depreciation on the “Government Authorization”denied by the lower authorities. The facts in respect of issue in dispute are that M/s KOAL was authorized by Pitney Bowes Inc USA, i.e. the parent company of the assessee, to sell various models of franking machines to customers in India and Nepal which included Postal Department of government, Banks and others. In this respect, M/s KOAL was granted approvals from the regulatory authorities. After formation of the assessee company, the business of sale of franking machine was transferred from M/s KOAL to the assessee company through a Business Transfer Agreement (BTA) executed on 15/10/2004 on a slump sale transaction, where in no specific value was assigned to individual asset at the time of slump sale. The actual lump sum consideration of Rs. 18.92 crores was paid by the assessee to M/s KOAL. In the ‘BTA’ executed of 15/10/2004, no value was assigned to the Government Approvals, which were listed as one of the thirteen assets acquired by the assessee company. The various other assets acquired by the assessee included all properties (including product registration), non-compete agreements, customer and vendor lists, transferred employees, contracts, and all other rights in respect of mailing business of M/s KOAL. After a period of almost one year, the assessee assigned values to the non-compete fee and Government Authorization, on the basis of valuation conducted by a consultant at the request of the assessee. The assessee assigned value of Rs. 4,51,66,708/-to Government Authorization/ Approvals and claimed depreciation at the rate of 25% amounting to Rs. 56,54,840/- treating the same as a depreciable intangible asset.

5.1 Before the Assessing Officer, the assessee contended that Government Approvals are an asset in the nature of license/ commercial rights which it had acquired from M/s KOAL and, thus, eligible for depreciation being intangible assets. The assessee was asked by the Assessing Officer to provide a copy of the financial statement of M/s. KOAL as on the date of its takeover, for ascertaining the values assigned to various assets, however, same was not made available by the assessee.

5.1.1 According to the Assessing Officer, no value was assigned by the assessee in the ‘BTA’ dated 15/10/2004 while acquiring the mailing business from M/s KOAL and no payment was made towards acquiring these approvals. According to the Assessing Officer, M/s KOAL had not paid any sum to regulatory authorities to acquire such authorization/ approvals and therefore it had not assigned any monetary value in its financial statement and therefore it was not an asset in the books of transferor, when the assessee acquired the business.

5.1.2 The assessee submitted before the Assessing Officer that permission to market the electronic franking machine, was a license granted by the Department of post, Govt. of India, which falls within the ambit of section 32 of the Act. It was also contended that said Government Authorization might be in the nature of business or commercial rights, which were required to carry on the business activity and hence same might be considered under the expressions, “or any other business or commercial rights of similar nature”as laid down in section 32 (1)(ii) of the Act.

5.1.3 According to the Assessing Officer Government Authorization do not qualify as an intangible asset under section 32(1)(ii) of the Act as the rights mentioned in the said section are in the nature of intellectual property rights and thus the general word of similar nature, ought to be confined to the category of similarly placed assets and not Government Authorization/ Approvals. The Assessing Officer further held that M/s KOAL, had no know-how, patents, copyrights, trademarks etc in respect of machines manufactured by “Pitney Bowes Inc, USA”and was therefore in no position to transfer any intellectual property right. All such intellectual property rights lied with “Pitney Bowes Inc USA”itself, to which the assessee is a subsidiary, already had access.

5.1.4 The Assessing Officer further mentioned that after acquiring a business from the M/s KOAL, the assessee simply requested the “Department of Post”on 04/11/2004 for transferring the approvals given by the Central government in its name and the “Department of Post”on the basis of said application, transferred the approvals in the name of the company on 14/12/2004 without charging any amount. According to the Assessing Officer when M/s KOAL had no authority to transfer the approval letters either by sale or by nominations, the payment cannot be regarded for acquiring license or any other business or commercial rights.

5.1.5 The Assessing Officer, accordingly denied the claim of depreciation on Government Authorization/ Approvals.

5.1.6 The Ld. Commissioner of Income-tax (Appeals) also upheld the view of the Assessing Officer relying on his finding in assessment year 2007- 08 as under:

“5.2 The above submissions are vague and without any factual basis. The appellant is not even clear as to about the asset it obtained from M/s Kilburn Offices Automation Ltd., but states that no value was assigned to any of the individual assets. Neither had the appellant clarified as to how the asset can be termed ‘intangible’ nor the computation of its value in its submissions. The appellant’s appears to be of the view that Me AO is bound to accept the independent professional firm’s valuation and the financial statement submitted as tax audit report. The AO is empowered by the income tax Act to examine the facts of the case and then decide whether the appellant is entitled for any deduction as per the provisions of the Act. The onus is on the appellant to prove that they are entitled for the depreciation they have claimed in the return of income. In this case, the appellant has failed to discharge this onus both at the assessment as well as in the appellate proceedings.

5.3 The basic issue to be decided in this issue in this appeal is whether the AO’s finding is that the appellant obtained only an NOC from M/s Kilburn Offices Automation Ltd. and that the’ appellant had not valued this NOC to claim depreciation on it as intangible asset. Using the above NOC, the appellant requested the department of post on 04.11.2004 for transferring the approvals to its name. The Business Transfer Agreement is dated 15.10.2004 and the request to the postal department for transfer of approval was made on 04.11.2004. From all the facts mentioned above, this issue appears to be a typical case of making “a mountain out of a molehill”and further the appellant had failed miserably to make a legal case in their favor during the appellate proceedings. From the facts it is very clear that M/s Kilbum Offices Automation Ltd. had not paid the Government any amount for obtaining the approval for marketing franking machines and the appellant also did not pay the Government any amount for transferring the approvals in its name after obtaining the NOC from M/s Kilbum Offices Automation Ltd. During the appellate proceedings, the appellant was Hon’ble to contradict the above factual findings made by the AO and prove that the appellant had acquired an asset ‘tangible’ or ‘intangible’. There is no material in appellant’s possession to substantiate its claim that they have obtained an asset from M/s. Kilburn Officers Automation Ltd. Their valuation of intangible asset is also vague and is made without any basis.

5.4 Therefore the only conclusion which is possible on this issue is that the appellant had not acquired any asset ‘tangible’ or ‘intangible’ from M/s Kilburn Offices Automation Ltd. to claim depreciation on government authorizations.

Thus, I have no option but to sustain the AO’s dis allowance of depreciation on government authorizations Rs. 74,10,163/- and ground No. 3 regarding the dis allowance of depreciation is hereby rejected.”

5.2 The submission of the Ld. counsel of the assessee before us are summarized as under:

(i) The Government Authorizations’ provided the assessee within immediate right to sell electronic franking machine as per the approvals required from M/s. KOAL

(ii) The government authorization is were specifically mentioned as transferable assets under clause 2.2(e) of the ‘BTA’ and the specific authorization transferred to the assessee were also listed in the schedule 2.2 (e) of the BTA ( refer page 13 and 50 volume 1 of paper book). Such government authorizations are transferable and same were actually transferred in the name of the assessee after KOAL granted a no objection certificate in the name of the assessee company. The transfer was also acknowledged by the Department of post (refer page 429 to 430 of the paper book). Thus, the contention of the AO the KOAL had no authority to transfer the government authorization is completely incorrect.

(iii) The contention of the Assessing Officer M/s KOAL had not paid any sum to the regulatory authorities for acquisition of these government authorization or whether government authorization have been recognized as assets in the books of KOAL , is completely irrelevant. The emphasis may be placed on the fact that this intangible asset is not self generated by the assessee and has been acquired by paying the price for the same, which is duly supported by the valuation report of an independent valuer. The actual cost to the assessee as provided in section 43(1) of the Act is to be considered for allowing depreciation and not the cost to his predecessor/ seller except where so required by specifically stated provision. Reliance in this regard was placed on the judgment of the Hon’ble Supreme Court in the case of Jogta Coal Co. Ltd versus CIT (1959) 36 ITR 521 and ruling of the privy Council in the case of CIT versus Indian iron and steel company limited (1943) 11 ITR 324.

(iv) Such authorizations enabled the company to market the already approved models of electronic franking machines and related machines immediately and hence were of great value to the company. Therefore, even though KOAL did not pay any sum to the regulatory authorities, but it was remunerated by the company for the transfer of such Authorizations, as it saved the company from following a long drawn and cumbersome process of obtaining the Government Authorizations.

(v) It is amusing to note that the value assigned to non- compete fee as per the valuation report has been accepted by the department without any objection as the dis allowance on account of non-compete fee has been made at the value as per the valuation report, but the same valuation report has been completely ignored while adjudicating on the claim of depreciation on Government Authorizations. Thus, accepting the values of other assets (other than that of Government Authorizations) which were transferred under the same Business Transfer Agreement and taking an isolated view only for valuation of Government Authorizations is highly unjustified and unreasonable of part of the Ld. AO. The rule of estoppels applies on the Ld. AO and the Ld. AO cannot accept and interpret the facts of the case as per his convenience.

(vi) The Ld. AO completely erred in alleging that the values of Government Authorizations were hypothetically assessed by getting the valuation done at the subsequent date to the acquisition of the business which appears be an afterthought. In this regard, it is submitted that the fact that at the time of transfer i.e. on 17 December, 2004, the valuation report was not available could not prevent the Appellant to fix the price or cost of the assets as on 17 December, 2004. It is submitted that in the present case, even though the valuation report is dated 22 December 2005, the valuation of intangibles has been done as at 17 December 2004. It is a well settled principle that valuation report cannot be ignored or rejected on the ground that it provides the valuation of assets on a prior date and this principle has been upheld by the Ahmedabad ITAT in the case of Chitra Publicity Co. (P) Ltd vs. ACIT (2009) (127 TTJ 1). It was held in the aforementioned case that once the appellant has duly obtained a valuation report for valuing the assets acquired by it, it is incumbent upon the authority to dislodge the same by bringing adequate material on record, because in the absence of the same a technical expert’s opinion (valuer’s report) cannot be dislodged by the authority by merely ignoring the same. Reliance is also placed on the ruling given by the Gujrat High Court in the case of Ashwin Vanaspati Industries vs. CIT (2002) (174 CTR 90).

(vii) Further, the Appellant wishes to highlight that the Ld. AO and Ld. CIT(A) completely failed to appreciate that the technology, trademark, copyright, patent, etc. in respect of the electronic franking machines were held by Pitney Bowes Inc. and not by the Appellant. The Ld. AO and Ld. CIT(A) have completely confused themselves and have failed to differentiate between two different legal entities operating in two separate countries. The Ld. AO and Ld. CIT(A) have misunderstood Pitney Bowes Inc. and the Appellant to be one and the same entity which is far away from the factual and the legal position.

(viii) Further, even accepting the point of the Ld. AO for argument’s sake, the Appellant has never claimed that it acquired any intellectual property from KOAL of the nature of patent, know- how and/or technology to be used in or in relation to manufacture. In contrast what has been acquired by the Appellant is the right to do business on permits and authorizations previously acquired or owned by KOAL. The Ld. AO has failed to appreciate that the case of the Appellant is of acquiring a ‘license’ or ‘a business or commercial right of similar nature’ as the Government Authorizations is the approval/ right granted by the Government to sell the approved machines. Thus, the Appellant has acquired such right to market and sell the franking machines rather than acquiring any intellectual property from KOAL in respect of manufacture.

(ix) Without prejudices to other contentions of the Appellant, it is also submitted that, the Ld. AO has also failed to appreciate that without having the right and authorization to sell the electronic franking machines in India, it was even immaterial for the Appellant to have any kind of access to the technology, trademark, copyright, patent, etc. in relation to the electronic franking machines.

(x) Therefore, even if the technology, trademark, copyright, patent, etc. were held by Pitney Bowes Inc. it was only KOAL which was authorized by the Ministry of Communication and IT. Department of Posts to market and deal in the electronic franking machines in India and no other person or entity was authorized to market and deal with the approved electronic machines. Therefore, it was essential for the Appellant to acquire such Government Authorizations from KOAL, otherwise the whole motive of acquiring business by the Appellant from KOAL would be rendered meaningless.

(xi) Reliance is placed on the decision of Hon’ble Delhi ITAT in the case of M/s ONGC Videsh Ltd. (Taxpayer) [2009-TIOL-758- ITAT-DEL], wherein it was held that participatory right to carry out the hydrocarbon operations, acquired by the Taxpayer, pursuant to a Production Sharing Arrangement (PSA), held that the participatory right acquired by the Taxpayer was in the nature of asset, in the form of ‘license’ i.e. license to have an access and to carry out exploration, development and production of hydrocarbon operations and is eligible for depreciation under the provisions of the Act.

(xii) It is also submitted that the Hon’ble Supreme Court in the case of Techno Shares and Stocks Ltd. (2010) 327 ITR 323 has overruled the judgment of Hon’ Bombay High Court in the case of Techno Shares and Stocks Ltd. (2010) 323 ITR 69 wherein it was held that the intangible assets as mentioned in section 32(l)(ii) could only be in the nature of intellectual property rights. The Hon’ble Supreme Court has clearly held that the intangible asset can be in the nature of business or commercial right which is not in the nature of intellectual property. Thus, the belief of the Ld. AO is completely misplaced and unjustified.

(xiii) The permission to market the electronic franking machine and tax meters from Department of Posts and various State Governments (“Government Authorizations”) are thus in the nature of “License” which is squarely covered within the ambit of section 32 of the Act and were duly shown under the head “Intangible Assets” in the depreciation schedule annexed to the Tax Audit Report for the relevant assessment year.

5.3 The Ld. Senior DR, on the other hand, relied on the order of the lower authorities and submitted that government authorization/ approvals were granted in respect of the machines of Pitney Bowes Inc, USA and those products are approved by the Department of the post and approval was not to m/s KOAL as an entity but approval was in agent of Pitney Bowes Inc US. Thus, on termination of agency or distributors of agreement, M/s KOAL could not have get any authorization from the Department of Post. This government authorization was not in the nature of any right or license in the hands of the M/s KOAL itself. Further, these government authorizations have been transferred not by M/s KOAL to the assessee, but same has been assigned by the Department of post in the favor of the assessee, thus such government authorizations were not any kind of rights or license given by the governments to M/s KOAL per se. According to him, government authorization cannot be held as a intangible assets in the hands of the assessee.

5.4 We have heard the rival submissions and perused the relevant material on record. The issue in dispute involved in the case is whether the Government authorization/ approvals falls under the category of intangible assets mentioned in section 32(1)(ii) of the Act read with explanation- 3 and explanation- 4 below the said section. Before we proceed to adjudicate on the issue, it is relevant to refer the said section which reads as under:

“Section 32 . Depreciation

(1) in respect of depreciation of-

(i) building, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after first day of April 1998,

Owned, wholly or partly by the assessee and used for the purpose of business or profession, the following deductions shall be allowed-

…………………………….

……………………………..

Explanation 3.—For the purposes of this sub-section, the expression “assets” shall mean—

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

Explanation 4.—For the purposes of this sub-section, the expression “know how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).”

5.5 Thus, as per the provisions of the Act depreciation is allowable on intangible assets of the nature mentioned in the provision, which are acquired on or after 01/04/1998 and then owned and used for the purpose of business, then depreciation shall be allowed at the rate prescribed under Rule 5 and Appendix- I of Income Tax Rules, 1962.

5.6 In the case of M/s ONGC Videsh Ltd. (supra), the assessee was engaged in exploration, development and production of hydrocarbons in overseas jurisdictions to augment the oil security of India mainly by way of acquiring participating interest in production sharing contracts. During the year under consideration, the assessee through an assignment agreement date 10th Feb., 2001 with consortium members and the Russian Government acquired a 20 per cent participating interest in Sakhalin Production Sharing Agreement (“Sakhalin PSA”). The project relates to the Chayvo, Odoptu and Arkutun-Dagi oil, gas and condensate fields, which is offshore Sakhalin Island (“Sakhalin Block”). The PSA was entered into on 30th June, 1995 and was for a period of 25 years. Then the consortium members commenced hydrocarbons operations in the Sakhalin Block. Rosneft-S and SMNG-S held 40 per cent interest in the said Sakhalin PSA and in a joint operating agreement. Vide the assignment agreement date. 10th Feb., 2001, Rosneft-S and SMNG-S (assignors) assigned 50 per cent of their share in the Sakhalin PSA and in a joint operating agreement to OVI for a consideration of Rs. 15,590.96 million. Consequent to the acquisition of such rights and licenses, the assessee became a consortium member and the assignors were relieved from obligation under the Sakhalin PSA to that extent. Thus, by acquiring 20 per cent participating interest, assessee has become the member of the consortium and acquired proportionate share in rights and licenses granted by the Russian State for Sakhalin Block. By acquiring these business rights and exploration and production licenses, the assessee became entitled to carry on hydrocarbon operations in the Sakhalin Block. The contention of assessee was that the rights and licenses, being intangible assets, were entitled to depreciation @ 25 per cent in view of the amended provisions of s. 32 of the Act. Said claim of the depreciation was disallowed by the Assessing Officer. The Tribunal after considering the arguments of both sides held as under:

“12. From the record, we found that hydrocarbons in their natural habitat embedded in a particular territory are the property of the State Government, jurisdiction over such hydrocarbons does not lie with any private person other than State Government and a person cannot carry out hydrocarbons operations unless the person had entered into a production sharing agreement with the Government. In the instant case, by entering into an agreement called PCA, the Government owning the hydrocarbons, granted rights to the assessee company along with license for carrying on hydrocarbons operations. The business rights in the license are owned by the assessee entering into PCA and such right and license can be assigned and transferred to other parties subject to the terms and conditions of the PCA and approval of the Government. The assessee by virtue of acquisition of 20 per cent participating interest became the member of the consortium and acquired proportionate share in rights and licenses granted by the Russian State for Sakhalin Block. By acquiring these business rights and production licenses, the assessee became entitled to carry on hydrocarbon operations in the Sakhalin project. The statutory expression of the provision granting depreciation on intangible asset is that :

“know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st April, 1988.”

13. A reading of the above statutory expression brings home the point that the law has specified items of intangible assets eligible for depreciation in the following categories :

(i) Know-how

(ii) Patents

(iii) Copyrights

(iv) Trademarks

(v) Licenses

(vi) Franchises

(vii) Any other business or commercial rights of similar nature.

14. So far as claim of depreciation in case of intangible assets falling in the category of “any other business or commercial rights of similar nature” is concerned, as per our considered view, all the business or commercial rights are not by themselves assets eligible for depreciation, and that only those rights which are similar in nature with the know-how, patents, copyrights, trademarks, licenses etc. are eligible for claim of depreciation. In view of principle of ejusdem generis, the expression “any other business or commercial rights” has to be read in the company of the preceding words. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like know-how, patents, copyright, etc., forms a distinct genesis or category in as much as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression ‘any other business or commercial rights of similar nature’ also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in s. 32(1)(ii), the commercial rights of exploration of mineral oils, as acquired by the assessee fall under the expression of any other business or commercial rights of the nature similar to one of the categories i.e., licenses as stipulated in s. 32(1)(ii). The commercial rights of exploration and licenses acquired by the assessee being in the nature of intangible assets are eligible for the claim of depreciation at the rate prescribed under s. 32(1)(ii) of the Act. The AO himself in his order had observed that as a result of entering into such an agreement i.e., PCA, the assessee company has been granted licenses by Russian Government to explore and produce hydrocarbons in the agreement area. There is no dispute to the fact that assessee has incurred expenditure of Rs. 1,559.09 crores for obtaining the right and license for exploration of oil. It is not possible to say that such expenditure was neither capital nor revenue innature. If it is held to be capital, then it is obvious that what the assessee has acquired was a participating right which is in the  nature of commercial right of carrying on of business of exploration and production of mineral oil. It also cannot be said that the right so acquired was not an asset. If it is an asset being the right then it is obvious that same is commercial right, therefore in the nature of asset in the form of license. This right had been granted to the assessee by way of license and the assessee became owner of such right i.e., license to have an access and to carry on of business of exploration and development of mineral oil. Accordingly, as per our considered view such an asset falls within the category of asset falling under s. 32(1)(ii) of the Act. Accordingly, we are inclined to agree with the learned senior counsel that the assessee had acquired business and commercial right and license by making payment of Rs. 1,559.10 crores, which is in the nature of intangible assets entitled to claim of depreciation under s. 32(1)(ii) of the IT Act.

14A. In view of the above discussion assessee’s claim for allowing deduction of entire expenditure of Rs. 1,559.10 crores is declined. The stand of CIT(A) in treating the alleged expenditure as deferred revenue expenditure and directing the AO to allow 1/19th of the expenditure during the year is also declined, since there is no concept of deferred revenue expenditure under IT Act. As we have treated the expenditure as capital in nature the same is eligible for claim of depreciation at the rates prescribed for the assets falling under s. 32(1)(ii) of the Act. We direct accordingly.”

5.7 Further, Hon’ble Supreme Court in the case of Techno Shares and Stocks Limited (supra) held that intangible assets can be in the nature of business or commercial rights, which is not in the nature of intellectual property.

5.8 In the instant case, the claim of the assessee is that the government authorization is the approval/ right granted by the government to sell the approved machines which is akin to a “license”or a business or commercial right of similar nature and thus by acquiring the“Government Authorizations”from M/s KOAL in slum sale transaction, the assessee has acquired right to market and sell the franking machines, which is a kind of right to do business on permits or authorization. The assessee has further claimed that it was essential for the assessee to acquire such government authorization from M/s. KOAL, otherwise the whole motive of acquiring the business by the assessee from M/s KOAL would be rendered meaningless.

5.9 The assessee has not produced before us the Approval granted by the Department of Post or other regulatory authority, issued to M/s KOAL, which the assessee is claiming as a license for marketing of franking machines in India and sold to the assessee under slum sale. However, the assessee has submitted a copy of a letter issued by the Department of Post, Government of India to the assessee company, which is available on page 429 two 430 of the Volume 1B of assessee’s paper book. Contents of the said letter are reproduced as under:

“2. At present Pitney Bowes, US A Electronic Franking Machines(EFMs) are distributed/marketed by M/s, Kilbum Office Automation Limited. As stated in your letter quoted above M/s. Pitney Bowes of USA has formed its subsidiary Company in India under the Companies Act, 1956 and it intends to take over the marketing of Pitney Bowes Electronic Franking Machines in India. Since M/s. Kilburn has given no objection to transfer the marketing of said Electronic Franking Machines, approval of the Director General, Department of Posts is hereby accorded for marketing of Pitney Bowes, USA EFMs to M/s. Pitney Bowes India Pvt. limited, E514, Greater Kailash, New Delhi-48 in India terminating the existing distribution contract with M s. Kilburn Office Automation limited with effect from the date of issue of this letter. The following Pitney Bowes Electronic Franking Machines(EFMs) were earlier approvedby the Department of Posts for distribution through M/s. Kilbum  Office Automation Limited.

SI. No. Model Approval No. & Date
1. A-900 No.53-2/93-PMB(CPT) dated 3.10.96.
2. B-900 No.2-3/96 CPT II dated 28.7.98
3. GKM(E700) No.2-3/96 CPT II dated 29.7.98
4. B-700 No.2-6/98-CPT.n dated 23.9.99.

3. The conditions governing the approval of EFMs models cited above are hereby reiterated again as under for your information:

(i) M/s. Pitney Bowes India Pvt. Limited (PBIL) will have to adhere to the specifications of model approved and no modifications to any part of the said models should be done without written and prior approval of the Department of Posts.

(ii) PBH will have to maintain a record showing sale of machines to each party with particulars of Licence issued in respect of each machine and this, record will be open Jo scrutiny of authorized officials of the Department of Posts without prior notice.

(iii) PBIL will be held responsible for any misuse of the machine and any tampering that may occur in the hands of actual users
due to any fault in its design. It is, therefore, necessary to apply rigid quality control during the process of manufacturing to ensure that the machine is tamper proof and free from all defects.

3. The Director General, Department of Posts reserves the rigid to withdraw the approval of the said models of the EFMs in case any deviation in its specification and feature is noticed. The Director General (Posts) further reserves the right to take possession of any or all of the unapproved Franking Machines if they- arc found to have been manufactured or sold by your firm contrary to the specification of the approved model.

4. The above conditions can be varied, altered or supplemented by the Director General, Department of Posts, depending upon the various other circumstances that may warrant any such change for the smooth functioning of the operation of the Indian Post Offices. The said approval will be subject to such varied, altered and supplemented conditions w.e.f. the date of their notifications.

Receipt of the letter may please be acknowledged.”

5.10 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.

5.11 In the case of M/s ONGC Videsh Ltd.(supra), the assessee acquired the right to production in a consortium from parties, who were having such right of production in their independent capacity. Similarly in the case of Techno shares in stocks Limited (supra) , Holding of membership of the stock exchange by a member has been held as intangible assets eligible for depreciation. In both the cases the rights of business or commercial nature were possessed by the assessees, whereas in the instant case, the approval has been granted to machines of “Pitney Bowes Ins, USA”only and not to M/s KOAL, which even it could not transfer to any person of its choice. Thus, facts of the instant case are distinguishable from the cited cases.

5.12 Since we have decided that government authorizations/ approvals are not any kind of intangible asset in the hand of the KOAL, the other arguments of the parties that M/s KOAL has not paid any value for purchase of these Government Approvals and the value assigned by the valuer appointed by the assessee company, was a hypothetical value only etc are not required to be considered.

5.13 In view of above discussion, we hold that government authorization/ approvals are neither license nor the rights of business or commercial nature in the hands of M/s. KOAL, which could be transferred to the assessee and therefore no depreciation on the value assigned to government organizations/ approvals by the assessee, could be allowed to the assessee. The ground of appeal is accordingly dismissed.

6. In ground No. 3 the assessee has challenged depreciation disallowed on non- compete fee.

6.1 The Tribunal in its order dated 12/11/2010 in ITA No. 1428/Del/2009 and CO No. 178/Del/2009 in appeal against the order of the Ld. CIT-A arising from the original assessment under section 143(3) of the Act dated 28/12/2007, upheld the non-compete fee expenditure of capital nature, however the alternative plea of allowing depreciation on non-compete fee, if the same was held to be of capital nature, was restored to the file of the Assessing Officer. The issue of non- compete fee as capital expenditure was subsequently upheld by the Hon’ble High Court as well as Hon’ble Supreme Court. The Assessing Officer in compliance to the direction of the Tribunal raised queries to the assessee. The assessee contended that non-compete fee is squarely falls within the expression “any other business/ commercial rights of similar nature”used in clause(ii) of subsection(1) of section 32 of the Act. However the Assessing Officer was of the view that “business or commercial rights of similar nature”mentioned in sub clause (ii) of subsection (1) of section 32 is related to a class of rights which are intellectual property rights whereas the alleged payment is for non- compete fee. Accordingly, he denied depreciation on the “non- compete fee”, which is sustained as capital expenditure by the Tribunal and upheld by the Hon’ble High Court as well as Hon’ble Supreme Court.

6.2 On further appeal, the Ld. CIT-A following his own order in assessment years 2006- 07, 2007- 08 and 2009- 10 upheld the disallowance of depreciation on non-compete fee. The Ld. CIT-A in decisions for assessment years 2006- 07, 2007- 08 and 2009- 10, relied on the decision of the Tribunal in the case of M/s. Sharp business systems (India) limited in ITA No. 4564/Del/2004 dated 30/06/2011.

6.3 Before us, the learned counsel of the assessee submitted as under:

“2.4.7 Such right to carry on business unfettered by any competition from KOAL would result in acquisition of capital asset of a ‘similar nature’ as ‘know-how, patents, copyrights, trademark or franchisee. Similar examination was done in the Chennai ITAT decision of ITO vs Medicorp Technologies India Ltd. [122 TTJ 394].In the facts of the said case, the appellant company made payment to another company for purchase of its export business. The consideration paid also involved payment for the non-compete obligation for a period of 10 years. The Chennai ITAT held that the payment for the non-compete fee falls under the definition of ‘business or commercial right’. In examining whether the said expenditure would be treated as similar nature’ or not, the examination was done by applying the principles of ejusdem generis which applies when the mention of specific items of the same genus is followed by an expression of a general or a residuary nature pertaining to the same genus. The scope of this rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified.

2.4.8 Further, reliance is also placed on the decision of Hon’ble Karnataka High Court in the decision of CIT Vs. Ingersoll Rand International Ind. Ltd. [2014] 48 taxmann.com 349 (Kar-HC) (refer from page 219 to 227 of the Paper book for case laws), wherein the Hon’ble high court held:

“The term ‘or any other business or commercial rights of similar nature’ has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) ofExpln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(l)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision “(para 8) (refer page 227 of the Paper book for case laws).”

6.4 On the other hand, the Ld. Senior DR submitted that the decision of the Tribunal in the case of M/s. Sharp Business System Ltd. (supra) has been upheld by the Hon’ble Delhi High Court and which is reported as Sharp business system versus Commissioner of income tax-III, (2012) 27 taxmann.com 50 (Delhi) and thus issue is covered in favour of the Revenue.

6.5 In the rejoinder, the Ld. counsel also accepted the fact that issue in dispute was covered against the assessee by the decision of the Hon’ble Delhi High Court in the case of Sharp Business System (supra).

6.6 We have heard the rival submission and perused the relevant material on record. The issue in dispute is whether non-compete fee is in the nature of intangible assets eligible for depreciation under section 32(1)(ii) of the Act. This issue has been decided by the Hon’ble High Court of Delhi in the case of Sharp Business System (supra) as under:

“Q. Nos. 2 and 3 In Tangible Asset –

11. This question arose as a direct sequel to the appellant’s alternative submission that if the expenditure is treated as a conferring capital advantage, necessarily they are depreciable. The appellant claims for depreciation of “know-how”, “patents”, “copyrights”, “trademarks”, “licenses”, “franchises” or other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April 1998. Arguing by analogy, learned counsel for the appellant relied upon the judgment of the Supreme Court in Techno Shares & Stocks Ltd. (supra) where the issue was whether the contention of the assessee that it could claim depreciation on the Bombay Stock Exchange Membership Card held by it on the plea that it was a license or “business or commercial right of similar nature” was upheld. The appellant also relied upon the decision of this Court in Hindustan Coco Cola Beverages P. Ltd. (supra) and the judgement of the Kerala High Court in B. Ravindran Pillai Vs. CIT 332 ITR 531 (Ker). As would be evident from Section 32(1)(ii), depreciation can be allowed in respect of intangible assets. Parliament has spelt-out the nature of such assets by express reference to „know-how‟, „patents‟, „copyrights‟, „trademarks‟, „licenses‟and „franchises‟. So far as patents, copyrights, trademarks, licenses and franchises are concerned, though they are intangible assets, the law recognizes through various enactments that specific intellectual property rights flow from them. Licenses are derivative and often are the means of conferring such intellectual property rights. The enjoyment of such intellectual property right implies exclusion of others, who do not own or have license tosuch rights from using them in any manner whatsoever. Similarly, in the matter of franchises and know-how, the primary brand or intellectual process owner owns the exclusive right to produce, retail and distribute the products and the advantages flowing from such brand or intellectual process owner, but for the grant of such know-how rights or franchises. In other words, out of these species of intellectual property like rights or advantages lead to the definitive assertion of a right in rem. The decisions of this Court in Hindustan Coco Cola Beverages P. Ltd.

ITA-492-12 Page 11 (supra) and that of the Kerala High Court in B. Ravindran Pillai (supra) underlined that goodwill is also a species of depreciable right which can claim the benefit of Section 32. Those decisions were based on the ruling of the Supreme Court in CIT Vs. B.C. Srinivasa Setty 1981 (128) ITR 294 (SC) and subsequent cases which have ruled that goodwill is a depreciable capital asset. So far as the decisions in Techno Shares & Stocks Ltd. (supra) is concerned, the Supreme Court clearly limited its holding that the right to membership of Stock Exchange is in the nature of “any other business or commercial right” which was an intangible asset as is evident from the following observations:

“Before concluding we wish to clarify that our present judgment is strictly confined to the right to membership conferred upon the membership under the BSE Membership Card during the relevant assessment years. We hold that the said right to membership is “business or commercial activity” which gives a non-defaulting continuing membership and right to access Exchange and to participate therein and in that sense it is a license or akin to a license, in terms of Section 32(1)(ii)…….”

12. It is, therefore, apparent that the ruling in Techno Shares & Stocks Ltd. (supra) was concerned with an extremely limited controversy, i.e. depreciability of stock exchange membership. This Court observes that such nature was held to be akin to a license because it enable the member, for the duration of the membership, to access the Stock Exchange. Undoubtedly, it conferred a business advantage and was an asset which and was clearly an intangibleasset. The question here, however, is whether a non-compete right of the kind  acquired by the assessee against L&T for seven years amounts to a depreciable intangible asset. As discussed earlier, each of the species of rights spelt-out in Section 32(1)(ii), i.e. know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be “intangible asset”. The nature of these rights mentioned clearly spell-out an element of exclusivity which enures to the assessee as a sequel to the ownership. In other words, but for the ownership of the intellectual property or know-how or license or franchise, it would be Hon’ble to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance “in rem”. However, in the case of a non-competition agreement or covenant, theadvantage is a restricted one, in point of time. It does not necessarily – and not in the facts of this case, confer any exclusive right to carry-on the primary  business activity. The right can be asserted in the present instance only against L&T and in a sense, the right “in personam”. Indeed, the 7 years period speltout by the non-competing covenant brings the advantage within the public policy embedded in Section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. Another way of looking at the issue is whether such rights can be treated or transferred – a proposition fully supported by the controlling object clause, i.e. intangible asset. Every species of right spelt-out expressly by the Statute – i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the Revenue.”

6.7 Respectfully, following the above decision of the Hon’ble High Court, we uphold the finding of the Ld. CIT-(A) on the issue in dispute. The ground of the appeal is accordingly dismissed.

7. In ground No. 4 the assessee has challenged disallowance of depreciation on goodwill.

7.1 As regards the claim of depreciation on goodwill, the assessee raised additional ground first time before the Ld. CIT-(A) in appeal arising from reassessment only and no claim was made either in the return of income or before the Assessing Officer in original assessment proceedings or in the first round of appellate proceedings before Ld. CIT- (A) or before the Tribunal. The Ld. CIT-(A) has observed the pleas of the assessee as vague as the assessee wanted the amount initially shown as government authorization to be considered as “goodwill”or as residual intangible assets. Ld. CIT-(A) observed that assessee has not filed any evidence as to acquisition of goodwill. According to the Ld. CIT- (A), there was neither any reference of transfer of any goodwill in the BTA nor there was any mention of goodwill in the valuation report dated 22/12/2005. He further observed that assessee had not claimed any depreciation on goodwill in their profit and loss account or computation statement and therefore the additional ground was only an afterthought without any supporting evidence. The Ld. CIT-(A) distinguished the reliance placed by the assessee on the decision of Hon’ble Delhi High Court in the case of Areva T & D India Ltd in ITA No. 315/2010 dated 30/03/2012. According to Ld. CIT-(A) in the said case, the assessee had claimed depreciation on the goodwill in the return of income filed whereas in the instant case no such claim was made in the return of income and claim was made for the first time in first appellate proceeding. He further observed that the assessee had not furnished any depreciation statement or valuation report supporting evidence to substantiate its claim for depreciation on the goodwill and accordingly he rejected the additional ground raised by the assessee seeking depreciation on goodwill.

7.2 Before us, the Ld. counsel submitted that the value of Government Authorization, non-compete fee and other assets acquired from M/s KOAL was reduced from the total consideration and the residual value of Rs. 5,70,03,830/- was assigned to the asset of goodwill. He further submitted that goodwill is an intangible asset akin to the know-how, patents, copyrights, trademarks, license, franchisee etc as held in the case of Arera T & D India Ltd (supra) and the assets acquired by the assessee from M/s KOAL also included business information, business contract, transfer of employees etc. In support of the contention that goodwill is an intangible assets eligible for depreciation, the Ld. counsel relied on following decisions:

(i) Area T & D India Ltd versus DCIT(2012) 341 ITR 421(Del).

(ii) CIT versus Smifs securities Ltd (2012) 348 ITR 302(SC)

(iii) Triune energy services private limited versus DCIT (2016) 65 taxmann.com 288 (Delhi)

7.2.1 Further, the Ld. counsel relied on the following decisions where it is held that excess consideration over the value of net assets was considered as goodwill:

(i) decision of the Tribunal, Mumbai bench in the case of DCIT Vs. Toyo Engineering India Ltd. in ITA No. 3279/M/2008

(ii) decision of the Tribunal, Hyderabad bench in ITA No. 198/Hyd/2011

7.2.2 Further, the Ld. counsel submitted that in the eventuality that value of the Government Authorization is held to be of not of any value then that amounts may be allocated to goodwill and depreciation might be allowed accordingly.

7.3 On the other hand, the Ld. Senior DR, relied on the order of the Ld. CIT-(A) and submitted that there was no mention of goodwill in the “BTAbetween the assessee and M/s KOAL for slum sale transaction. He further submitted that the assessee got the assets transferred under slum sale transaction valued from a valuer and he assigned values to various assets including Government Authorization and non-compete fee etc, however he did not assign any value to the goodwill and therefore assessee is not entitled to make a claim of depreciation of the goodwill which never existed.

7.4 We have heard the rival submission and perused the relevant material on record. We find that in the case of Smifs Securities Ltd.
(supra), the Hon’ble Supreme Court has decided a question of law raised as under:

Question No.[b]:

“Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said Section?”

Answer:

In the present case, the assessee had claimed deduction of Rs. 54,85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under:

“In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company.”

It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.

The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [‘Act’, for short].

We quote herein below Explanation 3 to Section 32(1) of the Act: “Explanation 3.– For the purposes of this sub-section, the expressions “assets’ and “block of assets’ shall mean–

[a] tangible assets, being buildings, machinery, plant or furniture;

[b] intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.”

Explanation 3 states that the expression “asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. A reading the words “any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).

In the circumstances, we are of the view that “Goodwill’ is an asset under Explanation 3(b) to Section 32(1) of the Act.

7.4.1 In the case of Avera T & D India Ltd (supra), Hon’ble jurisdictional High Court, held the business information, business records, contracts, skilled employee, know-how etc as business and commercial rightseligible for depreciation under section 32(1)(ii) of the Act, however the issue of eligibility of goodwill for depreciation was not decided. Regarding goodwill, the Hon’ble court observed as under:

“15. In view of the above, it is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation under Section 32(1)(ii) of the Act. In the circumstances, the substantial question of law is decided in the affirmative and this appeal is allowed in favor of the assessee and against the Revenue and the impugned order is set aside.”

7.4.2 In the case of Triune Energy Services Private Limited (supra), the Tribunal held that no credible material had been brought in the valuation report submitted by the assessee on the basis of which a specific valuation could be ascribed to any specific intangible assets and therefore held that the AO and the CIT-(A) were justified in holding that the assessee was not entitled to depreciation on technical knowhow, valuation of business and non-compete fee mentioned in the report. In respect of the alternative claim of the assessee that the entire sum of Rs. 40,58,75,529/-paid towards intangible be considered as goodwill and the Tribunal following the decision of the Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (supra) upheld that assessee’s contentionthe depreciation could be claimed of the goodwill, but remanded the matter for purpose of the valuation of the goodwill. The Hon’ble High Court after considering the arguments of the rival parties upheld the eligibility of goodwill for depreciation which is allowable under section 32(1)(ii) of the Act in view of the decision of Hon’ble Supreme Court in the case of Smifs Securities Ltd. (supra). The Hon’ble High Court further observed that in the “business identification schedule”appended to business transfer agreement apart from the tangible assets also included contracts, business records and know-how, employees and goodwill of the transferor company and the goodwill included the goodwill in relation to the name associated to the business. Regarding the “goodwill”, the Hon’ble High Court held as under:

“13. Goodwill is intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resources, dealer network, customer base etc. The expression “goodwill”subsume within it a variety intangible benefits that are required when a person acquires a business of another is a going concern.”

7.4.3 In the light of above facts and circumstances, the Hon’ble High Court accepted the contention advanced on behalf of the assessee that the consideration paid by the assessee in excess of its value of tangible assets was rightly classified as goodwill.

7.4.4 In the light of above decisions, when we look at the facts of the instant case we find that in this case, in the business transfer agreement (BTA) there is no mention of goodwill. Further, the unit of M/s KOAL, which was acting as a agent for sale of electronic franking machines etc of M/s Pitney Bowes Inc, USA, in India and Nepal has been transferred to the assessee. It was the machines of M/s Pitney Bowes Inc., USA which are approved by the Department of post due to their technical competency. All the intellectual property rights in those machines were lied with M/s Pitney Bowes Inc. USA. Thus, it was the brand name of the “Pitney Bowes”on which M/s KOAL was floating. In the business transfer agreement (BTA) which is available on pages 1-48 of the volume 1A of the paper book, on page 12 , a list of transferred assets is mentioned which included real property leased, tangible assets like furniture equipments machinery etc, contract license agreements etc, inventories of the seller in existence, government authorizations, computer hardware and proprietary software, customer and vendor list, business know-how, rights of the seller under sales and purchase orders, transferred employee and transferred retailers, all advances received by the seller from its customers, all earnest money deposits etc. The assessee has got valuation of Government Authorizations and non-compete fee from M/s “Deloitte Haskins and sells”. Said valuation report is available on page 431 to 451 of the volume 1B of paper book. The valuer has assigned value to Government Authorizations at Rs. 3.63 crores and value to non-compete agreements at rupees 4.83 crores, however, no value was assigned to other intangible assets.

7.4.5 In view of the decision cited above, we are of the view that list of transferred asset included business know-how, customer and vendor list etc which are business or commercial rights of similar nature as specified in 32(1)(ii) of the Act, which constitute part of the “goodwill”of the business, transferred as going concern to the assessee. Since in the case tangible assets alongwith other business/ commercial rights, have been transferred to the assessee, the value of “Goodwill”should be computed by reducing the value of all liabilities, the tangible assets, Government Authorizations valued by the valuer and non-compete fee valued by the valuer, out of the slump sale consideration and then depreciation should be allowed at the rate prescribed for the intangible assets under section32(1)(ii) of the Act.

7.4.6 The Ld. Senior DR contended before us that in this case the original assessment proceedings were completed and thereafter matter was taken by the assessee to the Hon’ble Supreme Court, however, in all those appellate proceedings, the assessee did not file any claim for depreciation on the goodwill. Thereafter, reassessment proceedings have been taken up by the Assessing Officer wherein the claim of depreciation on government authorization and non-compete fee was disallowed. In appellate proceeding before the Ld. CIT-(A), consequent to the reassessment order, the assessee first time filed the claim of depreciation on goodwill. According to the Ld. Senior DR, this claim was made in view of the fact that depreciation on government authorization and non-compete fee was disallowed. He further submitted that reassessment proceedings were initiated for the purpose of assessment of escaped income and the assessee is not entitled for any claim of deduction enabling it to reduce its income in reassessment proceedings. In support of the contention, he relied on the decision of the Hon’ble High Court of Jammu and Kashmir in the case of CIT Vs. State Agro Development Corporation reported in (2001) 248 ITR 487.

7.5 We find force in the contention of the Ld. Sr. Departmental Representative. In appellate proceedings consequent to original assessment before the Ld. CIT-(A), the Tribunal, the Hon’ble High Court and the Hon’ble Supreme Court , the assessee did not file its claim for depreciation on goodwill and for the first time it made the claim in appellate proceeding corresponding to reassessment proceedings. We find that in the case of CIT Vs. State Agro Development Corporation (supra), the Hon’ble High Court of Jammu and Kashmir observed as under:

“8. In view of the above legal position, in the case before it, the Supreme Court held:

“………Since the original assessment has been concluded finally against the assessee, it was not permissible for the assessee in the reassessment proceedings to seek a review/ revision of theconcluded assessment for the purpose of computation of the  escaped income. The High Court clearly fell in error in permitting the assessee to re agitate, in the reassessment proceedings  under s. 147(a) of the Act, the finally concluded assessment proceedings and to grant to him relief in respect of items not only earlier rejected, but also unconnected with the escapement of income by assuming as if the original assessment had not been concluded or was ‘still open’.”

9. It is clear from the above decision of the Supreme Court that proceedings under s. 147 of the Act are for the benefit of the Revenue and not of the assessee and the assessee cannot be permitted to convert the reassessment proceedings to his advantage. The assessee cannot claim that assessment should be completed and loss should be determined to enable him to claim the benefit of carry forward and set off against the income of subsequent years. In such a case, the proper course for the Income Tax Officer would be to drop the proceedings under s. 147 of the Act.”

7.6 Though we have held in preceding paras that following the judgment of the Hon’ble Supreme Court in the case of Smifs Securities Ltd. (supra), depreciation on goodwill is allowable, but in view of the above decision of the Hon’ble High Court of Jammu and Kashmir, in our opinion, the claim of the depreciation on goodwill cannot be allowed in the year under consideration.

7.7 The alternative plea for allocating the value of government authorization towards goodwill is not accepted as the valuation has been carried out by the assessee from a valuer and the assessee is claiming the same as independent valuer, the assessee is bound to accept the value assigned to government authorizations. This alternative plea of the assessee, is accordingly rejected. The ground of the assessee is dismissed.

8. In the result, appeal of the assessee is dismissed.

ITA No. 290/Del/2013 for AY 2006- 07

9. Now we take up the appeal of the assessee in ITA No. 290/Del/2013 for assessment year 2006-07. The grounds of appeal reads 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 proceeding under section 147/148 of the Act was initiated correctly by Learned Assessing Officer (“Ld. AO”).

2. That on the facts and circumstances of the case & in law, the Ld. CIT(A) has grossly erred in upholding the disallowance of depreciation amounting to Rs. 98,80,220 on the intangible asset of “Government Authorizations”which was acquired by the appellant under a Business Transfer Agreement with the Kilburn Office Automation Limited.

3. That the Ld. CIT(A) has erred in upholding the disallowances 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 Ld. 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

10. The facts in brief of the case are that the assessee filed original return of income on 30/11/2006 declaring income of Rs. 4,95,64,342/-. The return was processed under section 143(1) of the Act on 30/01/2008. Subsequently, the Assessing Officer noticed in assessment proceeding of assessment year 2007-08, that the assessee claimed depreciation of Rs. 98,80,220/- on Government Approvals/ Authorizations by treating the same as intangible assets, which according to the Assessing Officer was not allowable in view of the provisions of law. In the assessment year 2007- 08 completed on 27/12/2010, the Assessing Officer disallowed the depreciation claimed on such Government Approvals. According to the Assessing Officer income chargeable to tax of Rs. 98,80,220/- had escaped assessment by allowing assessee excessive depreciation in terms of sub-clause (iv) of clause (c) of Explanation-2 to section 147 of the Act and thus, after recording reasons in writing, he issued notice under section 148 of the Act. In response, the assessee filed return of income on 23/06/2011. In the return of income filed the assessee maintained its claim of depreciation on government approval and also made/claim of Rs. 1,18,89,458/- being 1/5th of “non- compete fee”as deferred revenue expenditure. The reasons recorded were provided to the assessee. Notices under section 143(2) and 142(1) of the Act was issued and complied with. The assessment was completed at total income of Rs. 5,94,44,562/- under section 147 of the Act read with section 143(3) of the Act on 09/12/2011 after disallowing depreciation on government approvals and rejecting the claim of depreciation on non-compete fee. In the appeal filed before the ld. CIT- (A), the assesee challenged validity of reassessment proceeding and contested disallowance made by the Assessing Officer. The assessee also raised additional ground seeking depreciation on goodwill. The Ld. CIT-(A) upheld the validity of the reassessment proceedings in view of the facts that return was only processed under section 143(1) of the Act and reopening was done within four years from the end of the relevant assessment year and thus conditions of section 147 of the Act were duly satisfied. The learned CIT-(A) relied on the decision of the Hon’ble Supreme Court in the case of Sh. Rajesh Jhaveri reported in 291 ITR 500(SC). The Ld. CIT-(A) also rejected the contention of the assessee that in view of M/s GKN Driveshaft (India) Ltd Vs. ITO reported in 259 ITR 19 (SC) without disposing the objection filed by the assessee against the initiation of reassessment proceeding. The learned CIT-A upheld the disallowance of depreciation of Rs. 98,80,220/- on government authorization following his earlier orders in assessment year 2007- 08. Similarly, the disallowance of 1/5th of non-compete fee as deferred revenue expenditure was sustained. The Alternative plea of allowing depreciation on non-compete fees was also rejected following his order for assessment year 2007- 08. The additional ground of the assessee seeking depreciation on goodwill was also rejected following his finding in assessment year 2007- 08. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.

11. In ground No. 1, the assessee has challenged validity of assessment proceeding under section 147 of the Act.

11.1 Before us, the Ld. counsel of the assessee filed paper book having two volumes i.e. Volume 1 and volume 2 (pages 1 to 104). The volume 1 was further divided in Volume 1A (pages from 1 to 242 ) and volume 1 B (pages from 243 to 451). These Volume 1A and Volume 1B are common for the appeals filed for assessment year 2005- 06 to 2009- 10. The learned counsel referred to the reasons recorded, available on page 29 of volume 2 of the paper book and submitted that the entire primary and material facts were made available at the time of assessment for 2005- 06 and therefore there was no omission or failure on the part of the assessee to disclose all the facts fully and truly.

11.2 He further submitted that there was no new material or basis to reopen the assessment proceeding and accordingly the fundamental condition laid down for initiation of proceeding under section 147/ 148 of the Act was not satisfied in this case.

11.3 He further submitted that mere change of opinion or having second thoughts on the same material cannot be ground to commence the reassessment proceeding.

11.4 In support of the contention the Ld. counsel relied on the decisions of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Orient Craft Ltd. (2013) 29 taxmann.com 392 and CIT Vs. Atul Kumar Swami(2014) 363 ITR 693 (Delhi).

11.5 On the other hand, the Ld. Senior DR, relying on the orders of the lower authorities submitted that in this case assessment has been reopened within four years from the end of the relevant assessment year and therefore the requirement of proviso to section 147 of the Act of having no failure on the part of the assessee in disclosing the facts fully and truly, was not attracted. He further submitted discovery in later assessment year that assessee was not eligible for depreciation on government approvals constituted information and which came to the Assessing Officer by fresh facts revealed later on. In support of the contention he relied on the decision of the Hon’ble Supreme Court in the case of Kalyanji Mavji & Co. Vs. CIT reported in 102 ITR 287. He further submitted the return was processed under section 143(1) of the Act and no assessment was completed under section 143(3) of the Act, so there was no occasion with the Assessing Officer to frame a opinion on the issue of depreciation on government authorization and thus in reopening the assessment, there was no change of opinion. He further relied on the decision of the Hon’ble Delhi High Court dated 16th may, 2018 in the case of Indu Lata Rangwala in W.P.(C) 1393/2002

11.6 We have heard the rival submission and perused the relevant material on record. The reasons recorded by the Assessing Officer for reopening of the assessment are available on page 29 of the volume 2 of the assessee’s paper book, which reads as under:

“18.02.2011 During the assessment proceeding for the A.Y. 2007- 08 it was found the expenditure of non compete fee by treating it as deferred revenue expenditure. After examination it was found that the expenditure was capital expenditure in nature and was wrongly claimed as deferredrevenue expenditure. The similar deduction was claimed during the  A.Y. 2006- 07 also. Thus, the assessee has claim and was allowed wrong deduction/ excess deduction in respect of amount of non compete fee.

Further the assessee has taken over business of franking machines from KOAL under business transfer agreement executed on 15/10/2004. The acquisition of above business was done on slump sale basis by paying a lump sum consideration. Out of total sale consideration paid, the assessee assigned value of Rs. 4,51,66,708/- to the Govt., approvals granted to KOAL for marketing franking machines by the Department of Post, Govt, of India and different State Governments. The assessee has claimed depreciation by treating the Govt. Approvals/ Authorization as depreciable assets. Since the Govt. Approvals for marketing the franking machines are not depreciable asset, assessee has wrongly claimed and allowed depreciation on it. Thus, assessee’s income has escaped assessment to this extent also.

Under such circumstances I have reason to believe that assessee’s income to the extent mentioned above has escaped assessment in the A.Y. 2006- 07 in order to assess this income proceedings u/s 147 of the Income Tax Act, 1961 are initiated.”

11.7 It is evident from the reasons recorded that the Assessing Officer has relied on the assessment proceedings for assessment year 2007- 08, wherein the claim of the assessee of 1/5th expenditure on non- compete fee as deferred revenue expenditure and claim of depreciation on Government Authorization has been disallowed. In the case of Kalyanji Mavji & Company Vs. CIT (supra) the Hon’ble Supreme Court has held that the information may come from external source or even from materials already on record or may be derived from the discovery of new and important matter or fresh facts. In the instant case also the Assessing Officer discovered the facts required for reopening the assessment, during the assessment proceeding for assessment year 2007- 08 and which constitutes an information on the basis of which the Assessing Officer was having “reason to believe”that income escaped assessment. Thus, the contention of the ld. counsel that there was no fresh material for reopening of the assessment is not true. Further, the ld. counsel contended that that there was no failure or omission on the part of the assessee in disclosing facts fully and truly. We find that the assessment has been reopened within the four years from the end of the relevant assessment year and therefore the proviso to section 147 of the Act, according to which no assessment could be reopened without failure on the part of the assessee to disclose fact truly and fully, is not attracted in the facts of the instant case.

11.8 In the case of Orient Craft Ltd. (supra), the Hon’ble High Court of Delhi held that where a return of income has been processed under section 143(1) of the Act without scrutiny and subsequently, recording the reasons that on “going through the return of income”income escaped assessment, amounted to preview of earlier proceedings and an abuse of power of the Assessing Officer. The Hon’ble Court in the said case observed that there was no tangible material for reopening the assessment.

11.9 Further, Hon’ble Delhi High Court in the case of CIT Vs. Atul Kumar Swami (supra) held that “mere conclusion of proceeding under section 143(1) does not ipso facto brings power of invocation of reopening assessments. The relevant para of the decision is reproduced as under:

“5. As to what constitutes valid “reasons to believe” is no longer a matter of debate. So long as the law declared in Kelvinator (supra) stands, a valid reopening of assessment has to be based only on tangible material to justify the conclusion that there is escapement of income. In the present case, the note forming part of the return clearly mentioned and described the nature of the receipt under a non-compete agreement. The reasons for the notice under section 147 nowhere mentioned that the Revenue came up with any other fresh material warranting re-opening of assessment. In these circumstances, the court is of the opinion that mere conclusion of the proceedings under section 143(1) ipso facto does not bringinvocation of powers for reopening the assessment. We are satisfied that the Tribunal’s reasons are justified and do not call for any interference.”

11.10 It is relevant to refer the decision of the Hon’ble Jurisdictional High Court dated May 18, 2016 in the case of Indu Lata Rangwala Versus DCIT in Writ Petition (C) 1393/2002 , where in the Hon’ble High Court considered the earlier decisions available on the issue of reopening the assessment and held as under:

“Summary of the legal position

35.1 The upshot of the above discussion is that where the return initially filed is processed under Section 143 (1) of the Act, and an intimation is sent to an Assessee, it is not an ‘assessment’ in the strict sense of the term for the purposes of Section 147 of the Act. In other words, in such event, there is no occasion for the AO to form an opinion after examining the documents enclosed with the return whether in the form of balance sheet, audited accounts, tax audit report etc. 35.2 The first proviso to Section 147 of the Act applies only (i) where the initial assessment is under Section 143 (3) of the Act and (ii) where such reopening is sought to be done after the expiry of four years from the end of the relevant assessment year. In other words, the requirement in the first proviso to Section 147 of there having to be a failure on the part of theAssessee “to disclose fully and truly all material facts” does not at all apply where the initial return has been processed under Section 143 (1) of the Act.

35.3 As explained in Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) “an intimation issued under Section 143 (1) can be subjected to proceedings for reopening”, “so long as the ingredients of Section 147 are fulfilled”.

35.4 Explanation 2 (b) below Section 147 states that for the purposes of Section 147, where a return of income has been furnished by the Assessee but no assessment has been made and it is noticed by the AO that the Assessee has understated the income and claimed excessive loss, deduction, allowance and relief in the return then that “shall also be deemed to be a case where the income chargeable to tax has escaped assessment”.

35.5 As explained by the Supreme Court in Rajesh Jhaveri Stock Brokers P. Ltd. (supra) and reiterated by it in Zuari Estate Development and Investment Co. Ltd. (supra) an intimation under Section 143 (1) (a) cannot be treated to be an order of assessment. There being no assessment under Section 143 (1) (a), the question of change of opinion does not arise.

35.6 Whereas in a case where the initial assessment order is under Section 143 (3), and it is sought to be reopened within four years from the expiry of the relevant assessment year, the AO has to base his ‘reasons to believe’ that income has escaped assessment on some fresh tangible material that provides the nexus or link to the formation of such belief. In a case where the initial return is processed under Section 143 (1) of the Act and an intimation is sent to the Assessee, the reopening of such assessment no doubt requires the AO to form reasons to believe that income has escaped assessment, but such reasons do notrequire any fresh tangible material.

35.7 In other words, where reopening is sought of an assessment in a situation where the initial return is processed under Section 143 (1) of the Act, the AO can form reasons to believe that income has escaped assessment by examining the very return and/ or the documents accompanying the return. It is not necessary in such a case for the AO to come across some fresh tangible material to form ‘reasons to believe’ that income has escaped assessment.

35.8 In the assessment proceedings pursuant to such reopening, it will be open to the Assessee to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment.

35.9 The decisions of this Court and other Courts to the extent inconsistent with the above decisions of the Supreme Court cannot be said to reflect the correct legal position.”

(emphasis supplied externally)

11.11 In view of the decision, now the requirement of any fresh tangible material for reasons to believe , where return is processed under section 143(1) of the Act, is no longer required.

11.12 In the instant case, the return is processed under section 143(1) of the Act and thus it is not necessary to have a fresh tangible material to form “reason to believe”that income has escaped.

11.13 In view of above, we hold that assessment has been reopened validly. Accordingly, we uphold the finding of the Ld. CIT-(A) on the issue of dispute and the ground of the appeal is dismissed.

11.14 The remaining grounds in the appeal are identical to grounds No. 2 to 4 raised in ITA No. 289/Del/2013 for assessment year 2005- 06 and thus, following our finding in appeal for assessment year 2005- 06, we dismiss the ground No. 2 to 4 in the present appeal also.

12. In the result, appeal of the assessee is dismissed.

ITA Nos. 291 to 293/Del/2013 for AY: 2007- 08 to 2009- 10

13. Now we take up ITA No. 291 to 293/Del/2013 for assessment year 2007- 08 to 2009- 10 respectively. The grounds raised in all the three appeals are identical except the amounts involved in grounds. For sake of convenience, we are reproducing grounds of appeal for AY: 2007- 08.

“1. That on the facts and circumstances of the case & in law, the Ld. CIT(A) has grossly erred in upholding the disallowance of depreciation amounting to Rs. 74,10,163 on the intangible asset of “Government Authorizations”which was acquired by the appellant under a Business Transfer Agreement with the Kilburn Office Automation Limited.

2. That the Ld. CIT(A) has erred in upholding the disallowances 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.

3. That the Ld. 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.”

14. The facts in respect of the issues in dispute raised in the grounds in the above appeals, are almost identical to the facts in appeals of assessment year 2005- 06 and 2006- 07 decided earlier by us, except that in assessment year 2005- 06 and 2006- 07, the assessments have been completed under section 147 of the Act and accordingly the assessee challenged the validity of the reassessment proceeding along with the additions on merit.

15. Since grounds No. 1 and ground No. 2 raised in above appeals have already been decided against the assessee in ground No. 2 and 3 respectively in ITA No. 289/Del/2013 for assessment year 2005- 06, accordingly following our findings, the ground No. 1 and 2, in these appeals are also dismissed.

16. The ground No. 3 raised in the above appeals has also been decided in ITA No. 289/Del/2013 for assessment year 2005- 06. In the said appeal, though the depreciation on goodwill is allowed in principle with the direction to compute the amount of goodwill, however, the claim of depreciation on goodwill in the assessment year 2005- 06 was made in first appellate proceedings arising out of reassessment proceeding, thus, denial of claim by the Ld. CIT-(A) was upheld. The assessment years involved in present appeals are from assessment year 2007- 08 to assessment year 2009- 10 and no reassessment proceedings are involved in these assessment years, and therefore, the depreciation on goodwill is allowed to the assessee subject to our findings in ITA No. 289/Del/2013. Accordingly, the grounds of appeal are allowed for statistical purpose.

17. All the three appeals above are allowed partly for statistical purpose.

18. In the result, out of the five appeals of the assessee, the ITA Nos. 289 and 290/Del/2013 for assessment years 2005- 06 and 2006- 07 respectively are dismissed and the remaining three appeals from ITA Nos. 291 to 293 for assessment years 2007-08 to 2009-10 respectively are allowed partly for statistical purpose.

The decision is pronounced in the open court on 29th May, 2017.

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Category : Income Tax (25014)
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Tags : ITAT Judgments (4409) section 32 (122)

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