Case Law Details

Case Name : Johnson Matthey Chemicals India Pvt. Ltd Vs DCIT (ITAT Pune)
Appeal Number : ITA No.1507/PUN/2012
Date of Judgement/Order : 12/12/2017
Related Assessment Year : 2004-05
Courts : All ITAT (5510) ITAT Pune (154)

Johnson Matthey Chemicals India Pvt. Ltd vs. DCIT (ITAT Pune)

After going through the terms of BTA, Novation Agreement, the Toll Agreement, we find no merit in the stand of Revenue in this regard. The learned Departmental Representative for the Revenue also was of the view that no part of slump price is to be attributed to the know-how, patents and trademarks, since the same has not been acquired by the assessee. Even if we accept the said stand of learned Departmental Representative for the Revenue, ultimately after the slump price has been attributed first to the value of tangible assets, then the balance is to be attributed to intangible assets and once the same is done and whether it is under the umbrella of know-how, trademarks, patents or goodwill, it makes no difference since all these are covered under the umbrella of intangible assets, which are eligible for claim of depreciation under section 32(1)(ii) of the Act. The goodwill is also an intangible asset eligible for said depreciation as held by the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). In view thereof, we find no merit in the stand of learned Departmental Representative for the Revenue and the same is rejected.

The next issue is whether slump price can be bifurcated between value of tangible and intangible assets. The Hon’ble Punjab & Haryana High Court in Shreyans Industries Ltd. Vs. JCIT (2005) 277 ITR 443 (P&H) has laid down the proposition that in case slump payments have been received for all the rights transferred including the assets transferred, then consideration has to be allocated amongst the said assets.

The Hon’ble High Court thus, held that in the case of slump sale wherein both the parties had relied on Surveyor’s report in determining the consideration paid in lump sum, then depreciation was to be allowed on cost of fixed assets as per Surveyor’s report.

Further, the Hon’ble High Court of Delhi in Triune Energy Services (P.) Ltd. Vs. DCIT (supra) while considering the case of slump sale referred to the AS-10 and upheld the bifurcation of value of slump price over cost of tangibles and intangibles.

The Hon’ble High Court in CIT Vs. Pepsico India Holdings P. Ltd. (supra) had held that the valuation undertaken by an independent Valuer was in respect of slump price, was well accepted method and hence, we find no merit in the order of CIT(A) in rejecting the same.

The CIT(A) while denying the claim of assessee had placed reliance on the ratio laid down by the Hon’ble Supreme Court in Saharanpur Electric Co. Ltd. Vs. CIT (supra), wherein the proposition was laid down in case of seller of business and it was held that there was no merit in allocating slump price over the value of assets. First of all, the said ratio is in respect of assessment year prior to amendment and in the case of seller of business. Further, AS-10 of Accounting Principles also provide for the working of value of tangible and intangible assets and once the same is so allocated, the assessee is entitled to the claim of depreciation on such assets. The total consideration exchanged between the parties was Rs.153.18 crores. The assessee has allocated sum of Rs.27.49 crores to the value of assets including plant & machinery which has been taken over by the assessee. Further, the assessee had allocated sum of Rs.125.68 crores to the value of know-how, patents and trademarks, and goodwill. The said exercise was carried out in a systematic manner by the Valuer and in the absence of findings of any fallacy in the said distribution, there is no merit in rejecting the values adopted by the assessee. So, sum of Rs.153.18 crores in the first instance is to be allocated to cost of tangible assets, further to the value of trademarks, patents and know-how and the balance to the goodwill. The assessee had undertaken the allocation in assessment year 2003-04, which has been accepted in the hands of assessee. Further, it may be pointed out herein itself that the assessee has been allowed depreciation on the value of know-how, patents and trademarks by the Assessing Officer, which has not been disturbed in the preceding year. However, the depreciation claimed on goodwill was not allowed to the assessee, which was allowed by the Tribunal in turn, following the ratio laid down by the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra).

The learned Departmental Representative for the Revenue placed heavy reliance on the ratio laid down by the Delhi Bench of Tribunal in Osram India (P) Ltd. Vs. DCIT (supra), wherein the issue decided was on depreciation on goodwill. The Tribunal held that the said depreciation would not be allowed unless and until it is shown that the value of such goodwill is in fact value of intangible assets such as know-how, patents, copyrights, trademarks or any other business or commercial rights of similar nature being intangible assets. However, the said proposition now stands reversed by the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). The second aspect of the said decision was that wherein it has been held that the view taken by the Assessing Officer i.e. allowing depreciation on the whole amount of goodwill without any bifurcation if it was in accordance with law could not be disturbed, but if the same mistake had been committed by the Assessing Officer, which is not in accordance with law, then the said mistake cannot be perpetuated on the basis of rule of consistency. We have already decided the issue at length vis-a-vis claim of assessee on the value of tangible assets and intangible assets and in the absence of any mistake being pointed out by the Department in the bifurcation of amounts, then the said proposition cannot be allowed. In any case, the basis for bifurcation is the valuation report of an independent Valuer and the same cannot be tinkered.

The learned Departmental Representative for the Revenue has referred to the first and second additional evidence filed in Paper Book Vol-2 which is ICI India Ltd.’s annual report for financial years 2001-02 and 2002-03, which had been obtained from public domain. However, the learned Departmental Representative for the Revenue has not referred to any of the aspects of the said and the same is thus, not admitted.

In respect of third additional evidence i.e. Copy of Company News service – London Stock Exchange, the learned Departmental Representative for the Revenue fairly pointed out that the same may be ignored and hence, the same is ignored. In respect of fourth additional evidence i.e. valuation report of tangible assets of the assessee, which has been filed by the assessee also and already considered by the CIT(A) and hence, there is no merit in the claim of learned Departmental Representative for the Revenue that the same being additional evidence.

Further, the learned Departmental Representative for the Revenue filed Paper Book Vol-3, which is again additional evidence. However, the learned Departmental Representative for the Revenue after going through the said documents at serial No.1 to 3 pointed out that the same are to be ignored for deciding the issue and hence, the same are dismissed.

Another additional evidence by way of Paper Book Vol-4 filed, in which the Revenue had filed the relevant portions of notes in respect of disinvestment of assets of Synetix in the annual report of ICI India Ltd. However, the learned Departmental Representative for the Revenue only

referred to pages 35 and 47. However, the learned Departmental Representative for the Revenue has failed to submit the reasons favouring for its admission and in the absence of the same, we find no merit in the plea of learned Departmental Representative for the Revenue. Further, the learned Authorized Representative for the   assessee has also objected to its admission. However, we are rejecting the same. In any case, the treatment of receipt in the books of account of seller would not decide the issue vis-a-vis the treatment of said assets in the hands of assessee.

Before parting, we may also point out that as per the Toll Conversion Agreement, the value of Panki assets was taken at Rs.1 lakh. However, the CIT(A) had worked out the cost of 279.30 acres i.e. total landholding of ICI India Ltd. at Rs.174 crores; in case the same rate is applied to 27.52 acres, which was the portion of land on which catalyst business was carried on, then the same would work to Rs.17.37 crores. The learned Authorized Representative for the assessee fairly admitted that the value of Rs.17.37 crores be attributed to Panki assets. However, revised allocation value of land at Panki would be Rs.13 crores, out of total slump price of Rs.153 crores. Accordingly, we direct the Assessing Officer to re-compute the value of both tangible and intangible assets, accordingly. Following the same proposition, we hold that the assessee is entitled to claim the depreciation on the value of tangible assets and further on know-how, trademarks and patents and also on the goodwill. The assessee has also claimed depreciation on non-compete fees. The Assessing Officer is also directed to allow depreciation on non-compete fees of Rs.3.51 crores.

The next aspect of the issue is that where the assessee had already bifurcated slump price over the cost of tangible assets, value of know-how, trademarks, patents and balance to the goodwill in the preceding year i.e. assessment year 2003-04 and depreciation having been allowed to the assessee in the preceding year, consequent to which the said assets were part of block of assets and during the year under consideration, depreciation is claimed on the WDV of the said assets as on the start of financial year, then can the authorities disturb the same?. The claim of assessee vis-a-vis depreciation on tangible assets, know-how, patents and trademarks, goodwill and non-compete fee have either been allowed by the Assessing Officer or by the Tribunal in assessee’s own case in assessment year 2003-04. The value of the said assets and allocation of price amongst tangible and intangible assets had been accepted in preceding year and depreciation has been claimed and allowed in the hands of assessee. Once the assets had entered into block of assets and have already been allowed, the depreciation and the WDV of the said assets had been determined in the preceding year, which is brought forward at the start of financial year, then the assessee is entitled to claim the depreciation on the said WDV or not, was the next issue which was elaborately argued before us.

 Both the learned Authorized Representatives referred to different parts of section 43(6) of the Act. The learned Authorized Representative for the assessee referred to clause (c) of section 43(6) of the Act, which talks of `block of assets’. However, the learned Departmental Representative for the Revenue placed reliance on clause (b) of section 43(6) of the Act. The learned Departmental Representative for the Revenue was of the view that in case depreciation has not been allowed correctly in the preceding assessment years, then the same can be looked into by the Assessing Officer in succeeding year. He thus, emphasized that when an error had been made by Assessing Officer while working the value of assets under clause (b), then the same can be looked into afresh while deciding the case of allowability of depreciation in succeeding year. We find no merit in the stand of Revenue since after insertion by the Taxation Law (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 01.04.1988, the concept of ‘block of assets’ had been brought on Statute. The said section very clearly provides that aggregate of WDV of all assets falling within the ‘block of assets’ at the beginning of previous year and adjusted, could be increased by the cost of any asset acquired during the previous year and could be reduced by the money payable in respect of any asset, which is falling under ‘block of assets’, which has been sold or discarded, and on the balance, the assessee is entitled to claim depreciation. In view of the amendment to the Act and in view of the concept of ‘block of assets’ what has to be seen is the aggregate WDV of assets which are falling within the same block at the beginning of previous year, that is the first step. Thereafter, in case any new asset is acquired, then the value of such asset is to be included; and in case any such asset from the ‘block of assets’ is sold, then the value of same is to be excluded. However, none of the authorities can tinker with the WDV of the assets for any reason whatsoever. Once the asset has entered into ‘block of assets’ and thereafter, depreciation has been allowed and in the succeeding year, the WDV of such asset is to be accepted as sacrosanct and depreciation has to be allowed on the same. Such is the proposition laid down by the Hon’ble Bombay High Court in Director of Income Tax (IT) Vs. HSBC Asset Management (I) (P.) Ltd.

Further, the Hon’ble Bombay High Court in the case of CIT Vs. G.R. Shipping Ltd. in Income Tax Appeal No.598 of 2009, vide judgment dated 28.07.2009 had dismissed the appeal of Revenue on the question of depreciation to be allowed under section 32 of the Act. The Tribunal while deciding the said issue in ITA No.822/Mum/2005, relating to assessment year 2001-02, vide order dated 17.07.2008 had placed reliance on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. G.N. Agrawal (1996) 217 ITR 250 (Bom) for the proposition that after the amended scheme of depreciation of ‘block of assets’, the individual assets lose its identity and the depreciation should be allowed in respect of whole of the block. The Tribunal held that after amendment w.e.f. 01.04.1988, the individual assets have lost its identity and for the purpose of allowing depreciation only the ‘block of assets’ had to be considered and if the ‘block of assets’ was owned by the assessee and used for the purpose of business, depreciation will be allowed. Thus, the test of user had to be applied upon the ‘block’ as a whole instead of upon the individual asset. The Tribunal further held that except for the first year when the issue has to be seen whether the same was put to use, however, where the assessee has already used the asset for the purpose of business and had entered the ‘block of assets’, then the assessee was entitled to claim depreciation. The said proposition of the Tribunal was upheld by the Hon’ble Bombay High Court in judgment dated 28.07.2009 (supra). We find support from the aforesaid ratio laid down by the Hon’ble Bombay High Court.

The learned Departmental Representative for the Revenue in this regard placed reliance on the decision of Hon’ble High Court of Kerala in B. Raveendran Pillai Vs. CIT (supra). However, in view of the decision of the jurisdictional High Court on the issue in hand, we find no merit in the reliance placed upon by the learned Departmental Representative for the Revenue.

The stand of learned Departmental Representative for the Revenue that there could be instances where WDV can be changed and since in the present case there was allocation which was different from the actual cost, then harmonious construction was to be given to the provisions of said section does not stand. We find no merit in the stand of learned Departmental Representative for the Revenue that actual cost for entire block could be examined in the succeeding year if there were circumstances necessitating such change. We find no merit on the same and the same is rejected. Since we have decided the issue both on merits and also on preliminary issue of whether the WDV of assets could be disturbed in the succeeding year, we hold that the issue of enhancement whether can be made by the CIT(A) or not becomes academic in nature and the same is not adjudicated. Accordingly, we direct Assessing Officer to allow claim of depreciation on tangible assets; know-how, trademark and patents; goodwill and non-compete fee. However, the value of intangible assets would be reduced by Rs.13 crores on account of value of Panki land. The grounds of appeal raised by the assessee are thus, partly allowed.

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