Shares, being tangible assets, depreciation not allowable u/s 32(1)(ii)

DCIT Vs Sanjana Cryogenics Storages Ltd. (ITAT Mumbai)

Shares are financial assets classified as tangible assets because they derive value from contractual claims. Hence, the same is not depreciable u/s 32 (1) (ii) of The Act.

Facts-

The assessee is a company engaged into the business of running of ammonia storage terminal, generation of power, dealing in ammonia, and trading/investing in shares, mutual funds, and derivatives. During scrutiny assessment, AO disallowed depreciation amounting to Rs 4,44,07,662/– and computed the total income of the assessee at ₹ 132,394,070/–.

The CIT (A) deleted the disallowance. Being aggrieved, Revenue filed an appeal before ITAT.

Conclusion-

Held that Section 32 (1) (ii) defines intangible assets as ‘know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. Even otherwise shares are financial assets classified as tangible assets because they derive value from contractual claims. Hence, the same is not depreciable u/s 32 (1) (ii) of The Act.

Held that we reverse order of learned CIT – A and restore the order of the learned assessing officer disallowing depreciation of Rs 4,44,07,662/- on shares purchased by the assessee holding that it is not a depreciable intangible asset.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

01. These are the three appeals filed by the learned Deputy Commissioner Of Income Tax – 3 (3) (1) Mumbai (The Learned AO) against the order of the learned Commissioner Of Income Tax (Appeals) – 8, Mumbai [ The Learned CIT [A]] for assessment year 2013 – 14, 2014 – 15 and 2016 – 17.

02. The learned AO has raised following grounds of appeal in ITA No. 3632/Mum/2018 for assessment year 2013 – 14 against the order of the learned CIT

– A dated 23/3/2018

“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs. 4,44,07,662/- claimed by the assessee in respect of Iron Ore rights, without appreciating the fact that the shareholders of RRS Minerals i.e., Mr. Bharat Bussa and Mrs. Rita Bussa who got 15.75 crores each as per the agreement dated 15.10.2009 were not having any right and the so called right for purchase of iron ore was with the company i.e. RRS and not with the shareholder and the assessee has never bought the business rights from RRS on which assessee is claiming depreciation?

2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs. 4,44,07,662/- claimed by the assessee in respect of Iron Ore rights, without appreciating the fact that the decision of the Hon’ble Supreme Court in the case of Mysore Minerals Ltd. vs. CIT (1199) 101 Taxman 166 (SC) is distinguishable from the facts of the instant case under consideration as the assessee has never bought the business rights from RRS on which assessee is claiming depreciation?

3. (a) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs.4,44,07,662/-claimed by the assessee in respect of Iron Ore rights by taking cognizance of the previous assessment year i.e. AY 2011-12 which was only processed u/s. 143(1)?

3.(b) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in directing the AO to delete the disallowance of depreciation of Rs.4,44,07,662/-claimed by the assessee in respect of Iron Ore rights by taking cognizance of the previous assessment year i.e. A. Y. 2012-13 where the issue was not examined and it is the impugned assessment year only that the facts in respect of depreciation in respect of Iron Ore Rights disallowed by AO were verified and brought on record by the AO?

3.c) Whether in view of the above facts the decision of the Hon’ble Bombay High Court in the case of Madhukar C. Ashar vs. Union of India [2016] 69 taxmann.com 221 (Bombay), is correctly applied and relied on by the CIT(A)?

4. The appellant craves leave to amend, alter, delete or add grounds which may be necessary.”

03. Brief facts of the case shows that assessee is a company engaged into the business of running of ammonia storage terminal, generation of power, dealing in ammonia and trading/investment in shares, mutual funds and derivatives. It filed its return of income on 30/9/2013 declaring a total income of ₹ 87,984,410/– and computing book profit u/s 115JB of the act at ₹ 93,484,751/–. Assessee has also shown a speculation loss of ₹ 7,32,376/-and claimed the same to be carried forward.

04. Return of the assessee was selected for scrutiny. Consequently the assessment order u/s 143 (3) of The Income Tax Act, 1961 (The Act) was passed by the learned AO on 31/3/2016 wherein he disallowed depreciation amounting to Rs 4,44,07,662/– and computed the total income of the assessee at ₹ 132,394,070/–.

05. Against this order, assessee preferred an appeal before the learned CIT – A, who by order dated 23/3/2018, deleted disallowance of depreciation of Rs 4,44,07,662/–. Aggrieved by that order, learned AO is in appeal before us.

06. Facts related to the disallowance of depreciation as culled out from assessment order is as Under:-

“6. Depreciation on Iron Ore Rights

6.1 in the assessment proceedings, it is noticed that the assessee company has claimed depreciation of ₹ 65,940,884 on Iron Ore rights Under block of
‘intangible asset’. In the assessment proceedings, the assessee has been asked to furnish the details of the same and its explanation for allowability of the claim of depreciation on such rights.

6.2 In response, the assessee company vide its AR’s letter dated 8/2/2016, 11/3/2016 and 21/3/2016 submitted the details and the explanation, as per which, the assessee company has taken over the company RRS minerals resources private limited which had exclusive Iron ore rights in respect of Iron ore extracted from the mines owned by Messer’s M S Gharse minerals ( MSMG). The assessee submitted agreement dated 9/8/2006 and entered into by the erstwhile mine owners MSMG through which RRS acquired exclusive right on a long-term in respect of purchase of Iron Ore extracted by MSMG. The assessee had paid ₹ 11.30 crores to MSG M for acquiring the long-term rights to purchase the Iron ore extracted by MSG M at a predetermined rate until the year 2027. The assessee further submitted that vide agreement dated 14/10/2009, the assessee company acquired shares of the promoters of RRS. By Virtue of 100 % holding of RRS, it becomes wholly owned subsidiary. The assessee company thereafter approached honourable Bombay High Court for merger of its wholly owned subsidiary and court has passed an order on 15/10/2010 permitting merger with effect from 15/10/2009 and on merger, all these deposits and preoperative expenses incurred by RRS along with payment made by the company to the promoter of RRS for acquiring 100 % ownership of RRS and other expenses aggregating to ₹ 46.89 crores have been capitalized as ‘Iron ore rights’ during the assessment year 2011 – 12. The assessee submitted that these rights are valuable commercial rights through which assessee is exclusively entitled to buy Iron ore extracted by the owners of the mine at predetermined price of ₹ 155 per metric ton till the year 2027. Therefore, the claim of treating said rights as intangible assets and subsequent claim of depreciation at the rate of 25% is correct and shall be allowed.

6.3 The above submission of the assessee company, all the agreements, order of the honourable Bombay High Court and other facts of the case of been examined carefully. On such examination, the assessee submission is found to be not tenable on the basis of the following:-

i. Assessee has shown Iron Ore rights and claimed depreciation by capitalising various amounts out of which two major payments are ₹ 11.30 crores paid to MSG M for buying the right of purchasing Iron Ore and ₹ 31.58 crores paid to shareholders of RRS for purchase of shares in RRS

ii. Clearly the shareholding of RRS minerals i.e. Mr. Bharat Busa and Mrs. Rita Busa who got ₹ 15.75 crores each as per the agreement dated 15/10/2009 were not having any right and the so-called right for purchase of tyrants order was with the company and not with the shareholder.

iii. A latin saying “ nemo det quod non habit’ which basically mean you can’t give what you do not have. Mr. Bharat Busa and Mrs. Rita Bussa were never having any intangible right in their individual capacity which can be transferred to the assessee. In fact, the mining rights were with MSGM and only purchase right were acquired by the assessee by paying amounts to MSGM.

iv. Clearly, assessee has never bought the business a right from RRS on which assessee is claiming depreciation. As per normal accounting entry passed in the books of accounts of the assessee company, the investment in shares of RRS would have been cancelled after the High Court order of merger of RRS with the assessee company and consequently, no asset would be remaining on which assessee could claim depreciation.

v. There is a clear difference between the amount paid to RRS and the shareholders of RRS. The amount paid to company is for the purchase of long-term intangible right to purchase Iron Ore at a predetermined rate from MSG are an amount paid to shareholder of RRS is to purchase the company.

vi. Assessee submission regarding capitalization of the amount paid to shareholder of RRS is not acceptable and not found to be tenable as no asset is created apart from investment in shares and on such assets no depreciation can be claimed or allowed.”

7. Accordingly, the learned assessing officer computed the disallowance on proportionate basis on ₹ 31.58 crores. He computed that Total Depreciation claimed is ₹ 65,940,884/– on total expenditure incurred of ₹ 46,89,12,953/–. Ld AO computed that expenditure on which depreciation is not allowable is ₹ 315,787,820 and therefore proportionate depreciation of Rs 4,44,07,662/– [ 6,59,40,884/-*31,57,87.820/ 46,89,12,953] is disallowed.

8. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A who dealt with the whole issue as Under:-

“3.2.1 Both the grounds no. 2 & 3 pertain to disallowance of Rs. 4,44,07,662/- on account of a part of total depreciation claimed on mining rights. Hence, dispose off the same at one go herein below.

Facts and contentions filed by the assessee

3.2.2 During the course of appellate proceedings, the authorized representative of the appellant discussed the grounds and written submissions on record. The relevant extract of the same corresponding to the above ground is reproduced as following:

1. The appellant resolved to venture into a new line of business of procuring and Exporting of Iron Ore during FY 2009-10. In the search process to carry out this business effectively, the appellant came to know that RRS Minerals Pvt Ltd (RRS’) had acquired sole long term buying rights for Iron-ore from a mine owner at Goa. Those rights entitled RRS to procure Iron Ore at a predetermined price from Mahabaleshwar Gharse& Associates till the year 2027 Accordingly, RRS was sole owner of commercial rights to but entire Iron Ore extracted from the mines of Mahabaleshwar Gharse & Associates at Goa till the year 2027 at a pre-determined price.

2. In order to acquire these rights from RRS, the appellant resolved to acquire the said RRS from its promoters for a total consideration of Rs. 31.50 Crores. In addition to the price agreed for acquisition, the appellant incurred costs of Rs. 787,820 in respect of stamp duty for transfer of shares and accordingly total costs of acquisition of RRS by the appellant stood at Rs. 315,787,820. The appellant incurred further costs of Rs. 153,225,133 and capitalized total costs of Rs. 468,912,953 in respect of Iron Ore in FY 2010-11 as under

3. The AO has accepted in principle accepted acquisition of Commercial business rights in the form of rights to procure Iron Ore at a pre­determined price for a period upto the year 2027. The AO has also accepted that these rights are Intangible Assets and has allowed depreciation in respect of Furthers costs of Rs. 153,225, 133 incurred. The AO however has disallowed depreciation in respect of costs of Rs. 315,787,820 incurred to acquire RRS from its promoters. Accordingly, the AO has disallowed depreciation of Rs. 4,44,07,662 out of total depreciation of Rs. 6,59,40,884 claimed by the appellant in respect of Iron Ore rights. The disallowance has been made in proportion of Costs of acquisition of RRS to Total Costs of acquisition. In para 6.3 of the assessment order, the AO has discussed reasons for the disallowance which are however contrary to the facts and prevalent applicable laws.

4. By virtue of acquisition of RRS from its promoters, RRS became wholly owned subsidiary of the appellant assessee on 15/10/2009. The appellant thereafter moved an application before Hon’ble High Court of Bombay for permitting merger of the said RRS with the appellant company so as to effectively control the business of procuring and Exporting of the Iron Ore. Hon’ble High Court of Bombay allowed merger of RRS with the appellant with effect from the original date of acquisition of RRS i.e. 15/10/2009. As per the norms and order of Hon’ble Bombay High Court, all the assets and liabilities of RRS were merged with the appellant’s company and recorded as such by the appellant. The amount of consideration paid for acquisition of RRS has been capitalised under the heading ‘Intangible Assets – Iron Ore Rights”.

5. On these facts, we most humbly submit that the AO was not at all justified in rejecting assessee’s claim for depreciation in respect of the costs of acquisition paid for acquiring RRS from its promoters. We most humbly submit that the assessee acquired a valuable right to but entire Iron Ore extracted from the mines of Mahabaleshwar Gharse& Associates (MGA) at a price of Rs. 155 per metric tonne for the period upto the year 2027. This would mean that these rights would entitle the assessee company to procure Iron Ore from MGA at a price of Rs. 155 per tonne for a period of apx. 17 years from the date of acquisition.

6. We most humbly submit that price paid for acquisition of RRS was essentially a price for acquisition of these rights as the said company does not have any other assets worth considering. We are submitting the balance sheet of RRS as at 31/03/2009 to show that the price has only been paid for acquisition of RRS and not for any other asset. Further, having allowed depreciation in earlier 2 years, the AO was not justified in disallowing the depreciation in this respect in this year. We most humbly pray your honour to kindly allow the assessee’s claim.

Decision

3.2.3 This ground pertains to disallowance of depreciation of Rs. 4,44,07,662/ claimed by the appellant on Iron Ore rights as Intangible assets. The Assessing officer has discussed this issue at para 6 of his order. During the assessment proceedings, the assessing officer observed that the assessee company has claimed depreciation on the Iron ore rights under the Block Intangible Assets’. On being asked about the allowability of the claim of the same, the assessee company contended before the assessing officer that it had taken over the company RRS Mineral Resources Pvt. Ltd. (RRS) which had exclusive Iron Ore rights in respect of Iron Ore extracted from some Iron Ore mines at Goa, owned by one M/s M.S. Gharse Minerals (MSGM.)

Brief facts of the case are that through an agreement dated 09.08.2006 entered into by RRS and mine owners MSGM, RRS acquired exclusive rights for a long term in respect of purchase of iron ore extracted by MSGM for a consideration of Rs.11.30 crores. Thereafter, vide agreement dated 14.10.2009, the assessee company acquired shares of RRS thereby becoming wholly owned subsidiary for a consideration of Rs.31.50 crores. Subsequently, Hon’ble Bombay High Court vide Order dated 15.10.2010 permitted merger of its wholly owned subsidiary w.e.f 15.10.2009. The assessee company capitalized all these deposits and other expenses aggregating to Rs.46.89 crores as Iron Ore Rights during A.Y.2011-12. The said rights are, therefore, treated as Intangible assets and subsequently, depreciation at the rate of 25 % has been claimed by the assessee from the year A.Y.2011-12 onwards. The successive AOs have for both AY 11-12 and AY 12-13 allowed depreciation in respect of the costs of Rs. 11 Crores paid in terms of agreement dated 24/11/2009 as well as also in respect of entire costs of borrowings so capitalized, i.e. in respect of the entire amount of Rs 46.89 crores. The present AO has, however, for the first time for AY 13-14 and then for AY 14-15, disallowed depreciation partly i.e. only in respect of Rs. 31,57,87,820 being the amount of stamp duty and transfer charges and sale consideration paid by the appellant in respect of buying of the company RRS from its shareholders. This has been done on a pro-rata basis this year, as full claim already stood allowed for earlier years,

3.2.4 In para 6.3 of the assessment order, the AO has discussed reasons for the disallowance so made by him. Crux of the decision of the AO was that the shareholders of RRS Minerals Resources Pvt. Ltd to whom the consideration of Rs. 31.50 Crores was paid, were not having any rights and the so called rights for which the consideration was paid, were held by the company RRS. He further took a view that one can’t give anything which he doesn’t have. The AO has accordingly held that the shareholders/ directors of the company RRS were not holding intangible nights in their individual capacity which could have been transferred to the appellant company. The AO further stated that as per normal accounting entry passed in books of account of the assessee company, the investment in the shares of RRS should have been cancelled after the order of Hon’ble Bombay High Court is received and consequently, no asset would be remaining on which assessee could claim depreciation. Thus, the AO has disallowed the depreciation in respect of the amount of Rs. 31.50 Crores paid to the owners of RRS to buy the company plus expenditures incurred on stamp duty and transfer charges.

3.2.5 In the course of appellate proceedings, Authorized representative( AR) of the appellant company submitted that the appellant company has bought the company RRS only for acquiring the valuable intangible business rights held by the said company RRS. The AR placed photo copies of all agreements on records and Submitted that the intent for buying the company RRS is quite evident from the covenants specified clause (i) and clause (j) of the agreement dated 14/10/2009 which are reproduced as under:-

“(i): In the premises M/s. RRS Minerals Resources Pvt. Ltd (the company) is holding buying and selling rights in respect of Iron Ore/ Fines extracted out of mines known as Garco Mines at ZamblimolachoSoddo’ situated at Muguli and CostiSarvoderm, Goa, as per the terms of Memorandum of Agreement dated 28 July 2006 and an agreement dated 9 August, 2006.

(i): The purchasers being interested to acquire the business and the aforesaid rights of the company (i.e. RRS) of buying and selling rights in respect of Iron Ore/ Fines extracted out of mines known as Garco Mines at Zamblimolacho Soddo! situated at Muguli and CostiSarvoderm, Goa, is required to acquire the entire paid up share capital and control over the company and thereby the business and aforesaid rights (rights of buying and selling rights in respect of Iron Ore/ Fines extracted out of mines known as Garco Mines at Zamblimolacho Soddo) of the company.”

3.2.6 The AR by placing his reliance on these covenants submitted that the appellant company always intended to acquire the business and the aforesaid intangible rights and the payment made to buy the said company was thus only for acquisition of intangible rights which was a compulsory tool to commence the business of mining purchasing and selling of Iron-ore. The AR thus submitted that the appellant company has rightly recognized the said payment of Rs. 31.57 Crores as the costs of intangible rights.

3.2.7 It is also seen from the audited balance sheet of the company – RRS as well as a trial balance as at 12/10/2009 has been attached with the agreement dated 14/10/2009. The AR submitted that an analysis of the audited balance sheet annexed with the agreement as well as the trial balance as at 12/10/2009 would show that the company RRS has very small amount of tangible Fixed Assets at only Rs. 87.194. Apart from these fixed assets of Rs. 87.194, the company RRS had only development costs of Rs. 81.07 Lakhs in respect of the mining rights so held by the said company. The AR thus submitted that the appellant company has paid the consideration for the intangible rights the said company RRS possessed as there were no other assets which could have carried any substantial value. Thus, the value of Rs. 31.50 Crores paid by the appellant company was only due to the existence of valuable commercial intangible rights related to Iron Ore and not for making any investment in shares of the company RRS which did not carry any value at all.

3.2.8 It is also found that Capitalization of the entire amount of Rs. 46.89 Crores have been accepted in earlier assessments and the depreciation has been denied for the first time in respect of the part of the WDV in AY 2013­14 by breaking up the opening WDV as on 01/04/2012 in the proportions of costs so capitalized.

3.2.9 I have perused the submissions filed by the appellant company and the assessment order. It is noticed that the dispute is only in respect of the payment of Rs. 31.50 Crores made by the appellant company to the shareholders for buying the company and associated costs of stamp duty and transfer of Rs. 687,820. As regards other payments as well as the costs of borrowing obtained by the appellant for entire amount of investments, the AO has allowed depreciation and has recognized existence of intangible assets. It is further noticed that in earlier year – AY 2012­13, scrutiny assessment has been made and the Intangible rights have been recognized as such and full amount of depreciation as claimed by the appellant has been allowed. Same was the case for AY 2011-12, where the assessment was although completed under section 143(1) of the Income Tax Act, 1961.

3.2.10 The AO while making the disallowance was primarily of the view that the shareholders of the company did not have any intangible right with them and therefore they could not have sold those rights. The AO was predominantly of the View that the payment to shareholders of RRS was made for making investment in shares of RRS and not for buying any intangible rights from them.

3.2.11 It is however observed from the agreement dated 14/10/2009 that the said agreement was a tripartite agreement wherein the company RRS was also a party to this agreement. In that agreement, the company RRS which was holding valuable rights was also a party to each of the covenant therein and was also accordingly liable to act upon and implement the same. It is further noticed from the covenants in clause (i) and (i) on page 5 of the agreement that the appellant has specifically conveyed its interest of acquiring the business and the intangible rights of exclusively buying and selling of Iron Ore extracted from the mines known as Garco Mines, Goa.

3.2.12 Section 32 of the Income-Tax Act, 1961 entitles a taxpayer to claim depreciation at prescribed rates for assets owned and used by the taxpayer for assets owned and used for purposes of his business or profession. The above section clearly states a fact that in order to claim depreciation, the asset is to be owned and used by the taxpayer. In the instant case, the Iron ore rights are owned and used by the previous owner which were later on acquired by the appellant company. In the landmark judgement of Hon’ble Apex Court of Mysore Minerals Ltd v. CIT (1999) 101 Taxman 166 (SC), the Hon’ble Court held that when an assessee is in possession of any rights in its own title and is also exercising such dominion over those rights and having full right to use and enjoy its usufruct in its own right, it is entitled to depreciation in respect of such rights or property. The relevant extract of the order is reproduced here as follows:

Parks in Principles and Practice of Valuation (fifth edition, at page 323) states: As for building, depreciation is the measurement of wearing out through consumption, or use, or effluxion of time. Paton has in his Account’s Handbook (third edition) observed that depreciation is an out of pocket cost as any other costs. He has further observed–the depreciation charge is merely the periodic operating aspect of fixed asset costs In Badiani P. K. v. CIT 1976 (105) ITR 642, the Supreme Court has observed that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place An overall view of the above said authorities shows that the very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time It is well-settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings, for the purpose of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession. We do not think such a benefit-to-none situation could have been intended by the Legislature. The finding of fact arrived at in the case at hand’ is that though a document of title was not executed by the Housing Board in favour of the assessee, but the houses were allotted to the assessee by the Housing Board, part payment received and possession delivered so as to confer dominion over the property on the assessee where after the assessee had in its own right allotted the quarters to the staff and they were being actually used by the staff of the assessee. It is common knowledge, under the various schemes floated by bodies like housing boards, houses are constructed on a large scale and allotted on part payment to those who have booked. Possession is also delivered to the allottee so as to enable enjoyment of the property. Execution of documents transferring title necessarily follows if the schedule of payment is observed by the allottee. If only the allottee may default the property may revert back to the Board. That is a matter only between the Housing Board and the allottee. No third person intervenes. The part payments made by allottee are with the intention of acquiring title. The delivery of possession by the Housing Board to the allottee is also a step towards conferring ownership. Documentation is delayed only with the idea of compelling the allottee to observe the schedule of payment. For the foregoing reasons, in our opinion, the High Court was not right in taking the view which it did. The appeal is allowed. The judgment of the High Court is set aside. The question referred by the Tribunal to the High Court is answered in the negative, that is, against the Revenue and in favour of the assessee. No order as to costs

3.2.13 It is seen that the appellant is in possession of Mining Iron Ore rights for exclusive purchase and sell of iron Ore extracted from the mines at Goa. The appellant has also exercised its dominion over these rights and has been using these rights and procuring Iron Ore by exercising its exclusive rights to buy the Iron Ore extracted from the Garco Mines, Goa and is exporting the same.

3.2.14 In the matter of Surana Pharmaceuticals Pvt. Ltd V. CIT 243 ITR 218 (Karnataka), Hon’ble Karnataka High Court while relying on the decision of Hon’ble Apex Court in the case of Mysore Mineral Vs CIT held that where the appellant has bought a property through acquisition of shares without having registered a sale deed in favour of the company, the company is entitled to depreciation in respect of the property so purchased. Hon’ble High Court appreciated that the ownership of the property was vested by acquiring shares in a society. According to section 2(47)(vi) of the Income Tax Act, 1961, “transfer” in relation to the capital asset includes any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons, or by way of any agreement or in any other manner whatsoever). This has the effect of transferring or enabling the enjoyment of immovable property. The ratio of this judgment could also be applied to the case at hand where valuable rights have been acquired through acquisition of shares of the company RRS.

3.2.15 in the matter of Madhukar C. Ashar v. Union of India [2016] 69 taxmann.com 221 (Bombay), Hon’ble Bombay High Court has held that where there is no change in facts and in law, past practice followed and accepted by the revenue cannot be allowed to be changed. Same was the position of law declared by the Supreme Court of India in the matter of Bharat Sanchar Nigam Limited v. UOI [2006] 282 ITR 273 (SC). In para 6 of the order, Hon’ble Bombay High Court held as under:

“6: We find that the impugned order of the CIT completely ignores the past practice accepted by the revenue in orders passed under section 143(3) of the Act taxing the income of the AOP on allocation in the hands of its individual members. Nothing is indicated in the impugned order to show that there has been any change in facts or in law, which would warrant taking a different view from that taken by the Assessing Officer from AY 2005-06 onwards. Although the principle of res judicata may not specifically apply, yet where a fundamental aspect running through various Assessment Years is subject of consideration then as held by the Apex Court in Radhasoami Satsang v. CIT [1992] 60 taxman 248, the same approach be adopted in the absence of change in facts and law. Further, in Bharat Sanchar Nigam Limited v. Union of India [2006] 282 ITR 273 the Apex Court held that though the principle of res judicata would not apply to tax matters as cause of action for each assessment year is distinct. Yet in case there is no change in the factual position or the law, the views expressed in one year are binding for the subsequent years. This on principle of consistency. Therefore, if the impugned order wants to depart from consistent view taken earlier, it must so justify. Moreover, the impugned order also completely ignores the fact that there has been no change amongst the members of AOP as existing since AY 2006-07 till date. The assessment order for AY 2006-07 and orders subsequent thereto do reflect a determinate share being attributed to each of the members of the AOP. This submission has not been adverted to in the impugned order while proceeding to hold that the shares of the individual members of the AOP are not determinate. Thus, the impugned order is in breach of natural justice being a non-speaking order.”

It is true that Principle of res judicata does not apply in matters pertaining to tax. However, when there is no change in facts or law, Hon’ble Courts have consistently held that a decision taken in an earlier year shall be binding for a subsequent year unless it is established that the decision taken earlier was per incuriam. Applying the same principle to the facts of this appellant, it is seen that the Appellant has claimed depreciation in respect of such mining Iron Ore rights for the first time in AY 2011-12 and furnished all relevant details of its claim in its return of income including the tax audit report. The appellant then claimed depreciation in respect of such rights for AY 2012-13 and its claim has been allowed after conducting scrutiny assessment. The AO has not pointed out that the orders passed in earlier years are per incuriam or could be distinguished for valid reasons.

3.2.16 In the matter of CIT V. Smifs Securities Limited [2012] 24 taxmann.com 222(SC), the Supreme Court has held that depreciation on similar facts is to be allowed. In this case, one ‘YNS Shares and securities Pvt. Ltd. was merged with the assessee company. The assessee paid consideration over and above the net value of assets acquired and claimed the amount so paid in excess of value as Intangible assets in form of Goodwill and claimed depreciation in that regard. The Supreme Court of India in para 6 of the order has affirmed the findings of lower authorities that the difference between cost of an asset and the amount paid constituted goodwill and that the assessee company in process of amalgamation has acquired a capital right in the form of goodwill because of which the market worth of the assessee company stood increased. The ratio of this judgment squarely covers the issue at hand. In the case of this appellant, it has paid Rs. 31.50 Crores to acquire business and intangible rights in the form of exclusive buying and selling rights for Iron Ore. The value of tangible assets acquired is only Rs. 87,194. It is therefore evident that the payment of Rs. 31.50 Crores has been made by the appellant for acquiring intangible rights and the price paid above the tangible value of assets is thus a price for acquiring these intangible rights. Hon’ble Supreme Court in the referred matter has held that the price paid over and above the value of tangible assets shall be regarded as goodwill which is an intangible asset eligible for allowing depreciation. Similarly, in the case of this appellant, the payment so made over and above the value of tangible asset has been recognized as for the valuable commercial rights under the block heading ‘Intangible Assets’. If not so recognized, this amount would have been recognized as Goodwill. In either case, the appellant would be entitled to depreciation on such intangible assets.

3.2.17 Yet another thing that goes in favour of the appellant is that the appellant has obtained term loan of Rs. 42 Crores from Axis bank by making representation before the bank that it requires money for acquiring these mining rights which shows the intent of the applicant to acquire those rights. The same can be seen from the agreement dated 14.10.2009 which exclusively mentions that the appellant company intended to acquire the Iron Ore rights by acquiring the Shares holding of RRS. Obviously, the Bank before advancing such a huge loan must have done due diligence as regards the use of loan and whether the goods or rights being bought with bank’s money were worth it. Obviously, the factum of payment is not in doubt. AO too has not doubted it. He has only raised technical objections.

3.2.18 It is also found that around 20% of shareholding of the appellant company is held by Hindalco Industries, a prestigious Birla Group company. The business intentions of the appellant company cannot be suspected. Denying depreciation on the main cost of the business on a technical ground, though that is a misplaced decision alright, is being unnecessarily harsh, particularly when the factum of payment and its sources, being 100% bank loan, are not in doubt even by the present AO.

3.2.19 In view of the facts and discussion in the above paragraphs, I am of the considered view that the AO has denied depreciation by taking a far-fetched view that the payment of Rs. 31.50 Crores is merely to buy shares of the company RRS and thus, no assets eligible for depreciation have been created, which is not a proper view on the basis of facts and the evidence on record as discussed above. Therefore, the AO is directed to delete the disallowance of depreciation of Rs 4,44,07.662/- claimed by the appellant in respect of Iron Ore rights These grounds of appeal are allowed.”

09. Thus, LD AO is aggrieved with the order of the learned CIT – A is in appeal before us.

010. The learned department representative referred to paragraph number 6.3 of the assessment order. He submitted that there were two payments made by the assessee. There is no dispute on allowability of depreciation on a sum of ₹ 11.30 crores paid by the assessee to MSMG for buying the rights of purchasing iron ore. The dispute is with respect to payment of ₹ 31.58 crores paid by the assessee company to the shareholders of RRS minerals private limited for purchase of shares of that company. He submitted that ‘shares’ cannot be  classified as an intangible asset on which depreciation can be allowed. He submitted that shares are not an intangible assets referred to under the provisions of Section 32(1) (ii) of the act. The assessee has claimed depreciation on purchase price of shares of another private limited company. He further submitted that the learned CIT – A has wrongly relied upon the decision of honourable Supreme Court in case of Mysore minerals Ltd versus CIT 101 taxman 166, which is clearly distinguishable. It was stated that the case before the honourable Supreme Court was not with respect to allowability of depreciation on shares. He further submitted that that the learned CIT – A also not correct in saying that assessing officer has allowed the depreciation for earlier assessment years i.e. Assessment years 11-12 and 12-13. He submitted that no depreciation has been allowed to the assessee on sum of ₹ 31.58 crores for purchase of shares. He further submitted that for assessment year 2012 – 13, assessment has already been reassessed by reopening of the assessment where the depreciation has been disallowed. He further submitted that the decisions relied by the learned CIT – A in paragraph number 3.2.14 and 3.2.15 do not have any implication. With respect to paragraph number 3.2.16 where the learned CIT appeal has relied upon the decision of the honourable Supreme Court in CIT versus Smifs securities Ltd, it was stated that the shares purchased by the assessee is not ‘goodwill’ but ‘shares’ of a company. Accordingly, he submitted that the learned CIT – A has erred in allowing the depreciation on purchase of shares holding it to be intangible assets.

011. The learned authorised representative vehemently supported the order of the learned CIT – A. He first referred to the paper book filed by the assessee containing 165 pages. He first referred to page number 163 – 165 of the paper book wherein the complete payment made by the assessee for acquisition of iron ore rights of ₹ 468,912,953 is made. It was stated that a sum of ₹ 315,000,000/– is paid to the shareholders of RRS mineral resources private limited in terms of the agreement dated 14/10/2009 for acquiring the shares of RRS minerals Ltd. On that stamp duty of ₹ 787,820/– was also paid and therefore total payment is ₹ 315,787,820/– which is incurred by the assessee for purchase of shares through which assessee has acquired commercial right over the iron ore extraction rights. He submitted that assessee has purchased shares of RRS Minerals and Resources Pvt Ltd and that company was having intangible assets in the form of Purchase rights of Iron ore. Therefore, assessee in substances did not acquire shares but intangible assets in form of purchase rights of Iron ore. He stated that the dispute is whether depreciation is allowable on this sum or not. He further stated that assessee has also paid ₹ 11 crores on 24/11/2009 for acquiring the commercial right [of exclusive purchase of iron ore from Gharse Mines] from Gharse family who were owners of the mine and there is no dispute of depreciation on the same. He also referred to several other payments made by the assessee on processing fees, stamp duty charges and interest paid which resulted into a total payment of ₹ 469,012,953/– for acquisition of iron ore rights. From the above sum nominal value of the share capital of ₹ 1 lakh is reduced, which is cancelled on the account of merger and therefore the total cost of iron or rights is ₹ 468,912,953. This was capitalized in balance sheet and in depreciation schedule for income tax purposes first in AY 2011-12. The LD AO allowed this claim of assessee u/s 143 (1) rws 154 of the Act. He extensively referred to the contract agreement dated 9/8/2006 and entered into between Gharse family members and RRS minerals resources private limited for buying the commercial right of purchasing iron or extracted at a predetermined price. He therefore submitted that RRS mineral resources Pvt Ltd were having a commercial right. Subsequently on 14th/9/2009, a tripartite agreement was entered into wherein Mr. Bharat and Mrs. Rita, are shown as ‘vendors’, who owned the shares of RRS minerals resources private limited and assessee along with Three Goenka individuals are shown as’ purchaser’. According to this agreement, 10000 equity shares of ₹ 10 each were purchased from vendors at a price of ₹ 315,000,000, paid equally to Mr. Bharat and Mrs. Rita. The agreement also specifically records that RRS minerals resources whose shares are transacted has right of purchasing iron ore in terms of agreement dated 9/8/2006. He further referred to the order of the honourable Bombay High Court dated 15/10/2009 by which RRS minerals and resources private limited, merged with Assessee Company. He further referred to the computation of income of assessee for assessment year 2011 – 12 i.e. which is the first year of claim of depreciation wherein such depreciation was allowed to the assessee. He also referred to the assessment order passed for assessment year 2012 – 13 u/s 143 (3) wherein the depreciation was allowed in the original assessment to the assessee but has been subsequently reopened by issue of notice u/s 147 and disallowance of depreciation was made. He therefore submitted that assessee has acquired mining rights passed by purchasing the right to purchase the iron ore extracted at an agreed price and further thereafter acquired the shares of the company, which was having those rights. He therefore submitted that by these complete acts, what assessee has acquired is an intangible asset on which depreciation u/s 32 (1) (ii) of the act is allowed. He extensively referred to the order of the learned CIT – A and relied on the same. He also extensively quoted the decisions relied upon by the learned CIT – A. He further referred to the decision of coordinate bench in case of Mehta equities limited ITA number 570/M/2015 for assessment year 2010 – 11 dated 21/9/2016 referring to paragraph number 18 stating that where an assets has already entered into a block of assets and is brought forward as opening written down value, there cannot be any question for not allowing the depreciation on the opening amount of WDV of the asset, so long as it continues to be used for the business of the assessee. He further referred to the decision of the honourable Bombay High Court in case of CIT versus Sonic Biochem Extractions Private Limited In Income Tax Appeal Number 2088 of 2013 dated 17th number 2015 to substantiate that the ‘user test’ is required to be satisfied only at the time of the purchase of plant and machinery when it first becomes the part of the block of the assets for the first time and not subsequently. He therefore submitted that the claim of the assessee has been correctly allowed by the learned CIT – A. accordingly, the appeal filed by the learned assessing officer deserves to be dismissed.

012. We have carefully considered the rival contention and perused the orders of the lower authorities. Even at the cost of repetition, but in order to bring clarity on the facts, certain documents placed before us requires to be appreciated.

013. Firstly on 9/8/2006 an agreement was entered into between M/s M S Gharse minerals, a partnership firm which is identified as a ‘seller’ with another company Messer RRS Minerals Resources Private Limited identified as a ‘buyer’ for purchase of iron ore. The seller assured the buyer that it would exclusively provide the buyers with all the iron ore extracted from the mining/please situated at Village Mugali. Price was determined based on margin to be earned by the seller. The buyer has agreed seller to compensate a net margin of ₹ 60 per metric ton for first 1,50,000 metric ton of Iron Ore extracted. Thereafter the margin assured to the seller was of Rs 100/- per ton. It was also stated that buyer paid ₹ 3,000,000/- to the family members of Gharse family. Thus by this agreement undisputedly RRS Mineral and Resources Limited was having an exclusive right of purchase of Iron Ore. This was considered as intangible assets by both the assessee as well as LD AO.

014. On 14/10/2009, an agreement was entered into between Mr. Bharat and Mrs. Rita being parties of the first part known as ‘vendors’ on one part, RRS Mineral Resources Private Limited, being the company as a second part, assessee along with three individuals being the party of the third part i.e. ‘ Purchasers’. According to this agreement, the vendor’s were shareholders and directors of RRS Mineral Resources Pvt Ltd; they owned 10,000 equity shares of ₹ 10 each. The agreement also says that RRS Minerals Resources Private Limited is also holding exclusive buying and selling right in respect of iron ore from Garco Mines acquired by it as per contract agreement dated 9/8/2006. Assessee, purchaser, acquired those shares of RRS Minerals Resources Private Limited at a consideration of ₹ 315,000,000. Thus, the shares of RRS Mineral Resources Pvt Ltd were acquired by assessee from shareholders of that company at Rs 31.50 crores. Property acquired by assessee is ‘shares’ in RRS Mineral Resources Pvt ltd whose underlying values is derived from the right of purchase with RRS Mineral Resources P Ltd.

015. With effect from 15/10/2009 [ effective date] , RRS minerals resources private limited got amalgamated with the assessee company by order dated 15 October 2010 [ date of order] of Honourable Bombay High Court in Companies petition number 372 of 2010.

016. On 24/11/2009, (prior to the date of order of the honourable High Court but after the effective date) an agreement was entered into between various Members of Gharse family being members of an AOP and RRS minerals resources private limited, (now the assessee) wherein ₹ 11 crore were paid as non­refundable advance for purchase of Iron Ore. the agreement is also known as agreement for sale and purchase of Iron Ore.

017. There are certain other expenses incurred by the assessee or Other parties with which we are not concerned.

018. The undisputed facts show that there is no dispute between the parties on allowability of depreciation on payment of ₹ 11 crores as per agreement dated 24/11/2009.

019. The only dispute is whether the depreciation is allowable to the assessee on payment of ₹ 31.58 crores made by the assessee for purchase of shares of RRS mineral resources Ltd as an intangible asset or not.

20. Provisions of Section 32 of The Income Tax Act describes that depreciation is allowable with respect to two different types of assets (i) tangible assets and (ii) intangible assets. The several assets are mentioned therein which can be stated to be intangible assets. We do not find that in 32 (1) (ii) ‘shares in a company’ are enlisted as ‘intangible assets’ on which depreciation is allowed. In the present case, what have been acquired by assessee are shares of RRS Minerals And Resources Private Limited for Rs 31.58 Crores. Hence, according to us, shares are not an ‘intangible assets’ u/s 32 (1) (ii) of the act and therefore the assessee is not entitled to depreciation on a sum of ₹ 31.58 crores paid by the assessee to Mr. Bharat and Mrs. Rita for purchase of shares of RRS minerals and resources private limited.

021. The learned CIT – A has held that for assessment year 11 – 12 and 12-13, assessee has been allowed depreciation. We find that though for assessment year 2012 – 13 the assessee was allowed depreciation on this sum in assessment order passed u/s 143 (3) of the act but subsequently that assessment year was reassessed u/s 147 wherein depreciation was disallowed on this sum. Therefore there is no truth in the claim that assessee is allowed depreciation for AY 2012-13. Undoubtedly, for assessment year 2011 – 12 the assessee has shown capitalization of ‘intangible assets’ of ‘iron ore rights’ of ₹ 468,912,953 on which depreciation at the rate of 25% is claimed in the return of income. Return of assessee was not picked up for scrutiny and accepted u/s 143 (1) of the Act. This remains undisturbed. Thus, this return was not at all examined by the LD AO. Fact remains that whether the assessee is entitled to depreciation on purchase of shares as an intangible asset was not at all examined even in assessment year 2011 – 12 also. Therefore, it cannot be said that the assessing officer has allowed depreciation to the assessee for that year. Thus for AY 2011-12 also, ld AO did not examine whether cost of shares of a pvt ltd company of Rs 31.58 crores, included in intangible assets of Purchase rights of iron ore is eligible for depreciation at the rate of 25 % as intangible assets.

022. On careful examination of the assessment order for assessment year 2011 – 12, the depreciation schedule has narration of ‘Intangible Assets’ Iron Ore Mining Rights. There is no evidence that the assessing officer examined that in block of intangible assets, assessee has included “shares’ also.

023. Therefore, LD AO has not formed any view on allowability of depreciation on shares. Therefore, there cannot be any question of violation to principles of consistency by LD AO. In fact the ‘shares’ cannot be classified as intangible assets u/s 32 (1) (ii) of the act. Thus, LD CIT (A) for allowing claim of assessee on principles of consistency is devoid of any merits.

24. The learned CIT – A has also accepted the plea of the assessee with respect to the consistency as in assessment year 2011 – 12 depreciation has been allowed. We find that in the guise of consistency, it can never be held that ‘shares’ are intangible asset on which depreciation can be allowed u/s 32(1) (ii) of the Act. Such is also not the mandate of the decision of the honourable Bombay High Court relied upon by the learned CIT – A in 69 taxmann.com 24.

025. Section 32 (1) (ii) defines intangible assets as ‘ know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature’ . Even otherwise shares are financial assets classified as tangible assets because they derive value from contractual claims. Hence, same are not depreciable u/s 32 (1) (ii) of The Act.

026. The learned CIT – A has accepted argument of the assessee that issue is covered in favour of the assessee by the decision of the honourable Supreme Court in case of Mysore minerals Ltd [1999] 106 Taxman 166 (SC)/[1999] 239 ITR 775 (SC)/[1999] . The issue before the honourable court was that when assessee purchased for the use of its staff seven low-income group houses from the Housing Board and made part payments against which the assessee was delivered possession of the buildings. The assessee claimed depreciation on the flats used for the purpose of its business. The Assessing Officer
rejected the claim on the ground that the assessee had not become owner for want of deed of conveyance in its favour. Honourable Supreme Court allowed the claim of depreciation holding that assessee is ‘Owner’. It was not the case that whether shares can be considered as intangible assets on which depreciation can be granted. Therefore, reliance on this judgment does not help the case of the assessee.

027. The learned CIT – A accepted the plea of the assessee that issue decided by the honourable Karnataka High Court in Surana pharmaceuticals private limited versus CIT 243 ITR 218 covers in favour of assessee and therefore as the assessee has acquired a valuable right through acquisition of shares of the company RRS minerals resources private limited, the depreciation to be allowed to assessee. We find that in that case assessee purchased the house property at Bombay on which depreciation was claimed. The property was purchased without there being any sale deed registered in favour of the assessee, though the value exceeded Rs. 100. According to the Assessing Officer depreciation under section, 32 could be claimed only by the ‘owner’ and as the sale deed had not been registered, the claim of the assessee was rejected holding that assessee is not an ‘owner’. The honourable High Court relying on the decision of the honourable Supreme Court held that assessee is owner of the asset though sale deed is not registered in its favour. We also find that this decision also do not deal with the fact that whether the shares purchased by a company can be classified as intangible asset or not. Therefore, reliance on that decision does not help the case of the assessee.

028. The issue before us is not the satisfaction of ‘user test’ or the fate of the asset, which already entered into a block of assets. The issue before us is simple that whether the shares purchased by the assessee can be held to be at depreciable intangible asset or not. None of the judicial precedents cited before us up or the case of the assessee.

029. In the result, we reverse order of learned CIT – A and restore the order of the learned assessing officer disallowing depreciation of Rs 4,44,07,662/- on shares purchased by the assessee holding that it is not a depreciable intangible assets. Grounds no 1-3 of the appeal are allowed.

030. Appeal of the ld A O is allowed.

031. Appeals of the LD AO for AY 14-15 and 16-17 are on similar issue of depreciation on Intangible assets. There is no difference in the issue except of amount of depreciation disallowed. For the reasons given by us in allowing appeal of LD AO for AY 2013-14 we also allow the appeal of LD AO for these two years.

032. Accordingly all three appeals filed by ld AO for respective assessment years are allowed

Order pronounced in the open court on 20.06.2022.