IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH `C' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI N.K.BILLAIYA (ACCOUNTANT MEMBER)
ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
Caylx Chemicals & Pharmaceuticals DCIT Range 8(1),
Ltd., 5, Marwah Complex, Marwah Aayakar Bhavan, M.K. Road,
Estate, Saki Vihar Road, Saki Naka, Mumbai.
Andheri(E), Mumbai Vs.
PA No.AABCC 1457 B
(Appellant) (Respondent)
Appellant by : Shri M Subramanian
Respondent by: Shri Rajarshi Dwivedy
Date of hearing: 5.2.2013
Date of pronouncement: 8 .2.2013
ORDER
Per Bench:
The assesee has filed these three appeals for assessment year 2005-06 against
order dated 10.11.2010, for assessment year 2006-07 against order dated 18.1.2010
and for assessment year 2007-08 against order dated 29.10.2010 of ld CIT(A) .
2. Since most of the grounds and relevant facts in all these appeals are common,
we heard these appeals together and dispose them off by a common order for the sake
of convenience.
3. Firstly, we take up appeal for assessment year 2005-06 being I.T.A.
No.34/M/2011. Grounds of appeal taken by assessee are as under:
Ground No.1
" 1. The Learned Commissioner of Income Tax (Appeals) 16 Mumbai
[the CIT (A)1 erred in confirming the disallowance made by Deputy
2 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
Commissioner of Income Tax Range 8 (1), Mumbai (the AO) of Rs.
12,37,420/- on account Depreciation on building purchased from firm.
2. On the facts & Circumstances of the case Learned CIT (A) ought to
have held that since the Appellant had paid the consideration to the firm
in terms of agreement for purchase of business of firm the Appellant be
allowed the claim for depreciation on building.
3. The Appellant prays that the A.O be directed to allow the depreciation
on building.
GROUND NO.II.
1. The Learned CIT (A) erred in not giving any decision in respect of
disallowance of depreciation of Rs.14,63,399/- on additions to Plant &
Machinery made by the AO.
2. The Appellant prays that the AO be directed that the Sum of Rs.
14,63,399/- being depreciation on additions to Plant & Machinery
installed prior to March, 2005 by allowed as deduction."
4. In respect of Ground No.1 of appeal, relevant facts are that assessee is engaged
in the business of manufacturing and dealing in active pharma ingredients. Vide
Memorandum of Undertaking (MOU) dated 1.9.2004, the firm through its partner
decided to corporatise its business entity and, accordingly, transferred the business
carried on by it as a going concern w.e.f. 1.9.2004 to the assessee company. As per
MOU placed on record at pages 1 to 5 of PB, all the assets and liabilities of the firm
relating to the said business immediately before the succession become the assets and
liabilities of the assessee company. That all the partners of the firm immediately before
the succession has become shareholders of the assessee company in the same
proportion in which their capital accounts stood in the books of the firm on the date of
succession. That the partners of the firm shall not receive any consideration or benefit
directly or indirectly in any form or manner other than by way of allotment of shares of
the assessee company. That the aggregate of the shareholding in the company of the
partners of the firm was decided not to be less than 50% of the total voting power in
the assessee company. In view of the said MOU, assessee company agreed to pay,
satisfy, discharge and fulfill all the debts, liabilities, contracts and engagements of the
firm in relation to the said business and also agreed to indemnify and to keep
indemnified the firm and its partners against the same and all proceedings, claims and
demands in respect thereof. It was also decided that from the effective date i.e
3 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
1.9.2004, the transfer of the said business by the firm to the assessee company would
be completed by transfer of assets either by handing over the delivery to the assessee
company by the firm or by executing any documents or by any other manner/method
as may be mutually agreed upon by all the parties thereto considering the nature of the
assets to be so transferred.
5. In view of above, it is stated that assessee company has purchased the assets
and liabilities of the firm. The said firm revalued its building premises at Rs.1,24,74,000
before it was taken over by the assessee company against Written Down Value (WDV)
of the said premises of Rs.5 lakhs. Assessee company claimed depreciation on the said
revalued price at Rs.1,24,74,000. However, AO stated that the depreciation claimed and
revalued amount could not be allowed as per Explanation 4A of the provisions of section
43(1) of the Act. AO stated that the actual cost of the transferred assets should be
same WDV of the assets as at the time of transfer by the firm. Accordingly, AO allowed
depreciation on the building at Rs.50,000/- and excess depreciation of Rs.12,37,420 was
disallowed. Being aggrieved, assessee filed appeal before ld CIT(A).
6. On behalf of assessee, it was contended that AO invoked Explanation 4A of the
provisions of section 43(1) wrongly as it applies to sell & lease back transaction and not
sale of premises on ownership basis. It was submitted that assessee company has
purchased the premises owned by the firm and before transferring it to the assessee, it
was revalued by the firm in its books to reflect the current market price. Hence, cost of
the premises is the purchase price by the assessee company for which it has paid
consideration and depreciation claimed by the assessee be allowed. Ld CIT(A) did not
agree with the contention of the assessee and vide para 3.3.3 held that the building
belonging to the firm was taken over by the assessee company as a going concern and,
it was revalued at Rs.1,24,74,000 and depreciation was , accordingly claimed on it. Ld
CIT(A) has held that Explanation 4A to Section 43(1) squarely applies to the case of the
assessee and, therefore, addition made by the AO is confirmed. Hence, this appeal by
assessee.
7. During the course of hearing, ld A.R. made his submissions on the line of
submissions as made before the authorities below. He further referred to the decision
4 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
of ITAT in the case of Karimjee (P)Ltd vs. ITO, (2007) 15 SOT 128(Mum) and submitted
that Explanation 4A to Section 43(1) is applicable on sale and lease back transaction and
not to the assets which were revalued by the erstwhile firm before being taken over by
the assessee company. He submitted that depreciation claimed on the revalued asset is
in order and same should be allowed.
8. Ld D.R. supported the orders of authorities below.
9 We have considered submissions of ld representatives of parties and orders of
authorities below.
10. There is no dispute to the fact that assessee company has taken over the assets
and liabilities of the erstwhile firm as a going concern. However, provisions of section
47(xiii) provides that any transfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in the business carried on
by the firm, (i) all the assets and liabilities of the firm relating to the business
immediately before the succession become the assets and liabilities of the company; (ii)
all the partners of the firm immediately before the succession become the shareholders
of the company in the same proportion in which their capital accounts stood in the
books of the firm on the date of the succession; (iii) the partners of the firm do not
receive any consideration or benefit, directly or indirectly, in any form or manner, other
than by way of allotment of shares in the company; and (iv) the aggregate of the
shareholding in the company of the partners of the firm is not less than fifty per cent of
the total voting power in the company and their shareholding continues to be as such
for a period of five years from the date of the succession will not amount to transfer for
the purpose of section 45 of the Act. Since in the MOU entered into above conditions
are satisfied as per clause (2) of the said MOU dated 1.9.2004, we hold that said take
over of the premises of the firm by the assessee company as a result of succession of
the firm by the assessee company of the business carried on by the firm is not a
transfer. Hence, WDV as in the books of the firm has to be considered the value of the
said premises in the hands of the assessee company. Therefore, assessee will be
entitled to depreciation on the said WDV of the building. Accordingly, we uphold the
action of the AO for the reason stated hereinabove and not for the reasons as
5 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
mentioned in the assessment order or by ld CIT(A). Hence, Ground No.1 of appeal is
rejected.
11. In respect of Ground No.2 of appeal, assessee claimed depreciation of
Rs.14,63,399 which was disallowed by the AO on the ground that assessee was asked to
produce documentary evidence to prove that the assets were put to use before 31st
March 2005. AO has stated that after verification, assessee has not been able to
produce any evidence to prove that the following assets were put to use before 31st
March, 2005:
Date Name of the party Amount Depreciation
claimed
31.3.2005 Silica Ware Pvt. Ltd. 1,11,284
31.3.2005 Raj Insulation 65,520
31.3.2005 Pharmalab process 7,40,353
26.2.2005 Victory Mercantile 52,46,400
61,63,557 7,70,445
23.3.2005 Thermax Limited 1,45,167
23/3/2005 Thermax Limited 4,54,608
31.3.2005 Techno India 44,080
31.3.2005 Thermax Limited 10,60,751
17,04,606 2,13,076
Date of
installation
1.4.2005 Pharmalab Process Equipment 70,635
1.4.2005 Aahan Engg. Pvt Ltd. 94,180
1.4.2005 Nile Limited 47,0901
1.4.2005 Aahan Engg. Pvt Ltd., 23m547
2,35,452 29,432
31.3.2005 Pharmalab Process Equipment 20,72,674 2,59,084
31.3.2005 Sapphire Machines Pvt Ltd. 15,30,895 14,63,399
Therefore, AO disallowed the depreciation claim of the assessee of Rs.14,63,399
on above asserts. Being aggrieved, assessee filed appeal before ld CIT(A).
6 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
12. Ld CIT(A) in para 3.2.2 has considered the submissions of assessee but no
finding has been given. Hence, this appeal by the assessee.
13. At the time of hearing, ld A.R. submitted that above assets were added by the
assessee during the assessment year under consideration. He further submitted that ld
CIT(A) has not given any finding in respect of above disallowance of depreciation by the
AO though assessee had taken this ground before him. Ld D.R. has not disputed above
fact.
14. In view of above submissions of ld representatives of parties and considering the
order of ld CIT(A) we agree that ld CIT(A) has not adjudicated said ground as to
whether assessee is entitled for depreciation of Rs.14,63,399 in respect of above assets,
details stated in para 11, hereinabove, stated to have been purchased and added in the
assessment year under consideration. Therefore, we consider it prudent to restore this
issue to the file of ld CIT(A) with a direction to decide same after giving due opportunity
of hearing to both parties and considering such evidences as may be placed before him.
Hence, Ground No.2 of appeal is allowed for statistical purposes.
15. Now we take up appeal for assessment year 2006-07 being I.T.A.
No.2736/M/2010.
16. Grounds of appeal taken by the assessee are as under:
"1) On the facts and circumstances of the case the learned Commissioner
of Income Tax (Appeal) 16-CIT(A)-16 erred in confirming the
disallowance of ESIC payments made within the time allowed under the
statute & ignored the submission regarding payment made during the
course of hearing.
2) On the facts & Circumstance of the case the learned CIT (A) 16 erred
in disallowing 1/5th of product development expenses confirming wrong
by Assessing Officer as intangible assets.
3) On the facts & circumstances of the case the learned CIT (A) 16 erred
in disallowing depreciation on office building by wrongly applying
provisions of explanation 4A to the provision of Section 43 (1) of Income
Tax Act,1961."
7 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
17. At the time of hearing, ld counsel for assessee did not press Ground No.1.
Hence, Ground No.1 is rejected as not pressed for.
18. In respect of Ground No.2 of appeal, AO has stated that in assessment year
2005-06, the development expenses claimed by the assessee were treated as technical
know-how fee and only depreciation was allowed on it. In view of above, AO disallowed
the claim of 1/5th product development expenses of Rs.59,05,048/- and allowed
depreciation on WDV of Rs.83,86,383/-, which works out to Rs.20,96,590. Thus, AO
made addition of Rs.38,08,458 to the total income of the assessee. Being aggrieved,
assessee filed appeal before ld CIT(A).
19. Ld CIT(A) vide para 2.4 of the impugned order confirmed the action of AO. Ld
CIT(A) has stated that neither before the AO nor before him, assessee produced any
evidence as to why the order of AO for assessment year 2005-06 should not be
followed. Hence, assessee is in further appeal before us.
20. During the course of hearing, ld A.R. referred the order of ld CIT(A) for
assessment year 2005-06, appeal of which was also heard alongwith this appeal for
assessment year 2006-07 and submitted that in assessment year 2005-06, ld CIT(A)
vide para 5.3.1 held that the treatment of the expenditure by the assessee u/s.35AB
appears to be correct as the assessee is conducting research and development and
incurring expenditure regularly on acquiring know how. He submitted that ld CIT(A)has
accepted the claim of the assessee u/s.35AB of the Act and, therefore, order of ld
CIT(A) should be reversed. Ld D.R. did not dispute above contention of ld A.R.
21. We have considered submissions of ld representatives of parties and the orders
of authorities below for the assessment year under consideration as well as order for
assessment year 2005-06. Para 5.3.1 of the order of ld CIT(A) for assessment year
2005-06 reads as under:
"5.3.1 I have carefully considered the contention of the appellant
company as well as carefully gone through the available documents on
record. I find that the appellant had purchased process know-how for
manufacture of API's in the year 2000-01. The company had claimed
1/5th of the expenditure in the year in which the technical know-how was
acquired as per the provisions of section 35AB which was allowed to the
8 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
appellant by the Ld. AO. I also find that the company has a R&D centre
duly approved by the Department of Science & Technology, Govt. of
India at Dombivali, Mumbai. The product development expenses mainly
consists of expenses incurred at R&D centre as well as process know-how
purchased by the company from the third party which are written off @
20% every year in accordance with the provisions of section 35AB which
were allowed and accepted by the Ld. AO in the previous year. The Ld.
AO in the year under consideration held that know-how is a intangible
assets included in section 32(1)(ii) and is allowed depreciation. He
accordingly capitalized the expenditure and allowed depreciation thereon.
Undoubtedly, w.e.f. 1/4/1998, the intangible assets are included in the
list of depreciable assets. However, the expenditure on know-how was
also provided u/s. 35AB, so therefore, there is an option given to the
appellant either to claim the set off of expenditure as per the provisions
of section 35AB in respect of know-how expenditure or to capitalize the
same and claim the expenditure as per the provisions of sec. 32. It seems
that the appellant has chosen the first option i.e. to claim the
expenditure u/s. 35AB. The treatment of the expenditure appears to be a
correct step as the appellant is also conducting research and
development and incurring expenditure regularly on acquiring the know-
how. Therefore, there is no infirmity in the claim of the appellant, though,
the view of the expressed by the Ld. AO is also correct. However, looking
to the consistent practice of the appellant which has been accepted by
the Revenue in the previous years, I find that the addition made by the
Ld. AO is not correct and this is accordingly deleted. This ground of
appeal is decided in favour of the appellant."
22. We observe that in assessment year 2005-06, ld CIT(A) has allowed the claim of
1/5th of the expenditure u/s.35AB of the Act by holding that assessee company has a
R&D centre duly approved by the Department of Science & Technology, Govt. of India
at Dombivali, Mumbai and assessee is entitled to claim benefit of section 35AB of the
Act. In view of above, we hold that the order of ld CIT(A) to deny the claim of the
assessee u/s.35AB of the Act is not in order. The department has not brought any facts
to controvert the facts as stated by ld CIT(A) while deciding the same issue for
assessment year 2005-06. Further, ld A.R. submitted that there was no appeal filed by
department against the said order of ld CIT(A) for assessment year 2005-06 and ld D.R.
did not controvert said contention of ld A.,R. Hence, we allow Ground no.2 of appeal
taken by assessment for assessment year 2006-07.
23. In respect of Ground No.3 of appeal, ld representatives submitted that facts are
identical as in assessment year 2005-06. It was submitted that whatever view will be
9 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
taken by the Tribunal while deciding Ground No.1 of appeal for assessment year 2005-
06 will ipso facto apply to assessment year 2006-07.
24. We have considered above issue vide paras 4 to 10 hereinabove and have held
vide para 10 that assessee is entitled to depreciation on WDV of the building which was
in the books of erstwhile firm whose business has been taken over alongwith assets and
liabilities by the assessee company. We have upheld the action of AO. Since the facts
are identical to assessment year 2005-06, we reject Ground No.3 taken by assessee for
assessment year 2006-07.
25. Now we take up appeal for assessment year 2007-08 being I.T.A.
No.35/M/2011.
26. Grounds of appeal taken by assessee are as under:
Ground No.1
"1. The Learned Commissioner of Income Tax (Appeals) 16 Mumbai [the
CIT (A)1 erred in confirming the disallowance made by Deputy
Commissioner of Income Tax Range 8 (1), Mumbai (the AO) of
Rs.9,69,894 on account Depreciation on building purchased from firm.
2. On the facts & Circumstances of the case Learned CIT (A) ought to
have held that since the Appellant had paid the consideration to the firm
in terms of agreement for purchase of business of firm the Appellant be
allowed the claim for depreciation on building.
3. The Appellant prays that the A.O be directed to allow the depreciation
on building.
Ground No.II
"1. The ld CIT(A) erred in not giving any decision in respect of addition of
Rs.9,69,894/- on account of depreciation in the computation of book
profit u/s.115JB of Income tax Act, 1961 by the AO.
2. On the facts and circumstances of the case, ld CIT(A) ought to have
held that no adjustment to book profit be made while calculating taxable
10 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
income u/s.115JB of the Act otherwise than the prescribed adjustment in
the Act."
27. Ground No.1 of appeal is similar to Ground No.1 of appeal for assessment year
2005-06 and Ground No.3 of appeal taken in assessment year 2006-07.
28. We have dealt with Ground No.1 for assessment year 2005-06 vide paras 4 to 10
and, vide para 10, we have held that assessee is entitled to depreciation on WDV of the
building which was in the books of erstwhile firm whose business has been taken over
alongwith assets and liabilities by the assessee company. Accordingly, we uphold the
action of AO. Since, the facts are identical to assessment year 2005-06, we reject
Ground No.1 of appeal taken by assessee for assessment year 2007-08.
29. In respect of Ground No.II, ld A.R. submitted that ld CIT(A) has not dealt with
this issue specifically in the impugned order and submitted that the same should be
restored to him to decide it by a speaking order. On the other hand, ld D.R. submitted
that this ground is consequential to Ground No.I of appeal. He submitted that ld CIT(A)
has not accepted the depreciation on revalued assets and consequently Ground No.2 of
appeal taken by assessee is to be rejected.
30. We have considered the order of ld CIT(A) and submissions of ld representatives
of parties. Though we agree with ld D.R. that it is consequential to Ground No.1of
appeal and Ground No.1 has been rejected by us hereinabove, we agree with ld A.R.
that ld CIT(A) has not dealt with this ground in the impugned order. In the interest of
justice, we restore this issue to the file of ld CIT(A) and direct to decide it passing a
speaking order after giving due opportunity of hearing to the assessee. This ground
No.II is allowed for statistical purposes.
11 ITA No.34/Mum/2011: Assessment Year: 2005-06
ITA No.2736/Mum/2010: Assessment Year: 2006-07
ITA No.35/Mum/2011: Assessment Year: 2007-08
31. In the result, appeals for assessment year 2005-06 and 2007-08 are allowed in
part for statistical purposes and whereas appeal for assessment year 2006-07 is allowed
in part.
Pronounced in the open court on 8th February, 2013
Sd/- Sd/-
(N.K.BILLAIYA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 8th February, 2013
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),16, Mumbai
4. Commissioner of Income Tax, 8, Mumbai
5. Departmental Representative, Bench `C' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI
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