Income Tax Appellate Tribunal - Hyderabad
M/S. Ushodaya Enterprises Ltd.,, ... vs Department Of Income Tax on 16 February, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA.No.1265/Hyd/2013
Assessment Year 2007-2008
DCIT, Circle-16(2) M/s. Ushodaya Enterprises
Hyderabad. vs. Ltd., Hyderabad.
PAN AAACU2690P
(Appellant) (Respondent)
For Revenue : Mr. Konda Ramesh
For Assessee : Mr. K. Gopal
Date of Hearing : 17.11.2015
Date of Pronouncement : 16.02.2016
ORDER
PER SMT. P. MADHAVI DEVI, J.M.
This is Revenue's appeal for the A.Y. 2007-08. Along with the Form No.36, the Revenue has raised the following grounds of appeal:
1. "The order of the CIT(A) is erroneous in law and facts of the case.
2. The Ld. CIT(A) ought to have considered that value of Software Film Library WDV of the asset is only Rs.160,96,47,766 in the hands of Sri Ch Ramoji Rao (HUF), instead of valuing at an exorbitant price of Rs.775,00,00,000.
3. The Ld. CIT(A) ought to have confirmed the addition towards the Film Software Library as the same is not intangible asset and it is to be treated 2 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
as Plant & Machinery and therefore a depreciation @ 15% has to be allowed instead of 25%.
4. Any other ground(s) that may be urged at the time of hearing."
1.1. Further, vide letter dated 10.10.2014, the Revenue has raised the following additional ground of appeal.
1. "The Ld. CIT(A) has erred in holding that the requirements of Section 43(1) are not met/or provisions are erroneously invoked."
2. Brief facts of the case are that the assessee is a company engaged in publishing of newspapers and also satellite television broad-casting. For the relevant assessment year i.e., A.Y. 2007-08, it filed its return of income on 31.10.2007 admitting income of Rs.27,10,85,700 under normal provisions and book profit of Rs.104,33,52,595 under the provisions of Section 115JB of the I.T. Act, 1961. Initially, the return was processed under section 143(1) of the I.T. Act on 19.03.2009. Subsequently, the assessment proceedings were completed under section 143(3) of the I.T. Act computing the taxable income at Rs.163,38,26,535.
3. Thereafter, the Ld. CIT, under section 263 of the I.T. Act, held the assessment order to be erroneous and prejudicial to the interests of the Revenue. Therefore, the original assessment order passed under section 143(3) was set aside by the Commissioner vide his order dated 28.03.2012 under section 263 of the I.T. Act with a 3 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
direction to re-do the assessment as per the directions given by him. The assessee challenged the revision order before the ITAT but it was upheld by the Tribunal. Thereafter, the A.O, in order to give effect to the revision order, issued notices under section 143(2) and 142(1) of the Act and examined the return of income of the assessee. He observed that the Ld. CIT has sought to revise the assessment order on the grounds that (i) excess depreciation has been claimed on Film Software Library which was purchased by the assessee from Sri Ramoji Rao (HUF) and (ii) the depreciation on Film Software Library has been allowed at 25% as allowable on an intangible asset, though the asset was to be treated as plant and machinery and depreciation was to be allowed accordingly.
4. The A.O. observed that Sri Ramoji Rao is the Kartha of Sri Ramoji Rao (HUF) and is also the Chairman of M/s. Ushodaya Enterprises Limited, wherein he, along with his family members is the 100% shareholder. He observed that M/s. Ushakiran Television and M/s. Ushakiran Movies being business units of Sri Ramoji Rao (HUF), are the owners of (Film Software Library) and are in the business of production of films and TV programmes which are exclusively telecast in the ETV channels owned by M/s. Ushodaya Enterprises Limited and that the resultant revenue generated by M/s. Ushodaya Enterprises Limited from the sale of advertising spots and telecast of films and programmes is shared with M/s.
4 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
Ushakiran Television and M/s. Ushakiran Movies. Therefore, he observed that it is M/s. Ushodaya Enterprises Limited which has been commercially exploiting the Film Software Library since F.Y. 1994-95 where production was exclusively done by M/s. Ushakiran Television and M/s. Ushakiran Movies which are in turn telecast in 12 channels owned by it in different Indian languages in India such as Telugu (two channels), Bengali, Marathi, Kannada, Urdu, Oriya, Gujarati, Hindi (four channels). He observed that M/s. Ushodaya Enterprises Limited is practically depending on the units of Sri Ramoji Rao (HUF) for the production and exploitation of film software library since F.Y. 1994-95 and further that since all of them are group concerns and are owned and controlled by Shri Ramoji Rao and his family members, it is difficult to understand the purpose of M/s. Ushodaya Enterprises Limited buying the Film Software Library at an exorbitant price of Rs.775 crores, from Sri Ramoji Rao (HUF), when it is the exclusive user of the same, particularly, when the WDV of the asset is only Rs.160,96,47,766 in the hands of Sri Ramoji Rao (HUF) as on 31.03.2006 for the A.Y. 2006-07. He held that in view of the above facts, the only possible conclusion that can be drawn is that the transfer of film software library was done at an enhanced cost of Rs.775 crores from its group concern with the sole purpose of claiming higher depreciation at Rs.96,87,50,000 by M/s. Ushodaya Enterprises Limited, thereby resulting in the reduction of income tax liability. Thus, holding that the 5 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
conditions set-forth as per Explanation-3 to Section 43(1) of the I.T. Act, are satisfied, he has adopted the value of TV software business/film library in the hands of the assessee company at Rs.160,96,47,766 (WDV in the hands of Sri Ramoji Rao (HUF) as on 31.03.2006). He accordingly, re-worked out the claim of depreciation of the assessee company.
5. Further, during the assessment proceedings, the A.O. also issued a detailed show cause notice dated 23.07.2012 requiring the assessee to produce the details of content rights with respect to films and programmes library which is transferred through negatives, discs or tapes and as to why these assets should not be treated as 'tangible assets' and allowed depreciation accordingly. The assessee filed its submissions stating that the satellite and content rights of films or programmes form part of 'copy rights' which are eligible for depreciation under the head 'Intangible Assets' and are eligible for depreciation as provided in the schedule to Income Tax Rules. It was submitted that the depreciation was allowed as on intangible assets for the two consecutive assessment years i.e., A.Ys. 2007-08 and 2008-09. It was also submitted that in the A.Y. 2006-07, the department itself had allowed depreciation on software library @ 25% , considering it as an 'intangible asset' in the hands of Sri Ramoji Rao (HUF) while brushing aside the claim for deduction under Rule 9A/9B as are applicable for rights of films, TV programmes etc., produced by it. It was 6 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
submitted that the assessee has acquired rights over the library from the HUF and hence, it is not justified in stating that the copyrights are not intangible assets and are eligible for depreciation as on 'Tangible Assets'. The A.O. however, was not satisfied with assessee's contentions and held that though there is no doubt about the intangibility of the film software library i.e., films and other TV programmes which are kept on CDs by the assessee, but observed that the rate of depreciation applicable thereon, would depend not on the tangibility or intangibility of the movies but how these are put to use by the assessee company, i..e., the functional test. He observed that in the assessee company's business, CDs and other storage media are used to store the films and other TV programmes, without which the assessee company would not be in a position to telecast anything and therefore held that this is not just an asset but is a vital tool of trade for the assessee company and hence, falls within the definition of "Plant and Machinery" and is accordingly eligible for depreciation @ 15%. He accordingly, re-worked the depreciation and computed the taxable income.
6. Aggrieved by the order of the A.O, the assessee preferred an appeal before the Ld. CIT(A), who allowed the same. The ld CIT(A) considered the order of the Ld. CIT under section 263 and observed that the CIT had not directed the A.O. to examine the matter of rate of depreciation afresh. He observed that during the revision 7 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
proceedings under section 263, the Ld. CIT dropped the proposal to treat the film library as 'plant' after being satisfied with the assessee's explanation and therefore, the A.O. did not have the mandate to deal with the issue once again. He, therefore, directed the A.O. to treat the film library as an intangible asset and allow depreciation on the acquisition cost @ 25%. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us.
7. The Ld. D.R, argued that the CIT under section 263 of the I.T. Act had directed the A.O. to re-do the assessment which includes the issue of the nature of the asset and the rate of depreciation allowable on such asset. Therefore, according to him, the Ld. CIT(A) has erroneously held that the A.O. has travelled beyond the mandate of the CIT and has further erred in directing the A.O. to adopt the rate of depreciation allowable on intangible assets i.e., @ 25%. Further, he relied upon the order of the A.O to argue that the asset was in the nature of a tool of the trade and therefore was rightly treated as plant and machinery and depreciation was rightly allowed at 15%.
8. The Ld. Counsel for the assessee, on the other hand, claimed it to be an intangible asset, while the A.O. treated it as 'Plant and Machinery'. It is the case of the assessee that the assessment order, passed under section 143(3) was originally passed allowing the depreciation on this asset @ 25% as is allowable on an intangible asset 8 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
while the asst order passed by the AO u/s 143(3) read with section 263 of the Act is only to give effect to the order of the CIT under section 263 of the Act and therefore the AO has to limit himself to the directions of the CIT. It was submitted that in the order u/s 263 of the Act, since the CIT did not give any direction to the AO to re-consider this issue, AO cannot do it.
9. Having regard to the rival contentions and the material on record as well as the written submissions filed by the Ld. Counsel for the assessee, we find that the first issue before us is about the nature of the asset the 'film software library' i.e., whether it is an intangible or tangible asset and the rate of depreciation allowable thereon ? The rate of depreciation allowable on an asset would depend on the nature of the asset.
10. To adjudicate this issue, we need to go into the facts of the case once again. We find that the assessment was initially completed under section 143(3) of the Act on 31.12.2009 allowing the depreciation on the film library @ 25% treating the same as an intangible asset. The CIT assumed jurisdiction under section 263 of the Act both on the ground of the valuation of the asset as well as on the ground of depreciation granted @ 25% treating the asset as an intangible asset. Assessee has submitted its detailed explanation as to why the asset 'Film Software Library' should be treated as an intangible asset. It was submitted that in the hands of Shri Ramoji 9 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
Rao (HUF) also, the asset was treated as an intangible asset and depreciation @ 25% was granted from A.Y. 2006-07. It was also submitted that the software library falls within the definition of "Copyright" under the "Copy Rights Act, 1957" and the depreciation on software library @ 25% was claimed by the assessee and also allowed by the AO in the asst proceedings u/s143(3) of the Act. Thereafter, the Ld. CIT did not discuss anything further about the nature of the asset and the rate of depreciation allowable thereon in the revision order but after discussing at length on the correctness of the valuation of 'Film Software Library', he set aside the assessment order with a direction to the A.O. to re-do the assessment. Now, it is the contention of the Ld. Counsel for the assessee that the CIT was satisfied with assessee's contentions and therefore, has not discussed about the rate of depreciation in the subsequent paras of his order and therefore, has not set aside the assessment order to that extent and A.O. has travelled beyond his mandate in reconsidering the issue. But it is difficult to accept this contention of the assessee for the reason that the CIT has set aside the entire assessment and not only to the extent of valuation of the 'Film Software Library'. We are of the opinion that if the CIT was satisfied with assessee's contention on the nature of the asset and the rate of depreciation allowable thereon, he might not have said so in detail in the revision order, but would have indicated so by setting aside the assessment order only to the extent he did not agree with the assessee. The Hon'ble Gujarat High Court in the case 10 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
of Addl CIT vs. Mukur Corporation reported in (1978) 111 ITR 312 (Guj) has held that there is nothing in section 263(1) of the Act to justify that before passing the final order under that section, the commissioner must necessarily and in all cases record final conclusions about the points in controversy before him and where the commissioner sets aside the assessment order and directs the AO to make a fresh assessment, the only proper course for the commissioner would be not to express any final opinion as regards the controversial points. Similar view was also expressed by the Hon'ble Madras High Court in the case of CIT Vs Seshasayee Paper and Boards Ltd, reported in (2000) 242 ITR 490 (Mad). In the case before us, the fact that the CIT has set aside the whole of the assessment and directed the A.O. to re-do the assessment makes it clear that he was not satisfied with assessee's contentions even on the nature of the asset and the rate of depreciation allowable thereon. Therefore, we do not agree with the finding of the CIT(A) on this issue.
11. Even with regard to the merits of the issue, i.e., the nature of the asset, we find that undisputedly, before its transfer to the assessee, the asset was treated as an 'intangible asset' in the hands of its previous owner, i.e., Shri. Ramoji Rao (HUF) and depreciation thereon was allowed at 25%. We find that the CIT(A), while holding that the AO has exceeded his mandate, has also held that even on merits, the films which are copied on disks 11 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
cannot be treated as plant. However, he has not given any reasons for holding so, while the reasoning given by the AO for treating the films as 'Plant and Machinery' is that the asset 'Film Software Library' is mostly contained in CDs and other storage media and that the assessee would not be in a position to telecast anything without the 'Film Software Library' i.e., the films and TV programmes therein and therefore, they are the vital tools of trade for the assessee company and hence Plant and Machinery. We are not able to agree with this finding of the AO. As observed earlier, the asset was treated as an intangible asset in the hands of the previous owner. The AO has applied the functional test to treat it as plant and machinery. He has relied upon various decisions to hold so. Having gone through the said judgments, we find that all of these decisions are on the functional tests to be applied to determine whether an asset is a 'Plant and Machinery'. 'Ind AS 38' is the Accounting Standard whose objective is to prescribe the accounting treatment for intangible assets that are not specifically dealt with in any other accounting standard. Though, the said accounting standard is not binding on us unless it is notified by the Central Government u/s 145(2) of the Act, we may get some guidance on this issue from para 4 of the said accounting standard which reads as under :
"4. Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software), legal documentation (in the case of a license or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements 12 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
should be treated under Ind AS 16, Property, Plant and Equipment, or as an intangible asset under this Standard, an entity uses judgment to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate computer software for a computer-controlled machine tool that cannot operate computer software for a computer- controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating system of a computer. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset."
11.1. From a reading of the above accounting standard and also the judgments relied upon by the AO, we find that an intangible asset can also be treated as plant, provided, it becomes an integral part of the tools used by the entity to carry on its business. In the case before us, the films and TV programmes are essential for the assessee company to carry on its business of telecasting of films and other programmes, but there is no caveat that the assessee company has to telecast only these films and programmes and none other for assessee's business. Further, not only the films and programmes in the 'Film Software Library', but the assessee may also telecast any other programmes or films on its channels. By purchasing the library, the assessee is gaining exclusive right over the asset but this library cannot be held as a tool for carrying on of its business as assessee can carry on its business even without the 'Film Software Library'. The said library only assists in determining the content of the telecast, but does not limit the telecast and 13 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
is not essential for the operations of the assessee's business and therefore cannot be termed as the tool of the trade. Thus, it fails the functional test adopted by the assessing officer. Therefore, we hold that the asset which consists of 'Copyrighted Films and Programmes' is an 'Intangible Asset' eligible for depreciation at the rate of 25%. Thus, the ground of appeal No.3 of the revenue is rejected.
12. The next issue to be decided is whether the Assessing Officer has rightly invoked Explanation 3 to Section 43(1) ? The brief facts relating to this issue are that pursuant to the order of the CIT u/s 263 of the Act, the AO invoked the provisions of Sec.43(1) and explanation 3 thereto and adopted the WDV of the film software Library in the hands of the previous owner as the 'Actual cost of the asset to the Assessee' and allowed depreciation on that value only. On appeal, the Ld CIT(A) proceeded to consider whether the provisions of Explanation-3 to Section 43(1) of the I.T. Act are attracted in the case of the assessee. He observed that the Explanation-3 to Section 43(1) is intended to counteract the attempts of an assessee to claim higher depreciation on assets acquired at more than the market value and can be applied only to those assets which are part of WDV block. He observed that if the assets are found to be part of WDV block of assets of the seller, the said Explanation cannot be invoked. He observed that even in respect of assets which are in the block of assets, the A.O. has to be 14 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
satisfied that the main purpose of transfer of assets is to claim higher depreciation. He observed that in assessee's case, the A.O. has roped in Explanation-3 to Section 43(1), though all the films in the film library were not in the WDV basket of films. He observed that the films in the WDV basket are mostly other language films and not Telugu films, the cost of which was written off as revenue expenditure many years ago and that this is a patent mistake committed by the A.O. Further, he also examined as to whether the A.O. has recorded the requisite satisfaction before invoking the provisions of Explanation- 3 to Section 43(1) of the Act. He observed that the assessment record does not contain any such satisfaction and further that even if the A.O. had recorded reasons, those reasons would not have stood the test of scrutiny in as much as the A.O. has erroneously believed the film library to comprise of only those films which form part of WDV of films, completely overlooking the fact that the library also consists of 1596 Telugu Films, which were not part of WDV basket. Thus, he held that since the A.O. did not record his satisfaction to invoke Explanation-3 to Section 43(1), the revaluation of the film library by the A.O. is not sustainable. He also observed that the A.O. has to determine the market value of the asset and not merely adopt the WDV of an asset in the hands of the previous owner. He observed that the A.O. has erred in assuming that the films in the film library bought by the assessee were all part of WDV of films and therefore, substitution of cost by the A.O. also is not sustainable. He 15 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
also observed that the assessee had relied upon an expert to value the film library on the basis of certain methodology and even if the expert has relied on some presumptions which are questionable and not scientific, the A.O. has failed to follow any method at all and has also failed to take into account the much and more valuable part of the library i.e., 1596 films (Annexure-2) which was outside the WDV basket. He observed that since the assessee's price is supported by an international renowned expert valuer, as compared to the valuation of the A.O. having no method or erroneous method, the former has to be accepted as more appropriate and reliable. He therefore, held that the value adopted by the assessee for purchase of film library i.e., Rs.775 crores is to be treated as the actual cost of entire film library to the assessee and depreciation thereon @ 25% is to be allowed. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us.
13. The Ld. D.R. supported the order of the A.O. and further submitted that the assessee herein as well as M/s. Ushakiran Movies and M/s. Ushakiran Television are all enterprises held by Shri Ramoji Rao (HUF) and his family members and that M/s. Usha Kiran Movies and M/s. Ushakiran Television produced the films and TV programmes respectively which are telecast by the assessee herein and a part of the revenue therefrom is also appropriated by the assessee herein. He submitted that during the relevant previous year, the assessee has 16 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
purchased the film library from Shri Ramoji Rao (HUF) at an exorbitant cost in order to reduce its income tax liability by claiming higher depreciation on the same and reducing its tax liability. He has drawn our attention to page-22 of the assessment order to show that the WDV of the Film Software Library as on 31st March, 2006 for the A.Y. 2006-07 in the books of Shri Ramoji Rao (HUF) is only Rs.160,96,47,766 whereas this library was valued by M/s. Ernst & Young at Rs.775 crores and based on such valuation, the film software library was transferred to the assessee at such an exorbitant rate and the depreciation was claimed @ 25% on such an enhanced value for taking undue benefit. Thus, according to him, this transaction attracts the provisions of Explanation-3 to Section 43(1) of the Income Tax Act. He submitted that though the issue of the applicability of Explanation-3 to Section 43(1) was very much part of the assessment order as well as the order of the Ld. CIT(A), the Revenue has inadvertently omitted to raise such ground at the time of filing of Form No.36 and prayed that the additional ground of appeal on this issue raised by the Revenue be admitted and adjudicated by this Tribunal.
14. The Ld. Counsel for the assessee, on the other hand, supported the order of the Ld. CIT(A) and extensively argued in favour of the assessee and drew our attention to the relevant material on record to demonstrate that the transfer of the asset and the valuation of the film software library was due to 17 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
commercial expediency i.e., to fulfill the condition precedent set by the foreign investor M/s Blackstone FP Capital Partner (Mauritius) V Ltd., and not due to any premeditated plan to reduce its income tax liability by claiming higher depreciation. He also has drawn our attention to the following judgments in support of the contention that before invoking the provisions of Explanation-3 to section 43(1) of the I.T. Act, the A.O. has to record his satisfaction that the valuation of the asset is done at a higher rate in order to claim higher depreciation:
i. Ashwin Vanaspati Industries vs CIT reported in 255 ITR 26 ii. Chitra Publicity Company (P) Ltd., vs Assisstant CIT reported in (2010) 4 ITR(T) 738 (Ahmedabad) (T.M.) iii. CIT VS Sekar Offset Press reported in 214 ITR 516 14.1. He submitted that as rightly brought out by the Ld. CIT(A), there is no such satisfaction recorded by the A.O. which is part of the assessment record and therefore, the invocation of the said provision is not sustainable. He also tried to distinguish the decisions relied upon by the AO from the facts of the case before us.
Further, without prejudice to the above contention, he also submitted that even if the valuation of the asset at Rs.775 crores is not accepted by the A.O, he cannot merely adopt the WDV of the asset in the hands of the 18 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
seller but has to arrive at the actual cost of the asset to the assessee by adopting a scientific and reasonable method and that in assessee's case, the A.O. has failed to carry out this exercise. According to him, the WDV of the asset as adopted by the A.O. to be the 'actual cost' to the assessee is not sustainable when the film software library consisted also of films not included in the WDV basket of films. He therefore, urged that the order of the Ld. CIT(A) be confirmed as regards the valuation of the asset at Rs.775 crores. The Ld. Counsel also filed detailed written submissions and extensively argued on the un- sustainability of the assessment order by relying on the judicial precedents.
15. Having gone through the assessment order as well as the order of the Ld. CIT(A), we find that the A.O. has invoked the provisions of the Explanation-3 to section 43(1), while the Ld. CIT(A) has held that the said provision is not applicable to the assessee's case. Therefore, we find that all the necessary facts are already part of the record. Therefore, we admit the additional ground of appeal and proceed to adjudicate the same.
16. For proper appreciation of the legal position and for the purpose of clarity and ready reference, the relevant provision is reproduced hereunder:
"43. In sections 28 to 41 and in this section, unless the context otherwise requires--19 ITA.No.1265/Hyd/2013
M/s. Ushodaya Enterprises Ltd., Hyderabad.
(1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:
[Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.] Explanation 1.--Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under 1[clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35 or under any corresponding provision of the Indian Income-tax Act, 1922 (11 of 1922).
[Explanation 2.--Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall be the actual cost to the previous owner, as reduced by--
(a) the amount of depreciation actually allowed under this Act and the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and 20 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
(b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets.] Explanation 3.--Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the [Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the 4[Joint Commissioner], determine having regard to all the circumstances of the case".
16.1. From a literal reading of the above provision, we find that the following conditions have to be satisfied before invoking the above provision.
1. The Asset should have been used by any other person for the purpose of his business before such an asset is acquired by the assessee: and
2. The A.O. is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of the liability to income tax (by claiming depreciation with reference to enhanced cost).
17. From the facts of the case before us, there is no dispute that the asset 'Film Software Library' was used by its previous owner i.e., Shri Ramoji rao (HUF) for the purpose of its business and also by the assessee herein 21 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
before the transfer of the same to the assessee exclusively. Therefore, undisputedly the first condition is satisfied.
18. It is now to be seen whether the second condition is satisfied for invoking the provisions of Explanation-3 to Section 43(1) of the I.T. Act ? For this purpose, it is necessary to go into the chronology of events. Brief facts relating to this issue are as under.
19. Shri Ramoji Rao (HUF) owns two business units viz., M/s. Ushakiran Movies ("UKM") and M/s. Ushakiran Television ("UKTV") and is also the chairman of the assessee herein and he and his family members are its shareholders. Thus, all the above parties are related to each other. All the assets and liabilities of UKM and UKTV are taken over by the assessee herein at book value as per the books of account of Shri Ramoji Rao (HUF) except the film software library which was taken over at Rs.775 crores. In the TV telecast business circles, it is understood that content rights of films consists of satellite rights of feature films and TV programmes along with the software for exploitation in TV channels. Shri Ramoji Rao (HUF) had acquired software library consisting of TV programme software and satellite rights of various feature films spread-over a period of time i.e., from 5 years to 50 years and in some cases, the period is perpetual. The business units of Shri Ramoji Rao (HUF), UKM and UKTV have claimed the expenditure incurred by them on films or programmes produced by them under Rule 9A or 9B in 22 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
earlier years up to A.Y. 2002-03 and thereafter, from A.Y. 2006-07, depreciation was claimed by them on the software library treating it as an intangible asset. Once again from the A.Y. 2006-07, Shri Ramoji Rao (HUF), claimed deduction under Rule 9A or 9B on the film and TV programmes produced during the relevant previous year which was not accepted by the A.O. and the depreciation was allowed on the software library. In the case of films produced, once deduction is claimed under Rule 9A/9B of I.T. Rules, there will not be any value in the books for the said films, but rights of the pictures can be sold and substantial income can be derived from sale of such rights. Thus they have commercial value. Admittedly, at the time of sale of software library to the assessee company, the WDV of the software library in the books of the Shri Ramoji Rao (HUF) was a sum of Rs.160.96 crores. The film software library included the films in the WDV basket as well as the other films which were claimed as deduction in full under Rule 9A/9B of the I.T. Act and therefore, though their value in the books was 'NIL', they possessed commercial value and have to be given a value when they are transferred.
19.1. During the relevant previous year, in order to expand its business and also withstand the competition in the market, the assessee company approached a private equity capital company, M/s. Black Stone FP capital partner, (Mauritius) V Limited, a foreign company, for investment in the equity shares of the assessee company.
23 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
The said company desired that the assessee company should acquire and own the film software library from Shri Ramoji Rao (HUF) before it makes the investment in the equity shares of the assessee company. To fulfill its contractual obligation and facilitate the foreign direct investment into the assessee company, the assessee company desired to acquire the said asset from Shri Ramoji Rao (HUF) and for the said purpose, the valuation of the Film software Library was referred to M/s. Ernst & Young, a reputed company having expertise in valuation of assets. Ernst & Young recommended the value of the software library in the range of Rs.746.41 crores to Rs.814.27 crores taking into consideration the rights in all the films and programmes in the software library proposed for sale at that time by Shri Ramoji Rao (HUF). By virtue of acquiring the asset, the assessee had acquired the entire Film Software Library consisting of 47.95 lakh minutes of TV programmes and 3778 films with satellite rights for a period ranging from 5 to 50 years and for some films for a perpetual period.
19.2. M/s. Black Stone had agreed to invest a sum of Rs.1217 crores for acquiring 26% stake in the assessee company by entering into necessary agreements, subject to the approval from Foreign Investment Promotion Board ("FIPB"), Government of India, as is required during that period. In anticipation of the said agreement going through, the assessee company had also obtained a loan from Standard Chartered Bank and acquired the software 24 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
library from Shri Ramoji Rao (HUF) during the F.Ys. 2006- 07 and the purpose was only to facilitate the investment by M/s. Black Stone in assessee company. However, M/s. Black Stone could not invest in assessee company as approval from the FIPB could not be obtained before the due date and the deal did not materialize/was not executed. Therefore, the assessee company had approached another investor, a domestic company i.e., M/s Equator Trading Enterprise Pvt. Limited, which came forward to invest a sum of Rs.2604 crores after carrying out the due diligence of the activities, assets and liabilities of the assessee company including the software library acquired by the assessee company from Shri Ramoji Rao (HUF). It was thereafter, that the domestic investor acquired 39% of share capital of assessee company by way of allotment of shares from the assessee company and also purchase of shares from Shri Ramoji Rao (HUF). Thus, M/s Equator Trading Enterprise Pvt. Limited, invested a sum of Rs.2604 crores in assessee company for 39% of share capital and desired that the assessee company should be split into four companies and the software library was accordingly transferred to one of the companies at the value acquired from Shri Ramoji Rao (HUF). M/s. Equator Trading Enterprise Pvt. Limited had also paid non-compete fees of Rs.670 crores subsequently to Ramoji Rao (HUF).
19.3. During the assessment proceedings under section 143(3) of the I.T. Act, the A.O. accepted the 25 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
contention of the assessee that it had acquired software library at Rs.775 crores and also allowed depreciation thereon as an intangible asset @ 25%. The CIT sought to revise the assessment order under section 263 of the I.T. Act on the grounds of high/exorbitant valuation of the library and also incorrect rate of depreciation allowed on the same. Before the Ld. CIT, the assessee had explained that there was no intention to enhance the valuation of the software library for the purpose of claiming enhanced depreciation in the books of account of the assessee due to the above facts of investment of equity capital by unrelated parties and further that Shri Ramoji Rao (HUF) is also assessed to tax by the same A.O. and he was aware of the book value of the software library and accepted the sale consideration of software library in the assessment of Shri Ramoji Rao (HUF) which establishes the fact that the market value of the software library was at arms' length. It was also submitted that Shri Ramoji Rao (HUF) had shown the entire sale value of software library in its return of income as income from business, but the department had assessed the sale consideration under the Head "Long Term Capital Gain" and Shri Ramoji Rao (HUF) had paid the taxes as demanded, though he appealed against the treatment of business income as income from capital gains before ITAT. Thus, it was submitted that there is no intention to reduce the tax liability particularly, as the outside investor invested a sum of Rs.2604 crores in the assessee company by taking 26 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
into account the value of various assets including software library.
20. The Ld. CIT, however, was not convinced with the assessee's submissions above and held that the A.O. has not considered the valuation report given by M/s. Ernst & Young P. Ltd., and that it is also not available on the assessment record of the A.O. He further observed that there was a change of incumbent during the assessment proceedings and therefore, the successor A.O. did not examine the applicability of provisions of section 43(1) read with Explanation (3) of the I.T. Act. He further observed that the assessee company claimed depreciation of software library on a sum of Rs.788.01 crores, while it acquired the software library only for a sum of Rs.755 crores. In reply to a query on this issue, assessee had submitted that there were other intangible assets also which were acquired by the assessee during the previous year but the A.O. did not verify the details of films purchased by the assessee company from others in the market. The Ld. CIT observed that there is no evidence on record that the A.O. examined the applicability of Section 43(1) read with Explanation-3 of I.T. Act. He further observed that the valuation report of Ernst & Young contains several contradictions and the A.O. ought to have examined the contents of the valuation report closely. Thus, he held the assessment order to be erroneous in so far as it was prejudicial to the interest of 27 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
the Revenue. On appeal by the assessee before the ITAT, the same was upheld.
21. During the course of assessment proceedings under section 143(3) read with section 263 of the I.T. Act, the A.O. re-examined all the contentions of the assessee and held that the transaction is between the related parties and that the assessee has been using the asset of its sister concerns exclusively and therefore, it is difficult to understand the purpose of the assessee to buy the same film software library at an exorbitant price of Rs.775 crores while the WDV of the asset is only Rs.160,96,47,766 in the hands of Shri Ramoji Rao (HUF) as on 31.03.2006. He held that the only conclusion possible at this juncture is that the transfer of Film Software Library was done at an enhanced cost from its group concern with the sole purpose to claim higher depreciation by M/s. Ushakiran Enterprises Limited thereby, resulting in reduction of income tax liability and thus the provisions of the Explanation-3 to section 43(1) of the I.T. Act are attracted. The Ld. CIT(A), on the other hand, held that the Explanation-3 to Section 43(1) is not applicable as the A.O. has not recorded the requisite satisfaction before invoking the said provisions. According to him, the A.O.'s observations in the assessment order are not sufficient compliance as envisaged in the said proviso but ought to have recorded reasons which led him to his satisfaction that the main purpose of the transfer was to reduce the tax liability. He further held that even if 28 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
the A.O. had recorded reasons, those reasons would not have stood the test of scrutiny inasmuch as he erroneously believed the film library to comprise of only those films which formed part of WDV basket of films, completely overlooking the fact that the library consisted of 1596 telugu films also which were not part of WDV basket. He observed that the A.O. has applied the provision on the premise that the main purpose of transfer was reduction of tax liability while the main purpose was to sell equity of the company which materialized long after the acquisition of the film library by the assessee. Therefore, according to him, the provisions of Explanation-3 to Section 43(1) of the I.T. Act are not attracted. He accordingly deleted the disallowance made by the A.O. against which the Revenue is now in appeal before us.
22. The Ld. D.R. relied upon the orders of the A.O. and submitted that the assessee and all the other entities being related parties, the A.O. has rightly brought out that the intention for the transfer of the asset at an enhanced rate was to reduce the tax liability of the assessee by claiming higher depreciation. He has referred to the decisions relied upon by the A.O. to justify invoking of the Explanation-3 to Section 43(1) and also of making disallowance. The Ld. D.R. has also filed written submissions in support of the contentions of the Revenue. He has also placed reliance upon the judgment of the Hon'ble Supreme Court in the case of Max Data Pvt. Ltd.
29 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
vs. CIT in Civil Appeal No.9772 of 2013 wherein while considering the provisions of section 271(1)(c) of the I.T. Act, it was held that before initiating penalty proceedings under section 271(1)(c) of the Act, the requirement of Law is that the A.O. has to be satisfied whether the penalty proceedings be initiated during the course of assessment proceedings but it is not the requirement to record his satisfaction in a particular manner or reduce it into writing. He further relied upon the approval granted by the Addl. CIT dated 05.02.2013 to the A.O. to invoke the provisions of section 43(1) of the Act and finalise the proceedings accordingly. The copy of the approval is placed at page No.1 of the paper book filed by him. He also relied on the judgments referred to by the A.O. in the assessment order and the following other decisions :
(i) Gujdar Kajoria Coal Mines Ltd., vs. CIT, Calcutta (1972) 85 ITR 599 (SC)
(ii) CIT (Central), New Delhi vs. Dalmia Dadri Cement Ltd., (1980) 125 ITR 510 (Del.) (HC)
(iii) Nagammal Cotton Mills (P) Ltd., vs. CIT (2002) 258 ITR 390 (Mad.) (HC).
(iv) CIT vs. Poulose & Mathen P. Ltd., (1999) 236 ITR 416 (Kerala) (H.C.)
(v) MAK Data P. Ltd., vs. CIT-II, SLP (Civil) No.18389 of 2013
(vi) Bilt Power Ltd., New Delhi vs. Addl. CIT, Range-2, New Delhi (2012) 34 CCH 134 (Del.) (Tribu.) 30 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
(vii) Ushodaya Enterprises P. Ltd., Hyderabad vs. ACIT, Circle-16(2), Hyderabad ITA.No.26/H/2011 dated 22.10.2014 (Hyd.) (Tribu.)
23. The Ld. Counsel for the assessee, while reiterating the above submissions made before the authorities below as to the nature of the transaction, submitted that it was only to attract capital investment to expand its business, that the assessee had approached a private investor i.e., M/s. Black Stone who agreed to invest a sum of Rs.1217 crores for acquiring 26% stake in the assessee company subject to the approval from Foreign Investment Promotion Board ("FIPB"), Government of India. He submitted that M/s. Black Stone is in no way connected to assessee company or to any of the business units of Shri Ramoji Rao (HUF). He submitted that M/s. Black Stone had entered into the agreement with the assessee and pending such agreement, the assessee company had obtained a loan from Standard Chartered Bank and acquired the Film Software Library from Shri Ramoji Rao (HUF) to facilitate the investment in the assessee company by M/s. Black Stone. He has drawn our attention to pages 214 of the paper book filed by the assessee to demonstrate that the proposed investor had stipulated that the software library should be owned by the assessee. He submitted that final approval was not granted by FIPB, due to which, the agreement could not be acted upon. Since the assessee had already taken a loan from Standard Chartered Bank, 31 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
the assessee had to approach another private equity firm for investment in assessee firm i.e., M/s. Equator Trading Enterprise Pvt. Limited. He has submitted that the valuation of the film library has been carried out by a reputed company, M/s. Ernst & Young and submitted that the said report had taken into consideration all the relevant facts and factors before arriving at the value. He submitted that the fact of the assessee entering into an agreement with M/s. Black Stone and the said agreement not being acted upon due to approval not given by FIPB and the fact that assessee had taken loan from Standard Chartered Bank on the basis of the said agreement are all matter of record and not in dispute. He submitted that it is also not disputed that M/s. Equator Trading Enterprise Pvt. Limited is also a un-related party to the assessee and that this company has accepted the valuation of the Film Software Library by M/s. Ernst & Young. Thus, according to him, the value of the Film Software Library is at arms length and therefore, the A.O., having made subjective enquiry has accepted the value adopted for the Film Software Library. He has also submitted that the circumstances which have necessitated the transfer of the Film Software Library from Shri Ramoji Rao (HUF) is also not in dispute. According to him, the investment of equity capital was possible only when the assessee abided by the conditions of the agreements and acquired and owned the Film Software Library.
32 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
23.1. The Ld. Counsel for the assessee further submitted that even if it is to be accepted that the A.O. was satisfied that the transfer of the asset had taken place in order to enable the assessee to claim higher depreciation,, the A.O. is required to value the asset with the approval of the JCIT after taking into consideration of all the relevant circumstances. He has submitted that the A.O. has failed to carry out this exercise, but instead has taken the WDV of the asset in the hands of the previous owner as the value without taking into consideration the fact that some of the assets i.e., Films and TV programmes transferred to the assessee, were in addition to the assets in the WDV basket. Thus, the value adopted by the A.O. is totally without any basis. The Ld. Counsel for the assessee further submitted that the income from the sale of Film Software Library has been offered as business income by Shri Ramoji Rao (HUF) but the department has not accepted the same as business income but has treated it as long term capital gain. He submitted that the Shri Ramoji Rao (HUF) is in appeal before the ITAT against the above. He submitted that the fact that Shri Ramoji Rao (HUF) has offered the income in his hands also goes to prove that there was no intention on the part of any of the related parties to claim higher depreciation or to reduce the tax liability. In support of his contention, he placed reliance on the following decisions.
33 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
(i) Ashwin Vanaspati Industries vs. CIT (2002) 255 ITR 26 (Guj.) (HC)
(ii) Chitra Publicity Co. P. Ltd., vs. ACIT (2010) 4 ITR 738 (Ahd.) (T.M.)
(iii) CIT vs. Sekar Offset Press (1995) 214 ITR 516
(iv) Kungendi Industrial Works P. Ltd., vs. CIT 57 ITR 540 (A.P.)
(v) CIT vs. Poulose & Mathen P. Ltd., (1999) 236 ITR 416.
24. Having regard to the rival contentions and the material available on record, we find that the assessee had argued that the A.O. has not recorded a finding in the assessment order or before seeking the approval of JCIT that the intention of the assessee was to reduce the tax liability and CIT(A) has accepted this contention and thus, according to him, the disallowance and the consequential additions are not sustainable. According to him, the A.O. has to record his satisfaction in writing before proceeding further and in support of this contention, he placed reliance upon the judgment of Hon'ble Gujarat High Court in the case of Aswin Vanaspati (cited supra). Before applying the said decision, we proceed to consider the facts of the case as to whether the facts on record would satisfy the apprehension of the A.O. that the transfer of the asset is to reduce tax liability. The agreement of the assessee with M/s. Black Stone for investment of equity fund in the assessee company is not disputed and it is also not out of place to mention that when such an 34 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
investment is proposed to be made, the investor company would stipulate certain conditions. As seen from the agreement between the assessee company and M/s. Black Stone, one of the conditions precedent to completion of the agreement was acquisition of the Film Software Library and TV Programmes Library from M/s. Ushakiran Television, M/s. Ushakiran Movies and Shri Ramoji Rao (HUF). It is also not in dispute that the agreement could not be completed due to non-receipt of the approval from FIPB within the due date and it is for the purpose of the execution of the agreement that the assessee had got the Film Software Library valued by Ernst & Young. Thus, it is clear that the valuation of the asset was done with an intention to get equity fund from a third party. The further fact that the assessee had taken loan from Standard Chartered Bank and since the assessee's agreement with M/s. Black Stone could not be executed, the assessee had to approach another party for the equity investment also is not disputed. According to us, the above facts justify the reference of the valuation of the asset to Ernst and Young, but does not prove that the valuation fixed/arrived at, was reasonable and was not exorbitant or that the higher valuation was not for claiming higher depreciation as the transaction was between related parties. However, the fact that the third parties have accepted the valuation goes to prove that the valuation is not entirely unreliable. The only ground on which the A.O. seems to have entertained the doubt is 35 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
because both the seller as well as the purchaser are related parties.
25. Let us now examine the judicial precedents relied upon by both the parties. With regard to the citation relied upon by the Ld. D.R., we find that the Hon'ble Supreme Court in the case of Guzdar Kajora Coal Mines Ltd., vs. CIT, Calcutta (cited supra) while dealing with the correctness of the valuation of an asset on its transfer between related parties adopted for the purpose of claiming depreciation, has held as under :
"11. Now, the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the IT authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But, if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to the IT authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual original cost was: See Pindi Kashmir Transport Co. Ltd. v. CIT (1954) 26 ITR 595 (Lah-Pak) : TC29R.253 and Kalooram Govindram vs. CIT (1965) 57 ITR 335 (SC) : TC29R.254. In this view of the matter it is open to the IT authorities to determine and to the assessee to show whether the goodwill of the business is or is not included in the consideration or the price paid for the acquisition of the asset. In other words, even if it is not expressly mentioned that goodwill has been sold, it can be shown and ascertained by evidence 36 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
whether the same has been purchased or not by the assessee. The expression "goodwill" has been considered and explained by this Court in S.C. Cambatta & Co. P. Ltd. vs. CEPT (1961) 41 ITR 500 (SC), and nothing more need be said about it. The principles stated by us are by no means exhaustive and are mainly illustrative.
12. Keeping in view the facts of the present case, we may make it clear that, if circumstances exist for going behind the valuation as also the allocation given in the deed of conveyance, it was and is open to the IT authorities to determine the valuation as well as the allocation between depreciable and non- depreciable assets."
26. In the case of CIT (Central), New Delhi vs. Dalmia Dadri Cement Ltd. (cited supra), the Hon'ble Delhi High Court while dealing with the provisions of Explanation-3 to Section 43(1) of the Act has held as under :
"11. We have heard the parties and given our utmost consideration to all the circumstances. As is clear from the narration of facts, in the books of Bhagwati Glass, the total expenditure incurred by it in the execution of the contract jobs was Rs. 3,11,954. As against that the assessee has paid Rs. 7,70,000 to it for execution of those jobs. This, on the face of it, appears to be a very high payment, specially when the Tribunal has noted that the jobs did not require any specialised or sophisticated skill. It was mostly a labour contract as the material was entirely supplied by the assessee. It is next also clear that the assessee and Bhagwati Glass were connected concerns indirectly owned by R. Dalmia, and that Bhagwati Glass had a carried forward loss of over Rs. 7 lakhs this year. The result has been that although Bhagwati Glass enjoyed a profit of about Rs. 4,58,000 in the execution of this contract, no tax liability ensued to it and the entire profit was wiped 37 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
off against the large brought forward loss. At the same time, the assessee has claimed to be entitled to depreciation, etc., on the capital value of those works at Rs. 7,70,000. The I.T. authorities were, therefore, right in observing that there was considerable element of collusion in the entire affair which could not be treated as the result of normal commercial considerations. The capital cost has no doubt been inflated in the hands of the assessee to enable it to claim higher depreciation, etc.
12. We find that the term "actual cost" came up for consideration before the Supreme Court in the case of Guzdar Kajora C041 Mines Ltd. vs. CIT 1972 CTR (SC) 231; (1972) 85 ITR 599. It was observed that the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the I.T. authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purpose, it is open to the I.T. authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. These observations in our view render the approach adopted by the Tribunal in the present case as unsustainable when it observed that collusion and inflation would not entitle the I.T. authorities to substitute their own figure of actual cost.
13. In the case of Guzdar Kajora Coal Mines Ltd. (supra), the deed of conveyance executed in favour of the assessee purported to transfer certain assets for a consideration of Rs. 6 lakhs paid by the assessee. Those assets included machinery, plants, stores, buildings, etc. The I.T. authorities found that 38 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
some of the directors and shareholders of the assessee and the vendor-company were the same and connected, and there were certain inflations and deflations of the written down values of the assets. No provision had been made for goodwill of the business. The ITO, therefore, allocated part of Rs. 6 lakhs to goodwill. The value of the depreciable assets was computed at Rs. 33,973 only. The Tribunal then rejected the assessee's claim holding, inter alia, that the allocation in the deed of conveyance was arbitrary. On a reference of the question whether the ITO was competent to go beyond the conveyance and fix a valuation of the assets on his own, the High Court answered the question in the affirmative. On appeal to the Supreme Court, it was held that there was no error or infirmity that would justify interference by the Supreme Court.
14. Similarly, the Calcutta High Court in Jogta Coal Co. Ltd. vs. CIT (1965) 55 ITR 89, observed that if the circumstances showed than an assessee had arranged to put a fictitious price on his assets in a contract or conveyance, it was open to the I.T. authorities to refuse to accept that price, go behind the contract or conveyance and ascertain what the original cost was. The Lahore High Court (Pakistan) has also in the case of Pindi Kashmir Transport Co. Ltd. (1954) 26 ITR 595 (Lah- Pak), observed that the I.T. authorities were justified in law in going behind the contract for determining the original cost to the company, for the purpose of making allowance of depreciation.
15. So far as the Explanations added to s. 43 of the Act, specially Expln. No. 3, under which alone the Tribunal has observed the interference by way of determination of actual cost can be made, we are of opinion that such Explanations are only elaborative and tend to bring out some of the circumstances in which the main provision of the law can operate. They can by no stretch be treated as exhaustive or to otherwise limit the wide scope which the provision of law may embrace. Rather the incorporation of some 39 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
of these Explanations by itself shows that the Legislature envisaged interference in given circumstances in the amount of purported actual cost.
16. We are further of opinion that the Tribunal was not justified in restricting the operation of the actuality of cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In these cases, the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost. This will be independent of the provisions contained in the IT Act. The provisions of this Act have not been introduced for this purpose. They have rather a special objective and is directed towards nullifying the malpractices, sometimes indulged in some quarters, of disproportionately inflating capital cost in order to earn high depreciation, and pass on in collusion substantial amounts to sister concerns or closely connected parties to whom those amounts may have little or negligible bearing on the incidence of tax. This is what appears to have happened in the present case. In our opinion, when the Legislature has prefixed the word "actual" to the word "cost", it was to lay emphasis on the reality and genuineness thereof and exclude collusive, inflated, deflated or fictitious costs."
27. In the case of CIT vs. Poulose & Mathen P. Ltd., (cited supra), the Hon'ble Kerala High Court while considering the applicability of the provisions of Explanation-3 to section 43(1) has held as under :
"15. We cannot agree with the conclusion of the Tribunal that the revaluation of the assets on the eve of the dissolution of the firm was made bona fide for adjustment of the mutual rights of the firm. This is not a case where there is no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, 40 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
the actual cost to the assessee less all depreciation actually allowed to him under the Act as defined under s. 43(6). Sec. 43(1) with Explanations thereof supersedes the general rule of law governing partnership, its assets and dissolution etc. The definition of 'actual cost' contained in s. 43(1) read with Explanations thereof affords a mechanism by which reduce the actual cost to a figure which is anything but real. When the asset was formally used by any other person for the purpose of his business and the main purpose of the transfer of the asset to the assessee is to claim a higher depreciation allowance so as to reduce the liability to pay income- tax, the 'actual cost' shall be determined by the AO in the exercise of the power conferred on him as prescribed in Expln. 3 to s. 43(1) no matter what the general law prescribes for determining the costs of the assets on dissolution of partnership firms and transfer of its assets.
16. Both the contesting parties, assessee as well as the Revenue, placed reliance on the decision of the Bombay High Court in Ginners & Pressers P. Ltd. vs. CIT 1978 CTR (Bom) 235 : (1978) 113 ITR 616 (Bom) : TC 29R.714, and the Tribunal said so in its impugned order. That was a case where s. 10(5)(a) of the 1922 Act corresponding to Expln. 3 to s. 43(1) of the present Act came up for discussion. The facts of that case narrated hereunder are more or loss similar to the facts on hand. The assessee, a private limited company, was a subsidiary of another private limited company. The object of formation of the assessee- company was to take over some oil and ginning mills, factories and land belonging to and used in its business by the present company. These assets were taken over by the assessee-company at a cost of Rs. 13,50,000. Their written down value for the parent company was only Rs. 2,21,412 while their original purchase cost to the parent company was Rs. 5,52,475. The assessee paid for the assets by issuing fully paid up shares of that value. The ITO applied the proviso to s. 10(5)(a) and, with the previous approval of the IAC, he fixed the actual cost of the 41 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
assets to the assessee at their written down value in the books of the transferor plus the balancing charge arising under s. 10(2)(vii). The Tribunal rejected the contention of the assessee that the assets had been transferred to the assessee by the parent company after they had been got valued by valuers, because the material on the basis of which the value had been fixed by the valuers for the assets in question had been withheld by the witness who was examined on behalf of the valuers before the ITO and the non- production of such material led to an adverse inference being drawn against the assessee- company. On these facts, two questions arose for consideration before the High Court on reference. First question is whether the proviso to s. 10(5)(a) has been properly applied and the second question is, whether the Tribunal is justified in rejecting the valuation and drawing an adverse inference against the assessee. As far as the first question is concerned the Court found that the condition for attracting the proviso to s. 10(5)(a) was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee-company. On the second question the Court found that the Tribunal was justified in rejecting the valuation report and drawing an adverse inference against the assessee. The first question alone is relevant in the present case and on that question the Court said that the ITO proceeded to fix or determine the actual cost (written down value) of the assets transferred by adopting the written down value of those assets transferred in the books of the transferor of the assessee-company as on the date of transfer and added to that figure the balancing charge arising under s. 10(2)(vii) of the Act. The Court further observed :
"It cannot be disputed that this method, if adopted, would clearly give the actual cost of the assets transferred to the transferor-
company as on the date of transfer, the determination would be irrational or unreasonable. If the ITO adopted this method 42 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
of determining the actual cost of the transferred assets with the approval of the IAC, it will be difficult to say that the method adopted was unreasonable or irrational".
17. Even if the assessee produces the valuation report, it cannot be said that the above conclusion would be different. Therefore, the drawing of adverse inference against the assessee has no impact on the question decided by the Court. The attempt of the Tribunal to distinguish the above decision on the basis that the assessee has furnished the revaluation report in the present case would not fructify."
28. In the case of Nagammal Cotton Mills P. Ltd. vs. CIT (cited supra), the Hon'ble Madras High Court has held as under :
"6. The learned counsel for the assessee submitted that the value of the machineries which the assessee had adopted when it took over the assets at the time of dissolution was in accordance with what had been said in the case of A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) :
TC 2R.453 wherein the Court approved the observation of this Court in the case of Md. Ussain vs. Abdul Gaffoor AIR 1950 Mad 758. Counsel submitted that the formation of the company was only due to the insistence of the lenders that the business of the company, namely, the running of the cotton mill should be by an incorporated company before the financial institutions could lend money to it. However, there is no material on record to substantiate that claim.
7. The fact that the assessee had adopted the market value at the time of dissolution even when such value is much higher than the written down value, would afford sufficient basis for invoking Expln. 3 to s. 43(1) when the surrounding circumstances indicate that the purpose of the transfer of the assets directly or indirectly to the 43 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
assessee where the assets had suffered depreciation prior to such transfer is such as to indicate that the main purpose of transfer was to enable the assessee to gain higher depreciation by taking a higher figure as it's cost at the time of such transfer. Here the firm was dissolved within about 13 months of its formation. The two partners besides the assessee- company were also the only two shareholders and directors of the company. The reality before and after the dissolution was the same. The same persons who enjoyed the benefits of the ownership of the assets and its uses continue to have such benefits, the two partners indirectly and the assessee itself directly. The findings recorded by the Tribunal in this background cannot be faulted. The question referred to us is, therefore, answered in favour of the Revenue and against the assessee."
29. The Coordinate Bench of Delhi Tribunal in the case of Bilt Power Ltd., New Delhi vs. Addl. CIT, Range- 2, New Delhi (cited supra), has held as under :
"36. At the outset, we may observe that AO has not considered the entire scheme as demerger under the Income-tax Act as contemplated u/s 2(19AA) of the Income-tax Act. Therefore, we do not consider it necessary to examine the observations of AO, and ld. CIT(A) and the submissions of both the parties on this count as it would only be of academic interest. This is evident from the fact that AO has invoked Explanation 3 to sec. 43(1) and not Explanation 7A to sec. 43(1). Further the contention of assessee that transferor company had also paid long term capital gain tax on the sale consideration is also not of much significance because tax liability is to be determined qua assessee. Therefore, the main issue for our consideration is whether AO was justified in invoking Explanation 3 to sec.43(1) by holding that the entire purpose of this scheme was reduction of tax liability by claiming higher depreciation in respect of those assets which were earlier used by transferor company by escalating the cost of the assets.44 ITA.No.1265/Hyd/2013
M/s. Ushodaya Enterprises Ltd., Hyderabad.
Explanation 3 has been incorporated in sec. 43(1) to counter the attempts of assessee to claim higher depreciation by purporting to purchase assets at more than their true or real cost. It is fundamental principle that department cannot question the wisdom of assessee in carrying out its business operations. Department cannot dictate as to how the assessee should conduct its business. However, legislature has made specific provisions in the Income-tax Act when department can depart from this fundamental principle and ignore the apparent state of affairs and pearce the smoky-screen created by assessee in the transaction to find out the true intention. These sections provide circumstances in which department can impute its judgment to the assessee's decision. The relevant provisions are to be found in section 40A(2), Explanation 3 to sec. 43(1), section 92C etc. But before these provisions can be invoked, legislature has required the AO to acquire necessary satisfaction in this regard which obviously has to be acquired judiciously and not arbitrarily. The AO should demonstrate that his satisfaction was rational and based on relevant factors. Explanation 3 to section 43(1) reads as under: -
43. "In sections 28 to 41 and in this section, unless the context otherwise requires-
(1) "actual cost " means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
Explanation 3 - Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income tax (by claiming depreciation with 45 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the [Joint Commissioner],determine having regard to all the circumstances of the case. "
Thus, the basic ingredients of Explanation 3 are as under: -
i) an asset was already in use in a business in the hands of one persons;
ii) that person transfers the asset to
assessee;
iii) the A.O. is satisfied that the main purpose of transfer of such assets was the reduction of liability to Income-tax by claiming depreciation with reference to an enhanced cost;
iv) the A.O. can refuse to accept the sale price as the actual cost to the purchaser (assessee) in the purchasers assessments.
37. The legislature has prefixed the word "actual" to the word "cost" which clearly signifies that emphasis is on the reality and genuineness of the cost so as to exclude collusive, inflated, deflated or fictitious cost. As already pointed out that the AO is required to judiciously acquire the necessary satisfaction regarding the object of transfer. It is not to be understood that every case wherever assessee acquires a used asset from other person then the object would only be reduction of tax liability. There may be genuine cases also where the asset has appreciated in value since its original purchase and consequently, the market value on the date of the sale is greater than written down value in the AO's chart. In the absence of any finding, that the main purpose of the transfer is to reduce the tax liability with reference to enhanced cost, it is not permissible 46 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
to the AO to reject the cost paid for the transfer. The AO cannot substitute his own estimate of the value rejecting the assessee's estimate as was held in by Hon'ble Supreme Court in Joyta Coal Company Ltd. vs. CIT, 36 ITR 521. Thus, where at the time of partition of a family, as was the case in Kalu Ram Govind Ram vs. CIT, 57 ITR 335, the assets were allotted among the members at a valuation arrived at in a reasonable manner, there being no allegation of inflated cost by reason of fraud, collusion, subterfuge, devise or false transaction made with an ulterior purpose, the department was held to be precluded from going behind the agreement between the purchaser and the seller in determining the purchase price. The thresh hold condition is that the transfer should be with intent to get the benefit of enhanced value of asset. Therefore, before invoking Explanation 3, the AO is required to record his satisfaction that entire transaction was undertaken with a view to reduce the tax liability by claiming higher depreciation. Before we embark upon for detailed discussion regarding actual cost to the assessee in terms of Explanation 3, we first decide some objections of both the sides. The assessee's objection is that AO has not recorded his requisite satisfaction for invoking Explanation 3: we are not in agreement with ld. Sr. Counsel's argument because, as rightly pointed out by ld. DR, a holistic view is to be taken. The entire discussion by AO proceeds on the premise that assessee was trying to claim higher depreciation on enhanced cost. The next objection of ld. Sr. Counsel is that AO did not determine the actual cost as required in Explanation 3. We are not in agreement with this argument also of ld. Sr. Counsel because, as rightly demonstrated by ld. DR, AO had made all out efforts to find out the actual cost. We do not find any substance in this plea of the assessee because AO had taken into consideration different valuation reports and WDV of assets before arriving at the conclusion that WDV as per Income-tax records was the actual cost of assets."
47 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
30. In assessee's own case for A.Y. 2008-09, 'B' Bench of this Tribunal (cited supra), while dealing with the disallowance of depreciation claimed on non-compete fee of Rs.670 crores paid by the assessee company to UKT and UKM for non-competing in the business directly or indirectly for a period of five years from the date of agreement, has held as under :
". . . . . .Therefore, considering the totality of the facts and circumstances we are of the view that as the impact of acquisition of 39% of equity shares by M/s Equator Trading Enterprises Pvt. Ltd. has not at all been examined by AO at the time of assessment proceeding or by the learned CIT(A) while disposing of assessee's appeal and further as the additional evidences produced before us were not examined either by the AO or by CIT(A), which certainly have a crucial bearing on the issue as to whether the payment of non-compete fee is genuine and necessary, we are inclined to remit the matter back to the file of AO for deciding afresh. Only after the issue relating to genuineness of non-compete fee paid and necessity to pay such fee is resolved, AO will decide the allowability of depreciation claimed on such non- compete fee by keeping in view the statutory provision as well as the ratio laid down in the decisions referred to hereinabove and any other decision brought to his notice. It is needless to mention that AO must afford a fair opportunity of hearing to assessee in the matter before deciding the issue. This ground is considered to be allowed for statistical purposes."
31. With regard to the decisions relied upon by the Ld. Counsel for the assessee, we find that in the case of Ashwin Vanaspati Industries vs. CIT reported in (2002) 255 ITR 26 (Guj.) (HC), the Hon'ble Gujarat High Court has held that before applying the provisions of 48 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
Explanation-3 to Section 43(1), the A.O. has to record his satisfaction that the assets were transferred for reducing the liability to pay income tax and for this purpose, an appellate authority cannot substitute its opinion to sustain the applicability of the said provision only because the assets which were transferred were used by any other person before date of acquisition. It was further held that merely because document in the nature of contract of purchase is entered into, denoting certain price, the same would not conclusively establish the correctness of the claim made by an assessee if the A.O. is of the opinion that the transaction is by way of subterfuge or device only to avoid tax which the assessee is otherwise liable to pay or that the transaction is an illusionary or colourable or that the assessee has acted fraudulently. It was further emphasized that the Explanation-3 does not require determination of market value at the hands of the A.O. but speaks of determination of actual cost by the A.O. with the prior approval of the JCIT having regard to all the circumstances of the case.
31.1. In the case of Chitra Publicity Co. P. Ltd., vs. ACIT reported in (2010) 4 ITR 738 (Ahd.) (T.M.) it was held that the A.O. under Explanation-3 to Section 43(1) has to determine the 'actual cost' which can only mean arms length value or real value or worth of assets transferred and it is, therefore, not possible to totally reject the 49 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
concept of market value of assets transferred as not relevant for determining the actual cost.
31.2. In the case of CIT vs. Sekar Offset Press reported in (1995) 214 ITR 516 it was held that the Explanation-3 to Section 43(1) of the I.T. Act, would be attracted only in cases where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purpose of business and the Income Tax Officer is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was for the reduction of the liability to income tax. It was held that there are no other circumstances, under which, the Explanation can be invoked.
31.3. In the case of Kungendi Industrial Works P. Ltd., vs. CIT reported in 57 ITR 540 (AP) wherein similar provisions of section 192(2) of the Act was considered and it was held that the increase in the value of the asset was substantial and out of the proportion to the WDV in the hands of the previous owner and the reasons advanced for the change-over did not justify the increase in value of the assets.
31.4. With respect to the case of CIT vs. Poulose & Mathen P. Ltd., reported in 236 ITR 416, it was submitted that the A.O. has relied upon this decision for invoking the provisions of section 43(1). However, he has submitted that the facts of the case before us are distinguishable from the said case before the Hon'ble Madras High Court.
50 ITA.No.1265/Hyd/2013M/s. Ushodaya Enterprises Ltd., Hyderabad.
Thus, according to him, the A.O. has invoked the provisions of section 43(1) and Explanation-3 thereto, without recording the satisfaction and hence, the subsequent valuation of the WDV of the asset by the A.O. is not sustainable.
32. From all the above decisions, the basic and common concept that has emerged is that before applying the Explanation-3 to Section 43(1) of the Act, the A.O. has to be satisfied that the main purpose of the transfer of the asset was reduction of tax liability by claiming depreciation on the enhanced cost. We find that though the A.O. has extensively reproduced the findings of the Ld. CIT under section 263, his show cause notice to the assessee and also the assessee's submissions to the A.O, there is no mention of the applicability of Section 43(1) and the Explanation-3 thereto, to the facts of assessee's case in the show cause notice dated 04.12.2012, but the show cause notice is only referring to the inaccuracies or inconsistencies in the valuer's report and there is no mention of the circumstances leading to the transfer of the asset in the assessee's submissions thereto. The A.O. has recorded his satisfaction in the assessment order that because the transaction is between related parties and the asset has been transferred at an exorbitant price, the provisions of Section 43(1) are attracted. In the entire assessment order, there is no whisper of the circumstances leading to the transfer of the asset i.e., the 51 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
agreements with the third parties for investment of equity and the pre-condition set by them for such investment.
32.1. Similar circumstance existed in the assessee's own case for the subsequent A.Y. 2008-09 regarding the non-competing fee and this Tribunal has observed that the factual position has not been properly appreciated by the authorities below and has set aside the issue for reconsideration. In the case before us, the Ld. CIT(A) also has not referred to or verified the circumstances leading to the transfer of the asset to come to the conclusion that the above provisions are not applicable to the case on hand but has granted relief on the ground that the A.O. has not recorded his satisfaction before invoking the above provisions. Though, the Ld. D.R. has not been able to rebut the factual submissions of the assessee on the circumstances leading to the transfer of the asset, we find that the same needs verification by the authorities below. In view of the same, we deem it fit and proper to remand this issue to the file of the A.O. for the limited purpose of verification of the facts and circumstances stated to be the cause of transfer of the asset to the assessee herein which are reproduced in the above paragraphs and we hold that if the said circumstances are proved to have existed, then the provisions of Explanation-3 to Section 43(1) are clearly not attracted. However, if the above circumstances are not proved or are found to be not the reason/purpose for transfer of the asset, only then shall the A.O. invoke the above provision. But in such 52 ITA.No.1265/Hyd/2013 M/s. Ushodaya Enterprises Ltd., Hyderabad.
circumstances, we direct that if the A.O. is not satisfied with the valuation done by Ernst & Young, then after giving a speaking order for not accepting the same, the A.O. shall revalue the asset in accordance with the provisions of law and shall not adopt the WDV of the asset in the hands of the previous owner. In the result, ground No. 2 and the additional ground of appeal are treated as allowed for statistical purposes.
33. In the result, appeal of the Revenue is treated as partly allowed for statistical purposes.
Order pronounced in the open Court on 16.02.2016.
Sd/- Sd/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated 16th February, 2016 VBP/- Copy to :
1. Dy. Director of Income Tax, Circle-16(2), Room No.611, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad.
2. M/s. Ushodaya Enterprises Limited, 6-3-570, Somajiguda, Hyderabad.
3. CIT(A)-V, Hyderabad.
4. CIT-IV, Hyderabad
5. D.R. ITAT 'A' Bench, Hyderabad.
6. Guard File