Income Tax Appellate Tribunal - Hyderabad
M/S. Ushodaya Enterprises Pvt.Ltd.,, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 765/Hyd/2012
Asst. Year: 2007-08
M/s Ushodaya Enterprises V/s. Asst. Commissioner of
Pvt. Ltd., Hyderabad. Income-tax, Circle - 16(2),
Hyderabad.
(PAN - AAACU2690P )
(Appellant) (Respondent)
Appellant by : Shri H. Padamchand Khimcha
Respondent by : Shri M. Ravinder Sai
Date of Hearing 19/12/2012
Date of 22/02/2013
Pronouncement
O R D E R
Per Saktijit Dey, Judicial Member:
This appeal filed by the assessee is directed against the order of the Commissioner of Income-tax-IV, Hyderabad dated 28/03/2012, passed u/s 263 of the Act, for the assessment year 2007-08.
2. The assessee has raised the following grounds of appeal:
"1.1 The learned Commissioner of Income-tax IV, Hyderabad has erred in passing the order under section 263 in the manner passed by him. The 2 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd order passed under section 263 being bad in law is liable to be quashed.
2.1. The learned Commissioner of Income-tax IV, Hyderabad has erred in concluding that the order passed by the learned Asstt. Commissioner of Income-tax Circle 16(2), Hyderabad under section 143(3) for the assessment year 2007-08 is erroneous in so far as it is prejudicial to the interests of revenue without demonstrating how is it so. The conditions or requirements for treating the assessment order as erroneous in so far as it is prejudicial to the interests of revenue being not satisfied, the order passed under section 263 is completely bad in law and liable to be quashed.
3.1 The learned Commissioner of Income-tax IV, Hyderabad has erred in making various averments in concluding that the valuation report given by M/s. Emst & Young is not realistic, not acceptable and contains several contradictions. The various averments of the learned Commissioner of Income- tax IV, Hyderabad made without any basis or logic are completely incorrect, contrary to the facts, bad in law and liable to be quashed.
4.1. The learned Commissioner of Income-tax IV, Hyderabad has erred in-
i. Concluding that the valuation report already furnished by the appellant on 18.3.22008 at the time of assessment , could not be examined by the Assessing Officer due to change in incumbent in office.
ii. Setting aside the assessment order passed by the Assessing Officer after duly examining the details of report.
iii. Concluding that the Assessing Officer has failed to examine the applicability of section 43(1) read with Explanation 3 and accordingly directing him to examine the applicability of the said provision. iv. Not appreciating that Explanation 3 to section 43(1) is not applicable to the facts and circumstances of the case.
v. Not appreciating that the software library was purchased at arms' length price and based on valuation report obtained from an export professional organisation.3 ITA No. 765/Hyd/12
Ushodaya Enterprises Pvt. Ltd 5.1. On facts and in the circumstances of the case and law applicable, the order passed by the learned Commissioner of Income-tax under section 263 is incorrect, contrary to fact, bad in law and liable to be quashed.
6.1. In view of the above and such other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned Commissioner of Income- tax IV, Hyderabad under section 263 of the Income- tax Act, 1961 be quashed or in the alternative, Explanation 3 to section 43(1) be held as inapplicable in the facts and circumstances of the case to the purchase of assets by the appellant."
3. As could be culled out from the grounds raised, the point of dispute in this appeal relates to the legality and validity of the order passed u/s 263 of the Act in setting aside the assessment order passed u/s 143(3) of the Act holding it to be erroneous and prejudicial to the interests of the revenue.
4. Briefly the facts relating to the issue in dispute are, the assessee company is engaged in the business of publishing of news paper and satellite television broadcasting. For the assessment year under dispute the assessee filed its return of income on 31/10/2007 declaring income of Rs. 27,10,85,700/- under normal provisions and book profit of Rs. 104,33,52,695/- u/s 115JB of the Act. Initially the return was processed u/s 143(1) of the Act. Subsequently, however, the assessee's case was selected for scrutiny and assessment was completed u/s 143(3) of the Act vide order dated 31/12/2009. The Commissioner called for the assessment records of the assessee for the impugned year and while perusing the assessment record, the Commissioner was of the view that the assessment order passed u/s 143(3) is erroneous and prejudicial to the interests of the revenue. He, therefore, in exercise of his power 4 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd u/s 263 of the Act, issued a notice to the assessee to show cause raising the following issues:
"(i) on verification of the records, it was noticed that the assets purchased by you from M/s.Ushakiran Movies and M/s.
Ushakiran Television were earlier used by them for the purpose of their business and depreciation was also claimed by them on these assets. The WDV of these two concerns- put together as on 01.04.2006 is Rs.160,96,47,766. However, these assets were purchased by you for a sum of Rs.787,80,67,883/- and depreciation was accordingly claimed on it. Admittedly, all these three concerns are inter-related being group concerns. Therefore, the main purpose behind this transaction c an be seen as one to reduce the liability to Income-tax (by claiming deduction with reference to an enhanced cost). And as such explanation 3 to Sec.43 squarely applies to your case.
In view of the above, please show cause as to why the WDV of Rs.160,96,47,766 as on 01.-04-2006 in the hands of HUFs (M/s. Ushakiran Movies and M/s. Ushakiran Television) should not be taken as FMV and depreciation in the hands of the company be allowed for the same amount as against he depreciation claimed by you on Rs.787,80,67,883/-.
(ii) On verification of the record, it was noticed that you have claimed depreciation @ 25% on the assets used for the purpose of telecasting the films and TV Serials and the cinematograph films which are available in the form of CDs/Magnetic Tapes treating them as intangible assets. These assets are in fact, tools to the business activity. These assets include hard copies of feature films and cine videos which are purchased from others for the purpose of telecasting which are in the form of CDs/magnetic tapes and no patent/proprietary rights can be claimed over them by you alone as anyone can purchase and telecast them in their channels. Therefore, these can be claimed as intangible assets by the producers only and not by anyone who purchased it for the purpose of telecasting. These assets at the best can only be treated as Plant & Machinery and not otherwise."
5. As is evident from the aforesaid show cause notice the Commissioner was of the opinion that while the WDV of the assets purchased from M/s Ushakiran Movies and Ushakiran Television put together was shown at Rs. 160,96,47,766/- as on 01/04/2006 whereas the assessee had purchased the very same assets for a sum of Rs. 787,80,67,883/- and claimed depreciation on it. All the parties, i.e. sellers and purchasers 5 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd being related to each other Explanation 3 to section 43(1) comes into play. Secondly, it was observed by the Commissioner that the assessee had claimed depreciation @ 25% by treating them as intangible assets, which according to the Commissioner being in the nature of tools to the business activity should have been treated as plant and machinery for the purpose of claiming depreciation at the appropriate rate. In response to the show cause notice, the assessee submitted a reply stating therein that the assessee purchased a software library of films and programmes from M/s Ushakiran Movies (UKM in short) and M/s Ushakiran Television (UKTV in short) for a sum of Rs.787,80,67,887/-. It was stated that these two business units, i.e. UKM and UKTV were owned by Shri Ramoji Rao, HUF.
6. The Authorised Representative for the assessee, submitting a break up of the purchase consideration of Rs.787,80,67,887/-, submitted that excepting the cost of software library valued at Rs. 775 crores all other assets and liabilities of UKM and UKTV were taken over at book value as per the books of account of Shri Ramoji Rao, HUF except the software library which was valued at Rs. 775 crores as per the valuation report. It was submitted by the assessee that software library in broadcasting activity consists of satellite rights of feature films and TV programmes software for exploitation in TV channels. Shri Ramoji Rao, HUF had acquired software library consisting of satellite rights of feature films and TV programmes software spread over a period of time ranging between 5 years to 50 years and in some cases the 6 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd period is perpetual. It was submitted that the value of software rights depends on the market demand of exploitation rights of feature films and tele software. The successful films always command a premium price irrespective of number of years of their screening by various channels. It was stated that the competition among channels would alone decide the market value of films and TV programmes. If the film is average, the premium would be low and the market value will also be low. The cost of production of software or its value in the books of account has nothing to do with the success or otherwise of the TV software and market value of TV software would entirely depend on the success of relevant programme but not related to the cost of software. It was submitted that in case of film producers once deduction is claimed under Rule 9A/9B of IT Rules, on any motion picture there will not be any value in their books but rights of the pictures can be sold and substantial income can be there on sale of such rights. The assessee in this context cited examples of certain movies, satellite rights of which were purchased between Rs. 3.5 crores to Rs.5.5 crores by different TV channels before their release to public. It was submitted UKM and UKTV have claimed the cost of production of films or programmes under Rule 9A/9B IT Rules in earlier years up to the assessment year 2002-03. Thereafter, from AY 2006- 07, depreciation was claimed by them on the software library treating it as an intangible asset. It was submitted that at the time of sale of software library to the assessee, the WDV of software was a sum of Rs. 160.96 crore, which does not include the value of software which was claimed as deduction in full under Rule 9A/9B of the IT Rules. The software library was 7 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd charged to profit and loss account and such software will have value for its future exploitation and commands value in the market.
7. It was further submitted that the assessee company approached a private equity capital from a foreign company, namely, M/s Blackstone FP Capital partner (Mauritius) V Ltd. and the said company for the purpose of investing in the assessee company desired that the assessee should own and acquire the software library from Shri Ramoji Rao, HUF. To facilitate the investment, the assessee got the valuation of software library done by M/s Ernst & Young, who recommended the value of software library in the range of Rs. 746.41 crores to Rs. 814.27 crores after taking into consideration all the film rights and programmes in the software library proposed for sale at that time by Shri Ramoji Rao, HUF. The assessee had acquired the entire software library consisting of 47.95 lakh minutes of TV programme and 3778 films with satellite rights for a period ranging from 5 years to 50 years and some film rights for a perpetual period for a sum of Rs. 775 crores, which is in between the value recommended by the valuer M/s Ernst & Young.
8. It was, further, submitted that M/s Blackstone agreed to invest sum of Rs. 1217 crores for acquiring 26% stake in the assessee company by entering into necessary agreement subject to the approval from foreign investment promotion board, Government of India. It was submitted that pending such agreement with M/s Blackstone, the assessee had 8 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd obtained loan from Standard Chartered Bank and acquired the software library from Shri Ramoji Rao, HUF during the FY 2006- 07 for facilitating the investment to be made by M/s Blackstone. It was submitted by the assessee that in response to specific query during the assessment proceedings a copy of valuation report by M/s Ernst & Young was submitted before the Assessing Officer. It was submitted that the fact that M/s Blackstone had agreed to invest in the assessee company subject to approval by the Government would indicate that the price agreed to be paid was at arm's length and in conformity with market value of the software library. The assessee submitted that as ultimately the agreement with M/s Blackstone could not be worked out due to non obtaining of approval of the Foreign Investment Promotion Board, the assessee entered into negotiations with domestic investor M/s Equator Trading Enterprises Pvt. Ltd. who came forward to invest a sum of Rs. 2604 crores after carrying out the due diligence on the activities, assets and liabilities of the assessee company including the software library acquired by the assessee company from Shri Ramoji Rao, HUF.
9. The learned Authorised Representative for the assessee further submitted that the domestic investor acquired 39% of share capital of the assessee by way of allotment of shares from assessee company and also purchased shares from Shri Ramoji Rao, HUF. It was submitted that this investment from investor establishes the fact that the market value of the software library determined by M/s Ernst & Young is correct. It was submitted that M/s Equator Trading Enterprises Pvt. Ltd.
9 ITA No. 765/Hyd/12Ushodaya Enterprises Pvt. Ltd invested a sum of Rs. 2604 crores in the assessee for 30% of share capital and M/s Equator trading desired that the assessee company should split into four companies and as such the software library was transferred to one of the companies at the value acquired from Shri Ramoji Rao, HUF. It was submitted that M/s Equator Trading Enterprises Pvt. Ltd. has also paid non-compete fee of Rs. 670 crores subsequently.
10. It was also submitted by the assessee before the Commissioner of Income-tax that there was no intention to enhance the cost of software library for claiming enhanced depreciation in the books of account of the assessee. The software library acquired was grouped under the current assets in the balance sheet and cost of library has been amortized over a period of time. It was submitted that Shri Ramoji Rao, HUF is assessed to tax by the same Assessing Officer 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 arm's length in the hands of Shri Ramoji Rao, HUF. It was further 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 has assessed the sale consideration under the head 'long term capital gain' and Shri Ramoji Rao, HUF has paid the tax on the sale consideration. It was submitted that the outside investor had invested a sum of Rs. 2600 crores in the assessee company by taking into account of value of various assets including the software library.
10 ITA No. 765/Hyd/12Ushodaya Enterprises Pvt. Ltd
11. With regard to the claim of depreciation by applying the rate of 25% the assessee submitted that the software library falls within the definition of copy right under the Copy Rights Act, 1957,hence, depreciation on software library @ 25% was rightly claimed by the assessee.
12. The Commissioner of Income-tax, in the course of revisionary proceedings under S.263, issued two more notices raising further issues with regard to the discrepancies found in the valuation report and seeking the assessee's clarification on them. In response to such notices, the assessee made further submissions to the effect that for any movie channel software library is the main asset which has been valued by M/s Ernst & Young according to the industry norms. It was submitted that while evaluating the market value of films tax was not a factor at all. The value of software library is based on the market trends and industry practices prevailing at the time of submission of the report. It was submitted that the rights over a movie may not appear in the books of account after write off but such movies are having predominant market value. It was submitted that the Assessing Officer while completing the assessment u/s 143(3) has examined the valuation report and all the facts submitted by the assessee during the assessment proceedings. The Assessing Officer after examining the entire issue had accepted the value of software library determined by M/s Ernst & Young. The Assessing Officer having conducted necessary enquiry and applied his mind while completing the assessment consideration of the same issues again in revision 11 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd proceedings amounts to change of opinion. In support of such contentions, the assessee relied upon various decisions of the Hon'ble Supreme Court and different High Courts.
13. The Commissioner, after considering the submissions of the assessee and the materials on record found that Shri Ramoji Rao, HUF and his family members owned the entire share capital of the assessee during the relevant previous year. Subsequently, a portion of the share capital was given to a private equity investor. Shri Ramoji Rao, HUF is also the Chairman of the assessee company. The assessee company had entered into a business transfer agreement with business units of Shri Ramoji Rao, HUF, i.e. UKM and UKTV on 15/03/2007. As per the agreement UKM and UKTV agreed to transfer their business as a going concern to the assessee company. The assets transferred under the agreement are: (i) content rights with respect to film and programme library consisting of rights telecast films and other TV programs, (ii) all movable assets including office, furniture, plant & machinery and equipment,
(iii) all licenses and approvals required to conduct the business,
(iv) all pending contracts, current assets including book debts and stocks, (v) all telephone, fax, telex, and communication lines pertaining to the business and (vi) services of all the personnel attached to the business. The sale consideration for transfer of the business undertakings by Shri Ramoji Rao, HUF was a sum of Rs. 787,80,67,883/-. As per the terms of the agreement the sale consideration was not divisible but is a single undivided slump sale consideration for the entire TV software business with no independent values being assigned to 12 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd the various components of the TV software business. In the books of account of the assessee, fixed assets, sundry debtors, inventories, loans and advances and current assets were recorded at the book value as appearing in the books of account of Shri Ramoji Rao, HUF. The assessee company acquired the fixed assets having book value of Rs. 3.62 crores but such assets were valued and acquired at book price whereas the software library whose WDV in the books of account of Shri Ramoji Rao, HUF was a sum of Rs.160,96,47,766/- was valued at Rs. 775 crores at the time of transfer of business undertaking on the basis of a valuation report of M/s Ernst & Young. It was seen by the Commissioner that the entire networth of the business undertakings transferred by Shri Ramoji Rao, HUF was a sum of Rs.173,81,74,313/-.
14. The Commissioner of Income-tax, on going through the valuation report of M/s Ernst & Young, found it to be not realistic or acceptable as while valuing the software library at the hands of the seller Shri Ramoji Rao, HUF several assumptions and presumptions were made. The Commissioner was of the view that the market value determined at the hands of the seller may not be the market price or estimated range price from the angle of the purchaser. The assessee company did not determine the market value of the software library and in an arm's length transaction a buyer of the property cannot rely totally on the value determined by the seller. M/s Ernst & Young valued the software library at the behest of the Shri Ramoji Rao, HUF and not at the behest of the assessee 13 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd company. The valuation report further mentioned that the valuation of software library is applicable to Shri Ramoji Rao, HUF only and not to others. In the said valuation report, it has further been mentioned that Shri Ramoji Rao, HUF has accumulated losses of Rs. 1600 crores and as a result of this huge carried forward business loss and unabsorbed depreciation the HUF will not have any tax liability in future. The Commissioner was of the view that this factor influenced the valuer to enhance the market value of the property as it will not result into any tax liability at the hands of the seller.
15. It was further noted by the Commissioner of Income- tax though the valuation of software library was done for the purpose of starting new channel and the value of software library was determined on 30/09/2006 till the end of the previous year the assessee did not start any new channel. Shri Ramoji Rao, HUF also did not start any new channel whereas the entire valuation report is based on the basic assumption that Shri Ramoji Rao, HUF is going to launch dedicated film channels in USA and in the rest of the world in Telugu, Kannada, Benaglee and Marathi languages. This did not happen either in the previous year or in the subsequent year. From the method adopted for valuation of software library the Commissioner of Income-tax found that the valuations have been made only on assumption. In the report, it has been mentioned that Telugu films library has earned advertisement revenues of Rs. 7.5 crores from re-run of its content on Eenadu Telugu Channel. About 16 films are run during a week and as each film is for 3 hours the total time for, which films are run 14 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd during a week is 48 hours, which is 1/3 r d of total available time of 168 hours on the Eenadu Telugu Channel. Thus, when a Telugu film channel would be launched, the revenue would be doubled to approximately to Rs. 15 crores per annum. The Commissioner found this method of valuation to be purely on assumptions as firstly no new channel was started during the previous year and secondly, even if fully dedicated Telugu film channel is also launched, the advertisement revenues would become double from Rs.7.5 crores to Rs. 15 crores per annum is without any basis. According to the Commissioner of Income- tax the software library should be determined with reference to the market value prevailing on the date of valuation i.e. 30/09/2006. Therefore, there is no basis for the valuer to jump at the conclusion that the revenue will automatically become double and thereby valued the Telugu films at Rs. 230 crores.
16. It was further noticed by the Commissioner of Income-tax that the valuer did not value the software library by one method of valuation. Different methods were adopted for valuing the films in the software library. In respect of Telugu films discounted cash flow method was adopted and for valuation of Kannada film the valuer adopted market capitalization method i.e. P.E. method and for a portion of the software library the valuer adopted cost price method. Thus, the valuer has not applied or followed any method consistently. It was also noticed by the Commissioner that it was reported in the valuation report around 58% of the films owned by Shri Ramoji Rao, HUF were released to the prior to the year 1990. The films released after the year 2000 comprises about 12% of 15 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd the software library. Whereas all the films were valued at an average price which according to the Commissioner was not appropriate. The assessee company has furnished the average cost of acquisition of each film in the hands of Shri Ramoji Rao, HUF in software library and the average market value of each film as per the valuation report of M/s Ernst & Young. The average cost of acquisition of Telugu film was worked out to a sum of Rs. 6,43,550/- and average market value of each Telugu film as per the valuation report was worked out to a sum of Rs.28,81,858/-. In respect of Kannada films the average cost of acquisition was worked out to a sum of Rs.4,08,086/- and the value determined the market value of each Kannada film at Rs.23,10,450/-. Similarly films of other languages the average cost of acquisition of each film was worked out to a sum of Rs.2,22,538/- and the market price of each film was determined by the valuer at a sum of Rs. 9,42,818/-. The basis for determination by the market value by M/s Ernst & Young is the data supplied by Shri Ramoji Rao, HUF and no independent verification was carried out by the valuer. It was further noticed by the Commissioner that rights over 27% of the films in the film library would expire before 31 st December, 2009, which is less than two-and-half years' of valuation.
17. That the valuation report was made on the basis of assumptions was further found from the fact that the total advertisement revenues on the utilization of software library will accrue to the HUF whereas in an arm's length transaction the broadcaster of software library is also entitled to retain a part of the advertisement revenues for rendering the services, 16 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd which proves the fact that the value determined by the valuer is not at arm's length. It was further noticed by the Commissioner that the valuer has fixed the total software library between Rs.746.41 crores and Rs.814.27 crores while the assessee company has adopted the value at Rs. 775 crores. The total cost of software library in the hands of Shri Ramoji Rao, HUF as per the valuation report was sum of Rs. 448.37 crores. The assessee had earned revenue of Rs. 296.64 crores from the programmes contained in the software library. Thus, on the date of valuation, i.e. 30/09/2006, the cost of software library to Shri Ramoji Rao, HUF works out to Rs. 151.73 crores (Rs. 448.37 - 296.64) and most of the films were very old films produced before the year 1980. In view of these inconsistencies, the value adopted in the valuation report could not be accepted as correct.
18. On examining the assessment records, the Commissioner found that in the return of income filed by the assessee, the assessee has claimed depreciation on the software library acquired from Shri Ramoji Rao, HUF at 25% on a sum of Rs. 778,01,07,072/-. As the asset was acquired in the last week of March, 2007 depreciation claimed was for a period of less than 180 days and the same was quantified by the assessee at a sum of Rs.98,50,13,384/-. The total depreciation claimed on cinematography films and software library was a sum of Rs.99,01,02,307/-. The depreciation claimed by the assessee was allowed by the Assessing Officer in the assessment completed u/s 143(3) of the Act. It was noticed by the Commissioner that during the course of assessment 17 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd proceedings, the Assessing Officer on 07/06/2008 had required the assessee to furnish a copy of the valuation report and basis for the valuation of the films. However, the valuation report stated to have been submitted by the assessee before the Assessing Officer on 18/03/2008 was not in the assessment record. It was further found from the record by the Commissioner of Income-tax that during the continuation of the assessment proceedings there was a change in the incumbency and a new Assessing Officer took over the charge. However, from the assessment record it was not at all discernible that the succeeding Assessing Officer had perused the valuation report of M/s Ernst & Young as nothing about the valuation report has been mentioned in the order sheet or in the assessment order passed u/s 143(3). The assessment record further revealed the fact that the Assessing Officer did not examine the applicability of provisions of section 43(1), Explanation 3 of the Act. It was also a fact that while the assessee company acquired the software library for a sum of Rs. 755 crores but it has claimed depreciation on the software library at a sum of Rs. 788.01 crores. This fact was not at all verified by the Assessing Officer while allowing the claim of depreciation.
19. The Commissioner of Income-tax did not accept the contention of the assessee that the Assessing Officer has conducted due enquiry before completing the assessment because when the valuation report does not exist in the assessment record it is not known whether it is existed at the time when the scrutiny assessment order was passed and 18 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd whether the Assessing Officer had an opportunity to look into the valuation report. The Commissioner further observed that the assessment order passed reveals that the Assessing Officer has not at all looked into the valuation report as otherwise the Assessing Officer certainly would have found out the inconsistencies in the valuation report. The Commissioner further held that the Assessing Officer totally ignored to examine the applicability of Explanation-3 of S.43(1). The Commissioner held that thought the Assessing Officer has called for the details he has neither conducted any probe with regard to the valuation of the software library nor he has examined the applicability of provision as contained in Explanation-3 of S.43(1). The Commissioner, therefore, held the assessment order passed u/s 143(3) to be erroneous and prejudicial to the interests of the revenue. Thus, the Commissioner set aside the assessment order with a direction to the Assessing Officer to examine the applicability of provisions of section 43(1) Explanation 3.
20. The Commissioner of Income-tax also directed the Assessing Officer to take the assistance of an expert in valuation of software library, if necessary, and the Assessing Officer should obtain the prior approval of Additional Commissioner in respect of determination of software library in accordance with the provisions of section 43(1) Explanation 3. The Commissioner further directed the Assessing Officer to provide opportunity to the assessee to prove that the price paid by it was the market price of the software library on the date of acquisition. The Commissioner also made it clear in his order 19 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd that the assessee is at liberty to furnish either any other evidence or another valuation report determining the market value of software library to show that the price at which it has purchased the software library is at arm's length.
21. Aggrieved, the assessee is in appeal before us.
22. The learned counsel for the assessee submitted before us that the order passed by the Commissioner of Income-tax u/s 263 of the Act is in violation of the basic principles of the provision contained u/s 263 of the Act. The learned counsel submitted that the assessment order passed u/s 143(3) of the Act, cannot be considered to be erroneous and prejudicial to the interests of the revenue as the Assessing Officer has passed the order after conducting necessary enquiry. The learned counsel referring to the notices issued by the Assessing Officer in course of assessment proceedings which are at pages 142 & 146 of the paper book and the reply submitted by the assessee in compliance thereof, which are at pages 134 and 145 of the paper book, submitted that the Assessing Officer had not only conducted necessary enquiry with regard to the issue of depreciation but has completed assessment only after examining in detail the reply submitted by the assessee along with other supporting evidences. It was submitted by the learned counsel that only because the Assessing Officer has not mentioned about the valuation report in the assessment order it will not mean that enquiry was not made by him. The learned counsel submitted that even assuming that the enquiries made by the Assessing Officer are inadequate, the jurisdiction u/s 263 of IT Act cannot be assumed, as it was not a case of lack of enquiry. The learned 20 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd counsel submitted that in case of ALA Firm V/s. Commissioner, 189 ITR 285, the Hon'ble Supreme Court held in the following manner:
"We think there is force in the argument on behalf of the assessee that, in the face of all the details and statement placed before the Income-tax Officer at the time of the original assessment, it is difficult to take the view hat the Income-tax Officer had not at all applied his mind to the question whether the surplus is taxable or not. It is true that the return was filed and the assessment was completed on the same date. Nevertheless, it is opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him. It is not as if the assessment record contained a large number of documents or the case raised complicated issues rendering it probable that the Income-tax Officer had missed these facts. It is a case where there is only one contention raised before the Income-tax Officer and it is, we think, impossible to hold that the Income-tax Officer did not at all look at the return filed by the assessee or the statements accompanying it. The more reasonable view to take would, in our opinion, be that the Income-tax Officer looked at the facts and accepted the assessee's contention that the surplus was not taxable. ...."
23. The learned counsel submitted that the notices issued by the Assessing Officer calling upon the assessee to furnish details and clarification on various issues and furnishing of explanation and details by the assessee indicates that the Assessing Officer has undertaken the exercise of examining the issues in dispute and on being satisfied with the explanation furnished by the assessee the Assessing Officer accepted the same. The learned counsel referring to the decision of the Hon'ble Delhi High Court (Full Bench) in case of CIT V/s. Kelivnator of India Ltd., 256 ITR 1 submitted that the Hon'ble Delhi High Court has held as under:
"We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under Section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of Sub- section (1) of Section 143 or Sub-section (3) of Section 143.21 ITA No. 765/Hyd/12
Ushodaya Enterprises Pvt. Ltd When a regular order of assessment is passed in terms of the said Sub-section (3) of Section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without anything further, the same would amount to giving premium to an authority exercising quasi judicial function to take benefit of its own wrong."
24. The learned counsel submitted that the aforesaid decision of the Hon'ble Delhi High Court was also confirmed by the Hon'ble Supreme Court in case of CIT V/s. Kelvinator India Ltd., 320 ITR 561. The learned counsel referred to a decision of the Hon'ble Delhi High Court in case of CIT V/s. Eicher Ltd., 294 ITR 310 wherein the Hon'ble Delhi High Court held in the following manner:
"In Hari Iron Trading Co. v. Commissioner of Income Tax,(2003) 263 ITR 437, a Division Bench of Punjab and Haryana High Court observed that an assessed has no control over the way an assessment order is drafted. It was observed that generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only such points are taken note of on which the assessee's Explanations are rejected and additions/disallowances are made. We agree.
Applying the principles laid down by the Full Bench of this Court as well as the observations of the Punjab and Haryana High Court, we find that if the entire material had been placed by the assessed before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessed, then merely because he did express this in the assessment order, that by itself would not give him a ground to conclude that income has escaped assessment and, Therefore, the assessment needed to be reopened. On the other hand, if the Assessing Officer did not apply his mind and committed a lapse, there is no reason why the assessed should be made to suffer the consequences of that lapse."
25. The leaned counsel referring to the aforesaid decision of the Hon'ble Delhi High Court submitted that since the Assessing Officer 22 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd accepted the assessee's explanation with regard to valuation of the software library and claim of depreciation, he did not mention it in the Assessment order and only dealt with such issues on which the assessee's explanation was considered to be not acceptable and additions and disallowances were made. In this context, the learned counsel also relied upon the following decisions:
1. CIT V/s. Gabriel (India) Ltd., [1993] 203 ITR 108 (Bom.)
2. ICICI Venture Funds Management Company Ltd. V/s. CIT LTU, [2011] 5 Tax Corp (AT) 23878 (Bangalore)
3. Infosys BPO Ltd. V/s. CIT - AY 2005-06 & 2006-07-
Income-tax Appellate Tribunal Bangalore dt. 16/03/2012 & 25/05/2012.
26. The learned counsel submitted that even the Commissioner has not denied the fact that the Assessing Officer has conducted enquiry in course of the assessment proceedings with regard to the valuation of the software library and the claim of depreciation. Therefore, in the facts of the present case, it cannot be said that there is lack of enquiry. The learned counsel submitted that there is difference between lack of enquiry and inadequate enquiry. While in case of lack of enquiry, jurisdiction u/s 263 can be exercised but it is impermissible in case of inadequate enquiry. In support of such contention, The learned counsel relied upon the following case laws:
(a) CIT v/S. Sunbeam Auto Ltd. (2009) 332 ITR 167(Del)
(b) CIT V/s. Hindustan Marketing and Advertising Co. Ltd.
(2011)341 ITR 180(Del) 23 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd
(c) Hitendra A.Nanavati V/s. CIT(2010)135 TTJ 17(Ahd.)
(d) Suresh K.Jajoo V/s. ACIT (2011) 5 Tax Corp. (AT) 24079 (Mumbai)
(e) Regency park Property Management Services (P)Ltd. V/s. CIT (2010 )35 DTR 284(Del)
(f) Cyber Park Development & Construction Ltd. V/s.
DCIT (Income-tax Appellate Tribunal Bangalore dt.28.12.2011)
(g) Infosys BPO Ltd. V/s. CIT - AY 2006-07- ITAT Bangalore - dt.25.5.2012
27. The learned counsel submitted that the language of provision as contained u/s 142(1) & 143(2) envisages calling for information for the purpose of enquiry as per the satisfaction and desire of the Assessing Officer. Therefore, as per the statutory provision what information to be called for and the method of enquiry for computing the income of the assessee is totally within the jurisdiction of the Assessing Officer. In view of this, by exercising the power u/s 263 of the Act, the Commissioner in effect is trying to make a fresh enquiry at his level for substituting his opinion with that of the Assessing Officer. The learned counsel submitted that this is not envisaged u/s 263 of the Act. In this context, the learned counsel relied upon the following case laws:
(a) CIT V/s. Ashish Rajpal (2010) 320 ITR 674 (Del.)
(b) B and A Plantation and Industries Ltd. and Anr. V/s. CIT and Ors. (2007) 290 ITR 395 (Gau.)
(c) CIT V/s. Gabriel (India) Ltd. (1993) 203 ITR 108(Bom) 24 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd
(d) Hari Om Bansal V/s.ITO(2012)6Tax Corp.(AT) 27323 (Chennai)
(e) Ad. CIT V/s. Shipra Estate Ltd. (2010) 35 SOT 256 (Del)
(f) Barry Welmiller International Resources P. Ltd. V/s.
ITO (2011) Tax Corp (AT)23844(Chennai)
28. The learned counsel further submitted that the erstwhile owner of the assets have claimed deduction under Rule 9A/9B of the Income-tax Rules as intangible assets, which was accepted by the Assessing Officer. It was further submitted by the learned counsel that assessment for the assessment year for 2008-09 and 2009-10 have been completed accepting the valuation after initiation of the proceedings u/s 263 of the Act. The learned counsel submitted that as the Commissioner has not given any conclusive finding that the assessment order is erroneous and prejudicial to the interests of the revenue the exercise of jurisdiction u/s 263 of the Act is legally unsustainable.
29. With regard to observation of the Commissioner of Income-tax that the Assessing Officer has not examined the applicability Explanation 3 of section 43(1), the learned counsel submitted that the main purpose of Explanation 3 to section 43(1) is to determine the actual cost of assets and the actual cost has to be determined by the Assessing Officer having regard to all the circumstances of the case. Therefore, in the facts of the present case the Assessing Officer has determined the actual cost after considering the valuation report, hence, 25 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd his action cannot be termed erroneous and prejudicial to the interests of the revenue. The learned counsel submitted that it is only the Assessing Officer who is obliged under the Act to record a satisfaction that the assets were transferred for reducing the liability to pay income tax and for this purpose the Commissioner cannot substitute his opinion to sustain the applicability of Explanation 3 to section 43(1). In support of such contention, the learned counsel relied upon the following decisions:
1. Ashwin Vanaspathi Industries V/s. Commissioner, 255 ITR 26 (Guj.)
2. Chitra PubliCommissionery Co. Pvt. Ltd. V/s.
Commissioner, [2010] 4 ITR (Trib.) 738.
30. The learned Departmental Representative, on the other hand, submitted that the material on record shows that the sale consideration for transfer of business undertaking UKM and UKTV by Shri Ramoji Rao, HUF was Rs. 787.80 crores which is not divisible and the purchase price payable by the assessee was single undivided slump sale consideration for the entire TV software business with no independent values assigned to the various components of TV software business. The agreement indicates that the sale was by way of a slump sale with no independent value assigned to individual asset. Therefore, the value of Rs. 775 crores assigned to the software library is without any material or basis. The learned Departmental Representative submitted that the contention put forth by the assessee with regard to acquisition of software library to the 26 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd effect that the foreign investor insisted on assessee owning the software library was also not tenable in view of the fact that the purpose and the conditions set by the foreign investor was already met and transaction took place as a slump sale with no independent value being assigned, therefore, there was no necessity of specifically assigning the value of Rs. 775 crores to the software library. The learned Departmental Representative submitted that this act on the part of the assessee indicates that the main purpose of recording asset which had book value of about Rs. 160 crores at Rs. 775 crores was only to claim enhanced depreciation, which brings it within the ambit of Explanation 3 to section 43(1). The learned Departmental Representative submitted that the applicability of Explanation 3 to section 43(1) never occurred to the Assessing Officer nor he examined its applicability.
31. The learned Departmental Representative submitted that the Assessing Officer has not applied his mind before completing assessment is further patent from the fact that the assessee had originally claimed depreciation @ 10% at Rs. 77.50 crores which was subsequently changed @ 25% i.e. at Rs. 99 crores by treating the software library as intangible asset. This aspect was also not examined by the Assessing Officer. The Assessing Officer also did not examine whether the software library is in the nature of intangible asset and at best whether it can be treated as plant & machinery, which is eligible for depreciation @ 15%. The learned Departmental Representative submitted that the valuation report of the software library could not have been examined by the Assessing 27 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd Officer who completed the assessment is revealed from the fact that though the valuation report was submitted before the previous Assessing Officer who initiated the assessment proceedings, however, when the Commissioner inspected the assessment record, no valuation report was available in the file. This indicates the fact that the subsequent Assessing Officer did not examine the valuation report at all. The learned Departmental Representative submitted that the succeeding Assessing Officer had issued a notice u/s 142(1) dated 04/12/2009 calling for certain information, which was filed on 17/10/2009. In this notice also, the Assessing Officer did not dwell upon either provisions of section 43(1) Explanation 3 or what would be the appropriate rate of depreciation i.e. 25% or 15%. The Assessing Officer's query was confined to the acquisition of the business and the information submitted by the assessee were also in that respect.
32. The learned Departmental Representative submitted that other glaring inconsistencies were also not dealt upon by the Assessing Officer. The learned Departmental Representative submitted that the assessee claimed depreciation on software library at Rs. 788 crores whereas it acquired software library from UKM and UKTV at Rs. 775 crores. When this issue was raised by the Commissioner in the course of the revision proceeding, the assessee submitted that software other than intangible asset was acquired by the assessee. It is apparent from the assessment order that the Assessing Officer before allowing depreciation did not verify the details of purchase of films by the assessee from the market and there was no 28 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd enquiry by the Assessing Officer in respect of films purchased from others. The learned Departmental Representative submitted that the Commissioner has pointed out specific instances of inconsistencies and contradictions in the valuation report as mentioned in paras 15 & 16 of his order. It was submitted by the learned Departmental Representative that the films acquired by the assessee were mostly old. Films released after 2000 constituted only 12% and rights over 27% of films were going to expire on 31/12/2009. In some cases the assessee itself has written off certain costs as software more than 10 years. However, the valuer had valued all the films by applying a straight jacket formula which aspect was never examined by the Assessing Officer.
33. The learned Departmental Representative submitted that the value of the software library of Rs. 775 crores was accepted in toto without even understanding that the entire transaction of acquiring the software library was through a slump sale with no independent bifurcation of value of assets. Therefore, the value of assets were assigned with a clear intention of claiming enhanced depreciation. The learned Departmental Representative submitted that depreciation was claimed by the assessee on the software library at Rs. 99 crores, which was allowed by the Assessing Officer. Whereas if Explanation 3 to section 43(1) would have been invoked, the assessee would have been entitled for a depreciation of Rs. 20 crores. The learned Departmental Representative further submitted that all the transactions were between related parties and it is not a case of assessee buying or taking over the assets 29 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd from totally independent third parties. Therefore, without proper enquiry and examination the values assigned to the software library by the valuer cannot be considered to be at arm's length price. The Assessing Officer having not properly applied his mind to all these facts the assessment order passed is certainly erroneous and prejudicial to the interests of the revenue and therefore the Commissioner was justified in setting aside the assessment order in exercise of power u/s 263 of the Act.
34. We have heard the rival submissions and perused the materials on record as well as the decisions cited. Exercise of power u/s 263 of the Act has to be made on existence of two preconditions. The order sought to be revised must be erroneous and at the same time, it must be prejudicial to the interests of the revenue. The intent and purpose of the Income- tax Act is to levy and collect tax in accordance with the provisions of the Act and this task has been entrusted to the revenue. If due to erroneous order of the Assessing Officer the Revenue is losing tax lawfully payable by an assessee, then, it will certainly be prejudicial to the interests of the revenue.
35. Therefore, to ascertain whether the order sought to be revised u/s 263 is erroneous it has to fall within the following category of errors, which are (i) incorrect assumption of facts, (ii)incorrect application of law, (iii) non application of mind to something which was obvious and required application of mind or (iv) the finding is based on no material or insufficient material so as to effect the merits of the case and 30 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd thereby cause prejudice to the interest of the revenue. Section 263 of the IT Act, seeks to remove the prejudice caused to the revenue by erroneous order passed by the Assessing Officer. It empowers the Commissioner of Income-tax to initiate suo motu proceedings either when the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matter where such enquiry was prima-facie warranted. The Commissioner is well within his power to regard an order as erroneous on the ground that in the circumstances of the case the Assessing Officer should have made further enquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the civil court which is neutral in giving a decision on the basis of evidence produced before it the role of an Assessing Officer under the Income-tax Act is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return, which appears to be in order but calls for further enquiry. The Assessing Officer therefore must discharge both the roles effectively. In other words, he must carry out the investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him.
36. The scheme of assessment in recent years has undergone a radical change. It deserves to be noted that the assessment order in the present case was made u/s 143(3) of the Act. As per the scheme of the Act the Assessing Officer was statutorily required to make assessment u/s 143(3) after 31 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd scrutiny and not in a summary manner as contemplated by sub- section (1) of section 143. Bulk of the returns filed by the assessee across the country are accepted by the department u/s 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore required to act fairly, judiciously and diligently while accepting or rejecting the claim of the assessee in cases of scrutiny assessment. He should be fair not only to the assessee but also to the public exchequer. The Assessing Officer has the onerous job to protect on one hand the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him and on the other hand, he has a duty to protect the interests of the revenue and to see that no one by adopting a subterfuge with an intention to evade tax escapes without paying the legitimate tax as per the provisions of the law. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept whatever the assessee claims before him. It is the duty of the Assessing Officer to ascertain the truth of the facts stated and the genuineness of the claim made in the return when the circumstances of the case are such as to provoke enquiry. Arbitrariness in either accepting or rejecting the claim has to be shunned at all cost. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the enquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. In this category also falls failure on the part of the Assessing 32 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd Officer to apply a particular provision of law if otherwise it is applicable. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is mechanical or stereotyped order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In the case of Malabar Industrial Co. Ltd. V/s Commissioner, 243 ITR 83 the Hon'ble Supreme Court held as under:
"7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. "
37. It is well settled principle of law that while making assessment the Assessing Officer acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and subject to revision by the Commissioner of Income-tax u/s 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The ratio laid down by the Hon'ble Supreme Court and different High Courts as well as this Tribunal, some of which have been cited before us by the learned counsel for the assessee also points to the same direction. In all these decisions it has been held that orders which are subversive of the administration of the revenue must be regarded as erroneous and prejudicial to the interests of the 33 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd revenue. If the Assessing Officer is allowed to make assessments in an arbitrary manner, as it appears to have been done in the present case the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record the Assessing Officer had made certain addition to the income of the assessee the same would have been considered erroneous by any appellate authority as being violating of principles of natural justice which require that the authority must indicate for an adverse order. Therefore, the same principle should also apply when an order is against the interest of revenue. As a matter of fact such orders are prejudicial to the interests of both the parties because even the assessee is deprived of the benefit of a positive finding in his favour though he may have sufficiently established his case. Thus, it can safely be said an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the revenue u/s 263 in following cases:
1. The order sought to be revised contains error of reasoning or of law or of fact on the face of it.
2. The order sought to be revised proceeds on incorrect assumption of fact or incorrect application of law.
3. Orders passed without applying the principle of natural justice or without application of mind.
4. The order passed by the Assessing Officer is a stereo-
typed order which simply accepts what the assessee stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.
34 ITA No. 765/Hyd/12Ushodaya Enterprises Pvt. Ltd
38. Therefore applying the aforesaid principles we have to see whether the assessment order is erroneous and prejudicial to the interests of the revenue. On a perusal of the order passed u/s 143(3) we find that there is not a whisper about the valuation report submitted by the assessee valuing the software library at Rs. 775 crores. There is not even a single word mentioned by the Assessing Officer with regard to claim of depreciation by the assessee on the software library. The Assessing Officer has not thought it proper to examine or enquire as to how the assets having book value of Rs. 160 crores were acquired for Rs. 775 crores simply on the basis of the valuation report submitted by M/s Ernst & Young. The Assessing Officer has also not examined how and under what circumstances the assessee has changed its stance by applying the rate of 25% while claiming depreciation on the software library by treating it as intangible asset. It also never crossed the mind of Assessing Officer that acquisition of asset of 160 crores at an enhanced value of Rs. 775 crores cannot be accepted only on the basis of the valuation report submitted by the assessee without making a deeper probe into the matter. The Assessing Officer also failed to examine the applicability of Explanation 3 to section 43(1) as the circumstances clearly suggest the fact that the intention behind such transfer of asset may perhaps be to reduce the tax liability, by claiming higher depreciation. The Commissioner in his order has pointed out specific inconsistencies, some of which are enumerated hereunder:
35 ITA No. 765/Hyd/12Ushodaya Enterprises Pvt. Ltd
1. As per the business transfer agreement between the assessee and Shri Ramoji Rao(HUF), the entire going concerns of UKM and UKTV were transferred to the assessee for a sale consideration of Rs. 787,80,67,883/- as a single undivided slump sale consideration for the entire TV software business with no independent values assigned to the TV software business whereas the assessee in its books of account has taken fixed assets, sundry debtors, inventories, loans and advances and other current assets at the book value as appearing in the books of account of Shri Ramoji Rao, HUF whereas the software library was valued at Rs. 775 crores when the entire net-worth of business undertaking transferred by Shri Ramoji Rao HUF was a sum of Rs. 173,81,74,313/-.
2. The valuation was made not by the assessee but at the behest of Shri Ramoji Rao, HUF and in the valuation report also the valuers made it clear that the valuation of software library is applicable to Shri Ramoji Rao HUF only and not to others. Hence, the assessee could have made his own valuation of the software library without having to accept the valuation made at the behest of Shri Ramoji Rao HUF.36 ITA No. 765/Hyd/12
Ushodaya Enterprises Pvt. Ltd
3. The entire valuation report is on the basis of estimate only. The valuer has arrived at the revenue earning from advertisement on hypothetical basis and also has valued the films on that basis.
4. The valuer has adopted different methods for valuing the films in the software library.
5. Though the software library contained films 58% of which were released prior to 90% and only 12% were released after 2000, the valuation of all the films in the software library have been made by applying an average rate.
The films which are pretty old cannot be valued at the same rate as the new films. Similarly, with regard to earning of advertisement revenue also inconsistencies were found.
39. Another crucial factor noticed by the Commissioner which cannot be overlooked is that the Assessing Officer who initiated assessment proceedings and set into motion the process of enquiry by calling upon the assessee to produce information and document and before whom the assessee has filed the valuation report was transferred during the currency of the assessment proceedings and a new Assessing Officer joined in his place. The new Assessing Officer after assuming charge issued a notice to the assessee to produce certain information and document none of which related to the valuation report or 37 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd the valuation of the software library. The Assessing Officer after receiving the reply from the assessee in compliance to his letter dated 07/09/2009 completed the assessment. On perusal of assessment record, the Commissioner found that the valuation report of M/s Ernst & Young was not available in the assessment record.
40. It is quite evident that the Assessing Officer has not mentioned a single word about the valuation report or the authenticity of the valuation made of the software library in the assessment order. Neither any recording in this regard has been made by him in the order sheet. Therefore, non- availability of the valuation report in the assessment record coupled with the fact that the Assessing Officer has failed to mention anything about it either in the assessment order or in the order sheet vindicate the conclusion arrived by the Commissioner that the Assessing Officer has not at all considered the valuation report for verifying the genuineness or authenticity of the valuation of software library made at Rs.775 crores. The valuation made at Rs. 775 crores assumes importance and calls for a thorough probe and verification because of the fact that the book value of the same asset were shown at Rs. 160 crores and the transactions were between related parties. Therefore, the Assessing Officer should have been more circumspect and should have examined the genuineness of the claim i.e. valuation of the software library to find out whether the price is at arm's length or not.
38 ITA No. 765/Hyd/12Ushodaya Enterprises Pvt. Ltd
41. From the assessment order it is very much apparent that the Assessing Officer has not undertaken the exercise with the earnestness in which he is required to do it. The Assessing Officer has not at all examined any one of the issues pointed out by the Commissioner in his order though they are very much germane for making a valid assessment. The entire assessment order has been passed in a mechanical manner without properly appreciating the facts and materials on record. The assessment order not only reveals lack of enquiry but also demonstrates complete non application of mind by the Assessing Officer. The Assessing Officer has also failed to examine whether the transaction attracts the provisions contained to Explanation 3 to Section 43(1). Applicability of Explanation (3) to S.43(1) assumes importance considering the fact that assets having book value of Rs.160 crores were valued at Rs.775 crores, that too at the instance of the seller, and also considering the fact that the transaction is between closely related parties. The decisions relied upon by the learned Authorised Representative for the assessee in this regard in the case of Ashwin Vanaspathi Industries (supra) and Chitra Publicity Co. P. Ltd. V/s. ACIT (supra), are factually distinguishable, in view of the fact that in the present case, the Assessing Officer has not at all considered the applicability of Explanation (3) to S.43(1) of the Act. None of the inconsistencies in the valuation report pointed out by the Commissioner of Income-tax and the other issues raised by the Commissioner appear to have been examined or enquired into by the Assessing Officer who completed the assessment, for which the obvious reason may be that the incumbent Assessing 39 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd Officer never got an opportunity to examine or verify the valuation report stated to have been submitted by the assessee before the earlier Assessing Officer, but which was not available in the assessment record at the relevant point of time when the impugned assessment was framed. In view of the inconsistencies pointed out by the Commissioner of Income-tax, the valuation report submitted by the assessee cannot be considered to be sacrosanct without testing or verifying the authenticity of the value arrived therein. In the valuation report, value of the software library has been recommended to be between Rs.746.41 crores and Rs.814.27 crores, which suggests that the valuation has been made by estimation, as the valuer was not sure as to what would be the exact value of the asset in question, viz. software library. This itself constitutes a valid reason to justify re-valuation of this asset, by bringing further corroborative evidence, so as to arrive at the correct value. This apart, non-consideration of various issues, discussed above, has rendered the impugned assessment order erroneous and also caused prejudice to the interests of the revenue. Therefore, in our view, the Commissioner was well within his jurisdiction while exercising his powers u/s 263 of the Act and setting aside the assessment order passed u/s 143(3) of the Act.
42. The further contention of the learned Authorised Representative for the assessee that the Commissioner of Income-tax cannot issue a second show cause notice is also not acceptable, in view of the fact that the issuance of second show cause notice became necessary, as the valuation report was not 40 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd available in the assessment record and only after calling for the valuation report and examining it, the Commissioner of Income-tax could find out the inconsistencies therein, and hence, issued the notice to the assessee in compliance with the principles of natural justice, so as to give an opportunity to the assessee to explain the position in the light of the inconsistencies pointed out. The contention of the learned Authorised Representative for the assessee that in subsequent assessment year also the Assessing Officer has not questioned the valuation of software library, even after initiation of revisionary proceedings for the year under consideration; and the further contention that the purchase consideration of the software library has been treated as capital gains in the hands of Shri Ramoji Rao HUF, do not conclusively establish the authenticity of the valuation of software library, nor curtail the power of the Commissioner of Income-tax in exercising the jurisdiction under S.263 of the Act.
43. The Commissioner has also acted in a just and fair manner while directing the Assessing Officer to ascertain the value of software library by taking assistance of an expert and also examine the applicability of provisions of section 43(1) read with Explanation 3 thereunder and at the same time, the Commissioner has also afforded an opportunity to assessee to furnish any other evidence or another valuation report for establishing that the price paid for acquisition of software library is the market price on the date of acquisition. In our view, such a direction by the Commissioner is just and 41 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd reasonable, besides being most appropriate, considering the facts of the case.
44. The decisions in the case of ALA Firm (supra) and CIT V/s. Kelvinator of India Ltd. (supra) and CIT V/s. Eicher Ltd. (supra) are on the issue of legality and validity of reopening of assessment, and not specifically on the issue of exercise of jurisdiction under S.263 of the Act. The scope of re-assessment under S.147/148 and the scope of revision under S.263 are different and they operate in different fields. While proceedings under S.147/148 are initiated by an Assessing Officer, viz. Assessing Officer itself, to bring to tax the income, which he has reason to believe has escaped assessment earlier, the proceedings under S.263 are initiated by the Commissioner of Income-tax -an authority higher to the Assessing Officer- in exercise of his supervisory powers, to revise the orders of assessment, etc., which according to him are erroneous and prejudicial to the interests of Revenue. As such, the conditions to be fulfilled for invoking those provisions are also different. So far as the other decisions relied upon by the learned Authorised Representative for the assessee are concerned, there is no quarrel with the ratio laid down in those decisions, but the peculiar facts and circumstances involved in the present case, discussed above, render the ratio laid down in those cases inapplicable to the facts of the present case.
45. Considering totality of facts and circumstances of the present case, after perusing the materials on record and the order the passed by the Commissioner u/s 263 as well as the 42 ITA No. 765/Hyd/12 Ushodaya Enterprises Pvt. Ltd assessment order passed u/s 143(3), we are convinced that the Assessing Officer has passed the assessment order without making proper enquiry and without application of mind as he has failed to consider the authenticity of the valuation of the software library at Rs. 775 crores with reference to the valuation report as well as he has failed to examine the applicability of provisions contained in explanation 3 to section 43(1) of the Act. In such view of the matter, the assessment order passed is erroneous and prejudicial to the interests of the revenue and therefore liable to be set aside u/s 263 of the Act. Accordingly, we sustain the order of the Commissioner passed u/s 263 of the Act.
46. In the result, appeal of the assessee is dismissed.
Order pronounced in the court on 22 nd February, 2013.
Sd/- Sd/-
(Chandra Poojari) (Saktijit Dey)
Accountant Member Judicial Member
Hyderabad, Dated. 22 nd February, 2013.
Kv/BVS
Copy forwarded to:
1. M/s Ushodaya Enterprises Pvt. Ltd., 6-3-57-, Eenadu Complex, Somajiguda, Hyderabad.
2. Asstt. Commissioner of Income-tax Circle 16(2), Hyderabad.
3. Commissioner of Income-tax -IV, Hyderabad
4. Departmental Representative, ITAT, Hyderabad.