Income Tax Appellate Tribunal - Mumbai
Solvay Pharma India Ltd, Mumbai vs Assessee on 23 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI H BENCH, MUMBAI
Before Shri Pramod Kumar (Accountant Member)
and Shri R S Padvekar (Judicial Member)
ITA No. 5285/Mum/2010
Assessment year: 2005-06
Solvay Pharma India Limited ...........................Appellant
271, Business Park, 6th floor
Model Industrial Colony
Off Aarye Road, Goregaon (E)
Mumbai 400 063 (PAN : AABCD0322J)
Vs.
Additional Commissioner of Income Tax
Range 7 (2), Mumbai ........................Respondent
Appearances:
P J Pardiwala, for the appellant
M R Kubal, for the respondent
Date of hearing : August 23, 2011
Date of pronouncement : October 25 , 2011
O R D E R
Per Pramod Kumar:
1. By way of this appeal, the assessee appellant has challenged correctness of CIT(A)'s order dated 24th February 2010, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2005-06.
2. The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in confirming the Assessing Officer's action of "deducting the sale proceed of Rs 7 crores, on sale of their (the assessee's) brand 'Karvol' from the opening written down value of the block of assets 'intangible assets', thereby disallowing the depreciation of Rs 1.75 crore, as against the appellant's claim that the gain on sale 2 I.T.A No.5285/ Mum/2010 Assessment year: 2005-06 of trademark 'Karol' was a long term capital gain". The assessee has raised several grounds of appeal, in addition to this ground of appeal, but these grounds of appeal are primarily arguments in support of this ground of appeal, so we need not take up all these grounds of appeal separately.
3. To adjudicate on this appeal, only a few material facts need to be taken note of.
The assessee before us came into existence as a result of demerger of the pharmaceutical division of Duphar Interfran Limited, in accordance with the cheme of arrangement duly approved by Hon'ble Bombay High Court and effective from 1st April 2000. As a result of this demerger, all the assets and liabilities of the pharmaceutical division, including certain brands owned by Duphar including 'Karvol' stood transferred to the assessee as on 3rd May 2001. However, as assets and liabilities were accounted for historical costs basis, and these brands did not have any cost of acquisition, the assets such as 'Karvol' brand were not accounted for in the books of accounts. During the relevant previous year, the assessee sold the said 'Karvol' brand for a consideration of Rs 7 crores and invested the sale proceeds in RECL bonds eligible for exemption from taxability of capital gains under section 54 EC. In response to Assessing Officer's requisition to show cause as to why the sale proceeds of Rs 7 crores, on sale of Karvol brand, not be treated as capital gain since the cost of acquisition in 'intangible assets' is nil and there is a separate block of assets for such intangible assets, it was submitted by the assessee that the asset sold was never part of the block of asset, no depreciation has been allowed on the same, and, therefore, the question of taxability as short term capital gains does not arise. The Assessing Officer did not accept this plea of the assessee. He observed that the assessee does have a block of assets by the name of 'intangible assets' and has claimed depreciation on this block @ 25%. It was noted that opening written down value of this block of assets is Rs 13,68,77,344 and the closing written down value is Rs 10,26,58,008. He was of the view that since there is in existence a block of assets with closing wdv more than sale proceeds of Karvol, the provisions of Section 50 are not applicable. However, according to the Assessing Officer, the sale proceeds of Karvol brand were required to be reduced from the w.d.v. Accordingly, he reduced Rs 7 crores from the w.d.v. of block of assets and recomputed the depreciation. He also noted that with the concept of the block of assets, individual asset loses its identity and the intangible block has to be taken into 3 I.T.A No.5285/ Mum/2010 Assessment year: 2005-06 account, for computing admissible depreciation. The Assessing Officer further noted that as per section 32(1), depreciation is allowable in respect of intangible assets acquired after 1.4.1998, and that, in the instant case, the brand 'Karvol' has been acquired on 3.5.2001. It was also noted that admittedly the asset was put to use by the assessee, and that as per Explanation 5 to Section 32(1) , depreciation is mandatory. The Assessing Officer thus proceeded to hold that one has to proceed on the basis that depreciation was allowed to the assessee. On this basis, the AO recomputed the depreciation which was now computed at Rs 1.75 crores less ( being 25% of Rs 7 crore reduced from the block of assets) than claimed by the assessee. The disallowance of depreciation was added back to assessee's income. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. We find that the asset in question has come back to the assessee as a result of demerger, and that the said asset did not have any cost of acquisition in the hands of the assessee. None of the authorities below have pointed out any costs which could be attributed to the said asset, i..e brand name 'Karvol', and they have only speculated as to what could possibly be costs in such cases without making any specific comments on the costs in the present case. We have also noted that since the assets were accounted on the basis of historical costs, these costs could not be brought to the books of the assessee, and as such there was no question of these assets entering the block of assets. No doubt there is a specific block of assets in respect of intangible assets but since the asset in question has, at no stage, entered the said block of assets, the sale consideration on parting with the asset could be reduced from the block of assets. In order that sale proceeds of an asset could be reduced from a block of assets, it is condition precedent that the cost of such asset is included in the said block of assets. There is nothing on record to establish that the brand name Karvol, at any stage, entered into the block of assets. In this view of the matter, we see merits in assessee's grievance and decline to uphold the stand of the authorities below. The sale proceeds on the Karvol brand, on the facts of this case, cannot be reduced from the block of assets 4 I.T.A No.5285/ Mum/2010 Assessment year: 2005-06 for intangible assets. The very approach adopted by the Assessing Officer, which has met the approval of the CIT(A), does not meet our approval.
6. For the reasons set out above, we delete the impugned disallowance of depreciation of Rs 1.75 crores in respect of intangible assets. The Assessing Officer is directed to accept the assessee's claim of long term capital gain as the asset was admittedly held for more than three years, but as the assessee had invested the sale proceeds in eligible investments, which has not been disputed by the Assessing Officer anyway, the capital gains are prima facie eligible for benefits of Section 54 EC, though, given the fact that this aspect has not been disputed by the Assessing Officer, it is not really necessary to give any specific finding in respect thereof.
7. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on 25th day of October, 2011.
Sd/- sd/-
(R S Padvekar ) (Pramod Kumar)
Judicial Member Accountant Member
Mumbai; 25th day of October, 2011.
Copy forwarded to :
1. The appellant
2. The respondent
3. Commissioner , Mumbai
4. Commissioner (Appeals) , Mumbai
5. Departmental Representative, bench, Mumbai
6. Guard File
True Copy
By Order etc.
Assistant Registrar
Income Tax Appellate Tribunal
Mumbai benches, Mumbai