The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that where depreciation on an intangible asset, namely trademark, arising pursuant to an amalgamation has been specifically examined and allowed by the Assessing Officer in the first year of claim under Section 143(3), and no proceedings have been initiated to disturb that assessment, then in a subsequent year, in the absence of any change in facts and circumstances, the Revenue is not justified in disallowing depreciation on that asset, because in the subsequent year depreciation is to be computed on the opening Written Down Value of the block.
The ITAT laid down, in application of the rule of consistency and block of assets principle, that once the Revenue has itself allowed depreciation in the very first year after verification/examination of the necessary facts, and has not availed the statutory remedies to disturb that position, it cannot, in a later year, dispute the opening Written Down Value or re-examine the correctness of that opening Written Down Value for the purpose of denying depreciation.
The Tribunal additionally held on facts that the trademark “Nutrifeed” was not fictitious, in view of the documentary record showing prior use/registration steps by the transferor company and the eventual registration of the trademark in the assessee’s name pursuant to amalgamation.
The Division Bench comprising Sandeep Singh Karhail (Judicial Member) and Om Prakash Kant (Accountant Member) examined the factual position that the amalgamation had been approved by the NCLT with effect from April 01, 2015 and that, pursuant to the scheme, the entire business and all assets and liabilities of the transferor company stood vested in the assessee. It noted that because the assessee’s shares were valued at Rs. 231 per share and the transferor company’s shares at Rs. 23 per share, the excess cost incurred by the assessee in issuing shares to the transferor company’s shareholders was assigned to the trademark transferred under the amalgamation and valued at about Rs. 15.90 crore.
The Tribunal placed significant emphasis on the fact that in AY 2016-17, which was the first year of claim of depreciation on the trademark, the Assessing Officer had specifically examined the allowability of depreciation under Section 32 on the intangible asset by issuing a pointed query under Section 142(1). After the assessee furnished a detailed reply and judicial support, the Assessing Officer completed the scrutiny assessment under Section 143(3) without disallowing depreciation on the trademark. The Tribunal therefore treated the claim as having already been examined and accepted in the first year of the block.
The Tribunal further observed that the year under consideration, AY 2017-18, was only the second-year post amalgamation, and the depreciation claimed therein was on the opening Written Down Value of the block. On that footing, it held that the exercise of redetermining the eligibility of the original claim in the second year was “merely academic”, there being no change in facts and circumstances.
On the question whether the trademark was fictitious, the Tribunal rejected the Assessing Officer’s finding. It noted the documentary material showing that the transferor company had applied for registration of the trademark “Nutrifeed”, that after amalgamation the change in applicant’s name was sought on the basis of the NCLT order, and that the certificate of registration was ultimately issued in the assessee’s name under the Trade Marks Act, 1999. On this material, the Tribunal expressly held that it did not find any merit in the Assessing Officer’s finding that the trademark transferred pursuant to the amalgamation was fictitious.
Briefly, the respondent/ assessee, engaged in the business of manufacturing, storing, packing, distributing, transporting and rendering assistance and services in relation to agricultural, organic and inorganic fertilisers, filed its return declaring total income at Nil. Pursuant to a Scheme of Arrangement sanctioned by the National Company Law Tribunal, Mumbai Bench, Trans Agro India Private Limited, being the transferor company, merged with the assessee with effect from the appointed date of April 01, 2015, and the entire business along with all assets, liabilities, duties and obligations stood transferred to the assessee.
In the books of account, the assessee recorded an intangible asset in the nature of “Trademark” amounting to Rs. 15.92 crores at the value determined by an independent valuer. As recorded by the Tribunal, the valuer determined the assessee’s share value at Rs. 231 per share as on March 31, 2015, while the transferor company’s share value was determined at Rs. 23 per share, and accordingly the assessee issued 20,09,880 equity shares to the shareholders of the transferor company. The total consideration paid pursuant to the amalgamation was stated to be approximately Rs. 46.42 crore.
During assessment proceedings, the Assessing Officer called upon the assessee to furnish the basis of the valuation of shares of both the transferor company and the assessee and to explain how an intangible asset described as “Trademark” came to be created in the assessee’s books when no such asset was recorded in the transferor company’s books as on March 31, 2015. The assessee furnished the valuation report and the swap ratio report.
The Assessing Officer noted that the valuer had adopted the Net Asset Value method for valuation of business assets and had also used the Discounted Cash Flow method for valuing certain intangible assets not recorded in the transferor company’s books, which were termed as “Trademark”. The Assessing Officer held that the valuer had adopted future cash flows and net present value on the basis of management assumptions without verification of projections, that the royalty rate for trademark valuation was estimated arbitrarily, and that the intangible asset created in the books was fictitious and without basis or rationale. On that basis, depreciation of Rs. 2.98 crores claimed at 25% on the trademark value of Rs. 11,97,07,415 was disallowed under Section 32(1)(ii) of the Act.
Appearances:
Senior DR, Himanshu Joshi, for the Appellant/ Revenue
Dr. K. Shivram and Rahul Hakani, for the Respondent/ Taxpayer
