Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.A. No. 2358/CHNY/2014 Assessment year: 2006-2007

Attorney(S)

Shri. Sridhar Dora, JCIT., Advocate ;
Shri. V. Sridharan, Sr. Adv. for P.J. Rishikesh, Advocate., Advocate

Judges

N.R.S. Ganesan, J.M.
Abraham P. George, A.M.

Acts

Rule 5(1A) of Income Tax Rules, 1962 (in short the Rules). Submission
Section 2(1) of Information Technology, Act, 2000
clause (i) of Sub section (1) of Section 32
subsection (1)of Section 32;and (c)
INFORMATION TECHNOLOGY ACT 2000
sub section 1 of Section 32
U/S 41(2) of the IT Act, 196L"
provisions of Section 41(2).
Income Tax Rules, 1962,

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Smart Summary

Tribunal Opinion Summary — ITA No.2358/CHNY/2014

Factual and Procedural Background

This appeal was filed by the Revenue against an order dated 05.06.2014 of the learned Commissioner of Income Tax (Appeals)-IV, Chennai. The dispute arises from the acquisition by the assessee (an advertising company) of one LED panel from its sister concern M/s. Tricom Vision. The assessee purchased the LED panel from M/s. Tricom Vision for a total consideration of Rs.3,12,60,000/- (including VAT). The LED panel was acquired on 04.08.2004 and commissioned on 05.12.2005. The Revenue challenged the CIT(A) order allowing the assessee depreciation on the cost claimed by it and classifying the LED panel as eligible for depreciation at the rate of 60%.

The Tribunal pronounced its order on 12th February, 2019, at Chennai. The Bench comprised N.R.S. Ganesan (Judicial Member) and Abraham P. George (Accountant Member).

Legal Issues Presented

What cost is to be adopted for calculating depreciation in the hands of the assessee for the LED panel acquired from M/s. Tricom Vision — the amount actually paid by the assessee (Rs.3,12,60,000/- including VAT) or the seller's written down value (Rs.8,41,579/-) adopted by the Assessing Officer?
Whether the LED panel qualifies as equivalent to a "computer" and is therefore eligible for depreciation at the rate of 60% under the applicable Income Tax Rules/New Appendix I?

Arguments of the Parties

Revenue's Arguments (Appellant)

The Assessing Officer contended that the written down value (WDV) of the LED panel in the books of M/s. Tricom Vision was Rs.8,41,579/-, and that this value should be taken as the cost for depreciation purposes in the hands of the buyer (assessee).
It was submitted that the original cost when acquired by M/s. Tricom Vision was Rs.1,80,00,000/-, yet the assessee paid Rs.3,00,00,000/- (figures discussed in the record) or Rs.3,12,60,000/- (including VAT) to acquire the asset. Allowing depreciation on such enhanced cost would result in aggregate depreciation exceeding the original cost, contrary to the first proviso to Rule 5(1A) of the Income Tax Rules, 1962.
The Revenue alleged that the transaction involved common control (the managing partner of M/s. Tricom Vision was also the managing director of the assessee) and suggested the price was inflated to claim undue benefit by way of depreciation.
On the depreciation rate, the Revenue argued the LED panel is merely an electrical appliance and not a computer, hence not entitled to 60% depreciation but only to the lower rate (e.g., 10%) applicable to electrical appliances.
The Revenue maintained that Explanation (3) to Section 43(1) was rightly invoked by the Assessing Officer to determine the actual cost in the hands of the assessee where transfer was designed to reduce income tax liability.

Assessee's / Authorized Representative's Arguments (Respondent)

The assessee submitted that depreciation must be allowed on the actual cost to the assessee, relying on the decision of the Hon'ble Apex Court in Jogta Coal Co. Ltd vs. CIT (1959) 36 ITR 521.
The assessee asserted the actual cost to it was Rs.3,12,60,000/- (including VAT) and produced a valuation report dated 02.01.2004 from a Government-approved valuer valuing the LED display at Rs.3,05,00,000/-; the Assessing Officer rejected that valuation without giving reasons.
The assessee pointed out that there was no reduction in tax liability in either party because the seller treated the surplus on sale as short-term capital gains and that assessment was accepted.
Regarding the depreciation rate, the assessee contended that the LED panel is an electronic display system with data-processing abilities, in-house software, memory and processing functions; its architecture and design were similar to a computer and thus it qualified for 60% depreciation applicable to computers.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jogta Coal Co. Ltd vs. CIT (1959) 36 ITR 521	Principle that cost for the purpose of depreciation is the cost in the hands of the assessee (buyer) and not the cost in the hands of the previous owner.	The Tribunal relied on this authority to support the conclusion that the actual cost to the assessee (the amount it paid/acquired) is the relevant figure for depreciation and that the Assessing Officer was not entitled to simply adopt the seller's written down value as the buyer's actual cost without proper determination of circumstances.

Court's Reasoning and Analysis

The Tribunal considered the rival contentions, the valuation placed before the lower authorities and the statutory provisions reproduced in the record. The step-by-step reasoning expressed in the opinion is as follows:

Factual findings: It was not disputed that the assessee paid Rs.3,12,60,000/- (including VAT) for the LED panel and that the managing partner of M/s. Tricom Vision was also the managing director of the assessee. The Assessing Officer had taken the seller's written down value (Rs.8,41,579/-) as the cost for the assessee.
Statutory framework on "actual cost": The Tribunal reproduced Section 43(1) of the Income Tax Act (definition of "actual cost") and Explanation 3 thereto, noting that Explanation 3 empowers the Assessing Officer, with prior approval, to determine the actual cost where the main purpose of the transfer was reduction of income tax. The Tribunal observed that Explanation 3 does not automatically permit the AO to adopt the seller's written down value as the buyer's actual cost; rather, actual cost must be determined with regard to the circumstances.
Valuation evidence: The assessee produced a valuation report from a Government-approved valuer assessing fair market value at Rs.3,05,00,000/-. The Tribunal noted that the Assessing Officer had not given any reason for disregarding that valuation.
Reliance on precedent: The Tribunal invoked Jogta Coal Co. Ltd (supra) to affirm that the cost relevant for depreciation is the cost in the hands of the assessee and not that of the previous owner.
Analysis of seller's assessment: The Tribunal examined the assessment order of M/s. Tricom Vision showing that the surplus on sale was treated as short-term capital gains (i.e., the seller accepted a tax consequence different from tax reduction by enhanced depreciation), and reproduced and analysed provisions of Section 41(2), Section 32(1) and related rules to conclude that the seller's treatment did not support an inference that the transfer was undertaken primarily to reduce tax through enhanced depreciation in the buyer's hands.
Conclusion on cost: Given the valuation evidence, the lack of reasons for rejecting that valuation, the judicial authority, and the seller's accepted tax treatment, the Tribunal concluded there was no basis to treat the acquisition as an artificial transfer aimed at tax reduction; therefore the CIT(A)'s conclusion that the cost to the assessee for depreciation was the amount paid by it (Rs.3,12,60,000/-) was justified.
On whether the LED panel is a "computer": The Tribunal observed that the term "computer" is not defined in the Income Tax Act, but noted the definition provided in Section 2(1) of the Information Technology Act, 2000 (defining computer as an electronic, magnetic, optical or other high-speed data processing device or system performing logical, arithmetic and memory functions and including related input/output/processing/storage/software/communication facilities).
Valuer's technical description: The Tribunal set out the registered valuer's description of the LED panel: a Natural Color LED digital display system with controller and accessories; in-house software for online message change; capability to run animation or DVD; capability to display instant variable messages, scrolling or running messages and play DVD; payment of royalty; and an expected future life of six years.
Application of definition to facts: The Tribunal compared the valuer's description with the IT Act definition and found that the LED panel had memory functions, processing ability and could perform logical actions (synchronizing inputs to display). On that basis, the Tribunal concluded the LED panel fits, "more or less", the IT Act definition of a computer and is therefore eligible for depreciation at the rate of 60% under New Appendix I of the Income Tax Rules, 1962.
Final assessment of orders below: For the reasons given (on cost and on classification as a computer), the Tribunal found no reason to interfere with the CIT(A)'s order.

Holding and Implications

Holding: The Tribunal's final decision was that the appeal of the Revenue is DISMISSED. The Tribunal upheld the order of the CIT(A).

Immediate implications and direct effect:

The cost to be adopted for calculating depreciation in the hands of the assessee is the actual cost incurred by the assessee for acquiring the LED panel (the amount paid by the assessee, recorded as Rs.3,12,60,000/- including VAT), and not the written down value of the seller.
The LED panel, on the facts and the valuer's description placed on record, was held to be equivalent to a computer (within the sense of the IT Act definition) and therefore eligible for depreciation at the rate of 60% as per the New Appendix I of the Income Tax Rules, 1962.
The Tribunal found no substance in the Revenue's allegation that the transaction was undertaken primarily to reduce tax liability by way of enhanced depreciation, particularly in view of the seller's treatment of surplus as short-term capital gains and absence of AO's reasons for rejecting the valuer's report.
No broader or new legal precedent was announced by the Tribunal beyond application of existing authorities and statutory provisions; the decision resolves the parties' dispute by upholding the CIT(A) determination in this case.

Order pronounced on 12th February, 2019, at Chennai. Bench: N.R.S. Ganesan (Judicial Member) and Abraham P. George (Accountant Member).

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Deputy Commissioner Of Income Tax, Company Circle Ii(4) I/C Chennai 600034 () v. Kumudam Publications Pvt. Ltd. ().

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER Department in this appeal, filed against an order dated 05.06.2014 of the ld. Commissioner of Income Tax (Appeals)-IV, Chennai has raised two issues. First is on the cost, which is to be adopted for calculating depreciation on an LED panel acquired by the assessee from its sister concern called M/s. Tricom Vision. Second is ITA No.2358/CHNY/2014. :- 2 -: whether the LED panel could be considered as equivalent to a computer for allowing deprecation at the rate of 60%.

2. Ld. Counsel for the Revenue, strongly assailing the order of the ld. CIT(A) allowing the claims of the assessee submitted that assessee had acquired one LED panel from M/s.Tricom Vision on 04.08.2004 and commissioned it on 05.12.2005. As per the ld. DR, M/s.Tricom Vision had claimed deprecation on this LED panel from assessment year 2001-2002 and the written down value of the LED in their books was Rs.8,41,579/- only. Further, as per the ld. DR, cost for this LED panel, when originally acquired by M/s. Tricom Vision, was Rs.1,80,00,000/- only. Contention of the ld. DR was that against a written down value of Rs.8,41,579/-, assessee had paid a sum of Rs.3,00,00,000/- to M/s. Tricon Vision and claimed deprecation thereon. As per the ld. DR, if deprecation was to be allowed on a cost of Rs.3,00,00,000/-, aggregate depreciation on the LED panel would exceed its original cost of Rs.1,80,00,000/-. This according to the ld. DR was against first proviso to Rule 5(1A) of Income Tax Rules, 1962 (in short the Rules). Submission of the ld. DR was that Managing Partner of M/s. Tricom Vision, from whom assessee purchased LED panel was also the Managing Director of the assessee company. Thus, according to him, huge price of Rs.3,00,00,000/- ITA No.2358/CHNY/2014. :- 3 -: paid was only with an intention of claiming undue benefit by way of deprecation.

3. Alluding to the question of deprecation rate applicable for an LED panel, ld. DR submitted that it was only an electrical appliance and could not be allowed depreciation at 60%. As per the ld. DR, LED panel was not a computer. According to the ld. DR, LED panel could at best be considered only as an electrical appliance and not as a computer. Thus, according to him, it was not eligible for depreciation @60% available to a computer, but only 10% available for electrical appliance.

4. Continuing his arguments further, ld. DR submitted that ld. CIT(A) had allowed the claim of the assessee taking an erroneous view that Explanation (3) to Section 43(1) of the Act, enabled the ld. AO to determine the market rate as actual cost and not any other figure. As per the ld. DR, this was an erroneous conclusion drawn by the ld. CIT(A). Contention of the ld. DR was that even if both M/s. Tricom Vision and assessee were subject to tax at maximum marginal rate, it was an admitted position that they were claiming set off of carried forward loss and hence there would be undue tax benefit arising to them in future. According to him, ld. CIT(A) fell in error in holding that the cost that was to be considered for allowing ITA No.2358/CHNY/2014. :- 4 -: deprecation was Rs.3,12,60,000/- (including VAT of Rs.12,60,000/-) paid by the assessee for acquiring the LED panel board from M/s. Tricom Vision. Further, according to him, ld. CIT(A) also erred in holding that LED board was a computer eligible for deprecation at the rate of 60%.

5. Per contra, ld. Authorized Representative strongly supporting the order of the ld. CIT(A) submitted that depreciation was to be allowed on the actual cost to the assessee. Reliance was placed on the judgment of Honble Apex Court in the case of Jogta Coal Co. Ltd vs. CIT (1959) 36 ITR 521. As per the ld. AR, actual cost to the assessee was Rs.3,12,60,000/-. Contention of the ld. AR was that there was no reduction of Income Tax liability in the hands of the seller or the buyer, since the surplus arising on sale of the panel was considered as short term capital gains in the hands of the seller M/s. Tricom Vision and such assessment was accepted by the said firm. Ld. AR also pointed out that assessee had filed a valuation report dated 02.01.2004 from an approved valuer who had placed the fair market value of the LED display at Rs.3,05,00,000/-. However, as per the ld. AR, the ld. AO had rejected such valuation report without giving any reason. ITA No.2358/CHNY/2014. :- 5 -:

6. Adverting to the rate of depreciation, ld. Authorized Representative submitted that the LED panel acquired by the assessee was an electronic display system with large of number of display screens and data processing abilities, for displaying pictures in a synchronized manner over various display screens after processing the inputs. According to him, its architecture and design was the same as of a computer and hence it was eligible for claiming depreciation at the rate of 60%.

7. We have considered the rival contentions and perused the orders of the authorities below. First we will deal with the issue regarding cost on which on deprecation is to be calculated. It is not disputed that assessee had acquired the LED panel from M/s. Tricom Vision for a total cost of Rs.3,12,60,000/- including the VAT. It is also not disputed that Managing partner of the said firm and Managing Director of the assessee was the very same person. Ld. AO had taken the written down value of Rs.8,41,579/- in the books of M/s. Tricom Vision as the cost for the assessee, on which depreciation was allowed. Claim of the assessee before us is that it had filed a valuation report from a registered valuer which had valued the LED panel at Rs.3,05,00,000/-. Copy of the valuation report has been placed at paper book pages 1 to 11. It is not disputed by the Revenue that ITA No.2358/CHNY/2014. :- 6 -: assessee had placed the valuation report before the lower authorities. At this juncture, it will be apposite to have an understanding of the term actual cost as defined in Section 43(1) of the Act. Said Section is reproduced hereunder:- 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 to the said Section which has ostensibly been invoked by the ld. AO is reproduced hereunder:- Where, before the date of acquisition of 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 (Joint Commissioner) determine having regard to all the circumstances of the case. The above Explanation in our opinion does not empower the ld. AO to adopt the written down value of the seller as the actual cost for the buyer acquiring the asset. It has to be determined according to the circumstances of the case. In the present case before us, assessee had filed a valuation report from the Government approved valuer named Shri. V. Shanmugavel who had assessed the fair market value ITA No.2358/CHNY/2014. :- 7 -: at Rs.3,05,00,000/-. No reason has been mentioned by the ld. AO for disregarding the valuation of the approved valuer. Honble Apex Court in the case of Jogta Coal Co. Ltd (supra) has clearly held the cost for the purpose of depreciation allowance would be cost in the hands of the assessee and not that of the previous owner. That apart, assessment order of M/s. Tricom Vision, the seller, for the very same assessment year, placed at paper book pages 1 to 7 clearly show that the surplus on sale of the LED panel was considered in its hands as short term capital gains. Relevant paras of their assessment order is reproduced hereunder:- From the method deployed as explained above, it is clear that the assessee had resorted to the provisions of section 41(2). On being asked to clarify, the AA of the assessee filed in his reply dated 28.11.2007. a note on the sale of LED - Board. In that reply, the assessee admitted -that it had sold one of its LED Display Equipment board to M/s. Kumudam Publications Private ltd for a consideration of Rs 300 lakhs. The WDVof the concerned block of assets as on the date of sale is Rs 8,41,579. The original cost of the LED Display Equipments is Rs 188.0 Lakhs. The differential value of Rs 1,79,58,421 has bun considered as balancing charge U/S 41(2) of the IT Act, 196L" and that the difference between the sale consideration and the actual cost amounting to Rs 112.0 L.akhs (300-188 lakhs) has been admitted as short term capital gains as per section 50 at IT Act ... However, though the assessee had quoted the provisions of section 41(2) verbatim in his above mentioned reply, it is seen here that he has failed to understand the nuances of the above mentioned subsection. For the purpose of clear understanding, the provisions of ITA No.2358/CHNY/2014. :- 8 -: Section41(2) is reproduced as under :

41 (2): Where any building, machinery, plant or furniture,- (a) which Is owned by the assessee; (b) in respect of which depreciation is claimed under clause (i)of subsection (1)of Section 32;and (c) which was or has been used for the purpose of business is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as 00es not exceed the difference between the actual cost and the written down value, shall be chargeable to income tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due. From a careful reading of the above sub section, there emerge three conditions that are to be fulfilled by Q person to claim the benefits as per the provisions of Sec41(2). , They being: 1) That the asset should be owned by the assessee 2) That for that particular asset, depredation has bun claimed under clause (i) of Sub section (1) of Section 32 and 3) that the asset was or has bun used for the purpose of business. All the conditions must be simultaneously fulfilled by a person to claim, the benefits CIS given under S 41(2). For the sake of clarity, sub section 1 of Section 32 is also reproduced below :

32 (1) In respect of depreciation of -

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangtbte assets acquired on or after the 1st day of April, 1998, Owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed -

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed.

(ii) in the case of block of assets, such percentage on the written down value thereof as may be prescribed ... " ITA No.2358/CHNY/2014. :- 9 -: From the above, it is clear that for a person who can claim the benefits u/s 41 (2), the depreciation for such an asset must satisfy all the three conditions imposed in that sub section. Apart from being owned by the assessee and used for the PU-po5e of business, the depreciation for the asset must have been claimed under clause (i) of sub section 1 of Section 32. Going back to such clause and reading it would clearly mention that the assets must not only be of an undertaking engaged in generation a generation and distribution of power but also undergo depreciation under the straight line method. The words ' ... such percentage on the actual cost thereof,' clearly mentions this. In the above case, the assessee engaged in advertising business, cannot, under any figment of imagination, be termed as an undertaking engaged in the generation of power. Hence, for not fulfilling one of the three basic conditions of section 41(2), the assessee would not be entitled to the benefits of the sub section, Even assuming for a minute that the assessee is engaged in the business of generating power and is eligible to get the benefits of Balancing Charge, the assessee would not be entitled to claim so for the reason given below : According to Rule 5(1A) and Appendix 1A, a power generating unit can claim the benefit of Balancing charge only if the depreciation is calculated on a fixed percentage, i.e., Straight line Method of claiming Depredation on the assets which are listed out in the above mentioned IT Rule and Appendix. Since the assessee had claimed depredation of its assets on reducing balance method, his claim of the benefit of Balancing charges is not accordance with the provisions of IT Act. In short, since the assessee is not a power generating undertaking, the claim of balancing charge cannot be entertained and the capital gains on the sale of LED Display Equipment has to be done following the provisions of section 50 and 50A. As per these two sections, the capital gains on the sale of the asset should be calculated s under:- Sale consideration of LED : 3,00,00,000 Less: WDV as on 31.3.2004 (As per the provisions of 5OA) : 8,41,579

---------------------- Short Term Capital Gain (as per provisions of S 50) : 2,91,58,421

------------------------ Thus there can be no case for the Revenue that the acquisition of the LED panel from M/s. Tricom Vision by the assessee was for reduction of tax liability by claiming excess depreciation. In our opinion ld. CIT(A) was justified in holding that cost to the assessee for the purpose claiming depreciation was cost incurred by it for acquiring the LED panel from M/s. Tricom Vision. ITA No.2358/CHNY/2014. :- 10 -:

8. As to the question whether the LED panel is equivalent to a computer for availing depreciation at the rate of 60% for computers in New Appendix I of Income Tax Rules, 1962, term computer has not been defined in the Act. However, it has been defined in Section 2(1) of Information Technology, Act, 2000 as under:- Computer means electronic, magnetic, optical or other high- speed data processing device or system which performs logical, arithmetic and memory functions by manipulations of electronic, magnetic or optical impulses, and includes all input, output, processing, storage, computer software or communication facilities which are connected or relates to the computer in a computer system or computer network. Characteristic of the LED Panel acquired by the assessee has been given in the registered valuers report as under:-

1. The identified Plant and Machinery is the Natural Color LED Digital display system with display controller and accessories.

2. In house software development was carried for online message change, to run animation or even run a DVD on the display panel.

3. After the software development, the LED display panel is capable of displaying instant variable messages, scrolling or running messages & playing DVD.

4. Royalty was paid to the original equipment supplier.

5. Future expected life of the equipment is 6 years. In our opinion, the above description does, more or less fits to the definition of computer as given in Information Technology Act, 2000. It had memory function, ability for processing and could also perform logical action by synchronizing the inputs to display. Thus in our ITA No.2358/CHNY/2014. :- 11 -: opinion, the LED panel purchased by the assessee was eligible for claiming depreciation at the rate of 60%.

9. For the reasons mentioned at para 7 & 8 above, we find no good reason for interfering with the order of the ld. CIT(A).

10. In the result, the appeal of the Revenue stands dismissed. Order pronounced on Tuesday, the 12th day of February, 2019, at Chennai. Sd/- (N.R.S. GANESAN) /JUDICIAL MEMBER Sd/- (ABRAHAM P. GEORGE) /ACCOUNTANT MEMBER "/Chennai #/Dated: 12th February, 2019. '( )(/Copy to:

1. /Appellant 3. * ()/CIT(A) 5. ( //DR

2. /Respondent 4. */CIT 6.

Deputy Commissioner ... v. Kumudam Publications...