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Tax Publishers Padmini Products (P) Ltd. v. Dy. CIT [ITA No. 154 of 2014, dt. 5-10-2020] : 2020 TaxPub(DT) 4179 (Karn-HC) Depreciation on revalued intangible trademarks post conversion of Partnership firm into Company under section 47(xiii) -- Applicability of section 43(1) Explanation 3 read with 5th proviso to section 32(1). *Facts:* A firm Padmini Products was into selling incense sticks and allied products. On 1-2-2005 they converted their firm into a Private Limited company prior to which all intangible assets were duly valued and surplus credited to partners capital accounts. The said capital accounts were converted into shares of Rs. 1000 each at a premium of Rs. 13500 each and shares were duly allotted. The Assessee Private company formed as a result of the conversion returned losses for assessment year 2005-06 and 2007-08 and NIL income for assessment year 2006-07 and 2008-09. Assessment year 2005-06 was reopened by revenue under section 147 alleging that the company had wrongly claimed depreciation on self-created intangible assets which was not existing in erstwhile firm. Since there being no cost incurred for these intangible assets no depreciation is allowable under section 32(1)(ii) and depreciation be restricted vide proviso 5 to section 32(1). Since no intangible existed in the firm's books no depreciation becomes allowable. The assessing officer did not invoke section 43(1) Explanation 3 as well is to be noted. On appeal ITAT held that section 43(6) mentions "actual cost to assessee" which was absent in hands of erstwhile firm thus no depreciation is allowable on the intangible assets. Aggrieved assessee went in appeal to High Court -- Held in favour of the assessee that -- 1. They were entitled to depreciation on the intangible asset which arose out of revaluation in the hands of the erstwhile firm. 2. Proviso 5 to section 32(1) talks only of splitting of depreciation in the hands of predecessor and successor and is applicable only in 1st year of succession and no such splitting need has risen or has been claimed in this case. There was no depreciation on intangibles in hands of firm so no invocation of proviso 5 to section 32(1) is possible. 3. None of the tax authorities have invoked section 43(1) Explanation 3 either questioning the asset valuation or the imputed cost of the intangibles in the hands of the company being allegedly used only to avoid income-tax without which denial of depreciation is incorrect. 4. Section 47(xiii) conditions are also found to be met by assessee.

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Padmini Products (P) Ltd. v. Dy. CIT [ITA No. 154 of 2014, dt. 5-10-2020] : 2020 TaxPub(DT) 4179 (Karn-HC)

Depreciation on revalued intangible trademarks post conversion of Partnership firm into Company under section 47(xiii) -- Applicability of section 43(1) Explanation 3 read with 5th proviso to section 32(1).

Facts:

A firm Padmini Products was into selling incense sticks and allied products. On 1-2-2005 they converted their firm into a Private Limited company prior to which all intangible assets were duly valued and surplus credited to partners capital accounts. The said capital accounts were converted into shares of Rs. 1000 each at a premium of Rs. 13500 each and shares were duly allotted.

The Assessee Private company formed as a result of the conversion returned losses for assessment year 2005-06 and 2007-08 and NIL income for assessment year 2006-07 and 2008-09. Assessment year 2005-06 was reopened by revenue under section 147 alleging that the company had wrongly claimed depreciation on self-created intangible assets which was not existing in erstwhile firm. Since there being no cost incurred for these intangible assets no depreciation is allowable under section 32(1)(ii) and depreciation be restricted vide proviso 5 to section 32(1). Since no intangible existed in the firm's books no depreciation becomes allowable. The assessing officer did not invoke section 43(1) Explanation 3 as well is to be noted. On appeal ITAT held that section 43(6) mentions "actual cost to assessee" which was absent in hands of erstwhile firm thus no depreciation is allowable on the intangible assets.

Aggrieved assessee went in appeal to High Court --

Held in favour of the assessee that --

1. They were entitled to depreciation on the intangible asset which arose out of revaluation in the hands of the erstwhile firm.

2. Proviso 5 to section 32(1) talks only of splitting of depreciation in the hands of predecessor and successor and is applicable only in 1st year of succession and no such splitting need has risen or has been claimed in this case. There was no depreciation on intangibles in hands of firm so no invocation of proviso 5 to section 32(1) is possible.

3. None of the tax authorities have invoked section 43(1) Explanation 3 either questioning the asset valuation or the imputed cost of the intangibles in the hands of the company being allegedly used only to avoid income-tax without which denial of depreciation is incorrect.

4. Section 47(xiii) conditions are also found to be met by assessee.