Transfer of Intangible Assets for a valuable consideration by way of allotment of Shares is entitled to Depreciation: Karnataka HC [Read Judgment]

The Karnataka High Court held that the transfer of intangible assets for a valuable consideration by way of allotment of shares is entitled for depreciation.

The assessee, M/s Padmini Products is a Private Limited Company engaged in the business of manufacturing, dealing and exporting incense sticks and allied products. The assessee succeeded in the business of partnership firm, ‘Padmini Products’.

Before the firm was converted into a private limited company, the partnership firm had revalued all its intangible assets and arrived at a value of Rs.65,26,40,150 using standard valuation methods. All assets and liabilities of Padmini Products i.e., the erstwhile partnership firm, including the aforesaid intangible assets were transferred to the assessee.

In consideration, the assessee allotted shares at the face value of Rs.1,000/- and premium of Rs.13,500 per share each to the partners of the erstwhile partnership firm and no other consideration in any other form was paid by the assessee either to Padmini Products or to its partners. The assessee filed the returns of income for the Assessment Years declaring a loss.

The assessee filed return of income for Assessment Year 2006-07 and 2008-09 declaring the income as ‘NIL’. The case of the assessee for the Assessment Year 2005-06 was reopened under Section 147 of the Act on the ground that during the course of the proceeding for Assessment Year 2007-08, it was noticed by the Assessing Officer that assessee had made claim of depreciation on intangible assets, which was not in accordance with Section 32(1) of the Act.

Thereafter, a notice under Section 148 of the Act was issued. The assessee by a communication stated that return of income for Assessment Year 2005-06 already filed be treated as return in response to the notice under Section 148 of the Act. Thereafter, a notice under Sections 143(2) and 142(1) of the Act was issued to the assessee. The Assessing Officer by an order held that intangible assets valued in the hands of the company at the time of succession, were valued as per assessee’s own valuation and not for any actual consideration.The Tribunal dismissed the appeal preferred by the assessee.

The issue raised in this case was whether on the facts and in the circumstances of the case, the ITAT was right in law in upholding the action of Learned Respondent in re-opening the assessment for the assessment years 2005- 06, 2006-07 and 2008-09 under Section 147 of the Income Tax Act in the absence of any tangible material but merely on the basis of additions made in subsequent assessment year 2007- 08.

The division judge bench of Justice Alok Aradhe and H.T. Narendra Prasad observed that the assessee and the erstwhile partnership firm are different entities and there was transfer of intangible assets by the partnership firm to the assessee for a valuable consideration that is by way of allotment of shares.

Thus the court said that the aforesaid transaction is squarely covered under Section 47(xiii) of the Act and therefore, the assessee under Section 32(1) of the Act was entitled for depreciation with reference to actual cost incurred by it with reference to intangible assets.

“It is noteworthy to mention here that 5th proviso to Section 32(1) of the Act restricts the total depreciation which can be claimed in case of succession etc. to the depreciation which would have been allowable had there been no succession. The 5th proviso (earlier 4th proviso) to Section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum to Finance Bill, 1996,” the court said.