Depreciation on intangible assets on conversion of proprietorship into private ltd. company allowed

Depreciation on intangible assets on conversion of proprietorship into private limited company allowed as the transaction was not considered sham

ABCAUS Case Law Citation:
ABCAUS 3019 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
CIT vs. Sandvik Chokshi Ltd. [2015] 55 taxmann.com 453 (Gujarat)
Commonwealth Trust (India) Ltd vs CIT reported in 306 ITR 356 (Ker).

The only issue involved in these appeals was whether the CIT(A) was justified in disallowing the depreciation on intangible assets vested with the assessee company on conversion of proprietorship business into private limited company?

The assessee was a private limited company engaged in the business of planning and design consultancy. The said private limited company was formed by conversion of a proprietorship business of Architects and Interior Designers.

The relevant assessment year was the first return of income filed in the name of the assessee company. The assessee company filed its return of income admitting loss. During the said assessment year, the assessee had taken over the assets and liability of the proprietary concern and during such take over, the intangible assets of the proprietary concern remaining in the books of proprietary concern were valued for which consideration was issued in the form of allotment of shares to the proprietor.

The assessee company claimed depreciation on the intangible asset brought forward from the books of proprietary concern on the revalued amount of intangible assets which was disallowed to him.

The Tribunal observed that the AO had accepted the entire transactions as genuine. It was not the case of the Ld.AO that the transactions by way of conversion of proprietary concern into private limited company were so arranged with a malign intention to evade payment of taxes or reduce the instance of tax liability thereon. The Revenue had not considered the transaction of assets and liabilities getting vested with the private limited company from the books of proprietary concern as sham.

The Tribunal observed that when the revalued amount of intangible assets was remaining in the books of the proprietary concern prior to conversion itself. The said revalued intangible asset together with other assets and liabilities got vested with the assessee company pursuant to conversion. Hence, there was no reason to disallow the claim of depreciation on the revalued portion alone.

The Tribunal further observed that generally, this transfer of net assets would be treated as transfer and liable for capital gains but pursuant to operation of law by way of specific provision contained in Section 47(xiv) of the Income Tax Act, the said transaction was not considered as a transfer. Hence when the assessee claims the benefit as provided in the statute after duly satisfying the Revenue that it had indeed complied with all the conditions stipulated for the claim that the subject mentioned transaction was not been considered as transfer within the meaning of Section 47(xiv) of the Act, then the very same assets and liabilities which got vested in the hands of the vested entity i.e., the assessee company cannot be disputed by the Revenue by way of disallowance of depreciation on revalued portion of intangibles.

The Tribunal opined that decision of the Hon’ble Gujarat High Court was applicable to the facts of the instant case. Also it is now well settled that consideration by way of issuance of shares on the entire value of net assets and liabilities is a valid consideration as per the decision of Hon’ble Kerala High Court.

Accordingly, the Tribunal directed the AO to grant depreciation on revalued portion of intangible assets for all the years in appeal

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