Transfer of a capital asset by firm to existing company: Applicability of section 47(xiii)
- The Assessee was a Private Limited Company engaged in the business of manufacturing, dealing and exporting of incense sticks and allied products. The Assessee succeeded to a business of partnership firm viz., ‘Padmini Products’ with effect from 01.02.2005. Before the firm was converted into private limited company, the partnership firm had revalued all its intangible assets and arrived at a value of Rs.65.26 crore 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 had allotted shares at the face value of Rs.1,000/- and premium of Rs.0.13 lakhs 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 2005-06 and 2007-08 declaring a loss of Rs.14.98 crore and Rs.12.08 crore respectively. The Assessee had 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 business of manufacture and sale of incense sticks was built on an intangible experience of aroma which could rarely be secured in the form of trade name/ trade mark. It was pertinent to mention here that Assessing Officer himself had found that the erstwhile partnership firm was the registered owner of various trade marks. It was also pertinent to mention here that valuation of the shares was made by the Assessee as per the accounting standards 10 & 26. It was also noteworthy that none of the authorities had either questioned the valuation of the intangible assets or have doubted the genuineness of the transactions. Thus, the intangible asset of the Assessee had a real money value. The aforesaid trademark viz., the intangible assets were transferred to the Assessee for a valuable consideration.
- Section 32(1) of the Act provides for depreciation in respect of trademarks owned wholly or partly by the Assessee. In the instant case, the Assessee succeeded to the business of the partnership firm, which had trademarks registered in its name. Therefore, the Assessee under Section 32(1) of the Act was entitled for depreciation. It was also pertinent to note that under Section 47 of the Act, any transfer of capital asset or an intangible asset by a firm to a company as a result of succession of the firm by a company is a recognized mode of transfer.
- Admittedly, the Assessee and the erstwhile partnership firm were different entities and there was transfer of intangible assets by the partnership firm to the Assessee for a valuable consideration that was by way of allotment of shares. Thus, the aforesaid transaction was 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 with reference to intangible assets.