PER SHAMIM YAHYA: AM This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-IX, New Delhi dated 18.3.2010 pertaining to assessment year 2006-07.
2. The grounds raised read as under:- 1.0 That the disallowance of Rs. 2,29,300/- on account of fee paid to the Registrar of Companies for the increase in the authorized share capital of the company is bad in law. ITA NO. 3203/Del/2010 1.1 That without prejudice the claim of the assessee u/s. 35D of the I.T. Act should have been allowed by the Assessing Officer / Commissioner of Income Tax (A). 2.0 That the disallowance of claim of Rs. 4,80,044/- on account of depreciation of good will is bad in law. 2.1 That the Ld. Commissioner of Income Tax (A) ought to have held that the goodwill is an intangible asset and purchase cost of goodwill is subject to provisions of depreciation u/s. 32 of the I.T. Act. 3.0 That the disallowance of Rs. 48,22,346/- u/s. 40A(2)(b) of the I.T. Act is bad in law. 3.1 That the Assessing Officer has grossly erred in invoking the provisions of section 40A(2)(b) of the
I.T. Act and the Ld. Commissioner of Income Tax (A) has grossly erred in upholding the action of the Assessing Officer . 3.2 That without prejudice the Assessing Officer /Ld. Commissioner of Income Tax (A) ought to have identified as to what extent the professional charges paid are excessive or unreasonable within the meaning and context of section 40A(2)(b) of the
I.T. Act. 4.0 That each ground of appeal is independent of and without prejudice to other grounds of appeal raised herein. ITA NO. 3203/Del/2010 The appellant-assessee prays that the relief as per grounds of appeal above may kindly be allowed to him and the appellant craves leave to add, amend, alter, chance, substitute, vary or raise any additional ground(s) of appeal if it becomes necessary to do so in the interest of justice either at the or before the date of hearing.
3. Apropos disallowance of Rs. 2,29,300/- on account of fee paid to the Registrar of Companies. In this case Assessing Officer noted that from the perusal of the records, it was found that a sum of Rs. 2,29,300/- paid as fee to ROC has been debited to the profit and loss account under the head Rates and Taxes. Assessing Officer observed that the amount was paid for increase in authorized share capital. He held that the fee for increase in authorized share capital was capital in nature, as per the decisions of the Honble Apex Court in the case of Punjab State Industrial Development Corporation Ltd. vs. C.I.T. [1997] 225 ITR 792 and Brooke Bond India Ltd. vs. C.I.T. [1997] 225 ITR 798.
4. Upon assessees appeal Ld. Commissioner of Income Tax (A) referred to several case laws and affirmed the Assessing Officers action. As regards assessees alternative claim that amortization u/s. 35D may be allowed. Ld. Commissioner of Income Tax (A) found that the expense in question was not covered by the provision of section 35D. He referred to the decision of the C.I.T. vs. Hindustan Insecticides Ltd. [2001] 250 ITR 338 (Del.) in which the Honble Jurisdictional High Court has held that the fee paid for increase in share capital is not for registration of company and hence it is not amortizable under the provisions of section 35D. Accordingly, the ITA NO. 3203/Del/2010 claim of the assessee to allow amortization of the expenses was rejected.
5. Against the above order the assessee is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted that the increase in authorized share capital has facilitated substantial explanation of the company and in view of this matter assessees claim of the said expenses being revenue in nature should be allowed. However, we find that in light of the catena of case laws including that from the Apex Court referred by the Assessing Officer and the Ld. Commissioner of Income Tax (A), this issue has to be decided against the assessee. Hence, we hold that the amount paid for fee increase in various share capital cannot be allowed as revenue expenses. We further hold that the same is not covered by the provision of section 35D of the Act. Hence, we affirm the orders of the authorities below on this issue and decide the issue against the assessee.
7. Apropos disallowance of Claim of Rs. 4,80,044/- on account of depreciation of goodwill. The Assessing Officer noted that in financial year 2004-05, there was general business transfer agreement between Minda Industries Ltd. and the assessee for a consideration of Rs. 2,75,00,000/-. As per the agreement there was a transfer of assets however, goodwill as a separate intangible asset was not covered by the agreement. Before the Assessing Officer, the company did not produce any documents; it stated that there was a transfer of goodwill. The Assessing Officer observed that there are about 10 sister concerns which have Minda prefixed to their names, however, no such payment was made by any of the sister concern to Minda ITA NO. 3203/Del/2010 Industries Ltd. In light of this fact, the Assessing Officer was of the view that the payment on account of goodwill was made without any service being rendered. As regards the nature of asset, the Assessing Officer has made elaborate discussion of the nature of goodwill as in intangible asset. The Assessing Officer noted that goodwill remains insubstantial in form and nebulous in character. Distinguishing it from other intangible assets mentioned in section 2(11) comprising knowhow, patents, copyrights, trademarks, licenses, franchises or any other business of commercial rights of a similar nature, the Assessing Officer opined that unlike these assets goodwill may or may not depreciate in value. In a progressing business, goodwill may increase and in a declining business it may decline. There being no certainly as to the erosion in value of goodwill with passage of time, the legislature chose not to include goodwill in the list of intangible assets when providing for depreciation on such assets in Finance Bill 1998-99. The exclusion of goodwill from the list of intangible assets despite being the oldest and foremost example of intangible assets clearly indicates that it was not the intent of Legislature to extend the benefit of depreciation to goodwill. The Assessing Officer was of the view that the provision of the Statute must be understood strictly. Goodwill has been excluded from the list of intangible assets in section 2(11), therefore, it cannot be so read. Further, the Assessing Officer relied upon a number of court decisions for strict interpretation of Statute. The decisions relied upon by the Assessing Officer are: Polestar Electronic (Pvt.) Ltd. vs. Addl. CST (1978) 41 STC 409, 421 (SC); [Jagdish Ch. Patnaik vs. State of Orissa, JT 1998 (3) S 105, 112-13]; [Azad Tobacco (P) Ltd. vs. C.I.T. (1997) 225 ITR 1002 (All); and CST vs. Modi Sugar Mills Ltd., AIR 1961 (SC) 1047. ITA NO. 3203/Del/2010
8. Before the Ld. Commissioner of Income Tax (A) assessee claimed that Government of India amended the definition of block of assets vide the Finance Act (No. 2) 1998 to include intangible assets and correspondingly Section 32 was amended to allow depreciation on intangible assets. It was submitted that the law has specified items of intangible asset eligible for depreciation in the following categories:-
i) Know-how. ii) Patents iii) Copyrights iv) Trademarks
v) Licences vi) Franchises vii) Any other business of commercial rights of a similar nature. 8.1 It was argued that although goodwill does not fall under all these categories (i) to (vi) above specified in the provision, it would be covered in the residual category of any other business or commercial rights of similar nature. It was further submitted that the goodwill has not been defined in the Income Tax Act, but it has been recognized as a capital assets in section 55(2)(a). Assessee also relied upon the judgement of the ITAT order in the case of Kotak Forex Borkerage Ltd. vs. ACIT in I.T.A. No. 2692/Mum/2007 decided on August, 2009, wherein it was held that the goodwill is a business or commercial right of a similar nature referred to in clause (ii) of Section 32(1) of the Act and consequently depreciation is allowable on the same. However, the Ld. Commissioner of Income Tax (A) was ITA NO. 3203/Del/2010 not in agreement with the assessees submission. He referred to the decision of the Mumbai High Court in the case of C.I.T. vs. Techno Share and Stocks Ltd. [2009] 184 Taxman 103 (Bom.). He further referred to the decision of ITAT, Ahmedabad in the case of Bharatbhai J. Vyas vs. Income Tax Officer [2005] 097 ITD 0248. Ld. Commissioner of Income Tax (A) referred to the decision of ITAT Mumbai in the case of R.G. Keswani vs. ACIT [2009] 116 ITD 133 and in the case of ACIT vs. Jagdish C. Sheth [2006] 101 ITD 0360. He observed that in both these judgements, ITAT held that strict construction has to be applied to the provisions of section 32(1)(ii) and goodwill does not come under the expression of any other business or commercial rights in the nature similar to knowhow, patents, copyright, etc. and, therefore, deprecation on the ground of goodwill is not allowable. Accordingly, Ld. Commissioner of Income Tax (A) affirmed the disallowance made by the Assessing Officer .
9. Against the above order the Assessee is in appeal before us.
10. We have heard the rival contentions in light of the material produced and precedents relied upon. Ld. Counsel of the assessee submitted that the Assessing Officer has failed to appreciate the real facts due to which the amount was treated as goodwill in the books of accounts of the assessee. This amount came into existence on account of the fact that the existing running unit was transferred by Minda Industries Ltd. to this newly formed company i.e. the assessee for a consolidated consideration of Rs. 2.75 crores and the difference between the net value of assets, which assets were recorded at book value, was recognized as goodwill in the books of accounts and the same represented various assets as were also identified in the business transfer agreement as under:- ITA NO. 3203/Del/2010 Contracts means the rights and obligations of the Transferor under all contracts and agreements relating to the Business to which the Transferor is a party. Permits means licenses including EPCG/DEEC/Advance License and its obligation, bonds, legal undertaking (LUT) consents, authorizations, orders, confirmations, permission, certificates, approvals existing as well as in pipelines and authorities, as set for in Schedule III. Para 2.2 and 2.4 of the Business Transfer Agreement 2.2 Transferor hereby assigns and the Transferee hereby accepts assignment of the Contracts. If the consent of any entity (other than a government authority) is required for the assignment of rights and obligations of any of the contracts under this Agreement, the Transferor on the form of assignment agreement to be executed with such other entity, and the Transferor shall use all reasonable endeavors to notify and / or obtain the consent of such other entity in respect of the assignment as soon as possible. 2.4 Transferor hereby transfer and the Transferee hereby accepts transfer of the employees. 10.1 Ld. Counsel of the assessee further submitted that the Honble Delhi High Court in its judgement in the case of Areva T&D India Ltd. vs. DCIT (2012) 345, ITR 421 (Del.) on the identical facts has held that when the consideration paid for transfer of business exceeds the tangible value of assets, the excess amount paid, which is categorized in the books of the buyer as goodwill and is paid for the business claim, business information, business records, ITA NO. 3203/Del/2010 contracts and skilled employee etc., the same falls in the category of any other business or commercial rights of similar nature: as contained in section 32(1)(ii) of the I.T. Act; and is therefore, eligible for depreciation. 10.2 Ld. Counsel further submitted that Assessing Officers reasoning on disallowance of depreciation that the goodwill is a separate asset and the same is not mentioned in the business transfer agreement is based on erroneous interpretation of terms of the business transfer agreement. He claimed that the facts of the judgement of the Delhi High Court as given above are identical to the facts of the assessees case. Ld. Counsel further submitted that the Assessing Officer has relied upon the judgement of the Mumbai High Court in the case of C.I.T. Vs. Techno Shares and Stocks Ltd. He submitted that the said judgement of the High Court of Mumbai has been reversed by the Honble Supreme Court as reported in 327 ITR 323. Therefore, the Ld. Counsel of the assessee submitted that the claim of depreciation made by the assessee were perfectly in order and in consonance with the judgements of the jurisdictional High Court and the Honble Supreme Court of India. 10.3 Ld. Departmental Representative on the other hand, relied upon the orders of the Assessing Officer and Ld. Commissioner of Income Tax (A). She submitted that the case laws referred by the ld. Counsel of the assessee were distinguishable on the facts of the case. Ld. Departmental Representative referred to the following decisions for the proposition that goodwill on depreciation is not allowable.
i) Borkar Packaging (P) Ltd. vs. ACIT (2010) 131 TTJ 99. ITAT, Panaji Bench. ITA NO. 3203/Del/2010 ii) Chowgule & Co. (P) Ltd. vs. ACIT {2011] 131 ITD 545 ITAT, Panaji 10.4 We have carefully considered the submissions and perused the records. We find that the figure of the goodwill in the assessees case has arisen when the existing running unit was transferred by Minda Industries Ltd. to the assessee newly firm company i.e. the assessee for a consolidated consideration of Rs. 2.75 crores and the difference between the net value of assets, which assets were recorded at book value, was recognized as goodwill in the books of accounts. We find that the transaction took place in the preceding assessment years and the figure of goodwill is coming from the previous balance sheet. We agree with the submissions of the ld. Counsel of the assessee that the Honble Delhi High Courts decision in the case of Areva T & D India Ltd. vs. DCIT (2012) 345 ITR 421 supports the case of the assessee. The facts of this case before the Honble High Court were as under:- "The assessee vide a slump sale agreement required, as a going concern, the transmission and distribution business of the transferor-company. The book value of the net tangible assets (assets minus liabilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as RS.28.11 crores. The said assets and liabilities were recorded in the books of transferee at the same value as appeared in the books of the transferor. The balance payment of Rs.16,58,76,000/- over and above the book value of net tangible assets, was allocated by the assessee towards acquisition of bundle of business and commercial rights, compendiously termed as 'goodwill' in the books of account, which comprised, inter alia, the following: - (i) business claims, (business information, (iii) business records, (iv) contracts, (v) ITA NO. 3203/Del/2010 skilled employees, (vi) know-how. The assessee-company while filing its return claimed depreciation under section 32(1)(ii) with respect to the aforesaid amount of Rs.16,58,76,000/- as being a price paid for acquisition of above mentioned intangible assets. The Assessing officer disallowed the depreciation on 'goodwill' as claimed in the return. The Assessing Officer disallowed the claim of the assessee- company on grounds, namely, (a) depreciation under section 32(2)(ii) is not available on goodwill; (b) the assessee was unable to demonstrate that the amount shown as goodwill in the books of account was in fact a payment made towards acquisition of 'certain business and commercial rights' and therefore eligible for depreciation in tax as per section 32(1)(ii)." The Hon'ble Delhi High Court has further held as under: - "Applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression 'business or commercial rights of similar nature' specified in section 32(1)(ii), it is seen that such rights need not answer the description of 'know-how, patents, trademarks, licenses or franchises' but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in section 32(1)(ii) preceding the term 'business or commercial rights of similar nature - it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words 'business or commercial rights of similar nature' have been ITA NO. 3203/Del/2010 additionally used, clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of 'business or commercial rights' cannot be restricted to only six categories of assets, viz ., know-how, patents, trademarks, copyrights, licenses or franchises. The nature of 'business or commercial rights' can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees and know-how, were all assets, which were invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets were, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor; in the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. [Para 13} In view of the above discussion, it is held that the specified intangible assets acquired under slump sale agreement were in the nature of 'business or commercial rights of similar ITA NO. 3203/Del/2010 nature' specified in section 32(l)(ii) and were accordingly eligible for depreciation under that section. [Para 14}. 10.5 In light of the above case laws, we are in agreement with the submissions of the ld. Counsel of the assessee that the goodwill that has been recognized in this case represents various assets in the nature of goodwill. We find considerable cogency in the submissions of the Ld. Counsel of the assessee as mentioned above. Thus, we hold that the assessees case is covered by the decision in the Honble Delhi High Court as above. The case laws relied upon by the Ld. Departmental Representative are not applicable as they are Tribunals decisions and Honble Jurisdictional High Court takes a precedence over the same.
11. Apropos disallowance of Rs. 48,22,346/- u/s. 40A(2)(b) In this issue Assessing Officer noted that assessee company has paid the sister concern M/s Minda Industries Ltd. [covered u/s. 40A(2)(b)] professional charges of Rs. 48,22,346/-. The company was asked to justify the payments. Assessing Officer noted that only explanation or reply filed by the assessee company dated 20.8.2008 reads as under:- The payment was made towards the management services such as corp. planning and fin. Department, legal and secretarial dept. direct and indirect taxation, audit and finalization of accounts 11.1 Assessing Officer noted that the above were not supported by any evidence or documents whatsoever as to how these arrangement of sharing of technical personnel / professionals with Minda Industries Ltd. is designed and operated and how costs have been distributed across sister concerns. Assessing Officer held that ITA NO. 3203/Del/2010 from the submissions of the assessee it is absolutely unclear as to why this payment can be allowed. Firstly, as a business expense and secondly as reasonable payment made to sister concern u/s. 40A(2)(b) for services rendered. Hence, the claim of Rs. 48,22,346/- as professional charges was disallowed.
12. Before the Ld. Commissioner of Income Tax (A) assessee reiterated the submissions made before the Assessing Officer. Ld. Commissioner of Income Tax (A) further noted that ld. Counsel for the assessee simply listed the services rendered by the sister concern. It was submitted that the payment was made @ 2% of the sales of the assessee company after deducting tax at source on applicable rates. It was submitted that all the expenses so incurred were of revenue in nature and laid out as expended wholly and exclusively for the purpose of the assessee company. That assessee company was not having its own senior and professional staff. It is availing the services of Minda Industries Ltd.. It was also stated that several large industrial groups, in order to avoid duplicity of resources and cut costs, employ senior management people in one company, who oversee and supervise the working of companies in the group. The cost of such senior corporate resources are then apportioned and spread over amongst the various companies in the group. It was further submitted that the Assessing Officer was duty bound to make enquiry with regard to section 40A(2)(b) whether such expenditure was excessive or unreasonable having regard to the fair market value of the services rendered. Considering the above, Ld. Commissioner of Income Tax (A) observed that it was not in dispute that the payments were made to the persons specified in Clause (b) of Section 40A(2) of the Act that ITA NO. 3203/Del/2010 therefore, the onus was on the assessee to explain what services were rendered by the sister concerns and how the expense was neither excessive nor unreasonable. That it was not brought on record any facts with regard to the total of such expenses incurred by M/s Minda Industries Ltd. the amount incurred for each of the services, the ratio in which it has been apportioned between all the sister concerns, the comparable markets, rates, the savings to the assessee by obtaining the services from the sister concern as against obtaining them from the market. Etc. Ld. Commissioner of Income Tax (A) further observed that by simply debiting 2% of sales as cost for services purported to have been rendered by the sister concern, it cannot be said that the assessee has discharged the responsibility to establish the genuineness and veracity of the expenses. He held that the payment was neither excessive nor unreasonable has not been established by the assessee. As the assessee has not produced any details either at the assessment stage or at the appellate stage, he found no reason to interfere with the findings of the Assessing Officer.
13. Against the above order the Assessee is in appeal before us.
14. We have heard the rival contentions and perused the records. Ld. Counsel of the assessee submitted that expense has been properly incurred. Ld. Counsel of the assessee placed reliance upon the following cases laws:-
i) 2011-TII-18-Hon'ble High Court DEL-INTL in the case of C.I.T. vs. M/s Nestle India Ltd. 337 ITR 103 ii) Delhi High Court in the case of C.I.T. Vs. Samsung India Electronics Ltd. 2011-TIOL-313-Hon'ble High Court DEL-ITAT ITA NO. 3203/Del/2010 iii) Punjab and Haryana High Court C.I.T. vs. Siya Ram Garg (HUF) [2011] 237 CTR 321. iv) Delhi High Court in C.I.T. vs. Gautam Motors 184 Taxman 21 (Del.)
v) Delhi High Court in C.I.T. vs. Modi Revlon (P) Ltd.
210 Taxman 161 (Mag. Section)
15. Ld. Counsel of the assessee in this regard further submitted that assessee and Minda Industries Ltd. are taxable at the same rate and therefore there was no motive to avoid the payment of any taxes; that there was no intention to evade taxes; that Assessing Officer has not discharged its onus of providing as to what would have been the fair market value of the services rendered.
16. Ld. Departmental Representative on the other hand placed reliance upon the orders of the authorities below, she claimed that any detail of the expenses have not been provided to the authorities below. It has not been shown that same is reasonable as compared to the market rates of the services. Hence, she claimed that the order of the Ld. Commissioner of Income Tax (A) be affirmed.
17. We have carefully considered the submissions and perused the records. We find ourselves in agreement with the submissions of the authorities below that assessee has not supported the expenditure in this regard with proper details and supporting. Assessee has merely stated that certain list of services were being rendered for which payment is made @ 2% of the sales of the assessee company. In our considered opinion, these submissions are not sufficient to justify the assessees claim of the expenditure in this regard. We further note that the assessee has not given any ITA NO. 3203/Del/2010 submission in this regard that the expenditure incurred by the assessee were commensurate with the market rates. We also note that no such examination has been done by the authorities also.
18. In light of the above, in our considered opinion, the matter in this regard needs to be remitted back to the file of the Assessing Officer. The Assessing Officer shall examine the assessees claim regarding these expenses after giving proper opportunity to the assessee. Assessing Officer shall also examine as to whether the amount paid for the services were commensurate with the market rates. Needless to add that the assessee should be granted adequate opportunity of being heard.
19. In the result, the Appeal filed by the Assessee is partly allowed. Order pronounced in the open court on 19/7/2013. Sd/- Sd/- [I.C. SUDHIR] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Date 19/7/2013 SRBHATNAGAR Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT TRUE COPY By Order, Assistant Registrar, ITAT, Delhi Benches ITA NO. 3203/Del/2010
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