TMI Blog2013 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial rights of similar nature" by applying the principle of ejusdem generis held that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) and were accordingly eligible for depreciation under that section. Thus the MOU between the assessee and SKS Society cannot be said to be purely personal & the acquisition of rights over the assets of SKS Society including the customer base is an intangible asset against the entire World, therefore, client acquisition cost paid by the assessee is towards acquiring an intangible asset and therefore eligible for depreciation u/s 32(1)(ii). In favour of assessee. Proportionate expenditure u/s 14A r.w.r. 8D disallowed - Held that:- As relying on Godrej Boyce Mfg. Co. Ltd vs. DCIT(2010 (8) TMI 77 - BOMBAY HIGH COURT) wherein held while making that determination the AO should provide a reasonable opportunity to the assessee for producing its accounts or relevant material having a bearing on the facts and the circumstances of the case. In the present case AO has not afforded adequate opportunity to the assessee and has not given an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has filed the appeal on the following grounds:- 1. The order of the learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, in holding that the appellant is not entitled to depreciation claimed at Rs.99,25,284/- is unsustainable in law. 2. The learned Commissioner of Income Tax (Appeals)- IV, Hyderabad, failed to note that "right to access the members of the society was an Intangible asset" falling within the meaning of the definition contained intangible asset as laid down in section 32(1) (ii) of the Income Tax Act, 1961 and therefore the Appellant was entitled to claim the depreciation at Rs.99,25,284/-. 3. The learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, failed to note that there could not be any disallowance under section 14A of the Income Tax Act, 1961 as the entire investments in mutual funds were not made from borrowed funds but from the proceeds of fresh issue of equity shares and therefore erred in directing the Assessing Officer to work out the disallowance under section 14A of the Income Tax Act in terms of Rule 80 of the Income Tax Rules, 1962. 4. Without prejudice to the aforesaid ground, the learned Commissioner of Income Tax (Appeals)-IV, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Swayam Krishi Sangam (SKS)towards transfer of customers was for an intangible asset eligible for depreciation. 4. The Assessing Officer noted that as per appendix to Rule-5 of the IT Rules any assessee would be eligible for depreciation @ 25% in respect of intangible assets of know-how, patents, copy of rights, trade marks, licenses, franchises or any other business or commercial rights of similar nature. The Assessing Officer was of the view that the intangible asset claimed to have been acquired by the assessee does not come under any of the identified assets appearing in the depreciation schedule. The Assessing Officer was also of the view that since the assessee had acquired part of the already existing business of SKS the said asset had not been created during the course of business of the assessee, hence cannot be considered to be a business or commercial rights of similar nature. The Assessing Officer observed that the amount of Rs.3,97 crores paid by the assessee for acquisition of clients who were already enrolled with SKS and participating in their finance business. The Assessing Officer further noted that subscribers were already having a participation in the finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to user for the purpose of its business. The Assessing Officer finally concluded that as no intangible asset has come into the possession of the assessee no depreciation can be allowed. Accordingly, the Assessing Officer disallowed the depreciation claimed of Rs.99,25,284/-. 6. Being aggrieved of the assessment order passed, the assessee filed an appeal before the CIT (A). During the course of hearing before the CIT (A), it was contended by the assessee that it had entered into understanding with Swayam Krishi Sangham Society (SKSS), an NGO engaged in microfinance and acquired the entire business of micro finance of SKS through a business transfer agreement. The acquisition was made as a slump sale. While arriving the value of the business besides physical and actual assets, a value for creating a customer base of more than 1,10,000 borrowers, related brand recall value, trust and faith on the business concept, including the usage and adoption of SKSS logo and brand, which the source of income to the business that was being acquired was also arrived at Rs.3,97,00,000 included in the total consideration of Rs.5.127 crores. It was submitted that the acquisition made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the amounts regularly. These borrowers with proven track records have high value for any lender. SKSS had also created a financial service delivery mechanism and due to the efforts of SKS, NPA as a percentage of advances stood at 1.54% in the year 2005-06 which was later reduced to 0.12%. It was therefore contended that the right to access the customers of the society is an intangible asset which is used for the purpose of business of the assessee. Referring to the decision in the case of Ravindra Kumar Jain vs. CIT (263 ITR 368), Upendra M. Dalal (89 ITD 629), Techno Shares and Stocks Limited vs. (101 TTJ 349), it was submitted that even the membership card of stock exchange though not specified u/s 32(1) (ii) is held to be a right to carry on business or profession and therefore would be eligible for depreciation as intangible asset. It was submitted that the term "business or commercial rights" has not been defined in the Act, hence is to be assigned the meaning as has been assigned to the same in various judicial precedents. It was submitted that the right acquired by the assessee being essential to do the business is necessarily a business or commercial rights. In support o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y right obtained for carrying business effectively and profitably has to fall within the meaning of intangible asset. 8. The CIT (A) after considering the submissions of the assessee and referring to section 32(1) (ii) of the Act observed that depreciation is intended to a limited category of intangible asset. The CIT (A) was of the view that the customer base acquired by the assessee cannot be termed as know-how, patent, copy right or trade mark or franchise. It also cannot be considered a licence or business or commercial right of similar nature as it does not relate to any intellectual property whereas section 32(1)(ii) contemplate depreciation in respect of those license or right which relate to intellectual property. In this context, the CIT (A) relied upon a decision of Hon'ble Bombay High Court in case of CIT vs. Techno Shares and Stocks Limited and others (225 CTR 337) wherein the Hon'ble High Court held that the expression licence is a very wide term and it would embrace within its sweep not only the permission to use immovable property for lawful purposes but also permission to carry on any trade business, profession etc., including the right to acquire the intellectual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as a right acquired the purpose of business of the assessee. The right acquired for being a commercial right, the assessee is entitled for depreciation. In support of his contention, the learned authorised representative of the assessee relied upon the following decisions:- i) Areva T D India Ltd. Vs. DCIT (345 ITR 421) (Del) ii) The AP Paper Mills Ltd. Vs. ACIT (2010) 128 TTJ (Hyd) 596 iii) CIT vs. Hindustan Coca Colas Beverages Pvt. Ltd (331 ITR 192) (Del) iv) Skyline Caterers P. Ltd. Vs. ITO (306 ITR (AT) 369) v) CIT vs. SMIFS Securities Ltd. (348 ITR 302) (SC) vi) M/s India Capital Markets Pvt. Ltd. Vs. DCIT (56 SOT 32) The learned departmental representative, on the other hand, supporting the order of the CIT (A) submitted that the assessee has only acquired the right over the SKS and not over all the customers. It was submitted that even assuming that the assessee has acquired right over the clients still then it cannot be said to be an intangible right as defined u/s 32(1)(ii) of the Act read with rule-5 of the schedule in the Appendix of IT Rules. Therefore, depreciation cannot be allowed to the assessee. 10. We have heard rival submissions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uters and fixtures. In consideration of the SKS Company agreeing to pay the above amounts, SKS Society agrees to transfer the Portfolio to SKS Company. It is hereby agreed and acknowledged between the Parties that the transfer of the loans would require the consent of the lenders, Parties agree to cooperate with each other to ensure that the approvals from the lenders are duly obtained,...." 11. Clause-3 of the MOU even provided for transfer of employees of SKS Society. Therefore, reading of the MOU as a whole gives an impression that the entire business of SKS Society was transferred to the assessee company as a going concern by way of slump sale. This also included the acquisition of rights over more than 110000 existing clients of SKS Society. This fact has also not been disputed by the Assessing Officer or CIT (A). The Assessing Officer even has accepted it as a capital asset. However, both the Assessing Officer as well as CIT (A) have disallowed the claim of depreciation solely on the ground that the right acquired over the clients of SKS Society is not an intangible asset u/s 32(1)(ii) of the Act. At this stage it would be appropriate to look into the provision contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to in Sec.32(1)(ii) will apply to these limited category of intangible assets and not to a wider category of intangible assets. The Hon'ble Delhi High Court in case of Areva T D India Ltd. Vs. DCIT (supra) while interpreting the term "business or commercial rights of similar nature" by applying the principle of ejusdem generis held as under : "In the present case, 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) of the Act. It is seen that such rights need not answer the description of "know-how, patents, trade marks, licences 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 to in section 32(1)(ii) of the Act 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 anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation under that section." 12. The Hon'ble Supreme Court in case of CIT vs. Smifs Securities Limited (supra) while considering whether goodwill would fall under the expression "any other business or commercial right of similar nature" held that the principle of ejusdem generis would strictly apply while interpreting the expression "any other business or commercial right of similar nature" and by applying the said principle goodwill is held to be an intangible asset. In case of Hindustan Coca Cola Beverages Pvt. Ltd. (supra) the Hon'ble Delhi High Court upholding the view of the Income-tax Appellate Tribunal, Delhi Bench in treating goodwill as an intangible asset held that the meaning of business or commercial rights of similar nature if understood in the backdrop of section 32(1)(ii) of the Act would mean commercial rights or such rights which are obtained for effectively carrying on business and commerce and commerce as is understood is a wider term which encompasses in its fold many of facet . The Hon'ble High Court held that any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire world which can be asserted as such to qualify for depreciation u/s 32(1) (ii) of the Act. However, the facts in the present case are different. The MOU between the assessee and SKS Society cannot be said to be purely personal. On the other hand, the acquisition of rights over the assets of SKS Society including the customer base is an intangible asset against the entire World as held by the Hon'ble Delhi High Court. Therefore, the facts of the case considered in the light of the ratio laid down by various judicial precedents referred to hereinabove, in our view, the client acquisition cost paid by the assessee is towards acquiring an intangible asset and therefore eligible for depreciation u/s 32(1)(ii) of the Act. In aforesaid view of the matter, we direct the Assessing Officer to allow the assessee's claim of depreciation. Hence, the grounds raised by the assessee are allowed. 15. The next issue as raised in ground Nos. 3 and 4 is with regard to disallowance of proportionate expenditure u/s 14A of the Act on earning of exempted income. During the assessment proceedings, the Assessing Officer noticed from the computation statement that the assessee has received dividend f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the Act provides that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Therefore, the expenditure incurred for earning the exempted income is subjected to disallowance. The Hon'ble Bombay High Court in case of Godrej Boyce Mfg. Co. Ltd vs. DCIT(supra) had held that the Assessing Officer should determine as to whether the assessee has incurred any expenditure (direct or indirect ) in relation to dividend income/income from mutual fund which does not form part of the total income. The Hon'ble High Court further held while making that determination the Assessing Officer should provide a reasonable opportunity to the assessee for producing its accounts or relevant material having a bearing on the facts and the circumstances of the case. In the case of the assessee, the Assessing Officer has not afforded adequate opportunity to the assessee and has not given any finding whether the assessee has incurred direct or indirect expenditure for earning dividend income from mutual fund. The CIT (A) has also not given any conclusive finding in this regard. Further, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been created exclusively for the benefit of the employees of the company and to provide financial assistance to the employees for purchasing equity shares of the company under employee share purchase scheme. It was submitted that as the loan has been advanced for the benefit of the employees it should be regarded as solely and exclusively for the purpose of business and no disallowance of interest payment should be made. The Assessing Officer however did not accept the submissions of the assessee and disallowed an amount of 23,03,418. 27. The CIT (A) after considering the submissions of the assessee sustained the addition by observing that the shares to be acquired by the MD or the employees were to be their personal properties. He further observed that the assessee has not been able to establish that but for the acquisition of share by the MD or the employees the assessee could have been put to some financial disadvantage. He further observed that the assessee has also not established that the loan was given to the MD or the employees to promote the business of the assessee company itself. Accordingly, the CIT (A) held that proportionate interest has to be disallowed as fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee . The CIT (A) also sustained the addition by observing that the assessee having already recognised the income cannot de-recognise it again. 31. We have heard rival submissions of the parties and perused the material on record. It is not disputed that the interest amount of 9,63,944/- relate to interest on NPAs and has been taken on accrual basis. It is nobody's case that the assessee has actually received the interest income. The prudential norms of RBI or NBFCs have laid down that income from NPAs may not be recognised on accrual basis. The Hon'ble Supreme Court in case of Southern Technologies Ltd. Vs. JCIT (320 ITR 577) held that income recognition with regard to NPAs should be as per section 45Q of the RBI Act. Following the aforesaid decision of Hon'ble Supreme Court, the Hon'ble Delhi High Court in case of CIT vs. Vasisth Chay Vyapar Ltd., and another (330 ITR 440) held that where even the principal amount itself had become doubtful of recovery it cannot be said that interest thereupon had accrued. The Hon'ble Delhi High Court further held that having regard to the provisions of section 45Q of the RBI and prudential norms issued by the RBI in exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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