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2014 (8) TMI 271 - AT - Income TaxEnhancement of income No reasonableness of purchase consideration Held that:- CIT(A) has not only upheld the disallowance of depreciation but he has held that the entire payment sum was to be disallowed u/s 40A(2) - CIT(A) has referred that Shri Binoy Jacob was main promoter of TPPL i.e. one company in which he holds 74% shares - in the assessee company which bought the ongoing business for TPPL Shri Binoy Jacob holds 50% share - Other investor M/s. Saipen Italy had acquired 50% share at a premium of 45,840 per share of ₹ 10 /- each - But Shri Binoy Jacob did not have to pay a single rupee as premium on acquisition of 50% equity - CIT(A) found that there is no plausible explanation as to why Saipen should pay such high premium for acquision of a startup company - CIT(A) has held that entire sum liable to be disallowed and he enhanced the assessment to that extent. Whether a payment made by the assessee which has neither been claimed as an expenditure or a loss can be disallowed and subject to taxation Held that:- Assessees counsel has fairly admitted that the valuation report was obtained post slump sale agreement in order to determine / record the values of various tangible and intangible assets acquired by the assesee - If there are defects in the valuation report, it cannot lead to conclusion that the whole agreement between the assesee and the other parties is bogus - tax planning through legitimate means is perfectly justified - it has never been the arguments of the revenue that the money paid by Saipen Italy was not paid or was of Mr. Binoy Jacob or was of TPPL own money routed through this manner - the conclusion by the authorities that the whole scheme was a colourable device cannot be sustained and is liable to be set aside. Depreciation of payment of intangibles Held that:- CIT(A) has found that valuation report was prepared by a Chartered Accountant who was also appearing on behalf of the assessee in the appellate proceedings - numerous defects have been reported in the valuation report - the valuer has mentioned that in preparing the valuation report the valuer has relied upon and assumed without independent verification , the accuracy and completeness of all information provided by the company - the information provided there has not been verified by the valuer - the valuer is a Chartered Accountant and he made his valuation only by taking into account the economic data and the ratio of turnover and profits - there is lack of credibility on the valuation assigned by the valuer towards technical knowhow, valuation of business and price for non-compete clause - the main stay of the TPPL was consultancy and execution of FPSO projects though its skilled employee who were very much a part of assessee company - It has further been noted by the CIT(A) that the assessee has never engaged in any R & D activity - credible materials have not been brought out by the valuation report on which a specific valuation can be attributed to the intangible assets the authorities are justified in holding that assesee is not entitled to depreciation on the valuation of technical knowhow, valuation of business and non-compete fee mentioned - Relying upon CIT vs. Smith Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] - good will is an asset under Explanation 3 (b) to section 32(1) of the I.T. Act. Whether the valuation of good will by the assesee at ₹ 40.58 crore is appropriate or not Held that:- The valuation report submitted by the assesee does not deal with valuation of good will - no material has been brought on record which can aid into the computation of good will in this regard - revenue has submitted that the sum of ₹ 40.58 crore towards good-will was arrived at between the assessee and the TPPL before the agreement - there are proper and generally accepted methods of valuation of good-will and there was no method or procedure applied for valuation of good will has been brought on record the matter is remitted back to the AO for adjudication. Application of section 170 and Explanation 3 of section 43(1) Held that:- The whole scheme in the case cannot be termed as sham transaction - while dealing with enhancement on account of disallowance of depreciation by invoking 5th proviso to section 32(1), CIT(A) has observed that there is no need to give separate opportunity for the enhancement - AO has not considered these aspects thus, the matter is remitted back to the AO for fresh consideration. Enhancement on account of rent for use of assets Held that:- In the agreement the lease rent of ₹ 30 per sq. ft. p.m. was specified - The facilities in this regard included provision for air conditioning facilities through AC plant and also power back up facilities through DG sets - CIT(A) has found the sum paid is excessive and he had substituted the same with this figure of ₹ 6 sq. ft. there was no basis whatsoever for arriving at this figure of ₹ 6 per sq. ft. has been specified - even if the payment made is considered to be excessive and it cannot be substituted by any guess work or otherwise thus, the matter is remitted back to the AO for fresh consideration Decided partly in favour of assessee.
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