TMI Blog2010 (12) TMI 700X X X X Extracts X X X X X X X X Extracts X X X X ..... iation is to be allowed on assets transferred for the year in which such transfer takes place in terms of section 43(6)(c)(i)(C)(b). - Held that:- Assessing Officer was right in computing depreciation for the period from 1.4.2002 to 30.3.2003 and reducing the same while computing the value of assets transferred in slump sale. Whether in view of section 43(6)(c)(i)(C)(b) only depreciation actually absorbed against the profits is to be taken into consideration or allowable depreciation has to be computed for all the years after 1.4.1988 for computing value of assets to be reduced from block of asset irrespective of the fact whether in the books the assessee had charged depreciation or not. - Held that:- Depreciation is to be charged for the period from 1.4.2002 to 30.3.2003 while computing the actual cost of the assets transferred by way of slump sale. - The depreciation allowable on the assets for the period upto 31.3.2002 has to be taken into consideration while computing the actual cost of the assets transferred by way of slump sale. - ITA No. 4145/M/2007, ITA No. 2503/M/2007 - - - Dated:- 3-12-2010 - S.V. Mehrotra, Asha Vijayraghavan, JJ. Sanjiv Dutt for the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the Assessing Officer was not justified in treating the expenditure on advertisement of Rs.1,11,00,000/- and sales promotion expenses of Rs.1,72,00,000/- as capital expenditure, ignoring the fact that the said expenditure was incurred for building "Brand" and "Image" of the company, which gives enduring benefit to the company and thus the expenditure on advertisement and sales promotion is in the nature of capital expenditure." 5. Brief facts apropos this issue are that the assessee had claimed advertisement expenses of Rs.1.11.crores and sales promotion expenses Rs.1.72 crores. The Assessing Officer required the assessee to justify its claim. After considering the assessee's submissions, the Assessing Officer concluded that the assessee had incurred such heavy expenditure to propagate and build up Brands owned by it. He observed that in this era of free market economy and cut throat competition, to sustain in the market and to increase the market share, brand identity and brand popularity are very important. He did not accept the assessee's contention that the expenditure was only for the purpose of boosting its sales. The Assessing Officer after considering various cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT vs. M/s. Warner Lambert India Ltd. in ITA No.954 and 3063/Mum/2006 order dated 31.12.2009 for the Assessment Year 1999-00 and 2001-02. As regards reliance placed on the decision of the Hon'ble Bombay High Court in the case of Patel International Film Ltd. supra, the ld. Counsel for the assessee pointed out that the same is distinguishable on facts as in the said case the assessee had purchased a film as model to demonstrate to its customers the colour processing work at the laboratory. Thus, purchase of film resulted in the acquisition of asset of capital nature providing enduring benefit to the assessee. The ld. Counsel for the assessee further pointed out that the Tribunal had considered the decision of the Hon'ble Bombay High Court in the case of CIT vs. Geoffrey Manners and Co. Ltd. wherein the Hon'ble Bombay High Court had considered the decision in the case of Patel International Film Ltd. supra. In this case the assessee produced an advertisement film to promote its products. The expenditure was incurred on promotion of films, slides, advertisement films and the assessee claimed it as deduction in computing its profit. The Hon'ble Bombay High Court upheld the assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness concern for the purpose of its business is bound to result in some benefits to its business and, the mere fact, that the benefit is not confined to one year, does not to our minds answer the question. Every businessman who carries on business wants to carry on his business not only at the scale at which he had been doing so but also wants to extend it as much as he can. It is one of the ordinary incidents of a business. ...... It is merely a case where for the purpose of extending the business new branches had been opened and certain expenses had been incurred by way of advertisement etc. We think that it cannot be said that an expenditure of this kind brings in an advantage for the enduring benefit of the trade and is, therefore, capital expenditure". At page 367 of the report, it was further observed that; "advertisement has now become a very common feature of every business and the amount is always spent to facilitate the business and to get better returns. No case has been cited before us in which it has been held that the amount spent in a special campaign of advertisement must necessarily be a capital expenditure". This decision of the Allahabad High Court has been ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High court held that "the correct test to be applied in such a case would be, that if the expenditure is in respect of an ongoing business of the assessee and there is no enduring benefit, it can be treated as revenue expenditure. If, however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be marketed". In the present case, there is no dispute that the assessee is in the line of manufacture and sale of the breath fresheners and chewing gums for many years and it is an ongoing business. The products are being sold by the assessee and the sales figures are also noted in the assessment orders. It is not therefore a case of a company which is yet to commence its business or market its products. We have already seen on the basis of the judgements of the Allahabad and Gujarat High Courts that there is no enduring benefit derived by the assessee by incurring the expenses on advertisement and sales promotion. In this view of the matter, we are of the view that the judgement of the Bombay High Court applies in favour of the assessee. 9. The learned CIT DR cited before us a ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the assessee. For the years under appeal before us, the percentage of the expenditure to the sales is much lower at 11.08% and 13.61% respectively for the assessment years 1999-2000 and 2001-02. The expenditure does not appear to us to be unreasonably high or excessive so as to provoke further examination. 11. In the light of the discussion made above, it follows that the provisions of section 32(1)(ii) of the Act, as amended by the Finance (No.2) Act, 1988 with effect from 1.4.1999 are not applicable to the present case. The assessee has not acquired any intangible asset on or after 1.4.1998 so that only depreciation will be allowed on the same and not the expenditure incurred in acquiring them. The expenditure was incurred by the assessee in the revenue field and not in the capital field, nor did the assessee acquire any asset, tangible or intangible, by incurring the expenditure on advertisement and sales promotion." 10. The ld. Counsel for the assessee pointed out that the percentage of expenditure to the sales in Assessment Year 1999-00 2001-02 was 11.8% and 13.61 % respectively. However, in the current Assessment Year it is still much lower and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump sale to CIL as a going concern. 14. Due to transfer of non-chocolate business to CIL, the assessee had given options to its employees to take voluntary retirement who did not wish to join CIL or who had not been absorbed by CIL. Except Ms. Chitra Dhoke, all employees had been absorbed by CIL. She therefore, opted for voluntary retirement. It was submitted that there was no formal scheme of voluntary retirement and thus requirement of section 35DDA were not satisfied. It was further submitted that tax u/s. 192 had been deducted from payment of Rs.17.00 lacs made to Ms. Chitra Dhoke without giving exemption u/s.10(10C) of the Act. Ld. CIT(A) observed that the Assessing Officer has not brought any material on record to show that assessee had made any compensation under the existing Scheme after considering the provisions of section 35DDA. Ld. CIT(A) observed that the VRS should be in accordance with any Scheme or Schemes of Voluntary Retirement. Since the assessee has himself contended that payment was not under any form or in the form of Scheme of Voluntary Retirement, the applicability of provisions u/s.35DDA merely on presumption was not justified. Taking note of the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax is not a relevant consideration for deciding the issue. 16. Per contra, the ld. Counsel for the assessee submitted that no formal Scheme has been adopted by the company and only an option was given to those employees who were not absorbed by CIL to opt for VRS. The ld. Counsel for assessee referred to the assessment order and pointed out that in the submissions the assessee has used only loose language but same is to be considered in over all context. The ld. Counsel for the assessee submitted that VRS contemplated u/s.35DDA is same as in section 10(10C) and, therefore, for invoking Sec.35 DDA it is necessary that the Scheme adopted by the company conforms with the requirements set out in Rule 2BA. He submitted that formulate Scheme should set out the conditions in accordance with Rule 2BA to come within the ambit of section 35DDA. He pointed out that no such Scheme was formed. Therefore, the provisions of section 35 DDA are not applicable. 17. We have considered the submissions of both the parties. Section 35DDA (1) of the Act reads as under:- 35DDA. (1) Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 35DDA are applicable because the payment has been made in pursuance to Scheme of voluntary Retirement and it is not necessary that the said scheme should comply with guidelines as per section 10(10C). We are not inclined to accept the plea of the ld. Departmental Representative. In the present circumstances, in order to resolve the dispute, we are of the opinion that principles of harmonious construction of statute have to be applied. As per these principles a statute must be received as a whole and one provision of the Act should be conformed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. The provisions relating to voluntary retirement scheme are contained in section 10(10C) and all the conditions laid down therein have to be fulfilled before exemption can be availed under the said section. The income and expenditure go together and it is difficult to appreciate that while considering the expenditure part any kind of claim could be taken into consideration whereas while allowing exemption only those claims are to be taken into considerations which conform to the guidelines under Rule 2BA. The lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso to section 43B which stipulates that no deduction will be allowed unless payment has actually been made by any mode as mentioned therein on or before due date as defined in Explanation 36(1)(va). The ld. CIT(A) allowed the payments mentioned at Sl.No.1 and 3 since the payment has been made immediately after holiday which was due date. However, as regards the payment mentioned at Sl.No.2, he observed that since the payment had been made beyond due date, and the same pertains to employees' contribution, therefore, it cannot be allowed. Having heard both the parties, we do not find any reason to interfere with the order of the ld. CIT(A) in regard to payments at Sl.No.1 and 3 because the payment has been made on the very next day after the holiday. Therefore, this ground is dismissed. 23. Ground No.4 reads as under:- "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs.19.44 lacs representing stores and consumables." 24. The brief facts apropos the above issue are that from the details of assets transferred pursuant to slump sale of its unit the Assessing Officer noticed that the assessee had claimed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock of raw material, packing material and finished goods, the stores had also become Nil as on 31.3.2003. The ld. Counsel for the assessee submitted that this schedule IV had not been taken into consideration. He pointed out that in the schedule relating to stock of materials no effect was given to inventory relating to stores and therefore, separate adjustment had been made. 29. We have considered the submissions of both parties and perused the records. The whole addition had been made solely on account of non consideration of schedule-IV to the balance sheet wherein figures of inventory are mentioned. Out of the opening inventory of Rs.21.73 lacs on account of stores and consumable an amount of Rs.2.29 lacs was utilized upto the date of sale and the balance of Rs.19.44 lacs was transferred to CIL. This, the difference had duly been reconciled. We, therefore, do not find any reason to interfere with the order of the ld. CIT(A). 30. Ground No.5 reads as under:- "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the Assessing Officer to recompute the long term capital gain after considering the amount of Rs.23,45,000/- clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gain. 34. Being aggrieved by this finding of the ld. CIT(A) the department is in appeal before us and the assessee in Ground No.2 of its cross objection has pleaded that in case the amount of Rs.23,45,000/- is not to be considered while computing long term capital gains, the Assessing Officer should be directed to allow the amount of Rs.23,45,000/- as bad debts. 35. The ld. Counsel for the assessee explained the facts as noted earlier and referred to the computation of income contained at page-16 of assessment order to demonstrate that as per terms of accounting policy, the assessee had added back Rs.14,000/- being the provision of doubtful debts amount during the year while computing its total income. He further pointed out that Rs.23,45,000/- was reduced from business income. Accordingly, the ld. Counsel for the assessee pointed out that correct amount which should have been claimed was Rs.23.31 lacs (Rs.23,45,000 - Rs.14,000). He pointed out that this amount should have been written off against provision appearing in balance sheet made over the years. He submitted that the modus operandi adopted by the assessee meets the requirements of write-off of bad debts as held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that Assessing Officer was justified in disallowing a sum of Rs.2,57,952/- towards employer/employees contributions to provident fund in the month of January, 2002 by invoking the provision of sections 43B/36(1)(va). Your respondent submits that on the facts of the case and proper interpretation of provisions of the Act, the ld. CIT(A) ought to have allowed deduction in respect of this amount as payment was made within the accounting year." 40. This issue is dealt with in department's appeal in ground No.3. We find that the amount of Rs.2,57,952/- was due for payment on 15.1.2003 but was paid on 16.1.2003. Thus, the payment in any case has been made within the grace period. Therefore, in view of the decision Hon'ble Supreme Court in CIT vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) wherein it has been held that no disallowance can be made under section 36(1)(va) or section 43B where employer's or employees' contribution is paid before the due date of filing the return under section 139(1) of the Act, this ground is allowable. In the result this ground is allowed. 41. Ground No.4 taken by the assessee in its cross objection reads as under:- "The ld. CIT(A) er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) of explanation 3 to section 32(1) of the Act. iv) In the case of CIT vs. M/s. Mahendra Mills 243 ITR 56, it has been held that the assessee has option to claim or not to claim depreciation and when the assessee does not claim the depreciation, the Assessing Officer cannot thrust upon the assessee the same. The reliance is also placed on the ITAT, Indore's decision in the case of Beta Napthol P. Ltd. vs. DCIT (50 ITR 375). v) The perusal of the aforesaid decision of the supreme Court clearly brings out that the allowable provisions of depreciation as contained in section 32 of the Act provides an inherent right to the assessee to claim depreciation." 43. The Assessing Officer considered the decision of the Hon'ble Supreme Court in the case of Mahendra Mills supra, and pointed out that the said decision would not be applicable as section 34(1) was deleted w.e.f. 1.4.1988. He observed that the Hon'ble Supreme Court while delivering the judgment upheld the judgments of the Hon'ble Courts of Bombay, Punjab and Haryana, Karnataka, Andhra Pradesh, Calcutta and Kerala. He noted that in all these judgments the Hon'ble Courts have relied on the fact that as per section 34(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, computed eligible depreciation for the year at Rs.8,61,26,465/- as per Annexure-A of his order and allowed the same as against the claim made for Rs.2,10,671/-. 47. Consequently the Assessing Officer also determined the long term capital gain under section 50B from slump sale of the unit to M/s. CIL at Rs.12,78,80,383/- as against the capital loss determined by the assessee at Rs.6,53,72,000/-. In doing so he determined the net worth of the unit sold to CIL in terms of Explanation to the provisions of section 50B as per which for computing the net worth, the aggregate value of total assets of the unit is to be reduced by the value of liabilities of the unit. Further, he noted that as per Explanation 2(a) to section 50B, for computing the net worth, the aggregate value of total assets shall be the written down value of the block of assets as determined in accordance with the provisions contained in sub-item (C) of item (i) of sub clause (c) of clause (6) of section 43, and in the case of other assets, the book value of such assets. Accordingly, he determined the value of assets transferred after considering the depreciation allowable till the date of the transfer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,45,617/- made by the Assessing Officer, as against as arrived at by your respondent at Rs.37,20,98,133/-. The CIT(A) erred in holding that Ground No.6 as raised before him was consequential in nature and needed no adjudication. The CIT(A) ought to have held that the correct WDV of fixed assets transferred to Cadbury India Ltd. under slump sale was Rs.37,20,98,133/-. The CIT(A) ought to have held that the computation of capital loss under section 50B of the Act as per the respondent was correct in law." 50. The ld. Sr. Counsel for the assessee submitted that the Assessing Officer has thrusted depreciation on the assessee while computing long term capital gains on account of slump sale of its unit to CIL. The ld. Counsel submitted that the WDV is to be computed as per the provisions contained in section 32 r.w.s. 43(6) of the Act. He referred to item (c) of clause 6 of section 43 which deals with written down value of block of assets. The ld. Counsel submitted that after the incorporation of block of assets concept, it is not material whether the asset is used or not for business but if it forms part of block of assets then, depreciation is to be allowed with referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplies to earlier years also. The Assessing Officer has allowed depreciation for earlier years also and, accordingly, computed WDV. He submitted that unabsorbed depreciation is to be carried forward and set-off in terms of section 32(2) only. Ld. DR referred to Explanation-3 to Section 43(6) and pointed out that as per the said Explanation any allowance in respect of depreciation carried forward under sub-section (2) of Section 32 shall be deemed to be depreciation actually allowed. He, therefore, submitted that as per legal fiction the carried forward depreciation is deemed to have been actually allowed and, therefore, there is no question of the same being available for set off. Therefore, there is no justification for claiming set off of unabsorbed depreciation against capital gain. He submitted that unabsorbed depreciation can be set off against profit in the subsequent years as per provisions under section32(2). 57. The ld. DR referred to page-12 of the assessment order and pointed out that the assessee had claimed deduction under section 80HHC i.e. under chapter VI-A, therefore, it is not correct to plead that there was insufficiency of profits. He submitted that the disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the rival submissions and have perused the records of the case. There are primarily two issues for consideration:- 62. Firstly, whether in case of slump sale, depreciation has to be allowed on the assets sold in slump sale up to the date of transfer or no depreciation is to be allowed on assets transferred for the year in which such transfer takes place in terms of section 43(6)(c)(i)(C)(b). 63. Secondly, whether in view of section 43(6)(c)(i)(C)(b) only depreciation actually absorbed against the profits is to be taken into consideration or allowable depreciation has to be computed for all the years after 1.4.1988 for computing value of assets to be reduced from block of asset irrespective of the fact whether in the books the assessee had charged depreciation or not. 64. First we will consider the first issue. 65. The facts are not in dispute. The assessee had computed the depreciation at Rs.2,10,671/- after excluding the net depreciated value of such assets from the block of assets from WDV as on 1.4.2002 whereas the Assessing Officer computed the depreciation on the assets transferred pursuant to slump sale up to 30.3.2003 on the ground that the assets had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) .......... (B) ......... (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced- (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the Assessment Year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, So, however, that the amount of such decrease does not exceed the written down value; ....." 68. From the definition of WDV as reproduced above, it is evident that for computing WDV of all the assets falling within a particular block of asset, the adjustments as contemplated from sub-item A-B have to be carried out before arriving at WDV. These adjustments have to be carried out to the WDV as at the beginning of the relevant previous year. There is no dispute in the present case as regards the adjustment as contemplated in claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de for computation of WDV in case of slump sale. 70. Sub-item (C) has been inserted by the Finance Act,1999 w.e.f. 1.4.2000simultaneously with the insertion of Section 50B for computing capital gain in case of slump sale. The basic mandate of the sub-item (C) is to decrease the actual cost of asset falling within that block, by taking those assets only as the assets in the relevant block. Further while computing actual cost, following depreciation is to be reduced from the value of asset:- - a. depreciation actually allowed in respect of Assessment Year commencing before 1.4.1988; plus - b. depreciation that could have been allowable for Assessment Year commencing on or after 1.4.1988. 71. Thus, two aspects are clear Firstly, reduction of actual allowance of depreciation is restricted for the period prior to 1.4.1988 and secondly, after 1.4.1988, the depreciation allowable has to be taken into consideration. The provision has been made regarding charging of depreciation w.r.t. assets transferred for computing the net value to be reduced from actual cost. 72. A bare perusal of sub-item (C) makes it clear that allowable depreciation has to be computed in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per section 32 depreciation is allowable only on the assets which are owned by the assessee and have been used wholly and exclusively for the purpose of business. Therefore, since upto the date of transfer the asset is owned as well as used for the purposes of business, deprecation has to be allowed. The concept of block of asset does not at all affects the basic essentials for allowing deprecation. Only change is that the concept of individual asset has been given a go by and now for the group of assets the concept of block of assets has been incorporated. 75. Ld. Senior counsel submitted that if we accept the departments contention then it would lead to an anomalous situation inasmuch that both the transferor and transferee will be able to claim depreciation on the same assets in the year of transfer because the fifth proviso to section 32 substituted by the Finance Act, 1999 w.e.f. 1.4.2000which deals with such situations, does not refer to slump sale. He submitted that this could never be the intention of the legislature and therefore, the WDV has to be computed after adjusting the asset sold in slump sale. We are unable to accept this plea of ld. Senior counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the Assessment Year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, So, however, that the amount of such decrease does not exceed the written down value; ... .." 78. A bare perusal of sub item (C) clearly shows that the actual cost of the asset falling within that block of assets sold in slump sale has to be reduced interalia by the amount of depreciation that "would have been allowable" to the assessee for any Assessment Year commencing on or after the first day of April, 1988 as if the asset was the only asset in the relevant block of assets. As per this provision irrespective of the fact whether the depreciation was claimed by the assessee or not, the depreciation has to be calculated. As discussed in detain with reference to first issue, this is a specific provision prescribing specific mode of computation and, therefore, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 82. Ground No.5 of the C.O. reads as under:- "Your respondent submits that in the event long term capital gain on account of slump sale ultimately determined is positive, then set off of brought forward unabsorbed depreciation under section 32(2) of the Act thereagainst be allowed. Your respondent prays that the Assessing Officer be directed accordingly." 83. The assessee, by way of this ground has taken an alternative plea that in case on the basis of aforementioned discussion ultimately long term capital gain on account of slump sale is determined at positive figure then set off of brought forward unabsorbed depreciation u/s.32(2) is to be allowed. This submission is based more on the principles of equity, rather than on sound legal footing. The prescription under sub-item (C) to section 43(6) for computing allowable depreciation is only for the limited purpose of determining the cost of asset transferred by way of slump sale to be reduced from block of asset. This fiction cannot be extended beyond the limit for which it has been incorporated in the Act. The function of this provision is restricted only to the extent of determining the actual cost of the asset transf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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