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2016 (1) TMI 755 - ITAT MUMBAI

2016 (1) TMI 755 - ITAT MUMBAI - TMI - Disallowance of depreciation on Goodwill - Held that:- the claim of the assessee company needs to be verified with reference to the agreements and other documents which has now been filed as additional evidence before us and the books of account by the assessee company. As such, we remit the matter back to the file of A.O. for deciding the issue afresh after considering the agreements along with the assets acquired, other evidences as submitted by the asses .....

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of the business of 'Sangam Direct' which shall be adjudicated by the AO on merits after considering the contentions along with evidences submitted by the assessee company without being influenced by our observations in this appeal. - Decided in favour of assessee for statistical purposes.

Disallowance of preliminary expenses written off u/s 35D - Held that:- The assessee company has incurred an amount of ₹ 70 lacs towards increase in authorized share capital, out of which 1/5th .....

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these expenses incurred for increase in authorized capital are capital expenditure. This claim of the assessee company that these expenses incurred for increase in authorized capital are relatable to the extension of undertaking needs to be verified by the authorities below and accordingly we set aside the orders of authorities below and restore the matter back to the file of A.O. for necessary verification and decide the issue afresh on merits - Decided in favour of assessee for statistical pur .....

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ssee company is stated to have claimed the write off of such stock based on applicable accounting standards which are mandatory in nature but failed to submit details of differences between physical stock and book stock before the authorities below, which is filed before us but the same need verification by the authorities below. In our considered opinion and in view of the interest of justice, this matter need to be restored to the file of A.O. for the limited purpose of verification of the gen .....

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order of the learned Commissioner of Income Tax(Appeals) 21, Mumbai (Hereinafter called "the CIT(A)") dated 13.04.2012 pertaining to the assessment year 2008-09. These appeals are heard together and disposed of by this common order for the sake of convenience and brevity. 2. Firstly, we shall take up assessee company's appeal in ITA No. 4809/Mum/2012 wherein the following grounds of appeal have been raised by the assessee company in Memo of Appeal filed with the Tribunal:- "(1 .....

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rect" from Hindustan Lever Ltd., over the book value of the assets, is not goodwill. 2) The CIT (A) has further erred in law and in facts by disallowing Preliminary Expenses written off of ₹ 14,00,000/- u/s. 35D of the Income Tax Act, 1961, by holding that the expenditure incurred on fees paid to Registrar of Companies for increasing the authorized share capital after commencement of business is not covered by sub clause 2(c)(iv) of section 35D of the Income Tax Act, 1961." 3. Th .....

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led "the Act"), the learned assessing officer (Hereinafter called "the AO") noticed that the assessee company has claimed depreciation of ₹ 89,42,899/- on goodwill @ 25%. The assessee company was asked to explain as to why the claim should not be disallowed as goodwill is not a depreciable intangible asset as per Part B of Appendix I of Income Tax Rules, 1962. In reply, the assessee company explained that the assessee company has paid excess amount than the value of ass .....

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04.2001. Hence, the assessee company submitted that it has written off in the books of account the goodwill by claiming depreciation u/s 32(1)(ii) of the Income Tax Act, 1961 which is allowable on goodwill as deduction under the Act. The assessee company relied upon the following decisions:- 1. Kotak Forex Brokerage Ltd. vs. ACIT, ITAT Mumbai 2. Skyline Caterers P. Ltd. vs. ITO Ward 8(3)(2) Mumbai, 20 SOT 266 3. Hindustan Coca Cola Beverages P. Ltd, Delhi Tribunal The above submissions were not .....

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be seen from the definition of intangible asset as detailed above under the Act. The A.O. also held that the decision relied upon by the assessee company were not final judgment on the issue. The A.O. relied upon the decision of Delhi ITAT in the case of Esquire Technologies P. Ltd. v. ITO (2008) 21 SOT 503, R.G. Keshwani v. ACIT (2009) 116 ITD 133 (Mum.) and Supreme Travels P. Ltd. v. DCIT (2009) 23 DTR (Bom) 215 and held that goodwill is not an intangible asset eligible for depreciation. Thus .....

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at the time of acquisition of the business of 'SANGAM DIRECT' from Unilever India Exports Ltd. and accordingly the difference between the acquisition cost and the book value of the assets was required to be termed as "Goodwill or Capital Reserve" as specified in the Accounting Standard. The assessee company submitted that the excess amount paid was towards use of brand name 'SANGAM', its reputation built up in the market and to effectively carry on the business of acqu .....

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the assessee company which was allowable as deduction being depreciation u/s 32(1)(ii) of the Act. The assessee submitted that the goodwill acquired are similar to other business or commercial rights of similar nature. The assessee company submitted that the excess amount paid by the assessee company was towards use of reputation built up in the market, brand name 'SANGAM' and to effectively carry on the business of acquiring company. The assessee company relied on the following decision .....

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Range 3(2), Mumbai - 2010-TIOL-541-ITAT-Mum, ITAT, Mumbai) (vi) A P Paper Mills Ltd. vs. ACIT Circle 3(3), Hyderabad - 2009-TIOL-821-ITAT-Hyd, ITAT, Hyderabad) (vii) Piaggio Vehicle Pvt. Ltd. vs. DCIT Circle 1(2), Pune - 2009 TIOL-626-ITAT Pune, ITAT Pune). and the assessee company requested the CIT(A) that the disallowance of depreciation on goodwill amounting to ₹ 89,42,899/- made by the A.O. should be deleted. 5. The CIT(A) after considering the facts of the case and submission made by .....

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the website and company's network was delivering such items directly to the homes of the customers under the brand name 'Sangam Direct'. The CIT(A) observed that during the previous year, the assessee company has acquired business of 'Sangam Direct' from M/s Unilever India Export Limited for an amount of (figures not supplied by the assessee company (before the CIT(A))) and the assessee company claimed that amount paid in excess to the value of net asset at the time of acqui .....

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y goodwill and whether the excess amount paid by assessee company was representing goodwill. In this regard, the CIT(A) observed that the assessee company has purchased the business of 'Sangam Direct' from M/s Hindustan Lever Ltd. The valuation of such business was made by M/s Ernst & Young P. Ltd. The copy of valuation report was duly filed before the CIT(A) by the assessee company, which was discussed by the CIT(A) in his order dated 13-04-2012 from pages 5 to 7. The CIT(A) after c .....

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arket. The CIT(A) referred to the report of the Consultancy firm and held that the brand name 'Sangam Direct' was not popular among the public. Thus, the CIT(A) held that, with regard to question No. (i) that the assessee did not acquire any goodwill of the acquired business of 'Sangam Direct' since the 'Sangam Direct Business' had no positive reputation called goodwill and the amount paid by the assessee company in excess of the book value of the assets of the acquired b .....

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, copy rights, trade marks, licenses, franchises or any other business or commercial right of similar nature being intangible assets acquired on or after 1-4-1998. The CIT(A) observed that various judicial decisions have interpreted the term 'goodwill' as an intangible asset in different manner and after considering the several decisions, the CIT(A) held that goodwill is not listed in the six items mentioned in the Section 32(1)(ii) of the Act. The CIT(A) observed that the alleged asset .....

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siness or commercial right similar in nature of these six items was acquired by the assessee company. As explained above, the acquired business "Sangam Direct" was continuously running in losses and therefore, was not having any positive reputation built over a period of time. Such negative reputation was having no commercial value. The true basis of depreciation allowable is character of asset and not its description. The amount paid by assessee company for alleged goodwill was not fi .....

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mpany is in further appeal before the Tribunal. 7. The ld. Counsel for the assessee company submitted before us that the assessee company has acquired business ""Sangam Direct" from Unilever India Exports Ltd. The assessee company showed us, the report on valuation analysis of 'Sangam Direct' business of Unilever India Exports Limited prepared by Ernst & Young Private Limited as at December 31, 2006 dated January, 29, 2007 which is filed in the paper book before the Tr .....

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d that these evidences were never called by the AO and the CIT(A) while adjudicating the relevant proceedings against the assessee company and hence there was no occasion before the assessee company to submit these evidences before the AO and the CIT(A). These documents were referred to by the assessee company in its submissions before the AO and the CIT(A) but are submitted now as these additional evidences go to the root of the matter and it is important and crucial that these additional evide .....

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ails of payment made and assets taken over in chart form for acquisition of business of 'Sangam Direct' along with Profit and Loss Account for the year ended 31-03-2009, which all are placed in paper book at page 150-176. The ld. Counsel submitted that the amount in excess of assets acquired by the assessee represents the goodwill paid for acquiring for such acquisition and it is an intangible asset within the meaning of section 32(1)(ii) of the Act, hence, depreciation on the same shoul .....

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RECT' which was acquired is a loss making business and it cannot have any goodwill. He submitted that all the agreement's with respect to such acquisition are filed as additional evidence before us and the assessee company submitted that the amount paid in excess of the lumpsum payment made for the acquisition of the assets is goodwill paid for the acquisition of such business. The details of such excess amount paid by the assessee company as goodwill is placed at page 176 of the paper b .....

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and depreciation has to be allowed of such excess payment. The ld. Counsel also relied on the decision of Hon'ble Delhi High Court in the case of Areva T&D India Ltd. v. DCIT (2012) 345 ITR 421 (Del) to contend that the payment over and above the book value of net tangible assets is the acquisition of goodwill. 8. The ld. D.R., on the other hand, relied upon the orders of authorities below and submitted that in the light of the various decisions referred to by the ld. A.R. and additiona .....

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The assessee company has paid excess amount over the assets acquired which the assessee company is contending to be goodwill for the acquisition of the said business, but the claim of the assessee company has not found favour with the authorities below. The assessee company has relied upon the decision of Hon'ble Supreme Court in the case of Smifts Securities Ltd. (supra), CIT v. Manipal Universal Learning Pvt. Ltd.(supra) and Areva T &D India Limited(supra). The assessee company has fil .....

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led by the authorities below. In our considered view and in the interest of justice, the request for admission of additional evidences by the assessee company under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 need to be accepted as these additional evidences so filed are vital and crucial to adjudicate the claim of the assessee company that it paid goodwill for acquisition of the business of "SANGAM DIRCET" from Unilever India Exports Limited. In our considered view, the c .....

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sue in the light of various decisions cited by the assessee company in accordance with law. Needless to say that proper and adequate opportunity of being heard shall be granted to the assessee company by the AO in accordance with the principles of natural justice. We must clarify that we have not commented on the merits of the claim of the assessee company about payment of goodwill for acquisitions of the business of 'Sangam Direct' which shall be adjudicated by the AO on merits after co .....

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lacs incurred in respect of increase in authorized share capital during the year under consideration which was expenses incurred by the assessee company towards increase in the authorized capital of the company, which the assessee company claimed that the same is allowable u/s 35D of the Act being 1/5th of the expenses in accordance with the decision in the case of CIT v. Multi Metal Ltd., 188 ITR 151 (Raj) and ACIT v. Fascel Ltd. (2009) 34 SOT 8 (Del). The A.O. rejected the contentions of the a .....

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ed for setting up of a new unit, therefore, the expenditure was not covered by the provisions of section 35D of the Act and the same was added to income of the assessee company. 12. Aggrieved by the decision of A.O. vide assessment orders dated 06-05- 2010 passed u/s 143(3) of the Act, the assessee company preferred an appeal before the CIT(A) and submitted that the expenditure was incurred to pay fees to Registrar of Companies for increasing the authorized capital of the assessee company and ar .....

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CIT(A) held that any expenditure incurred before the commencement of business in connection with the issue for public subscription of shares or debentures are allowed to be amortized u/s 35D of the Act and such expenditure incurred after commencement of business are not covered under the provision of the Section 35D of the Act. The ld. CIT(A) held that in the facts and circumstances of the case, the A.O. was justified in disallowing the assessee's claim of deduction of ₹ 14 lacs u/s 35 .....

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n authorized capital as the assessee company has undertaken extension of business whereby new business is to be set up at new place. The assessee company submitted that as per the audit report and Director's report of the assessee company for financial year 2007-08, the assessee company has acquired new business and hence, the capital was enhanced and these expenses were incurred towards fees to the Registrar of Companies. The assessee company also showed the audit report/Director's repo .....

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d this is the first time that the assessee company is taking this plea before the Tribunal that these expenses are incurred for extension of undertaking. No additional evidence has been filed by the assessee company to substantiate the same and the decision of Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Limited (supra) and Brooke Bond India Ltd. (1997) 91 Taxman 26 (SC) is directly applicable to this case that these are capital expenditure and not all .....

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ied by the authorities below. We are also aware that the Hon'ble Supreme Court in the case of Brooke Bond India Ltd.(supra) and Punjab State Industrial Development Corporation Limited(supra) has held that these expenses incurred for increase in authorized capital are capital expenditure. This claim of the assessee company that these expenses incurred for increase in authorized capital are relatable to the extension of undertaking needs to be verified by the authorities below and accordingly .....

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4725/Mum/2012 (Revenue's appeal) 17. The Revenue has raised the following grounds of appeal in the memo of appeal filed with the Tribunal:- "1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in allowing the loss of stock being the difference between the book stock and physical inventory even though no details of stock written off neither any evidences and details in support of the difference between book stock and physical inventory were submitted. 2. The appel .....

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as is a standard practice mandatorily to be followed by the companies as per accounting standard 2 of ICAI. It was submitted that the difference is due to pilferage, perishable, wastage, breakages etc. and is allowable as revenue expenditure. The assessee company, however, did not submitted details or evidences with respect to write off of stock. The A.O. observed that the assessee company has not submitted relevant details/evidences. The A.O. held that the onus is on the assessee company to pr .....

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ed by the assessment orders dated 06-05-2010 passed u/s 143(3) of the Act, the assessee company preferred an appeal before the CIT(A) and explained that the assessee company was dealing in supply of FMCG, staples & general merchandise, etc. and the nature of such stock was that it was prone to pilferage, perishable, wastage, breakages, damages, etc.. Every year the physical inventory was taken by assessee company and the same was verified with book stock. Based on the report of such physical .....

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. The assessee company explained that such discrepancy to the tune of ₹ 20,10,927/- was written off in the books of accounts as value of stock had gone down to that extent as on 31.03.2008. This fact had also been highlighted in the audited books of accounts. The assessee company relied on the decision of various courts and Tribunals on this issue. The CIT(A) after considering the submission and other case laws relied upon by the assessee company allowed the claim of the assessee company b .....

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sold to the customers after date of expiry. After date of expiry those items could not be sold to the public. Thus there exists element of loss in the business of appellant on account of pilferage, wastage, brokerage and perishables. The appellant has made claim of such losses after carrying out a physical verification of inventory by the employees, staff and officers of the company. There is no methods/procedure prescribed or available to know the actual damages caused on these accounts. Howev .....

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submitted that this write off of stock cannot be allowed as no evidence is produced before the A.O. to substantiate its claim of difference between physical stock and book stock. 21. The ld. Counsel for the assessee company submitted that the assessee company is dealing in slow moving items and difference between physical stock and book stock was written off in the books of account as per the Accounting Standard procedures. The Ld. Counsel submitted that an application for admission of additiona .....

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atement between physical stock and book stock which is placed at paper book page 144-149. The ld. Counsel relied upon the decision in the case of CIT v. Indian Rare Earths Ltd. (2015) 121 DTR 151 (Bom.) wherein it was held that write off of slow moving items was justified. 22. We have considered the rival contentions and perused the material on record. We have observed that the assessee company is dealing in slow moving items which are prone to pilferage, wastage, breakage and damages etc. The i .....

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