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2016 (5) TMI 267 - ITAT DELHI

2016 (5) TMI 267 - ITAT DELHI - TMI - Depreciation on Goodwill - Held that:- When the AO has not disputed the fact that the assessee has no goodwill to claim the depreciation, disallowance made by the AO and affirmed by the CIT (A) is not sustainable in the eyes of law. Moreover, in assessee’s own case qua the AYs 2008-09 and 2009-10, has already held that the assessee is entitled to claim depreciation on goodwill which is an asset u/s Explanation (3b) to section 32(1) of the Act - Decided in fa .....

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t the advances made to the subsidiary companies are to be treated as business advances.

Moreover, when the assessee company was carrying out its business activities through its subsidiaries and the assessee company was having interest free funds to the tune of ₹ 99.27 crores and ₹ 101.11 crores available with the assessee company in the beginning and end of the financial year respectively under consideration as per balance sheet not disputed by the AO when the assessee has .....

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we are of the considered view that when the assessee has made investment for business expediency to promote the business of its subsidiary, the interest paid thereon has to be allowed and as such, AO as well as CIT (A) have erred in making disallowance of assessee’s claim of deduction on account of interest on prorata basis - Decided in favour of assessee - ITA No. 753/Del./2007 - Dated:- 29-4-2016 - Shri N. K. Saini, Accountant Member And Shri Kuldip Singh, Judicial Member For the Petitioner : .....

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d Assessing Officer (AO) in disallowing depreciation on Goodwill amounting to ₹ 1,26,56,250/- allegedly on the ground that the same is not allowable u/s 32 of the Income Tax Act, 1961. 2. The learned Commissioner of Income Tax (Appeals) has erred both on fats and in law in upholding the action of the learned AO in disallowing the expenditure on account of interest paid amounting to ₹ 48,08,518/- allegedly on the ground that the assessee has utilized its interest bearing funds to adva .....

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r and to claim benefit of late deposit of EPF by relying upon the decision of the ITAT, Delhi in the case of Vestas RRB India Ltd. The assessee claimed the expenses pertaining to AY 2003-04 recorded in the tax audit report for FY 2003-04 relevant to AY 2004-05. The same was claimed in the relevant previous year while revising the return. Thereafter the case was subjected to scrutiny and consequent upon the issue of notices u/s 143(2) and 142(1), Shri Karan Mehta, CA put in appearance, filed nece .....

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ring funds to advance loans to its subsidiary companies which has also been affirmed by the CIT (A). 4. The assessee carried the matter before the ld. CIT (A) who has partly allowed the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal. 5. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and cir .....

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the revenue relied upon the order of the CIT (A). 7. Undisputedly, the assessee company is engaged in the business of manufacturing and trading of telephone instruments and has claimed depreciation on goodwill amounting to ₹ 126,56,250/-. The AO disallowed the claim of depreciation on goodwill claimed by the assessee on the ground that the goodwill is not an intangible asset as defined in section 32(1)(ii) of the Act. CIT (A) also affirmed the findings returned by the AO. 8. To proceed fu .....

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ctions shall be allowed. 9. Identical issue has been decided by the coordinate Bench of the Tribunal in the case of Bharti Teletech Ltd. (supra) by following the law laid down by Hon ble Apex Court in judgment cited as CIT vs. Smifs Securities Ltd. - 348 ITR 302. 10. Hon ble Apex Court decided the issue in controversy in para 9 of the judgement cited as Smifs Securities Ltd. (supra), which is reproduced for ready reference, as under :- We quote hereinbelow Explanation 3 to Section 32(1) of the A .....

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, franchises or any other business or commercial rights of similar nature. A reading the words any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that Goodwill' .....

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held that the assessee is entitled to claim depreciation on goodwill which is an asset u/s Explanation (3b) to section 32(1) of the Act. Consequently, ground no.1 is determined in favour of the assessee. GROUND NO.2 12. Assessee claimed expenditure to the tune of ₹ 91,40,242/- out of which AO has disallowed an amount of ₹ 48,08,518/- on account of interest on prorata basis. 13. Undisputedly, assessee company has advanced the loan to M/s. Bharti Infotec Ltd., one of its subsidiaries, .....

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sheet for the year ending 31.03.2003, lying at page 132 of the paper book. 14. The ld. CIT (A) affirmed the disallowance made by the AO by returning the following findings :- 4.2 During the appellate proceedings it is submitted that the appellant company is in the business of manufacturing and trading of telecom products and to promote companies with objects harmonized with that company. To do the downstream business in the line of call centers the appellant company promoted a subsidiary named B .....

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h business. The appellant has further submitted that it was having sufficient interest free funds to invest in subsidiaries and that investments in such shares was made out of mixed funds presumption should be that the same was made out of interest free funds. In this regard the appellant has submitted some figures of deposits and withdrawals made out of various bank accounts and submitted that due to huge volume of transactions it was not possible to find out the nexus between the amount receiv .....

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nterest was paid on secured loans as well as against overdraft facilities. According to the appellant it was also in the business of advancing and that it had earned income by way of interest in preceding previous years which were offered to tax. The appellant has harped on the ground that the amount advanced to subsidiary was out of mixed funds and hence no disallowance should be made. 4.3 I have gone through the contention of the appellant and do not find any merit in its case. It is well sett .....

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failed to establish as to how such investment has advanced the existing business activities of the appellant company and therefore in absence of such explanation offered I am unable to accept the argument of the appellant that investment in subsidiaries had in any way promoted the business activities of the appellant company. It is also not in dispute that both interest free funds and interest bearing funds were routed through common hotchpotch i.e. all the funds were intermingled in such a way .....

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pt the argument of the appellant that no disallowance should be made. As regard reliance placed by the appellant on various judgements the same are of no avail as facts of those case are distinguishable from that of the appellant's case. Thus considering the facts of the case disallowance made by the AO is confirmed. 15. The ld. AR for the assessee, by relying upon the judgment passed by the Hon ble Supreme Court in the case cited as Hero Cycles Pvt. Ltd. - 63 taxmann.com 308 (SC), contended .....

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cy, the Court summed up the legal position in the following manner:-. '26. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 .....

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in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 100 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of .....

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