TMI Blog2016 (8) TMI 222X X X X Extracts X X X X X X X X Extracts X X X X ..... in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 to the AO wherein it was inter alia confirmed that the said company transferred its abrasive division situated at Bhiwadi (Rajasthan) to the assessee company for a total consideration of ₹ 26.17 crores. It is also brought to our notice that subsequent to the take- over, the assessee company filed petitions with the concerned departments for registration of trademarks in the name of Assessee Company. It is further noted by us from the perusal of the order of Ld. CIT(A) wherein it has been accepted that the assessee had produced before him (i.e. CIT(A)) more than 26 files containing evidences with regard to acquisition of technical know-how. Under these circumstances, we find that there was no basis with the lower authorities to hold that no intangible assets were acquired by the assessee. Thus the assessee is eligible for the claim of depreciation u/s 32(1)(ii) on the amount of intangible assets acquired by it as per Business Transfer Agreement, and thus action of lower authorities was not factually or legally justified while making disallowance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing intangible assets: Assets Value (Rs.) Trade Mark 2,00,00,000 Technical Know- How 3,50,00,000 Goodwill 3,20,00,000 Marketing Network 3,75,00,000 Non-Compete fees 4,02,50,000 Total 16,47,50,000 6. The learned Commissioner of Income-tax (Appeals) erred in giving several findings which are either irrelevant or incorrect for allowing depreciation under section 32. 7. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is allowable only on those intangible assets which are protected rights. 8. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is available under section 32 only in respect of a registered trade mark' or patented know how . 9. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to allow depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed submissions before the AO to explain that surplus accruing on account of pre-payment of deferred sales tax was capital receipt not liable to tax. It was submitted that deferred sales tax was treated as unsecured loan in its books by the assessee and loan was not a trading liability. Thus, making full payment of loan at lesser account did not give rise to revenue receipts and therefore, it could not have been brought to tax u/s 41(1). No benefits had accrued to the assessee and therefore, it could not be brought to tax u/s 28(iv) of the Act also. But, the AO was not satisfied with the submissions of the assessee and therefore, he brought to tax the impugned amount as business income of the assessee u/s 41(1). 4.2. Being aggrieved, the assessee contested the matter before Ld. CIT(A) and made detailed submissions before him. It was submitted that the AO had relied upon the order of earlier year i.e. A.Y. 2005-06 to decide this issue against the assessee, and in A.Y. 2005-06 the Tribunal has decided this issue in favour of the assessee by holding that this amount was not liable to be taxed u/s 41(1). Ld. CIT(A) in the appeal order relying upon the order of the Tribunal in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal in the case of Gurdaspur Co- op. Sugar Mills vs. Deputy Commissioner of Income Tax for the proposition that amount of loan constituted benefit within the meaning of section 28(iv) and was thus taxable therein. 4.5. We have gone through the orders of the lower authorities, submissions made and judgments relied upon before us by both the parties. It is noted that the issue of taxability of surplus arising to the assessee on repayment on deferred sales tax liability has also arisen in earlier A.Y. i.e. A.Y. 2005-06 and 2006-07 wherein this issue has been decided in favour of the assessee by the Tribunal as well as by Hon ble Bombay High Court. It has been contended by the Ld. DR before us that in earlier year, the taxability has been examined u/s 41(1) only and not with respect to the provisions of section 28(iv), under which the impugned amount will be taxable as benefit accrued to the assessee. Before we deal with the arguments of Ld. DR, we find it appropriate to discuss about precise nature of impugned transaction. The assessee explained the nature of transactions before the AO and the reply of the assessee has been reproduced by the AO in the assessment. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of its deferred sales tax liability as under: Rs. Sales tax liability 2,26,45,595 Less: Premature pre-payment 63,42,160 Surplus on the above 1,63,031435 The company has treated the surplus accruing on premature repayment of deferred sales tax as a capital receipt not liable to income tax. 4.6. As discussed earlier also, the AO held this amount of surplus as remission of liability and brought to tax the same u/s 41(1). Ld. CIT(A) did not agree with the AO on this aspect and in view of decisions of the Tribunal and judgment of Hon ble Bombay High Court of preceding year, and it was held by him that this is not equivalent to remissions of liability as envisaged u/s 41(1) and therefore, same is not taxable u/s 41(1). The decision of Ld. CIT(A) was not contested by the Revenue on this issue and therefore it has attained finality. But the alternative issue raised by the Ld. CIT(A) was that this amount is equivalent to a benefit as has been envisaged u/s 28(iv) and therefore, it would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee of premature payment and discharge of the liability by finding out its NPV. If that was a permissible exercise and in terms of the settled law, then, we do not see how the Assessee can be said to have been benefited and as claimed by the Revenue. The argument of Mr. Gupta is not that the Assessee having paid ₹ 3.37 crores has obtained for himself anything in terms of section 41(1), but the Assessee is deemed to have received the sum of ₹ 4.14 crores, which is the difference between the original amount to be remitted with the payment made. Mr. Gupta terms this as deemed payment and by the State to the Assessee. We are unable to agree with him. The Tribunal has found that the first requirement of section 41(1) is that the allowance or deduction is made in respect of the loss, expenditure or a trading liability incurred by the Assessee and the other requirement is the Assessee has subsequently obtained any amount in respect of such loss and expenditure or obtained a benefit in respect of such trading liability by way of a remission or cessation thereof. As rightly noted by the Tribunal, the Sales Tax collected by the Assessee during the relevant year amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Bench had held that surplus arising on repayment of sales tax liability is on account of difference between payment of net present value against the future liability and it can neither be termed as remissions/session of liability nor it gives rise to any benefit to the assessee. According to Hon ble Special Bench, it is a simple case of collecting amount at net present value of future liability, which cannot be regarded as giving rise to any kind of benefit to the assessee. The Hon ble special Bench has discussed law on this issue in detail and this decision was subsequently affirmed by Hon ble High Court by passing detailed order which has been briefly discussed in our order above. It is further noted by us that Hon ble High Court has also relied upon and discussed its earlier order in the case of Mahindra and Mahindra Limited 261 ITR 501, wherein it was held that waiver of the principal amount of loan did not give rise to benefit as envisaged u/s 28(iv) and therefore it was not taxable u/s 28(iv). It is further brought to our notice by Ld. Counsel of the assessee that the benefit as envisaged u/s 28(iv) is something which actually flows to the assessee in monetary terms. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. Thus, ground nos. 1 to 4 are allowed. 5. Ground Nos.5 to 9:- In these grounds the assessee has challenged the action of lower authorities in denying the benefit of depreciation u/s 32 in respect of following intangible assets:- Assets Value (Rs.) Trade Mark 2,00,00,000 Technical Know how 3,50,00,000 Goodwill 3,20,00,000 Marketing Network 3,75,00,000 Non-Compete fees 4,02,50,000 Total 16,47,50,000 5.1. The brief background of the issue involved is that during the year under concern, the assessee had taken over Grinding Wheel Business of M/s Orient Abrasive Ltd. ( OAL ) as a going concern on a slump sale basis under Business Transfer Agreement dated 18.04.2006 for a consideration of ₹ 26.17 crores. Out of the assets acquired from OAL, assets worth ₹ 16.86 crores were intangible assets and accordingly the assessee claimed depreciation amounting to ₹ 2.37 crores on the same. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquired by the assessee as part of aforesaid deal and also doubted about the valuation of the same as was recorded by the assessee in its books. It was also held by the Ld. CIT(A) that the assessee did not acquire any Goodwill as it did not get any legal rights which were enforceable under the law and therefore it could not be considered to be eligible for depreciation. 5.4. Being aggrieved, the assessee filed an appeal before the Tribunal. 5.5. During the course of hearing before us, it has been argued by the Ld. Counsel that now this controversy has become narrowed down because of judgment of Hon ble Supreme Court in the case of CIT vs Smiff Securities Ltd. 348 ITR 302 (SC) wherein Hon ble Apex Court has held that assessee is entitled to claim of depreciation on the amount of Goodwill. It was held that amount of difference between book value of assets acquired and amount paid by an assessee represents amount of Goodwill acquired by the assessee as part of take- over deal, upon which assessee would be entitled to claim depreciation. It was brought to our notice that in subsequent year i.e. in A.Y. 2008-09, Ld. CIT(A) has himself granted benefit of depreciation on the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure of trade secrets. The assessee also submitted valuation report from M/s. Anmol Sekhri and Associates, the Registered Valuers (enclosed at page no. 10 to 192 of the paper book) for ascertaining valuation of the business giving values of each and every fixed assets and other intangible assets acquired by the assessee under the aforesaid deal. It is noted by us that the lower authorities have granted the benefit of depreciation on the amount of fixed assets acquired i.e. plant and machinery etc. Thus, genuineness of transaction has not been doubted, but what has been doubted merely is the valuation of intangible assets acquired under the deal. It is to be noted here that factum of acquisition of intangible assets has also not been disputed. Thus, under these circumstances, case made out by the lower authorities is that the amount paid by the assessee for its business is more than the appropriate value of its intangible assets. The assessee has also admitted this position that the assessee has paid an amount which is more than the amount of its tangible assets because of numerous intangible assets acquired by the assessee which were quite valuable in the opinion of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. In view of Accounting Standard 10 as issued by the [CAI the assessee's contention was right that the consideration paid by the assessee in excess of value of tangible assets was rightly classified as goodwill. In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The agreement itself indicates that slump sale in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angible and intangible assets acquired by the assessee. The assessee acquired entire plant and machinery, various trademarks, commercial list of customers and dealers, entire data and information in relation to sales and distribution network, of technical know-how, Goodwill of Grinding Wheel Business, rights of non- competition etc were described in the said agreement. It is further noted that proper break-up and justification for the consideration has been narrated in the said agreement. The said agreement also contains lists of employees of OAL to be taken-over by the assessee company. It also containing the list of trademarks, particulars of goodwill of business of the OAL in the form of business data, customer details, specifications and quality requirement for the products, trade secrets and other confidential information, software process and similar other intangible assets. There was a proper valuation report specifying separate value of each and every asset of tangible or intangible nature. It is also noted that the AO made direct inquiries with OAL in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to the tune of ₹ 4.90 crores. Rule 8D is not applicable in this year. In A.Y. 2007-08, in assessee s own case, the Tribunal held vide its order dated 28th April 2011 in ITA No. 3447/Mum/2010 as under: Vide ground Nos. 4 to 6 assessee contends that Rule 8D is not applicable retrospectively and disallowance under section 14A should be based on the facts and material circumstances of each case and in the light of decision of the ITAT in assessee s own case for the earlier year, we hold that it is reasonable to restrict disallowance to 2% of the dividend earning and we direct the Assessing Officer accordingly. 6.3. Thus, respectfully following the order of the Tribunal we hold that the disallowance on account of expenses under section 14A should be restricted to 2% of the dividend income. The disallowance with regard to interest should be made after excluding those mutual funds which are debt funds. Thus, assessee gets part relief and these grounds are partly allowed. 6.4. As a result appeal filed by the assessee is partly allowed. Now we shall take up assessee s appeal for A.Y. 2008-09 in ITA No.5800/Mum/2013 7. Ground Nos. 1 to 4: These grounds relate to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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