TMI Blog2019 (4) TMI 2072X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how is a colourable device adopted with the intention of inflating the cost in order to claim higher depreciation. It is important to note here that the seller firm as well as the successor company is owned and controlled by very same persons. No doubt, the respondent-assessee filed a report of valuation on goodwill, knowhow done by M/s. G.Sekar Associates, Charted Accountant Chennai, the said report does not contain report of valuation on goodwill, know-how of M/s. RMKV Silks. In respect of other concerns, it is not clear on what basis he assumed normal profits and super profits and the multiplying factors applied to value the goodwill, know-how he merely discussed the theory and principles governing the valuation of goodwill, know-how. Thus, the valuation report is bald cannot be accepted as the basis of valuation of goodwill, know-how. No credence can be given to the valuer s report. Whether or not the act of creation of goodwill, know-how by debiting to goodwill and knowhow and crediting to the partners account is valid under law? - It is a fundamental principle under the Partnership Act that during the subsistence of the partnership the value of interest of each pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he money borrowed which can be genuinely regarded as interest. The interest payable on a loan of money not any other asset acquired under a contract. The another important point to be noted is that the assessee firm had not credited the goodwill, know-how to the capital accounts of the partner - it is a device adopted by the assessee and as well as respondent-assessee to claim deduction in the hands of the company and benefit the partners of the erstwhile firm and who are also the Directors of the assessee firm. It is again another dubious device adopted with an intention of avoiding the payment of taxes. In fact, the segregation of the partners accounts into capital and current account is only for operation convenience and it constitutes one account only namely capital accounts of the partners. By segregating the capital account, into capital and current account, the seller firm conveniently avoided payment of capital gains on slump sale transaction by availing the exemption conferred under the provisions of s. 47(xiii) of the Act. Thus, viewed from any angle the interest paid on the credit balance of the partners of the seller firm is not allowable as a business deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied the ratio of the decision of the Hon ble Supreme Court in the case of Rotorck Controls India P. Ltd. [ 2009 (5) TMI 16 - SUPREME COURT]. Therefore, we reverse the findings of the ld. CIT(A) and confirm the action of the Assessing Officer in making the addition of provision for liability for bonus card points. Hence, this ground of appeal filed by the Revenue is allowed. Nature of expenditure - whether the expenditure incurred by the respondent-assessee on interior decoration, false ceiling and wooden structures carried out on the leased premises constitutes whether revenue or capital expenditure? - HELD THAT:- On bare reading of the above Explanation, it is clear and categoric that the expenditure contemplated in the said Explanation is capital in nature as the assessee enjoying the lease hold rights on the building is deemed to be the owner of the building. Once the assessee is deemed to be the owner of the building, any improvements or decoration carried out on the building partakes the character of the building, and by refurbishing, decorating or by doing interior work in the building an enduring benefit was derived by the assessee for the period of occupation and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 52,85,248/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest. 4. For these and such other ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be settled through allotment of equity shares in the same proportion in which such partners capital account stood in the books of our firm on business transfer date and by no other means; 3. The partners of the seller to whom shares are allotted in the above manner shall ensure that the aggregate of their shareholding in the purchaser company shall not be less than fifty percentage of the ,total voting power in the purchaser company for a continuous period of five years from the business transfer date viz. 7th January, 2012. 3.3 The Assessing Officer was of the opinion that the goodwill created in the books of the firm seller does not involve any cost and therefore, the actual cost in the hands of the seller firm is nil and therefore, even in the hands of the successor company the actual cost continuous to be nil and therefore, not eligible for any depreciation. Furthermore, the Assessing Officer also doubted the existence of any knowhow of Rs. 19,15,00,000/- as the firm seller is only retail trader of textiles and the question of creation of knowhow does not arise. Accordingly, the Assessing Officer denied the claim of depreciation on knowhow of Rs.19,15,00,000/- and good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for depreciation. The deeming provisions of s. 47 49 of the Act governing the cost of acquisition for the purpose of computation of capital gains are not applicable for the purpose of determining the actual cost of an asset for allowability of depreciation u/s. 32 of the Act. It is further submitted that the goodwill was purchased by the respondent-assessee company from the erstwhile firm and therefore, the depreciation on goodwill, knowhow is allowable placing reliance on the following decisions: CIT v. Smifs Securities 348 ITR 302 (SC) Hindustan Coca cola Beverages 331 ITR 192 (Del) B.Raveendran Pillai v. CIT 332 ITR 531(Ker.) Areva T D 345 ITR 421 (Del.) Triune Energy Services P. Ltd. v. DCIT 237 Taxman 230 (Del.) Chowgule Company P. Ltd. v. Addl. CIT 2016-TIOL-244HC-Mum-IT CLC Sons Pvt. Ltd. v. ACIT (ITAT Delhi) (Spl. Bench) 3.9 It was further submitted that the explanations 1 to 8 to s. 43(1) of the Act deeming the value of cost of acquisition of assets under such circumstances are not applicable in case of acquisition of assets taken over by a transfer under the provisions of s. 47(xiii) of the Act. It is further submitted that even the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is no cost in the hands of previous owner and therefore, placing reliance on the provisions of s. 49(1) of the Act held that even in the hands of the successor company i.e., respondent-assessee before us no cost was involved and therefore, denied the depreciation. As regards to the disallowance of claim for allowance of interest expenditure on the partners credit balances standing as liabilities in the books of the firm, the Assessing Officer is of the opinion that mere book entries do not create enforceable liability and disallowed the claim. 4.2 On appeal before the ld. CIT(A), he allowed both the claims accepting the contention of the appellant that goodwill is acquired by the assessee by paying consideration to the firm, the credit balances standing to the credit of partners account constitutes a liability in the hands of the firm. Accordingly, we held that interest liability on such balances is allowable as deduction. 5. Grounds of appeal No.1 4 are general in nature and do not require any adjudication. 5.1 Now, we shall deal with each of the issues. Ground of appeal No.2 challenges the decision of ld. CIT(A) allowing the depreciation goodwill, know-how. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm. The goodwill, know-how was merely created by book entry by debiting the goodwill, know-how and crediting partners accounts. This partners account was not treated as a part of capital accounts of the partners of the firm. Therefore, the question that arises is whether or not the act of creating goodwill, know-how is a colourable device adopted with the intention of inflating the cost in order to claim higher depreciation. It is important to note here that the seller firm as well as the successor company is owned and controlled by very same persons. No doubt, the respondent-assessee filed a report of valuation on goodwill, knowhow done by M/s. G.Sekar Associates, Charted Accountant Chennai, the said report does not contain report of valuation on goodwill, know-how of M/s. RMKV Silks. In respect of other concerns, it is not clear on what basis he assumed normal profits and super profits and the multiplying factors applied to value the goodwill, know-how he merely discussed the theory and principles governing the valuation of goodwill, know-how. Thus, the valuation report is bald cannot be accepted as the basis of valuation of goodwill, know-how. No credence can be given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges... 5.4 This principle was followed again by Hon ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 159 ITR 509 (SC) in the context of applicability of provisions of capital gains on the transfer of personal asset of the partner to the partnership firm as a capital contribution after referring to the judgment of Hon ble Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless. It has also to be borne in mind that evasion of law cannot be a trade pursuit. The expenditure in this case cannot, in any way, be allowed as wholly and exclusively laid out for the purpose of assessee's business. 5.7 In the backdrop of the above legal position and facts, the action of the Assessing Officer in determining the actual cost at Nil in the hands of the successor company i.e., respondent-assessee cannot be found fault with. Merely because, the firm had recorded the value of goodwill, knowhow at certain price the same would not conclusively establish the correctness of the claim, if the Assessing Officer is of the opinion that the transaction is by way of subterfuge or device in order to avoid tax which the assessee is otherwise liable to pay or that the transaction is illusory or colourable or that the assessee has acted fraudulently. The material pointed to be noted is that the partners of the erstwhile firm and the Members and Directors of the assessee-company are the same. They adopted the character of the corporate entity for the purpose of availing inflated depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re operation. Evidence gathered during the search seizure operation further fortifies the idea that this company has been used as a conduit for generating unaccounted wealth. Further, the assessee company has not offered to general public any share for subscription. All the shares are held by directors only. 5.8 In the light of above, the Assessing Officer had rightly exercised his duty by determining the actual cost of the goodwill, know-how at nil. 5.9 The ld. CIT(A) had not examined the issue in proper perspective, failed to examine the relevant provisions of the Act finally passed superficial order allowing claim of the respondent-assessee. Therefore, we reverse the order of ld. CIT(A) and restore the order of assessment on this issue. 5.10 In the result, ground of appeal No.2 filed by the Revenue is allowed. 6. Ground of appeal No.3 challenges the direction of ld. CIT(A) allowing the interest payable on the credit balance standing to the credit of erstwhile partners of the firm. 6.1 The liabilities in the form of credit balance of partners of the firm were taken over by the respondent-assessee company in terms of the business takeover agreement, respondent-as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets of the firm and the withdrawal of capital attributable to a fixed asset, intended to be retained as part of the capital structure of the firm, amounts to its monetization by the partners for their personal purposes, and is clearly impermissible, both from the stand-point of credit to the partner s capital account (on revaluation) and its withdrawal, considered from any perspective legal, accountancy, and also tax . Having regard to the above position of law in the absence of enforceable liability, the question of payment interest thereon does not arise. Further, the Hon ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) held that the mere book entry cannot create enforceable liability by holding as under: The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of accounts and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V Silks Pvt. Ltd. bearing ITA Nos.1593/Chny/2017 1622/Chny/2017 for assessment years 2013-14 (Cross Appeals): 8. These cross appeals filed by the assessee-company as well as Revenue directed against the order of the learned Commissioner of Income Tax (Appeals)-3, Madurai (hereinafter called as CIT(A) ) dated 10.03.2017 for the assessment year (AY) 2013-14. 8.1 Since, the identical facts and issues are involved in these appeals, we proceed to dispose the same vide this common order. 8.2 The brief facts of the case are as under: The assessee namely RMKV Silks Pvt. Ltd. is a private limited company incorporated under the provisions of Companies Act, 1956. The return of income for the Assessment Year 2013-14 was filed on 26.01.2013 disclosing total loss of Rs.5,36,57,185/- and this was revised on 31.03.2015 disclosing at a loss of Rs. 11,22,62,283/-. Against the said return of income, the assessment was completed by the Asst. CIT, Circle-1, Tirunelveli (hereinafter called as AO ) vide order dated 31.03.2016 passed u/s. 143(3) of the Act at total income of Rs. 9,78,27,920/-. While doing so, the AO made the following disallowances: 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce. 2.4 The CIT(A) ought to have appreciated that the Assessee is valuing the closing stock on the basis of net realizable value for clothes having in mind the period for which the clothes have not been sold. The valuation of the stock by the assessee based on the experience cannot be rejected without any valid reason. 2.5 The CIT(A) ought to have appreciated that when the management realized that a substantial part of the old stock was lying as on 31st March, after a careful study of the realization of the old stocks, calibrated the closing stock valuation to peg the same at realizable value whenever it is estimated to fetch a price lower than the cost. 2.6 The CIT(A) ought to have appreciated that by coincidence the estimate of such realizable value of these stocks amounted to 50% and 25% of the original cost in the second year and third year respectively of their shelf life. When older items forming part of the stock was found in the inventory the same was assigned a token value of Rs.100 in order to ensure control and prevent pilferage. 2.7 The CIT(A) failed to appreciate the fact that the estimates of realizable price arrived at by management, as confirmed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng stock. 9.1 During the course of assessment proceedings, the Assessing Officer disputed the value of the closing stock adopted by the assesseecompany. The Assessing Officer observed that the assessee-company valued the closing stock adopting the following methodology: Ageing pattern of the stock Method of Valuation Items purchased and not sold within a year Valued at cost Items purchased and lying in stock between 1 and 2 years 75% of the cost Items purchased and lying in stock between 2 and 3 years 50% of the cost Items purchased and lying in stock for more than 3 years Notional value of Rs.100/- per unit. 9.2 The Assessing Officer is of the opinion that valuing the stock by adopting arbitrary percentage of the cost is against the method of valuation adopted by the assessee himself i.e., cost or realizable value. The Assessing Officer also had taken note of the certain decisions of the Tribunal in the group of the assessee-company, wherein the Tribunal had not accepted su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock. It is salutary principle of law that the closing stock should be valued at the cost of market price, whichever is less. It is the stated policy of the assessee in the present case that stock is valued in accordance with this principle. But the crux of the issue lies on the value to be adopted as a market price or realizable value. The assessee-company had adopted @75%, 50% and Rs. 100/- per piece as the case may be as a market price or realizable value of the sarees lying in the closing stock. There is no dispute as to the quantity involved in the closing stock. The dispute is only with regard to the value of closing stock. It is not demonstrated before the lower authorities or before us as to how the 75%, 50% and Rs. 100/- per piece is the realizable value of the sarees. There is nothing on record to prove that the stock has become obsolete and there is no demand for the stock or there are no buyers for the stock. It is for the assessee to establish that there is no prospect of sale of goods and there was no demand for the goods and no buyers at the cost price. There can be 101 reasons as to why the stock could not be sold. One of the reasons can be perhaps the price quoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Ltd. (supra) cannot be applied to the facts of the present case, inasmuch as, the arbitrary valuation cannot be accepted as one of the methods of valuation stock. Similarly, the ratio of the decision of Hon ble High Court of Rajasthan in the case of Wolkem India Ltd. (supra) is not applicable as the question of factum of obsolescence is not established in the present case. As regards to the issue of following the decision of Co-ordinate Benches on the similar issue, we feel that it has no relevance since, our decision is premised on the well accepted principles of law and facts peculiar to the case followed the ration on decision of Hon ble High Court of Madras and Allahabad High Court. Thus, we do not find any merit in the ground of appeal filed by the assessee. Accordingly, we dismiss the ground of appeal No.2 filed by the assessee. 9.9 In the result, appeal filed by the assessee in ITA No. 1593/Chny/2017 is dismissed. 10. Now we shall take up the Revenue s appeal in ITA No.1622/Chny/2017 for AY 2013-14. 10.1 The Revenue raised the following grounds of appeal: 1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Vs CIT-Ill, New Delhi (2015)(62 taxman.com 100 (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court s ruling was dismissed by the Hon ble S.C (2016) 72taxmann.com334(SC) and also failed to consider the decision of Hon ble S.C in the cases of Shree Sajjan Mills Ltd Vs CIT(sc) 156 ITR 585 and Indian Molasses Co. (P) Ltd Vs CIT (Sc) 37 ITR 66 wherein it was held that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. 5.1 The CIT(A) failed to consider the fact that the assessee incurred the expenditure of Rs.6,49,09,981/- towards Gen. Store Changes, Additional Gondolas Fitting, Room alteration, Inside Mall new Frontage and Signs, Civil, Interior work, Supply of LED Down Lighters and Fixing of New CDMT with a view to bringing an enduring benefit of the business. 5.2 The CIT(A) failed to consider the decision of Hon ble Supreme Court in the case of M/s Ballimal Naval Kishore and Anr Vs CIT(1997)224 ITR 414(SC), whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed. 10.5 Ground of appeal No.4 challenges the decision of ld. CIT(A) allowing the provision for bonus card liability of Rs. 5,04,54,574/-. The assessee-company made a claim for deduction of provision for liability of unredeemed bonus points of Rs. 5,04,54,574/-. The facts of claim as stated by the assessee-company before the Assessing Officer are as under: 4.2 Any customer making a purchase, if he chooses to become a bonus card member and signs the membership form, is entitled for two points (Rs.1/-) for every Rs. 100 /- of his immediate previous purchases. The accumulated bonus points, earned on earlier purchases, are adjusted towards the future purchases on the date he chooses to redeem. The liability arises immediately after the customer becomes a member after a purchase. The customer is entitled to redeem the accumulated points at any time on his future purchases at any one of the group of concerns situated at any of the locations. 4.3 The RmKV Group of concerns makes a provision for bonus card at the year-end after adjusting the redemption that has taken place during the year. 4.4 It has also been clarified by the AR that the provision in each year is made for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the claim. 10.7 Being aggrieved by the above addition, the assessee-company preferred an appeal before ld. CIT(A), who vide impugned order allowed the appeal following the decision of ITAT, Chennai in ITA No.1097 1098/Mds/2016 dated 08.02.2017. Being aggrieved by the above decision, the Revenue is in appeal before us in the present appeal. 10.8 The ld. CIT-DR submitted that the provision for bonus card liability cannot be allowed as a deduction as the ratio of decision of Hon ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62 (SC) is not applicable to the facts of the present case. On the other hand, the ld. Counsel for the assessee Mr. Vijayaraghavan submitted that the provisions for bonus card liability is not a contingent liability as per accounting standard 29, the decision of the Hon ble Supreme Court in the case of Bharath Earth Movers 245 ITR 428 and in the case of Rotorck Controls India P. Ltd. (supra). 11. We heard the rival submission and perused the material on record. The issue involved in the present ground of appeals is on the allowability of provision made for liability towards unredeemed bonus points. The salien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. 11.3 Applying the above parameters to the facts of the present case, when the customer earns bonus points, it is not the obligating event that creates an obligation, which results in outflow of the resources. The transactions of purchase and the consumer loyalty programme in terms of which the bonus points are earned by the customer are independent and distinct transactions. The object of introducing customer loyalty programme is only to increase customer base and attracting the customers again. The expenditure on bonus points is not necessary for the purpose of making sales, the revenue in respect of which was recognized. There is no co-relation between the sales and the expenses on redemption of the bonus points. The expenditure is required to be recognized only in case the corresponding revenue receipt is recognized. In the present case, there is no corresponding revenue to the expenditure on unredeemed bonus points. These principles were enunciated by Hon ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and in the case of CIT v. Bilahari Investment Ltd. 299 ITR 1 (SC), which are extracted below vide para 12 13: 12. The argument of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be said that the concept of accrual is limited to one year. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the Fair Valuation Principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by provisions of the Companies Act. 11.4 It is only on the subsequent purchases, there is an obligation on the part of the assessee-company to redeem the points which results in outflow of resources, it is only at this point of time the liability can be recognized. Indisputedly, in the present case, the liability is recognized at the time of earning the bonus points. The number of points earned would only enable the assessee to estimate the liability of the obligation. Further, the Assessing Officer had made a note of material fact that the assessee-company has an absolute discretion to withdraw the scheme without assigni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. On the other hand, the ld. Counsel for the assessee submits that the Explanation 1 to s. 32 of the Act is not applicable to an expenditure, which is in the nature of revenue expenditure and submits that renovation to the leased premises is a revenue expenditure and in support of this proposition relied on the following decisions: 1.Thiru Arooran Sugars Ltd. v. CIT 350 ITR 324 (Mad.) 2. Roger Enterp. v. Rises Pvt. Ltd. 169 Taxman 41 (Del.) 3) CIT v. Bharat Commercial Corporation 226 ITR 242 (Pat.). 11.9 We heard the rival submission and perused the material on record. The issue involved in the present grounds of appeal is whether the expenditure incurred by the respondent-assessee on interior decoration, false ceiling and wooden structures carried out on the leased premises constitutes whether revenue or capital expenditure. The Assessing Officer had discussed the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 31(i) of the Income-tax Act, 1961. The question is what is the meaning of the expression in the context of section 10(2) of the 1922 Act. In New Shorrock Spg. Mfg. Co. Ltd., Chagla, C J., speaking for the Division Bench, observed that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The Learned Chief Justice observed: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure on repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indeed, the finding of the High Court is that as against the sum of Rs. 17,000 for which the assessee had purchased the factory in 1937, the expenditure incurred in the relevant accounting year was in the region of Rs. 1,20,000. 12.1 The language of the Explanation 1 is very plain and clear and there was no scope to give a different meaning. It is the bounden duty of the Courts to give literal meaning to the expressions and phraseology used by the legislature in the absence of any ambiguity in the provisions. The decision relied upon by the ld. Counsel for the assessee i.e., CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 (Mad.) etc. are rendered prior to introduction of Explanation 1 to s. 32(1) of the Act and therefore, the principles laid down in the said decisions have no application after insertion of the Explanation 1 to s. 32(1) of the Act. The ld. CIT(A) without properly appreciating the legal provisions governing the issues had granted relief. Therefore, we reverse the findings of ld. CIT(A) and restore the assessment order on this issue. Hence, this ground of appeal filed by the Revenue is allowed. 12.2 In the result, appeal filed by the Revenue in ITA No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng stock Rs. 3,99,44,986/-. 2.2 The CIT (A) should have accepted the valuation of closing stock as arrived at by the appellant which has consistently been at cost or realizable price whichever is Lower. 2.3 The CIT(A) ought to have appreciated that the Law itself permits the business entities to value the stock at its realizable price and hence the same should not be questioned unless such valuation Loses objectivity. 2.4 The CIT(A) ought to have appreciated that the Assessee is valuing the closing stock on the basis of net realizable value for clothes having in mind the period for which the clothes have not been sold. The valuation of the stock by the assessee based on the experience cannot be rejected without any valid reason. 2.5 The C)T(A) ought to have appreciated that when the management realized that a substantial part of the old stock was lying as on 31st March, after a careful study of the realization of the old stocks, calibrated the closing stock valuation to peg the same at realizable value whenever it is estimated to fetch a price lower than the cost. 2.6 The CIT(A) ought to have appreciated the fact that the sale price realized on the stock pertaining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein for the reasons given by us vide paras 9.6 to 9.8, this issue was decided against the assessee. For the parity of reasons given therein, this ground of appeal is decided against the assessee. 14.3 In the result appeal filed by the assessee in ITA No.613/Chny/2018 is dismissed. 15. Now we shall take up the Revenue s appeal in ITA No.759/Chny/2018 for AY 2014-15. The Revenue raised the following grounds of appeal: 1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 3,77,01,563/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the IT. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is not expenditure. 5.1 The CIT(A) failed to consider the fact that the assessee incurred the expenditure of Rs.4,27,08,600/- towards Gen. Store Changes, Additional Gondolas Fitting, Room alteration, Inside Mall new Frontage and Signs, Civil, Interior work, Supply of LED Down Lighters and Fixing of New CDMT with a view to bringing an enduring benefit of the business. 5.2 The CIT(A) failed to consider the decision of Hon ble Supreme Court in the case of M/s Ballimal Naval Kishore and Anr Vs CIT(1997)224 ITR 414(SC), wherein it was held that total renovation, leading to substantial improvements, is only capital expenditure. 5.3 The CIT(A) failed to consider explanations to section 30 and 31 of Income-tax Act 1961, wherein it is mentioned that the cost of repairs and as the case may be current repairs, shall not include any expenditure in the nature of capital expenditure. 5.4 The CIT(A) failed to consider explanation I to section 32 wherein it was mentioned that where the assessee incurred any capital expenditure for the purpose of business or professin on the construction of any structure or doing of any work in or in relation to, and by way of renovation or exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l No.5 challenges correctness of the decision of ld. CIT(A) allowing the expenditure incurred on renovation and temporary wooden structures on leased premises as revenue expenditure. This issue was also dealt by us in the assessee s own case for the assessment year 2013-14 in the Revenue appeal in ITA No.1622/Chny/2017, wherein for the reasons given therein vide paras 11.9 to 12.2 decided the issue against the assessee and in favour of the Revenue. For the parity of reasons given therein, this ground of appeal is also decided against the assessee and in favour of the Revenue. Accordingly, this ground of appeal filed by the Revenue is allowed. 20. In the result, appeal filed by the Revenue in ITA No.759/Chny/2018 is allowed. RMKV Fashion Garments Pvt. Ltd. in ITA Nos.1625, 1626/Chny/2017 761/Chny/2018 for the assessment years 2012-13, 2013-14 201415 respectively: 21. These three appeals filed by the Revenue directed against the different orders of the learned Commissioner of Income Tax (Appeals)3/1(i/c), Madurai (hereinafter called as CIT(A) ) dated 10.03.2017 13.12.2017 for the assessment years (AYs) 2012-13, 2013-14 2014-15 respectively. 21.1 Since, the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets and liabilities of one partnership firm namely RMKV Associates as they stood in the books of the said firm as on 08.01.2012 as per the business transfer agreement. The said firm had claimed the benefit of the provisions of s. 47(xiii) of the Act in respect of transaction sale of business. In the return of income, the respondent-assessee claimed depreciation on the intangible assets being goodwill, know-how of Rs. 6,48,00,000/- stated to have been taken over from the said partnership firm. Admittedly, this goodwill was created in the books of erstwhile firm by book entry by crediting to the respective partners accounts. The balance standing to the credit of partners of erstwhile firm was also taken over by the assessee company. 23. The respondent-assessee had claimed depreciation on the value of goodwill, know-how and also claimed interest on the credit balance of the partners taken over by the respondent-assessee. The Assessing Officer had disallowed both the claims. 24. On appeal before ld. CIT(A), the ld. CIT(A) granted relief on both the issues. The Revenue is in appeal before us challenging the correctness of the order of ld. CIT(A). 25. Grounds of appeal No.1 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -14: 1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 1,41,75,000/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the I.T.. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 77,76,000/- made on interest attributable to the portion of amount standing to the credit of Directors of the assesee company on account of revaluation of Goolwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer disallowed the depreciation on goodwill, know-how of Rs. 1,06,31,250/- and interest on the credit balances of partners erstwhile firm of Rs. 77,76,000/-. 36.1 On appeal before ld. CIT(A), the ld. CIT(A) granted relief on both the issues. The Revenue is in appeal before us challenging the correctness of the order of ld. CIT(A). 36.2 The Revenue raised the following grounds of appeal in ITA No.761/Chny/2018 for assessment year 2014-15: 1. The order of the CIT (Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 1,06,31,250/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of sectin 47(xiii) of the IT. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 (Revenue s appeal): 42. This is an appeal filed by the Revenue directed against the order of the learned Commissioner of Income Tax (Appeals)-3, Madurai (hereinafter called as CIT(A) ) dated 10.03.2017 for the assessment year (AY) 2012-13. 43. The brief facts of the case are as under: The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of retail cloth trade. The return of income for the assessment year 2012-13 was filed on 29.09.2012 disclosing total loss of Rs. 5,85,74,365/-. Against said return of income, the assessment was completed by Dy. CIT, Circle-1, Tirunelveli vide order dated 30.03.2015 passed u/s. 143(3) of the Act at total income of Rs. 1,70,27,377/-. During the previous year relevant to the assessment year under consideration, the respondentassessee acquired all assets and liabilities of one partnership firm namely RMKV Fabrics as they stood in the books of the said firm as on 07.01.2012 as per the business transfer agreement. The said firm had claimed the benefit of the provisions of s. 47(xiii) of the Act in respect of transaction sale of business. In the return of income, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of interest. 4. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored. 46. Grounds of appeal No.1 4 are general in nature therefore, do not require any adjudication. The ground of appeal No.2 challenges the decision of ld. CIT(A) allowing the depreciation on goodwill, know-how. In the case of RMKV Silks Pvt. Ltd. involving identical facts of the case for the assessment year 2012-13 in Revenue s appeal bearing ITA No.1621/Chny/2017, it is held by us vide para 5.1 to 5.7, for the reasons stated therein, the depreciation on goodwill, know-how is not allowable. For the parity of reasons stated therein, these grounds of appeal filed by the Revenue are allowed. 47. In the result, ground of appeal No.2 filed by the Revenue is allowed. 48. The ground of appeal No.3 challenges the decision of ld. CIT(A) allowing the interest on the credit balance of erstwhile partners of the firm. In the case of RMKV Silks Pvt. Ltd. involving identical facts of the case for the assessment year 2012-13 in Revenue s appeal bearing ITA No. 1621/Chny/2017, it is held by us vide paras 6.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2012-13 in assessee s own case. The ld. CIT(A) also granted relief in respect of provision for unredeemed bonus points expenditure of Rs. 3,53,87,903/- and disallowance of repairs incurred on leased premises. However, confirmed the addition on account of under valuation of closing stock. 55. Being aggrieved by that part of order of the ld. CIT(A), which is against the assessee, the assessee filed an appeal in ITA No.1594/Chny/2017 and the Revenue is in appeal on the grounds which are allowed in favour of the assessee in ITA No.1624/Chny/2017 for assessment year 2013-14. 56. Now we shall take up the assessee s appeal in ITA No.1594/Chny/2017 for AY 2013-14. 57. The assessee raised the following grounds of appeal: 1. The Order of the Commissioner of Income tax (Appeals) is contrary to Law, facts and circumstances of the case. 2. Valuation of Closing Stock: 2.1 The CIT (Appeals) erred in confirming the addition made by the assessing officer to the closing stock. 2.2 The CIT (A) should have appreciated that the valuation of closing stock as arrived at by the appellant has consistently been at cost or realizable price whichever is lower ever since i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and hence the same should not be questioned unless such valuation loses objectivity. 2.11 Cit failed to appreciate the fact that the stock of Rs. 49,19,68,876/- as on 31 .3.13 (valued at cost), stock to the tune of Rs. 98,28,940/- more than 4 years old was remaining in stock on 25.3.2016 at the time of assessment which has remote chance of reatisabitfty. Hence the cit is not justified the addition of Rs. 107,32,042/- by the assessing officer. 2.12 The CIT(A) failed to appreciate the fact that there is no income escaping assessment since the actuaL saLe value gets captured in the year of actual sate. 2.13 The CIT(A) erred in not following the order of the Tribunal favorable to the assessee in the following cases: I) M/s.RmK.Viswanatha Pitlal Sons in ITA Nos 1784 to 1787/Mds/2014 dt.01 .06.2016 ii) Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.201 6. iii) Rmkv textiles 2.14 The CIT(A) erred in following the order of the Tribunal which has been subsequently distinguished by the co-ordinate Bench. 2.15 The CIT(A) erred in not appreciating when there are two views possible the view favorable to the assessee should be followed [ CIT Vs Vegetable Produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of Rs.3,53,87,903/- made unde the head bonus redemption expenses. The CIT (A) failed to consider the fact that the liability incurred by the assessee was in the nature of contingent and fully dependent upon the uncertain future visit and at the option of the customers and hence was not a known liability. 4.2 The CIT (A) failed to consider the decision of the Hon ble Supreme Court in the case of Bharath Earth Movers Vs CIT wherein it was held that what should be certain is the incurring of the liability . But in the present case, the incurring of liability is uncertain and there is no reasonable scientific method adopted by the asessee to estimate the future visits and the purchase behaviour of customers so as to justify creating of provision for such liability 4.3 The CIT(A) failed to consider the deicison of Hon ble Delhi High Court in the case of Seagram Distilleris (P) Ltd Vs CIT-Ill, New Delhi (2015)(62 taxman.com 100 (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court s ruling was dismissed by the Hon ble S.C (2016) 72taxmann.com334(SC) and also failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us vide para 46 that no depreciation on goodwill and know-how is admissible as there was no actual cost incurred in acquiring the same. Accordingly, these grounds of appeal filed by the Revenue are allowed. 60.2 In the result, ground of appeal No.2 filed by the Revenue is allowed. 60.3 Ground of appeal No.3 challenges the correctness of decision of ld. CIT(A) allowing the interest on credit balance of partners of erstwhile firm as a deduction. This issue is also consequential in nature from the assessment year 2012-13. In the assessment year 2012-13, in the appeal filed by the Revenue in ITA No.1623/Chny/2017, it was held vide para 48 that the book entries cannot create enforceable liability and is only a device adopted with an intention of avoiding payment of taxes. Accordingly, the interest paid on the balances standing credit of partners of erstwhile firm cannot be allowed as a deduction, while computing the income from profits of business. Accordingly, ground of appeal No.3 filed by the Revenue is allowed. 60.4 In the result, ground of appeal No.3 filed by the Revenue is allowed. 60.5 Ground of appeal No.4 challenges the correctness of decision of ld. CIT(A) all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock of Rs. 2,30,99,133/-. 64. Being aggrieved by the addition, an appeal was preferred before ld. CIT(A), who vide impugned order deleted the addition on account of disallowance of depreciation on goodwill, know-how, interest expenditure, bonus card liability. However, confirmed the addition on account of under valuation of closing stock. 65. Being aggrieved by that part of order of the ld. CIT(A), which is against the assessee, the assessee filed an appeal in ITA No.614/Chny/2018 and the Revenue is in appeal on the grounds which are allowed in favour of the assessee in ITA No.760/Chny/2018 for AY 2014-15. 66. Now we shall take up the assessee s appeal in ITA No.614/Chny/2018 for AY 2014-15. The assessee raised the following grounds of appeal: 1. The Order of the Commissioner of Income tax (Appeals) is contrary to Law, facts and circumstances of the case. 2. Valuation of Closing Stock: 2.1 The CIT (Appeals) erred in confirming the addition made by the assessing officer to the dosing stock of Rs. 2,30,99,133/-: 2.2 The CIT (A) should have accepted the valuation of closing stock as arrived at by the appellant which has consistently been at cost or realiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal favorable to the assessee in the following cases: i) M/s.RmK.Viswanatha PilLai Sons in ITA Nos 1784 to 1787/Mds/2014 dt.01.06.2016 ii) Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.2016. 2.13 The CIT(A) erred in following the order of the Tribuna which has been subsequently distinguished by the co-ordinate Bench in the case of M/s.Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.2016 2.14 The CIT(A) erred in not appreciating when there are two views possible the view favorable to the assessee should be followed [CIT Vs Vegetable Products - 88 ITR 192 (SC)] 3. Appellant craves leave to adduce additional evidence at the time of hearing. 67. The only issue involved in the present appeal is whether addition on account of under valuation of closing stock is justified. This issue was also dealt by us in the assessment year 2013-14 in assessee s own case in ITA No.1593/Chny/2017, wherein for the reasons given by us vide para 9.6 to 9.8, this issue was decided against the assessee. For the parity of reasons given therein, this ground of appeal is decided against the assessee. 68. In the result appeal filed by the assessee in ITA No.614/Chny/2018 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to estimate the future visits and the purchase behaviour of customers so as to justify creating of provision for such liability 4.3 The CIT(A) failed to consider the deicison of Hon ble Delhi High Court in the case of Seagram Distilleris (P) Ltd Vs CIT-Ill, New Delhi (2015)(62 taxman.comlOO (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court s ruling was dismissed by the Hon ble S.C (2016) 72taxmann.com334(SC) and also failed to consider the decision of Hon ble S.C in the cases of Shree Sajjan Mills Ltd Vs CIT(sc) 156 ITR 585 and Indian Molasses Co. (P) Ltd Vs CIT (sc) 37 ITR 66 wherein it was held that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. 5. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the AO restored. 70. Grounds of appeal No.1 5 are general in nature, which do not require any adjudication. G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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