9911796707
TMI Blog2024 (5) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee company has been subsequently changed into "Culver Max Entertainment Private Limited." Accordingly, this order has been passed by the Tribunal in the new name of the assessee. However, for the sake of convenience, we continue to refer the name of the assessee as "SPN India", as the said name has been referred to both by the AO and Ld DRP. 3. The assessee SPN India is having a wholly owned subsidiary company named MSM Satellite (Singapore) Pte Ltd (MSM Singapore). In March, 2005 the above said MSM Singapore had purchased a TV channel named "SAB TV" from a company named M/s Shri Adhikari Brothers for cash consideration. At that point of time, the cash consideration paid had exceeded the net asset value taken over by it by Rs. 61.14 crores and hence the above said difference amount of Rs. 61.14 crores (Rs. 611.48 million) was accounted as "Goodwill" by MSM Singapore in its books of account. 4. Subsequently, during the financial year 2014-15 relevant for AY 201516, MSM Singapore demerged its broadcasting business and the same was taken over by SPN India, the assessee herein. The Ld A.R submitted that the demerger scheme was sanctioned by Hon'ble Bombay High Court on 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as at the year end, for which payment has not been made. Since the assessee did not deduct TDS from the above said expenditure so provided for, it voluntarily disallowed 30% of the expenses in accordance with the provisions of sec. 40(a)(ia) of the Act. The AO, however, took the view that the provision for expenses created by the assessee are in the nature of unascertained liabilities and accordingly held that entire provision is not allowable as deduction. Accordingly, the AO disallowed remaining portion of 70% also. Since the Ld DRP has confirmed the same, the assessee is challenging the said disallowance also. 6. We shall first take up the issue relating to depreciation claimed on goodwill. We noticed earlier that the broadcasting business of MSM Singapore was demerged and acquired by the assessee. The assets acquired from MSM Singapore included the "Goodwill". In that process, the goodwill that was available with MSM Singapore in its broadcasting business came to be owned by the assessee. The demerger has become effective as on 1.4.2014 and hence the assessee has claimed depreciation on goodwill for the first time in AY 2015-16. Thus, we notice that the goodwill had arisen in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." A careful perusal of the above said proviso would show that the same is applicable to a case, where demerger has taken place in the middle of the year. In that kind of situation, the depreciation allowable on the assets shall be allocated between the demerged company and resulting company on pro-rata basis in the ratio of number of days for which the assets were used by them. In the instant case, the demerger has taken place as on 1.4.2014. Hence the assessee herein has used the asset in the form of Goodwill for the whole of the year. Hence the question of allocating the depreciation on prorata basis between demerged company and resultant company will not arise in the facts of the present case. Hence, the AO was not correct in law in referring to the 6th proviso to sec. 32(1) of the Act. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating company had continued to hold the capital asset for the purposes of its own business." The above said Explanation 7 is applicable to a case of amalgamation. Identical provision is available in Explanation 7A for cases of demerger and the same reads as under:- "Explanation 7A. - [Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business:" Section 43(1) defines the expression "actual cost" for the purpose of Income tax Act. The Explanation 7 and 7A has been inserted in order to ensure that the assessees do not change the cost to their advantage in the cases of amalgamation/demerger. In the instant case, we notice that the MSM Singapore has demerged its broadcasting business and the value of goodwill was not changed at all, i.e., the very same value of goodwill as declared in the books of MSM Singapore was incorporated in the books of the assessee also. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d thereon. However, the fact would remain that, it is the MSN Singapore which had accounted the residual consideration as goodwill and not the assessee. Hence, above said observations of Ld DRP are also against the facts available on record. Accordingly, we are of the view that none of the reasons cited by the AO and ld DRP would justify the reduction of depreciation claimed on the amount of goodwill. 12. The Hon'ble Supreme Court has held in the case of CIT vs. Smiff Securities Ltd (2012)(348 ITR 302)(SC) that good will is eligible for depreciation, since it is in the nature of 'intangible assets". Hence the claim of the assessee is supported by the above said decision rendered by Hon'ble Apex Court. Since, it was submitted that MSM Singapore did not claim depreciation/was not eligible to claim depreciation on goodwill, the Explanation 5 to sec. 32(1) will not apply and hence the question of arriving at WDV by allowing notional depreciation will also not arise. 13. In the preceding paragraphs, we have discussed the facts and circumstances of the case and the law governing the allowability of depreciation claimed by the assessee on the amount of Goodwill. With regard to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod of accounting, when the actual expenses exceeded the provision amount. The AO also found fault with the provision made for Agency incentive, Channel placement charges etc. Accordingly, the AO came to the conclusion that the provision for outstanding expenses has been made on adhoc basis and there is no reasonable certainty of incurring expenses. Accordingly, the AO held that the provision for outstanding expenses is disallowable in toto. Since the assessee had disallowed 30% of expenses u/s 40(a)(ia) of the Act, the AO disallowed remaining 70% of the claim. 15. Before Ld DRP, the assessee submitted that it is following mercantile system of accounting and hence it is required to provide for all known expenses. The assessee also explained the methodology for determining the amount of provision for outstanding expenses. It also relied upon following decisions rendered by Hon'ble Supreme Court in order to reiterate its point that the provision for outstanding expenses is an accrued liability and hence allowable as deduction:- (a) Bharat Earth Movers vs. CIT (2000)(245 ITR 428)(SC) (b) Calcutta Co Ltd vs. CIT (1959)(37 ITR 1)(SC) (c) Rotork Controls India P Ltd vs. CIT (2009) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total (B) 29,22,40,846 Aggregate amount of (A) +(B) Rs. 156,38,27,668/- 17. There is no dispute with regard to the fact that the assessee is following mercantile system of accounting. Under the said system, it is required to provide for all known expenses and losses as at the yearend. Hence, it is required to make provision for all outstanding expenses and it is a routine exercise followed universally when mercantile system of accounting is followed. Making provision for expenses is based on "accrual" concept. An accrual is a record of revenue or expenses that have been earned or incurred but have not yet been billed or bills not yet received. This can include things like unpaid invoices for services rendered, or expenses that have been incurred but not yet paid. Accruals are important because they help to ensure that a company's financial statements accurately reflect its true financial position, even if it has not yet received payment for all of the services rendered by it or paid for all of its expenses bills. Hence, in accrual-based accounting, revenue is recognized when it is earned, regardless of when the payment is received. This means that if a company provides a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the same was not made. The above said observation of the AO is in total contradiction with the accounting principles explained by the Hon'ble Supreme Court in the above said cases. As observed by Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd (supra), what is required to be seen is that "whether the liability to pay the expenses has been incurred or not?". If the said liability has been incurred prior to the closure of the accounting year and if the payment has not been made, then the mercantile system of accounting mandates that the provision for outstanding liability towards expenses should be made. Besides the above, the AO has also made observations casting doubt about the method of accounting the provision for outstanding expenses, their payment etc. In our view, the same is unwarranted. First of all, making provision for known expenses and losses is a routine exercise followed universally, when mercantile system of accounting is followed. As noticed earlier, the amount of provision may be estimated and in a case, where the actual amount of expenses varies, then the said variation will be accounted for as expenditure or reversal of expenditure in the succee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, the addition of 70% of expenses amounting to Rs. 109,46,79,368/- made by the AO is liable to be deleted. We order accordingly. 22. The assessee has raised grounds with regard to non-granting of TDS to the tune of Rs. 8,13,81,645/-. In this regard, the Ld A.R submitted that the TDS credit was not given by the AO for the reason that the TDS certificates are not in the name of assessee, but it was in the name of amalgamated/demerged company. He submitted that the relevant income has already been assessed in the hands of the assessee and hence the TDS deducted out of the said income should be allowed credit in the hands of the assessee. We notice that the co-ordinate benches have directed the AO to allow TDS credit on identical circumstances in the following cases:- (a) Popular Complex Advisory P Ltd vs. ITO (ITA No. 595/Kol/2023 dated 22nd August, 2023) (b) Adani Gas Ltd vs. ACIT (ITA Nos.2241 & 2516/Ahd/2011 dated 18-01-2016) (c) Ultratech Cement Ltd vs. DCIT (ITA No. 1412/Mum/2018 & others dated 14.12.2021) In these cases, the co-ordinate benches have held that the resulting company in case of demerger and transferee company in the case of transfer, are eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of Rs. 109,46,79,368/- made by the AO. The decision rendered by us in AY 2015-16 is applicable to AY 2016-17 also. Accordingly, we delete the disallowance of Rs. 119,54,12,673/-. 26. We noticed that the assessee had reversed the provision for outstanding expenses made in AY 2015-16 in the succeeding AY 2016-17 and accordingly offered the same as income in AY 2016-17. Since the AO had disallowed the provision for outstanding expenses in AY 2015-16, the assessee made an alternative plea before the AO that the income offered in AY 2016-17 by way of reversal of provision for outstanding expenses should be reduced from the total income. Said plea of the assessee was accepted by the AO in AY 2016-16 and accordingly reduced Rs. 109,46,79,368/- from the total income. Since we have deleted the disallowance of Provision for outstanding expenses made in AY 2015-16, the reduction of Rs. 109,46,79,368/- granted by AO in AY 2016-17 is no longer required. Accordingly, we direct the AO not to reduce the total income by Rs. 109,47,79,368/-. 27. The next issue contested by the assessee in AY 2016-17 relates to the reduction of depreciation claimed on Goodwill. The decision rendered by us in AY ..... X X X X Extracts X X X X X X X X Extracts X X X X
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