2011 (12) TMI 575 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition claimed as 'Goodwill' on account of depreciation.
2. Deletion of disallowances on account of depreciation on patents, trademarks, and intellectual property rights.
3. Allowance of 1/3rd amount out of advertisement and publicity expenditure.
4. Non-allowance of deduction for prior period expenses.

Summary:

1. Deletion of Addition Claimed as 'Goodwill' on Account of Depreciation:
The issue pertains to the deletion of an addition of Rs. 37,50,000 made by the Assessing Officer (AO) claimed as 'Goodwill' by the assessee on account of depreciation on Written Down Value (WDV) paid to Usha International Ltd. for acquiring business and commercial rights. The learned AR argued that the business rights acquired were eligible for depreciation u/s 32 of the Income-tax Act as intangible assets. The ITAT upheld the CIT(A)'s decision, confirming that the amount of Rs. 1,73,00,000 was for exclusive business rights and eligible for depreciation, while Rs. 27,00,000 was treated as goodwill and not eligible for depreciation. The ground of revenue's appeal was dismissed following the ITAT's decision in the preceding year.

2. Deletion of Disallowances on Account of Depreciation on Patents, Trademarks, and Intellectual Property Rights:
The assessee purchased the manufacturing business of M/s. SIEL Aircon Ltd., including intellectual property rights, for Rs. 10,93,00,000, capitalized as patents and trademarks. The AO disallowed depreciation, but the CIT(A) granted relief, following the ITAT's decision in the assessee's own case for the assessment year 2001-02. The ITAT confirmed that intellectual property rights are intangible assets eligible for depreciation u/s 32. The ground of revenue's appeal was dismissed as no distinction of facts from the earlier year was brought on record.

3. Allowance of 1/3rd Amount Out of Advertisement and Publicity Expenditure:
The AO treated the expenditure of Rs. 3,93,98,597 on advertisement and publicity as capital expenditure, while the CIT(A) allowed only 1/3rd of the expenses, considering the enduring benefit. The ITAT, relying on the jurisdictional High Court's decision in CIT vs. Citi Financial Consumer Finance India Ltd., held that such expenditure is revenue in nature and should be fully allowed in the year incurred. The ITAT allowed the assessee's appeal and dismissed the revenue's ground, stating there is no concept of deferred revenue expenditure in Income-tax laws.

4. Non-Allowance of Deduction for Prior Period Expenses:
The assessee claimed deduction for prior period expenses of Rs. 1,050,654, arguing that the liability crystallized during the year. The AO and CIT(A) disallowed the claim, stating the assessee failed to substantiate that the liability accrued during the year under consideration, as the assessee follows the mercantile system of accounting. The ITAT upheld the CIT(A)'s decision, dismissing the assessee's ground.

Conclusion:
The appeal of the revenue was dismissed, and the appeal of the assessee was partly allowed. The order was pronounced in open court on December 23, 2011.