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2010 (9) TMI 291 - AT - Income TaxDepreciation - goodwill and non-compete fees - acquisition of intellectual property rights/intangible assets in the form of distribution rights, technical support and trademarks - Application of Section 14A - Held that - the claim of the assessee for depreciation on goodwill and non-compete fees has been allowed by applying the rule of consistency as well as relying on the concept of block of assets Rule 8D of the Income Tax Rules 1962 is applicable only prospectively i.e. from A.Y. 2008-09. Since the assessment year involved in the present case is 2005-06 - disallowance made by the A.O. out of interest expenses u/s 14A and confirmed by the ld. CIT(A) is not sustainable in the light of C.I.T. vs. Hero Cycles Ltd. (2009 -TMI - 35238 - PUNJAB AND HARYANA HIGH COURT) decision - the quantum of disallowance u/s 14A for the years earlier to A.Y. 2008-09 has to be worked out by adopting some reasonable method -
Issues Involved:
1. Disallowance of depreciation on goodwill. 2. Disallowance of depreciation on non-compete fees. 3. Disallowance under section 14A related to interest and administrative expenses. 4. Reduction of written down value of block assets due to capital subsidy. Issue-wise Detailed Analysis: 1. Disallowance of Depreciation on Goodwill: The assessee challenged the disallowance of Rs. 3,33,246/- depreciation on goodwill. The Tribunal observed that similar issues in the assessee's own case for earlier years (A.Y. 2003-04 & 2004-05) had been decided in favor of the assessee. The Tribunal held that the Written Down Value (WDV) of block assets could only be reduced in cases of sale, discarding, demolition, or destruction of an asset forming part of block assets. Since goodwill was part of the block of assets and no such events occurred, the disallowance was not justified. The Tribunal emphasized the principle of consistency and allowed the depreciation claim. 2. Disallowance of Depreciation on Non-Compete Fees: The assessee contested the disallowance of Rs. 2,96,631/- depreciation on non-compete fees. The Tribunal reiterated its earlier decision, stating that non-compete fees were part of the block of assets and depreciation had been allowed in previous years. There was no sale, discarding, demolition, or destruction of the non-compete fees. Therefore, the disallowance was not proper, and the depreciation claim was allowed. 3. Disallowance under Section 14A Related to Interest and Administrative Expenses: The assessee challenged the disallowance of Rs. 33,20,000/- under section 14A read with Rule 8D(ii) for interest expenses and Rs. 13,77,000/- for administrative expenses. The Tribunal noted that Rule 8D of the Income Tax Rules 1962 is applicable prospectively from A.Y. 2008-09. Since the assessment year involved was 2005-06, the Tribunal held that the CIT(A) was not justified in applying Rule 8D. The Tribunal further observed that the assessee had provided sufficient evidence that investments in shares were made from its own funds, and the borrowed funds were used for business purposes. The Tribunal ruled that the disallowance of interest expenses was not sustainable and deleted it. For administrative expenses, the Tribunal directed the A.O. to restrict the disallowance to 2% of the total exempt income, in line with the assessee's acceptance in earlier years. 4. Reduction of Written Down Value of Block Assets Due to Capital Subsidy: The assessee raised the issue of reducing the WDV of block assets by the capital subsidy received. The Tribunal referred to its earlier decision, which followed the Supreme Court's ruling in P.J. Chemicals Ltd., holding that the subsidy could not be reduced from the block of assets for computing depreciation. The Tribunal allowed this ground and directed the A.O. to recompute the depreciation accordingly. Conclusion: The appeal of the assessee was partly allowed. The Tribunal ruled in favor of the assessee on the issues of depreciation on goodwill and non-compete fees, disallowance under section 14A for interest expenses, and reduction of WDV due to capital subsidy. The disallowance of administrative expenses was partly allowed, with a directive to restrict it to 2% of the total exempt income.
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