2010 (12) TMI 700 - AT - Income Tax

Disallowance - Slump sale - advertisement and sales promotion - Revenue or capital expenditure - The main contention of the revenue is that the assessee was creating a Brand in India and the same is in the nature of intangible asset as contemplated in section 31(1)(ii) providing rights to the assessee - Held that the provisions of section 32(1)(ii) of the Act, as amended by the Finance (No.2) Act, 1988 with effect from 1.4.1999 are not applicable to the present case. The assessee has not acquired any intangible asset on or after 1.4.1998 so that only depreciation will be allowed on the same and not the expenditure incurred in acquiring them. - expenditure are revenue in nature. Regarding voluntary retirement scheme - Deduction u/s 35DDA or 37(1) - since the assessee did not conform to the guidelines laid down under Rule 2BA / 35DDA, provisions of section 35DDA are not applicable - amount paid under VRS allowed as deduction u/s 37(1). Regarding depreciation - whether in case of slump sale, depreciation has to be allowed on the assets sold in slump sale up to the date of transfer or no depreciation is to be allowed on assets transferred for the year in which such transfer takes place in terms of section 43(6)(c)(i)(C)(b). - Held that - Assessing Officer was right in computing depreciation for the period from 1.4.2002 to 30.3.2003 and reducing the same while computing the value of assets transferred in slump sale. Whether in view of section 43(6)(c)(i)(C)(b) only depreciation actually absorbed against the profits is to be taken into consideration or allowable depreciation has to be computed for all the years after 1.4.1988 for computing value of assets to be reduced from block of asset irrespective of the fact whether in the books the assessee had charged depreciation or not. - Held that - Depreciation is to be charged for the period from 1.4.2002 to 30.3.2003 while computing the actual cost of the assets transferred by way of slump sale. - The depreciation allowable on the assets for the period upto 31.3.2002 has to be taken into consideration while computing the actual cost of the assets transferred by way of slump sale.

Issues Involved:
1. Disallowance on account of advertisement and sales promotion expenses.
2. Disallowance under section 35DDA.
3. Disallowance under section 43B/36(1)(va) r.w.s 2(24)(x).
4. Disallowance out of expenses on stores and consumables.
5. Re-computation of long-term capital gain.

Detailed Analysis:

1. Disallowance on Account of Advertisement and Sales Promotion Expenses:
The Revenue challenged the deletion of disallowance of Rs.1,11,00,000/- for advertisement expenses and Rs.1,72,00,000/- for sales promotion expenses, arguing these were capital expenditures for building the company's brand. The Tribunal upheld the CIT(A)'s decision, noting that similar disallowances were deleted in earlier years (1999-00 and 2001-02). The Tribunal found that the expenditures were incurred wholly and exclusively for business purposes and did not result in an enduring benefit. The Tribunal cited various case laws, including CIT vs. Geoffrey Manners and Co. Ltd., and concluded that the expenditures were in the revenue field.

2. Disallowance Under Section 35DDA:
The assessee claimed Rs.17,00,000/- paid to an employee under a voluntary retirement scheme (VRS) as a deduction under section 37(1). The Assessing Officer (AO) disallowed this, applying section 35DDA, which mandates spreading such expenses over five years. The CIT(A) allowed the deduction, noting there was no formal VRS scheme, thus section 35DDA did not apply. The Tribunal upheld the CIT(A)'s decision, emphasizing the need for a formal scheme to invoke section 35DDA.

3. Disallowance Under Section 43B/36(1)(va) r.w.s 2(24)(x):
The AO disallowed Rs.7,72,285/- for late payment of provident fund contributions. The CIT(A) allowed payments made immediately after holidays but upheld disallowance for payments made beyond due dates. The Tribunal agreed with the CIT(A), allowing payments made the next day after holidays and disallowing the late payment for December 2002.

4. Disallowance Out of Expenses on Stores and Consumables:
The AO disallowed Rs.19,44,000/- for unutilized stores and consumables transferred to Cadbury India Ltd. (CIL) in a slump sale. The CIT(A) deleted the disallowance, accepting the assessee's reconciliation of inventory. The Tribunal upheld the CIT(A)'s decision, noting the reconciliation was adequately explained.

5. Re-computation of Long-term Capital Gain:
The AO computed long-term capital gain at Rs.12,78,80,383/- against a declared loss of Rs.6,53,72,000/-. The CIT(A) directed the AO to re-compute the gain after considering Rs.23,45,000/- claimed as bad debts. The Tribunal noted that the assessee's methodology of writing off bad debts against provisions met the requirements of write-off as per the Supreme Court's decision in T.R.F. Ltd. vs. CIT. Thus, the Tribunal allowed the claim for bad debts to the extent of Rs.23,31,000/- and directed the AO to re-compute the capital gain accordingly.

Additional Grounds and Cross Objections:
- Depreciation on Advertisement and Sales Promotion Expenses: The Tribunal dismissed this ground as it was contingent upon the Revenue's appeal, which was dismissed.
- Set-off of Brought Forward Depreciation: The Tribunal restored the issue to the AO for re-computation in accordance with the Special Bench decision in DCIT vs. Times Guaranty Ltd.
- Depreciation Computation: The Tribunal upheld the AO's computation of depreciation, rejecting the assessee's contention that depreciation should not be thrust upon them for earlier years. The Tribunal directed the AO to recompute the actual cost of assets transferred in the slump sale as per section 43(6)(c)(i)(C).

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, allowing the assessee's claims for advertisement and sales promotion expenses, voluntary retirement payments, and reconciliation of inventory. However, it directed the AO to recompute the long-term capital gain and the net worth of assets transferred in the slump sale, considering allowable depreciation. The Tribunal also restored the issue of set-off of brought forward depreciation to the AO for re-computation as per the relevant legal provisions.

← Previous Next →