2013 (3) TMI 410 - AT - Income Tax

Unrecognized Gratuity Fund - Deduction Under Sec. 36(1)(v) or Section 37 of the Income-tax Act - Provision created towards excise duty payable on closing stock of finished goods - contingent liability - Disallowance of proportionate interest on the investments made and loans advanced to its subsidiary - Depreciation on the goodwill - Held that - Regarding Unrecognized Gratuity Fund We have also carefully gone through the provisions of sec. 37 of the Income-tax Act. Sec. 37 provides for deduction of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession - In our opinion, even if any payment is made to an unapproved gratuity fund, it has to be allowed under sec. 37. Regarding addition of excise duty payable tothe closing stock - held that - Following the judgement in ACIT vs. D & H Secheron Electrodes (P) Ltd (2007 (11) TMI 546 - MADHYA PRADESH HIGH COURT ) wherein the issue was decided in favour of the assessee. It was held that the Excise Duty payable should not be added to the closing stock. Accordingly, this ground of the Revenue is dismissed. Interest on amount advanced to subsidiary company - held that - In our opinion, the assessee used its own non interest bearing funds and there is no cost to the assessee and it is a business decision taken by the assessee to make an investment in subsidiary company and that even if it is resulted in no income to the assessee, the notional interest cannot be disallowed on the reason that the assessee should have used its non interest bearing funds for the purpose of its own business purpose instead using borrowed funds for its business. Regarding Depreciation on goodwill - held that - The true nature of the assets which are acquired by the assessee is business and commercial rights which is nothing but goodwill on which the assessee is entitled for depreciation u/s. 32(1)(ii) of the Act. There is no dispute in this case regarding the payment of Rs. 14,55,21,444 and the total value of the tangible assets is lesser than Rs. 5,57,38,146 and this is nothing but intangible assets in the form of technical knowhow, copy right, trademark, licences, franchisees and the claim of depreciation on these items is admissible and it fits within the description of section 32(1)(ii) of the Act. Our view is supported by the various judgements relied on by the assessee s counsel. Accordingly this ground of the Revenue is dismissed. - Decided against the assessee.

Issues Involved:
1. Deletion of addition in respect of gratuity payment to an unapproved fund.
2. Addition of Excise Duty on closing stock.
3. Disallowance of proportionate interest on investments and loans to subsidiary.
4. Depreciation on goodwill (intangible assets).

Issue-wise Detailed Analysis:

1. Deletion of Addition in Respect of Gratuity Payment to an Unapproved Fund:
The Revenue challenged the CIT(A)'s deletion of Rs. 2,41,633 related to gratuity payment, arguing the fund was not recognized by the Commissioner of Income-tax. The Tribunal referenced a similar issue in the assessee's case for AY 2002-03, where it was ruled that payments to an unapproved gratuity fund could be deducted under sec. 37 of the Income-tax Act, despite not being deductible under sec. 36(1)(v). The Tribunal upheld the CIT(A)'s order based on the jurisdictional High Court's judgment in Warner Hindustan Ltd., which allowed such deductions under sec. 37.

2. Addition of Excise Duty on Closing Stock:
The Revenue contended that the provision for excise duty on closing stock was a contingent liability and should not be allowed. The Tribunal referred to its decision in DCIT vs. Suryalata Spinning Mills (P) Ltd., and the Madhya Pradesh High Court judgment in ACIT vs. D & H Secheron Electrodes (P) Ltd., which supported the assessee's position that excise duty payable should not be added to the closing stock. Consequently, this ground was dismissed.

3. Disallowance of Proportionate Interest on Investments and Loans to Subsidiary:
The Revenue disputed the CIT(A)'s deletion of Rs. 46,17,110 disallowed by the Assessing Officer for interest on advances to a sister concern. The Assessing Officer claimed the advances were made from interest-bearing borrowed funds. However, the CIT(A) found that the advances were from the assessee's own resources, not interest-bearing funds. The Tribunal referenced its previous decisions in the assessee's favor for AY 2002-03 to 2005-06, which established that the assessee used its own non-interest-bearing funds for the investment. The Tribunal ruled that the business decision to invest in the subsidiary, even if it resulted in no income, could not be second-guessed by the Assessing Officer. Thus, this ground was decided against the Revenue.

4. Depreciation on Goodwill (Intangible Assets):
The Revenue challenged the CIT(A)'s allowance of depreciation on intangible assets, including goodwill, claimed by the assessee following the amalgamation of M/s. Arandy Laboratories Ltd. The Assessing Officer denied the depreciation, arguing there was no evidence of the purchase of intangible assets. The CIT(A) allowed the claim, and the Tribunal upheld this decision, citing various judgments that supported the depreciation on goodwill as a commercial right under sec. 32(1)(ii) of the Act. The Tribunal noted that the excess of liabilities over assets acquired in the amalgamation represented intangible assets like technical know-how, licenses, and other business rights, which qualified for depreciation.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The key legal principles involved were the deductibility of payments to unapproved gratuity funds under sec. 37, the non-inclusion of excise duty in closing stock, the proper allocation of interest-free advances from non-interest-bearing funds, and the allowance of depreciation on goodwill as an intangible asset under sec. 32(1)(ii).

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