2013 (5) TMI 224 - AT - Income Tax

Depreciation on goodwill disallowed - Held that - This issue is no more res integra in view of the judgment of CIT v. Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT wherein excess consideration paid by assessee over the value of net asset acquired was considered as goodwill on which depreciation was claimed. In favour of assessee. Disallowance u/s 14A as per Rule 8D - Held that - As the assessment year involved is 2004-2005. As decided in Godrej Boyce Ltd. Mfg. Co. v. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT provisions of Rule 8D cannot be applied to any assessment year prior to 2008-2009 - matter sent back to the AO for working out of disallowance under this provision on reasonable basis. Disallowance of u/s 145A - difference between the Cenvat addition to opening and closing stock of raw material and packing material - Held that - According to the prescription of section 145A the amount of tax, duty, cess etc. is liable to be included in the value of purchases, sales, opening and closing stock. It is not appropriate to include the closing CENVAT in the figure of closing stock without modifying the figures of purchases, sales and opening stock. See CIT Vs. Mahalaxmi Glass Works Pvt. Ltd. 2009 (4) TMI 182 - BOMBAY HIGH COURT and CIT Vs. Mahavir Alluminium 2007 (11) TMI 41 - HIGH COURT, DELHI - store the matter to the file of A.O. as the authorities have not properly adjusted other figures with the amount of tax, duty, cess etc.

Summary

Issues Involved:
1. Depreciation on Goodwill
2. Disallowance under Section 14A
3. Disallowance under Section 145A

Detailed Analysis:

1. Depreciation on Goodwill:
- Issue: Confirmation of disallowance of depreciation on goodwill.
- Analysis: The assessee acquired the business of M/s. Dhariwal Nonwovens and capitalized the goodwill in the books of account, claiming depreciation. The Assessing Officer (AO) disallowed this claim, which was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. The Tribunal referred to the Supreme Court judgment in CIT v. Smifs Securities Ltd., which affirmed that goodwill is an asset under Section 32 of the Income-tax Act, 1961, and eligible for depreciation.
- Conclusion: The Tribunal held that goodwill is an asset eligible for depreciation, thus allowing the assessee's claim.

2. Disallowance under Section 14A:
- Issue: Confirmation of disallowance made under Section 14A regarding exempt dividend income.
- Analysis: The assessee earned exempt dividend income but did not disallow any expenditure voluntarily under Section 14A. The AO computed the disallowance as per Rule 8D, which was upheld by CIT(A). The Tribunal noted that Rule 8D cannot be applied to assessment years prior to 2008-2009, as held by the jurisdictional High Court in Godrej & Boyce Ltd. Mfg. Co. v. DCIT. Therefore, for the assessment years in question, the disallowance should be computed on a reasonable basis.
- Conclusion: The Tribunal vacated the CIT(A)'s findings and remitted the matter to the AO to compute the disallowance on a reasonable basis.

3. Disallowance under Section 145A:
- Issue: Confirmation of disallowance due to the difference between the Cenvat addition to opening and closing stock of raw material and packing material.
- Analysis: The AO observed that the assessee followed the exclusive method of accounting for valuing inventory and made additions accordingly, upheld by CIT(A). Section 145A mandates inclusion of tax, duty, cess, etc., in the valuation of purchases, sales, opening, and closing stock. The Tribunal referred to the jurisdictional High Court's judgment in CIT Vs. Mahalaxmi Glass Works Pvt. Ltd. and the Delhi High Court's judgment in CIT Vs. Mahavir Aluminium, which support this inclusion.
- Conclusion: The Tribunal set aside the impugned order and restored the matter to the AO for fresh decision in accordance with the judgments and Section 145A provisions.

Separate Judgments Delivered:
- The judgments for different assessment years and different assessees (M/s. Bhilad Textile Industries Pvt. Ltd. and M/s. Supreme Nonwovens Pvt. Ltd.) were consistent in their conclusions regarding the issues of depreciation on goodwill, disallowance under Section 14A, and disallowance under Section 145A. The Tribunal followed the same legal principles and precedents for each case, ensuring uniformity in the application of the law.