2013 (10) TMI 756 - AT - Income Tax

Depreciation on goodwill - Goodwill acquired on the retirement of a partner Held that - Though the partner retired, the partnership firm continued as such with new partners. The partnership firm being a separate and independent assessable unit, it continued its business through its new partners. Therefore, the assets and liabilities of the firm continued as such. The tangible and intangible asset including all its commercial rights, like goodwill, trademark, etc. continued with the partnership firm. What was paid to the retiring partner is his share of capital and not a cost for acquisition of any right from him - No part of the goodwill was acquired by the partnership firm while making payment to the retiring partner. In fact, the right of the partner on the partnership asset is ceased to exist on settlement of his capital account Therefore, goodwill has no value and hence, no question of any depreciation Decided against the Assessee. Profit on the sale of vehicle Held that - The taxpayer has not shown the profit or loss arising out of sale of the vehicles in the profit & loss account. The details of the persons to whom the vehicles were sold are not available on record Therefore, addition made @10% as profit over and above the book value, by A.O. is confirmed Decided against the Assessee. Whether the payment of interest @18% to the relatives of the partners is fair or excessive Held that - This excessive rate of interest payment to be adjudged on the basis of the rate of interest prevailing in the market - When the banks are charging interest at 16% to 25% for providing loans to the citizens, this Tribunal is of the considered opinion that paying interest @18% to the relatives of the partners cannot be considered to be excessive or unreasonable. The matter may be different if the rate of interest charged by the taxpayer exceeds the bank interest Rate of payment is reasonable Decided in favor of Assessee. Concealment of income Penalty under section 271(1)(c) of the Income Tax Act Held that - The details of the borrowed funds which were given to the sister concern of the taxpayer are available on record. What was found during the course of survey is the investment made by the sister concern in the capital asset - This does not amount to concealment of any part of income or furnishing inaccurate particulars. It is a difference of opinion between the assessing officer and the taxpayer with regard to a claim made.

Summary

Issues Involved:
1. Disallowance of interest on borrowed funds.
2. Disallowance of depreciation on goodwill.
3. Profit on sale of vehicle.
4. Disallowance of sales promotion expenses.
5. Disallowance of interest paid to relatives of partners.
6. Penalty under section 271(1)(c) of the Act.

Detailed Analysis:

1. Disallowance of Interest on Borrowed Funds:
The primary issue in ITA No.78/Coch/2010 for the assessment year 2004-05 was the disallowance of interest on borrowed funds. The taxpayer borrowed Rs.135 lakhs from its partners and diverted part of these funds to its sister concern, M/s Oberon Edifies & Estates (P) Ltd, which used the funds for business purposes. The taxpayer filed a revised return disallowing the interest paid on the diverted funds. The Tribunal confirmed the disallowance of Rs.7,01,233 since the taxpayer admitted the disallowance in the revised return and could not re-agitate the matter.

2. Disallowance of Depreciation on Goodwill:
In ITA No.79/Coch/2010 and related appeals, the issue was the disallowance of depreciation on goodwill. The taxpayer argued that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii). The Tribunal upheld the lower authorities' decision, stating that the payment to the retiring partner was his share of capital and not for acquiring any commercial right like goodwill. Hence, the taxpayer was not eligible for depreciation on goodwill.

3. Profit on Sale of Vehicle:
The taxpayer sold vehicles at book value but did not provide details of the sale in the profit & loss account or the names of the buyers. The assessing officer estimated a profit of 10% over the book value and made an addition of Rs.72,403. The Tribunal found no infirmity in the orders of the lower authority due to the lack of details provided by the taxpayer.

4. Disallowance of Sales Promotion Expenses:
The taxpayer claimed Rs.4,72,485 towards sales promotion expenses, supported only by self-made vouchers. The assessing officer disallowed Rs.1 lakh due to the possibility of inflated expenses. The Tribunal confirmed the disallowance in the absence of further supporting material.

5. Disallowance of Interest Paid to Relatives of Partners:
In ITA No.80/Coch/2010 for the assessment year 2005-06, the issue was the disallowance of interest paid to relatives of partners. The taxpayer paid interest at 18% to relatives, while paying 12% to partners. The Tribunal held that paying interest at 18% to relatives was reasonable, given the market rates charged by banks (16% to 25%). Therefore, the disallowance of Rs.6,30,000 was deleted.

6. Penalty under Section 271(1)(c) of the Act:
In ITA No.514/Coch/2010 for the assessment year 2006-07, the issue was the penalty levied under section 271(1)(c). The taxpayer claimed interest on borrowed funds given to a sister concern for business purposes. The Tribunal found that the taxpayer provided all relevant details and accepted the assessing officer's suggestion by filing a revised return. The Tribunal held that there was no concealment of income or furnishing of inaccurate particulars, thus deleting the penalty.

Conclusion:
The appeals in ITA Nos.78, 79 & 81/Coch/2010 and ITA Nos.02, 03, 04 & 05/Coch/2011 were dismissed, while ITA Nos.80/Coch/2010 & ITA No.514/Coch/2010 were allowed.