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2014 (1) TMI 588 - AT - Income TaxComputation of deduction u/s 80HHC of the Act Reduction of 90% of miscellaneous income Income treated as non-operational business income - Held that - miscellaneous income consist mainly of scrap sales, sales tax refund and discount - Nowhere it is mentioned that exchange gain is also included - Be that as it may, if there is any exchange gain involved the assessee is entitled for deduction under section 80HHC - the Assessing Officer was directed not to reduce 90% of Miscellaneous income from the eligible business profits for the purpose of computation of deduction u/s 80HHC - Decided against Revenue. Allowability of Expenses Bad debts u/s 36(i)(vii) r.w. 36(2) of the Act OR business loss u/s 37(1) of the Act Held that - The assessee has not written off the amount as bad debt but has claimed loss on assignment due to transfer of the debtors by a deed of assignment - for claiming the bad debt as allowable under the provisions of the Income Tax Act the same must be written off in conformity with the provisions of the Income Tax Ac - By transferring the debt to Mahindra & Mahindra Ltd., the assessee has lost the ownership over the debts - the assessee has made the provisions of section 41(4) redundant - the assessee has not shown any income on account of recovery of part of such debt since the assessee has assigned the debts to Mahindra & Mahindra. It is not the business of the assessee to assign debts - the assessee, i.e. the assignor has undertaken to collect the debts on behalf of the assignee and has remitted the same periodically - The submission of the assessee that M/s. Mahindra & Mahindra Ltd. has paid tax on the debts so recovered and therefore taxing the same in the hands of the assessee amount to double taxation is without any merit Thus, the contention of the assessee that amount of Rs.1,34,99,999/- should be allowed either as a bad debt or a business loss cannot be accepted - the assessee has adopted a colourable device to compensate Mahindra & Mahindra for the surrender of their 51% shareholding and therefore this is a capital expenditure Decided against Assessee. Nature of Expenses Capital OR Revenue expenditure Expenses paid for use of trade name Expenses treated as payment made for purchase of goodwill Depreciation not allowed on these expenditure Held that - There is no dispute to the fact that the assessee has incurred expenditure of Rs.75 lakhs being one time licence fee paid to the owner for granting to the user, the licence to continue to use the trade mark as per the name licence agreement dated 18-07-2002 - the assessee treated the same as Revenue expenditure in the books - Assessee contended that the entire amount should be allowed as Revenue expenditure the decision given in CIT Vs. SMIFS Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT followed - goodwill under Explanation 3(b) of section 31(2) of the Act is eligible for depreciation - Thus, the order of the CIT(A) set aside and the matter remitted back to the AO to allow depreciation on the goodwill Decided in favour of Assessee. Disallowance of Prepaid charges Charges paid in respect of debentures issued Held that - Decision of the SC in CIT Vs. Ashok Leyland Ltd. 1972 (10) TMI 1 - SUPREME Court followed - The amount incurred by the assessee being prepayment charges paid in respect of debentures issued are expenses incurred for the purpose of business and the same is an allowable expenditure Decided in favour of Assessee.
Issues Involved:
1. Computation of deduction under section 80HHC regarding miscellaneous income. 2. Disallowance of loss on assignment of debt under sections 37(1) and 36(1)(vii). 3. Treatment of payment for use of trade name as capital expenditure and depreciation on goodwill. 4. Disallowance of prepayment charges on debentures as business expenditure. Detailed Analysis: 1. Computation of Deduction under Section 80HHC Regarding Miscellaneous Income: The revenue contested the CIT(A)'s direction to the Assessing Officer (AO) not to reduce 90% of miscellaneous income from eligible business profits for the purpose of section 80HHC deduction computation. The AO had recomputed the deduction by reducing 90% of the miscellaneous income, which included sales tax refund, sale of scrap, and exchange gain, among others. The CIT(A) allowed the assessee's claim, following the Tribunal's decisions in the assessee's own case for prior years. The Tribunal upheld the CIT(A)'s order, noting consistency with earlier decisions and dismissing the revenue's appeal. 2. Disallowance of Loss on Assignment of Debt: The assessee claimed a loss of Rs.1,34,99,999 on the assignment of debt as a revenue expenditure under section 37(1) or as a bad debt under section 36(1)(vii). The AO disallowed the claim, treating it as a capital expenditure, arguing that the assignment was part of the consideration for shareholding transfer and not a genuine business loss. The CIT(A) upheld the AO's decision, stating that the loss was not incurred for business purposes but due to an agreement with the purchaser of shares. The Tribunal supported the lower authorities, emphasizing that the assignment was a colorable device to compensate for shareholding surrender and thus a capital expenditure, not allowable as a bad debt or business loss. 3. Treatment of Payment for Use of Trade Name: The assessee paid Rs.75,00,000 for the use of the trade name "Mahindra" for two years. The AO allowed only 50% of the expenditure, treating it as deferred revenue expenditure. The CIT(A) enhanced the assessment, treating the entire amount as a capital expenditure for acquiring goodwill, on which no depreciation was allowable. The Tribunal, referencing the Supreme Court's decision in CIT vs. SMIFS Securities Ltd., held that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii). Thus, it directed the AO to allow depreciation on the goodwill, dismissing the assessee's claim for full revenue expenditure but allowing depreciation. 4. Disallowance of Prepayment Charges on Debentures: The assessee incurred Rs.43,34,000 as prepayment charges for debentures, which the AO disallowed, stating there was no contractual obligation for such payment and it was not for raising money but for returning it. The CIT(A) upheld the AO's decision. The Tribunal, however, found merit in the assessee's argument that the expenditure was incurred to relieve future financial burdens, aligning with commercial expediency. Citing precedents, including the Supreme Court's decision in CIT vs. Ashok Leyland Ltd., the Tribunal allowed the prepayment charges as a revenue expenditure, setting aside the CIT(A)'s order. Conclusion: The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, providing relief on the issues of depreciation on goodwill and prepayment charges on debentures while upholding the disallowance of the loss on assignment of debt and the treatment of miscellaneous income for section 80HHC deduction.
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