2014 (1) TMI 650 - AT - Income Tax

Disallowance on account of reimbursement of warranty claims - Nature and allowability of Expenses Expenses incurred to be treated as business expenses or not Held that - HML is the seller and not the assessee company - even if any liability is taken over by the assessee as a part of business purchase agreement, discharge of such liability cannot be claimed as a revenue expenditure - the purchase of business is a purchase of a capital asset - so far as customers are concerned, they are duly satisfied because their rights under the warranty have been met by HML - So far as customer satisfaction is concerned, it is irrelevant whether the assessee reimbursed the liability to HML or not - reimbursement of the warranty claims by the assessee to HML has no business expediency Decided against Assessee. Disallowance of Depreciation on capitalization of professional charges Held that - The cost of the assets was determined after allocation of professional charges - the Department cannot take a different stand in different years in respect of allowability of depreciation in respect of professional charges capitalized and allocated to the cost of various assets. In this case, in the first two years, i.e., AY 2006-07 and 2007-08, the Assessing Officer has disallowed the depreciation - in the subsequent years, as per the contention of the assessee, the depreciation on the professional charges has been allowed in the orders passed under Section 143(3) thus, there would not be any justification for disallowance of depreciation on the professional charges in the earlier years order set aside and the matter remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of reimbursement of warranty claims.
2. Disallowance of claim of depreciation on capitalization of professional charges.

Issue 1: Disallowance of Reimbursement of Warranty Claims:
The appeal was against the disallowance of Rs. 9,96,228 on account of reimbursement of warranty claims for the assessment year 2006-07. The appellant argued that the reimbursement was a revenue expenditure incurred for the business purpose as per the business transfer agreement with Hindustan Motors Ltd. The appellant contended that the warranties became its liability after purchasing the business and were essential for maintaining goodwill. However, the Department argued that the warranties were the liability of the seller, HML, and any liability taken over during the purchase agreement would be capital expenditure. The Tribunal held that even though the appellant purchased the business, the specific clause in the agreement stated that warranties were of the seller, HML. The Tribunal rejected the appellant's claim based on business expediency, stating that the warranties were already fulfilled by HML, and reimbursing them had no commercial expediency. Thus, the Tribunal upheld the disallowance of the warranty claims.

Issue 2: Disallowance of Depreciation on Capitalization of Professional Charges:
The appeal challenged the disallowance of depreciation amounting to Rs. 8,83,995 on the capitalization of professional charges of Rs. 84,38,347. The appellant argued that the professional charges were capitalized and allocated to assets purchased as per the business transfer agreement, and depreciation was claimed on those assets. The Department disallowed depreciation on the professional charges added to the asset value. The appellant highlighted that in subsequent years, depreciation on such charges was allowed by the Revenue. The Tribunal noted that the Department's inconsistent treatment of depreciation on professional charges was unjustified. While the depreciation was disallowed in the initial years, it was allowed in later years. As there was no discussion in the assessment orders for subsequent years, the Tribunal directed the matter to be verified by the Assessing Officer for consistency. The Tribunal deemed the appeal partly allowed, emphasizing the need for a consistent approach in allowing depreciation on professional charges.

In conclusion, the Tribunal upheld the disallowance of reimbursement of warranty claims but directed a review of the disallowance of depreciation on professional charges for consistency in treatment across assessment years.