2014 (2) TMI 263 - AT - Income Tax

Validity of re-assessment u/s 147 - Held that - Assessee has not claimed any deduction in respect of unpaid sales tax liability of Alpa Marketing Enterprises of Rs. 16,180/- since beginning - The question of any disallowance of this amount or escaping any income from assessment did not arise - The re-opening of assessment was not valid - Decided in favour of assessee. Disallowance of depreciation - Held that - Assessee has paid Rs. 80 lacs towards intangible assets on acquisition of business of M/s. Alpa Marketing Enterprises - This consideration was paid towards intangible assets on acquisition of business and be considered as the goodwill - Relying upon the decision in CIT vs. Smith Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - Goodwill was an asset as per explanation 3 to Section 32(1) of the Act and therefore depreciation on the same should be allowed - The issue has been restored for fresh adjudication. Non-granting of credit for TDS - Held that - Income relating to this TDS has been offered in assessment year 01-02 & 2002-03 but TDS certificate was received late - The credit of tax was claimed during the year under appeal - Decided in favour of assessee. Disallownace of interest expenses - Held that - Funds borrowed by assessee were used by the assessee for business purposes and interest was paid by assessee to the lender and same was offered to tax - The AO has observed the requirement of funds by the appellant - The borrowings so made are represented by the business assets of the appellant, it is not the case that the amount so obtained has been diverted for non-business purpose - The disallowance should be deleted - Decided against Revenue.

Summary

Issues Involved:
1. Validity of Notice under Section 148 of the Income Tax Act.
2. Validity of Re-assessment under Section 147 of the Income Tax Act.
3. Disallowance of Depreciation.
4. Non-granting of TDS Credit.
5. Disallowance of Interest Expenses under Section 40A(2)(a).

Issue-wise Detailed Analysis:

1. Validity of Notice under Section 148 of the Income Tax Act:
The assessee challenged the issuance of the notice under Section 148 of the Income Tax Act, claiming it was based on a mere change of opinion and thus void ab-initio. The original assessment was completed under Section 143(3) on 31-01-2004. The notice under Section 147 was issued on 05-04-2004, alleging unpaid sales tax liability of Rs. 16,184/- was not incorporated in the tax audit report. The Ld. CIT(A) upheld the validity of the notice, stating that the outstanding liability was not verified during the original assessment. However, the Tribunal found that the assessee had not claimed any deduction for the unpaid sales tax liability, and thus, there was no escapement of income. Consequently, the Tribunal quashed the notice under Section 148 and allowed the assessee's appeal.

2. Validity of Re-assessment under Section 147 of the Income Tax Act:
The re-assessment was initiated based on the unpaid sales tax liability not being incorporated in the tax audit report. The assessee argued that the re-assessment was merely a change of opinion and thus invalid. The Tribunal agreed with the assessee, noting that no deduction for the unpaid sales tax liability was claimed, and therefore, there was no escapement of income. The Tribunal quashed the re-assessment order under Section 147, holding it unsustainable in law.

3. Disallowance of Depreciation:
The assessee claimed depreciation of Rs. 8,20,313/- on a license fee of Rs. 50 lacs paid for acquiring the business of Alpa Marketing Enterprises. The AO disallowed the depreciation, stating that the lump sum payment was for the goodwill of the business and not for any depreciable asset. The Tribunal restored the matter to the AO for fresh adjudication, considering the assessee's new argument that the payment should be considered as goodwill, which is eligible for depreciation as per the Supreme Court's decision in CIT vs. Smith Securities Ltd.

4. Non-granting of TDS Credit:
The assessee claimed TDS credit of Rs. 89,152/- for the year under appeal, arguing that the TDS certificate was received late. The AO and Ld. CIT(A) denied the credit, stating it should be claimed in the year the corresponding income was offered. The Tribunal allowed the assessee's claim, directing that the TDS credit be given in the years the income was offered.

5. Disallowance of Interest Expenses under Section 40A(2)(a):
The AO disallowed interest expenses of Rs. 22,99,322/- paid to a related party, Niya Finstock Pvt. Ltd., under Section 40A(2)(a), arguing that the borrowing was not required for the business and was intended to divert profits. The Ld. CIT(A) deleted the disallowance, noting that the borrowed funds were used for business purposes. The Tribunal upheld the Ld. CIT(A)'s decision, finding no evidence that the borrowing was intended to reduce tax liability or divert profits.

Conclusion:
The Tribunal allowed the assessee's appeals regarding the validity of the notice under Section 148, the re-assessment under Section 147, and the TDS credit claim. It restored the issue of depreciation disallowance to the AO for fresh adjudication and upheld the Ld. CIT(A)'s deletion of the interest expenses disallowance. The revenue's appeal was dismissed.