2014 (5) TMI 926 - AT - Income Tax

Claim of deduction u/s 35D of the Act Acquisition of manufacturing facility - Disallowance of deduction u/s 37(1) of the Act Legal and professional fees incurred Held that - The revenue authorities are themselves not sure, as to how the expenditure has to be treated thus, the most reasonable adjudication would be to set aside the findings of the CIT(A) on this issue and restore the issue to the AO with a direction to examine the nature of expense and come to one definite finding, i.e. whether the assessee was correct to invoke section 35D, or the AO was correct to treat it as revenue and in that case, the factum of TAS would be looked into, or the expense is a capital expenditure and if so, depreciation as per law has to be allowed Decided in favour of Assessee. Disallowance on incidental expenses Acquisition of assets capitalized - Excess claim of depreciation Held that - The acquisition of the machinery from Bilag is not disputed - the machinery is a capital asset and whatever expense is incurred on such outlay, it shall bear the character of capital and added to the cost - Relying upon Ciba Of India Limited Versus Commissioner Of Income-Tax 1993 (1) TMI 35 - BOMBAY High Court the amount would form part of the cost of the assessment for the purpose of depreciation thus, the additional depreciation, claimed by the assessee on Bilag machinery is to be allowed thus, the order of the CIT(A) is set aside and the AO is directed to allow the depreciation on the machinery that had been acquired from Bilag, and also include incidental expenses incurred on acquisition of assets - This would also include legal and professional expenses as incidental expenses Decided in favour of Assessee. Disallowance of professional fee reimbursed - Services provided by E&Y TDS not deducted - Held that - The expense is allowable, but the allowability of the expense is dependent on the deduction of TAS or exemption therefrom, is the onus, on the assessee to prove the correct reliance of legal provisions - there are invoices raised by the audit professionals and there upon, requests to the parent company, to make the payment to E&Y and BMR Associates - there is no evidence or agreement has been shown has to make the payment initially and also that there is any correspondence between the assessee and its parent for such an arrangement - The documents are essential to come to viable conclusion - the order of the CIT(A) be set aside and the AO is directed to take definite view Decided in favour of Assessee. Depreciation on goodwill and non-compete fee Held that - Following Commissioner of Income Tax, Kolkata Versus Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - intangibles like goodwill are eligible for depreciation - non compete fee is in the nature of the payment and is now covered u/s 28(va) of the Act, it would be revenue in nature the AO is directed to allow the depreciation on goodwill as per law and consider the payment of non-compete fee, in terms of section 28(va) Decided in favour of Assessee.

Issues Involved:
1. Disallowance of deduction claimed under Section 35D of the Income-tax Act, 1961.
2. Disallowance of legal and professional fees under Section 37(1).
3. Disallowance of incidental expenses capitalized with assets.
4. Disallowance of professional fees reimbursed to SCCL due to non-deduction of taxes at source.
5. Additional grounds regarding capitalization of legal and professional fees and depreciation on goodwill and non-compete fees.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction Claimed Under Section 35D:
The assessee claimed Rs. 14,27,727/- under Section 35D for expenses incurred on acquiring a manufacturing unit from Bilag Industries Pvt Ltd. The Assessing Officer (AO) disallowed this claim, stating that the assessee failed to provide evidence to satisfy the conditions under Section 35D. The CIT(A) upheld this disallowance, ruling the expenses as capital in nature and not allowable as revenue expenses. The ITAT directed the AO to re-examine the nature of the expenses and determine if they qualify under Section 35D or are capital expenses eligible for depreciation.

2. Disallowance of Legal and Professional Fees Under Section 37(1):
The assessee claimed Rs. 53,88,637/- as legal and professional fees under Section 37(1). The AO disallowed this due to non-deduction of taxes at source (TAS), invoking Section 40(a)(ia). The CIT(A) also disallowed the claim, treating the expenses as capital in nature. The ITAT noted the conflicting treatments by revenue authorities and remanded the issue to the AO for a definitive finding on whether the expenses qualify under Section 35D or as revenue expenses subject to TAS.

3. Disallowance of Incidental Expenses Capitalized with Assets:
The assessee capitalized incidental expenses of Rs. 1,13,57,742/- incurred on acquiring assets from Bilag and claimed depreciation. The AO disallowed this, applying Explanation 4A to Section 43(1), restricting the cost to the written-down value in Bilag's hands. The CIT(A) upheld this disallowance. The ITAT, referencing the Bombay High Court's decision in Ciba of India Ltd. vs CIT, ruled that incidental expenses should be capitalized and depreciation allowed accordingly. The ITAT directed the AO to allow depreciation on the machinery acquired from Bilag, including incidental expenses.

4. Disallowance of Professional Fees Reimbursed to SCCL:
The assessee reimbursed Rs. 23,74,987/- to SCCL for services provided by Ernst & Young, without deducting TAS. The CIT(A) disallowed this, stating that the payment to E&Y required TAS deduction. The ITAT noted the need for additional evidence to determine the nature of the payment and remanded the issue to the AO for a definitive view, considering the legal provisions and the nature of the transaction.

5. Additional Grounds:
The assessee raised additional grounds for capitalizing legal and professional fees and claiming depreciation on goodwill and non-compete fees. The ITAT directed the AO to allow depreciation on goodwill, referencing the Supreme Court's decision in Smifs Securities Ltd. However, the non-compete fee was deemed revenue in nature under Section 28(va) and should be allowed as revenue expenditure.

Conclusion:
The ITAT allowed the appeal for statistical purposes, directing the AO to re-examine the nature of expenses and apply the correct legal provisions, ensuring that depreciation on capitalized expenses and goodwill is appropriately allowed. The ITAT emphasized the need for a thorough and consistent approach in determining the eligibility of deductions and depreciation claims.

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