2015 (1) TMI 910 - AT - Income Tax

Addition u/s 40A(2)(b) - royalty/supervision charges - CIT(A) deleted the addition - Held that - No material has been brought on record by the Assessing Officer to show that M/s. Alkyl Amines and Chemicals Ltd was not in possession of technical know-how and technical now-how was not provided to the assessee. Further no material was also brought on record to show that the royalty @ 2% of the sale value was in excess of the fair market value prevailing at the material time for the technical know-how in consideration of which the royalty was paid. In such circumstances in our considered view no interference with the order of the CIT(A) is warranted.Similarly in respect of sale commission and supervision charges we find that no material was brought on record by the Revenue to controvert the claim of the assessee that the same was paid for services received or to show that the payments were more than the fair market value of such services. We therefore do not find any good reason to interfere with the order of the CIT(A) which is hereby confirmed and the grounds of appeals of the Revenue are dismissed. - Decided against revenue. Depreciation on goodwill - Held that - Explanation 3 to section 32(1) states that the expression asset shall mean an intangible asset being know-how patents copyrights trademarks licenses franchises or any other business or commercial rights of similar nature. A reading of the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial rights of a similar nature . The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3 (b) (para 4). In view of the above it is opined that Goodwill is an asset under Explanation 3(b) to section 32(1). (Para 5). - Decided in favour of assessee. Carpeting of existing road - revenue v/s capital - Held that - it is not in dispute that the expenditure of 2, 26, 191/- was incurred for resurfacing of existing road. Thus the expenditure incurred was on account of maintenance of existing road. No material was brought on record by the Revenue to show that the expenditure in question was incurred for acquiring any new asset hence revenue innature. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition made under section 40A(2)(b) on account of royalty/supervision charges.
2. Allowance of depreciation on goodwill.
3. Treatment of expenditure on resurfacing of existing road as capital or revenue expenditure.

Detailed Analysis:

1. Deletion of Addition Made Under Section 40A(2)(b) on Account of Royalty/Supervision Charges

Facts and Arguments:
The Revenue appealed against the deletion of additions made under section 40A(2)(b) by the CIT(A) for Assessment Years 2001-02, 2002-03, and 2005-06. The Assessing Officer (AO) had disallowed these expenses, arguing that payments were made to loss-making sister concerns to reduce tax liability. The AO noted that the services provided were general in nature and that the assessee failed to furnish supporting evidence for the reasonableness of these payments.

CIT(A) Findings:
The CIT(A) found that the payments were justified by the results obtained, as the assessee started making operational profits from AY 2001-02 onwards. The CIT(A) held that no material was brought on record to show that the payments exceeded the fair market value of the services received.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that no evidence was presented by the AO to show that the payments were excessive or unreasonable. The Tribunal confirmed that the payments were made for genuine services received and were in line with the fair market value.

2. Allowance of Depreciation on Goodwill

Facts and Arguments:
The Revenue contested the CIT(A)'s decision to allow depreciation on goodwill in Assessment Year 2005-06, while the assessee appealed against the disallowance of depreciation on goodwill in Assessment Year 2002-03. The AO had disallowed the depreciation, arguing that goodwill does not qualify for depreciation.

CIT(A) Findings:
For AY 2005-06, the CIT(A) allowed the claim based on Tribunal decisions in similar cases, holding that goodwill is an intangible asset eligible for depreciation. However, for AY 2002-03, the CIT(A) upheld the AO's disallowance.

Tribunal's Decision:
The Tribunal referred to the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which held that goodwill is an asset under Explanation 3(b) to section 32(1) and is eligible for depreciation. Consequently, the Tribunal confirmed the CIT(A)'s decision for AY 2005-06 and directed the AO to allow depreciation on goodwill for AY 2002-03.

3. Treatment of Expenditure on Resurfacing of Existing Road as Capital or Revenue Expenditure

Facts and Arguments:
The AO treated the expenditure of Rs. 2,26,191/- on resurfacing an existing road as capital expenditure, arguing it extended the life of the asset. The CIT(A) disagreed, treating it as revenue expenditure.

CIT(A) Findings:
The CIT(A) held that the expenditure was for resurfacing an existing road, thus qualifying as maintenance rather than the acquisition of a new asset.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, finding no evidence that the expenditure was for acquiring a new asset. The Tribunal confirmed that the expenditure was for maintenance and thus should be treated as revenue expenditure.

Conclusion:
- The Tribunal dismissed the Revenue's appeals for Assessment Years 2001-02, 2002-03, and 2005-06, confirming the CIT(A)'s decisions.
- The Tribunal allowed the assessee's appeal for Assessment Year 2002-03, directing the AO to allow depreciation on goodwill.

Order Pronouncement:
The order was pronounced in the Court on Friday, the 16th of January, 2015, at Ahmedabad.