2015 (4) TMI 718 - AT - Income Tax

Depreciation on goodwill - CIT(A) allowed the claim - Held that - Tribunal in the case of the assessee in the assessment year 2006-07 confirmed the order of the Commissioner of Income-tax (Appeals) allowing the claim of depreciation on goodwill to the assessee and dismissed the appeal of the Revenue as relying on B. Raveendran Pillai v. CIT 2010 (9) TMI 434 - Kerala High Court wherein held the assessee was entitled to claim depreciation on the name, trade mark and logo under the specific head provided under section 32(1)(ii) which covered trade mark and franchise. Admittedly the hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. By transferring the rights to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who were patients of the previous owners. When the good will paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial rights and it was comparable with trade mark, franchise, copyright, etc. referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation - decided in favour of assessee. Disallowance of building repair expenses - there was no check to identify whether the expenditure was capital or revenue in nature made a disallowance of ₹ 2,50,000 out of building repairs claimed by the assessee as per AO - CIT(Appeals) allowed the deduction - Held that - CIT (Appeals) allowed the deduction to the assessee by observing that looking at the nature of expenses and condition of building which was rented one, the expenditure appears to be regularly incurred on monthly basis as per requirement to maintain the building, and therefore, it was revenue in nature. The Departmental representative merely relied on the order of the Assessing Officer. No material could be brought on record to show that any part of the expenditure of ₹ 2,50,000 allowed by the CIT (Appeals) was capital and not revenue expenditure. Hence, we find no infirmity in the order of the CIT(Appeals) - Decided against revenue. Disallowance u/s 14A - CIT(A) deleted the addition - Held that - Assessing Officer has not shown any nexus between the borrowed funds of the assessee and the investment made by the assessee to establish that the borrowed funds were utilised by the assessee in making the investments. Therefore, we find no error in the order of the Commissioner of Income-tax (Appeals) holding that the assessee had interest-free funds far in excess of the investment made by it as at the year ending on March 31, 2007 and deleting the disallowance of interest expenditure of ₹ 3,15,370. Thus, this ground of appeal of the Revenue is dismissed. - Decided against revenue.

Summary

Issues Involved:
1. Depreciation on Goodwill
2. Building Repair Expenses
3. Disallowance under Section 14A of the Income-tax Act

Issue-wise Detailed Analysis:

1. Depreciation on Goodwill:
The Revenue appealed against the Commissioner of Income-tax (Appeals) [CIT(A)]'s decision to allow Rs. 6,25,000 on account of depreciation on goodwill. The Assessing Officer (AO) had previously disallowed this claim during the assessment year 2006-07, considering goodwill not an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income-tax Act. However, the CIT(A) overturned this disallowance, a decision upheld by the Income-tax Appellate Tribunal (ITAT) for the assessment year 2006-07. The Tribunal confirmed that the payment for business rights and goodwill, which was essentially for acquiring business rights, fell within the scope of intangible assets as defined under Section 32. The Tribunal cited precedents, including the Kerala High Court's decision in B. Raveendran Pillai v. CIT and the Delhi High Court's decision in CIT v. Hindustan Coco Cola Beverages P. Ltd., which supported the view that goodwill could be considered an intangible asset eligible for depreciation. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order.

2. Building Repair Expenses:
The Revenue contested the CIT(A)'s decision to allow Rs. 2,50,000 on account of building repair expenses. The AO had disallowed this amount, questioning the nature of the expenses and the lack of proper vouching. The CIT(A) observed that the expenses were regular and necessary for maintaining the rented building, which was over 100 years old and in a state of disrepair. The Tribunal agreed with the CIT(A), noting that the expenses were revenue in nature and incurred regularly to maintain the building. The Departmental representative could not provide evidence to classify any part of the expenses as capital expenditure. Therefore, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal.

3. Disallowance under Section 14A of the Income-tax Act:
The Revenue challenged the CIT(A)'s deletion of Rs. 6,58,652 disallowed under Section 14A. The AO had disallowed this amount, including Rs. 3,15,370 out of interest expenses and Rs. 3,43,283 as administrative expenses, on the grounds that the assessee had earned exempt dividend income and incurred interest expenses on borrowed funds. The CIT(A) found that the assessee had sufficient interest-free funds (share capital and reserves) exceeding the investments made, indicating that the borrowed funds were not used for earning exempt income. The Tribunal agreed with the CIT(A), noting the absence of any evidence to show a nexus between the borrowed funds and the investments. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of interest expenses and dismissed the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds, affirming the CIT(A)'s decisions regarding depreciation on goodwill, building repair expenses, and disallowance under Section 14A. The Tribunal's order was pronounced on June 20, 2014, at Ahmedabad.