2016 (2) TMI 706 - AT - Income Tax

Disallowance of depreciation on goodwill in connection with takeover of unit from Ashok Leyland Limited - Held that - The assessee has paid over the value of net asset to the extent of ₹ 147.57 lakhs and claimed the same as cost of the goodwill. However, the Assessing Officer disallowed the claim of the assessee on the ground that the payment does not fall within the meaning of know-how, patent or copyright. The Assessing Officer has not considered the judgment of Apex Court in SMIFS Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT ) wherein after considering the provisions of Explanation 3 to Section 32(1) of the Act found that the word any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill will fall under the expression any other business or commercial rights of similar nature . In view of the above judgment of Apex Court in SMIFS Securities Ltd., we are unable to uphold the orders of the lower authorities. Accordingly, we set aside the orders of the lower authorities. The Assessing Officer is directed to allow depreciation at the applicable rate on the payment relatable to goodwill. - Decided in favour of assessee Disallowance of expenditure which was capitalized in the books of account - expansion of the units - Held that - Even though it is independent, because of the interconnection of management, financial, administrative and production aspects of each expenditure has to be construed as revenue in nature and therefore, deductible while computing the taxable income.By respectfully following the judgments of Madras High Court in Rane (Madras) Ltd. (2007 (6) TMI 25 - HIGH COURT, MADRAS ) and in Sakthi Sugars Ltd. (2010 (8) TMI 456 - MADRAS HIGH COURT), the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the expenditure incurred by the assessee in connection with the expansion of the units at Sriperumbudur and Hyderabad as revenue expenditure.- Decided in favour of assessee Assessee is eligible for additional depreciation Depreciation on the amount paid to SIPCOT towards development of infrastructure - Held that - The assessee has contributed to SIPCOT for creation of common facilities such as roads, bridges, electrical lines, drainage, etc. These facilities are owned by the SIPCOT / Government and not by the assessee. Merely because the assessee contributed for establishment of common infrastructural facilities, it cannot be construed that the assessee owned those facilities. For claiming depreciation under Section 32 of the Act, the assessee should be the owner of the property / asset and the same should be used for business of the assessee. In the case before us, the common infrastructural facilities may be assets of the SIPCOT or Government agency to provide certain infrastructural facilities to the assessee. It is not the case of the assessee that those amenities are tools for carrying out the business of the assessee. Unless and until the capital asset is used as a tool for carrying out the business of the assessee and the assessee becomes the owner, this Tribunal is of the considered opinion that the assessee may not be eligible for depreciation. - Decided against assessee

Issues Involved:
1. Disallowance of depreciation on goodwill in connection with the takeover of a unit.
2. Disallowance of expenditure that was capitalized in the books of account.
3. Additional depreciation on new machinery installed.
4. Depreciation on the amount paid to SIPCOT towards the development of infrastructure.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Goodwill:
The first issue pertains to the disallowance of depreciation on goodwill related to the takeover of a unit from Ashok Leyland Limited. The assessee argued that the goodwill included marketable, manufacturing rights, and trade names, thus qualifying as an intangible asset eligible for depreciation at 25%. The Departmental Representative contended that not all intangible assets are eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961, which specifies certain intangible assets like know-how, patents, copyrights, etc. The Tribunal referred to the Apex Court's judgment in CIT v. SMIFS Securities Ltd., which held that goodwill falls under "any other business or commercial rights of similar nature" and is thus eligible for depreciation. Consequently, the Tribunal set aside the lower authorities' orders and directed the Assessing Officer to allow depreciation on goodwill.

2. Disallowance of Expenditure Capitalized in Books:
The next issue involved the disallowance of expenditure incurred in setting up new units, which was capitalized in the books but claimed as revenue expenditure by the assessee. The assessee argued that the expenditure was for expanding the existing business of iron castings. The Departmental Representative countered that the new units were independent industrial undertakings, and the expenditure should be treated as capital expenditure. The Tribunal referred to the Madras High Court's judgments in CIT v. Rane (Madras) Ltd. and CIT v. Sakthi Sugars Ltd., which held that expenditure for setting up new units in the same line of business should be treated as revenue expenditure. Thus, the Tribunal directed the Assessing Officer to allow the expenditure as revenue expenditure.

3. Additional Depreciation on New Machinery:
For the assessment years 2007-08, 2009-10, and 2010-11, the assessee claimed additional depreciation on new machinery installed during the year. The Assessing Officer allowed only 10% depreciation as the machinery was used for less than six months. The Tribunal referred to the Cochin Bench's decision in Apollo Tyres Ltd. v. ACIT, which allowed the balance 20% depreciation in the subsequent year. The Tribunal held that the assessee is eligible for additional depreciation and directed the Assessing Officer to allow the balance 20% depreciation.

4. Depreciation on Amount Paid to SIPCOT:
The final issue concerned depreciation on the amount paid to SIPCOT for land development. The assessee claimed depreciation at 10%, arguing that the payment was for developing infrastructure like roads, bridges, etc., which are akin to factory buildings. The Departmental Representative argued that the assets developed by SIPCOT were not owned by the assessee and thus not eligible for depreciation. The Tribunal held that for claiming depreciation under Section 32, the assessee must own the asset and use it for business purposes. Since the infrastructure was owned by SIPCOT and not used directly by the assessee for its business, the Tribunal upheld the lower authorities' decision to disallow the depreciation.

Conclusion:
The Tribunal allowed the appeals regarding the depreciation on goodwill and the capitalization of expenditure as revenue expenditure. It also allowed the additional depreciation on new machinery in the subsequent year. However, it upheld the disallowance of depreciation on the amount paid to SIPCOT for infrastructure development. The orders were pronounced on 19th February 2016 at Chennai.

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