2016 (8) TMI 1505 - AT - Income Tax

Revision u/s 263 - Nature of expenses - expenses incurred by the assessee company for launch/ initial issue of Franklin India Flexicap Fund and one other scheme - revenue or capital expenditure - HELD THAT - As on debatable issues where two views are possible jurisdiction u/s.263 is not to be exercised. We accordingly hold that exercise of jurisdiction u/s.263 could not have been made. As the impugned order passed u/s 263 has been quashed by the Tribunal 2012 (6) TMI 629 - ITAT MUMBAI and therefore, there are no basis to continue with the impugned disallowance made by the AO on account of launch/initial issue expenses in consequent to the order passed by the CIT u/s 263. Therefore, under these circumstances the impugned disallowance being devoid of force of law is directed to be deleted. - Decided in favour of assessee. Disallowing the administrative and other expenses and depreciation allowance - expenses pertaining to a erstwhile company which stood merged/amalgamated with the assessee company - HELD THAT - There is no dispute that the assessee company is engaged in the business activities in a full-fledged manner. This fact is confirmed in the impugned assessment order passed in the hands of the assessee company wherein income of the assessee company has been assessed under the head income from business . It is further noted that in the hands of erstwhile company itself, the AO of the said company in subsequent year i.e. A.Y. 2007-08 assessed its income under the head income from business and also allowed the benefit of depreciation. Thus, no contradictory action could have been taken in the hands of the assessee company while computing taxable income of the erstwhile company to be included in the taxable income of the assessee company, in consequence to the amalgamation/merger of FTAMC into the assessee company - entire facts and circumstances of this case suggest that lower authorities have themselves acknowledged factum of continuation of business - no rational to disallow routine administrative expenses under the erroneous presumption of non-continuation of business activities - disallowance of expenses and depreciation to be incorrect on facts as well as on law. - Decided in favour of assessee. Depreciation allowance u/s 32(1)(ii) of goodwill acquired by the assessee on acquisition and merger - HELD THAT - As relying on SMIFS SECURITIES LTD. 2012 (8) TMI 713 - SUPREME COURT a ssessee is prima facie entitled for the claim of depreciation on the amount of Goodwill acquired by the assessee on account of acquisition of erstwhile company (FTAMC). However, we find it appropriate that requisite facts in this regard should be verified by the AO. Therefore, we send this ground back to the file of the AO. The AO shall verify the factual assertion made by the assessee that depreciation has been allowed on this amount of Goodwill in subsequent years, as has been claimed before us. If it is found to be correct, then depreciation should be granted from the beginning. The assessee shall file requisite documents in support of its claim. AO take into account all the documentary evidences and other submission as may be made available by the assessee on objective basis before deciding this issue afresh, but keeping in view the legal position as discussed. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Jurisdiction
2. Launch Expenses
3. Prior Period Expenses
4. Allowability of Expenses of the Amalgamating Entity
5. Levy of Interest under Section 220(2) of the Act
6. Levy of Interest under Section 234D of the Act
7. Consequential Relief
8. Additional Ground: Depreciation on Goodwill

Issue-wise Detailed Analysis:

1. Jurisdiction:
The appellant challenged the jurisdictional validity of the impugned orders, but this ground was not pressed during the hearing and was dismissed as not pressed.

2. Launch Expenses:
The AO disallowed the launch/initial issue expenses of ?13.52 crores, considering them capital in nature, referencing SEBI regulations. The CIT(A) upheld this disallowance. However, the Tribunal noted that the order under Section 263, which directed the AO to verify these expenses, was quashed by the Tribunal earlier. Therefore, the disallowance was deemed illegal and was directed to be deleted.

3. Prior Period Expenses:
The appellant did not press this ground during the hearing, and it was dismissed as not pressed.

4. Allowability of Expenses of the Amalgamating Entity:
The issue pertained to the disallowance of administrative and other expenses of ?2,95,194 and depreciation allowance of ?73,17,204 related to Franklin Templeton AMC Limited (FTAMC), which merged with the appellant company. The CIT(A) misunderstood the findings of the CIT(A) in the case of FTAMC, which had held that FTAMC was engaged in business activities. The Tribunal found that the lower authorities had acknowledged the continuation of business and directed the deletion of the disallowance of expenses and depreciation.

5. Levy of Interest under Section 220(2) of the Act:
This ground and the subsequent ones were treated as consequential and dismissed.

6. Levy of Interest under Section 234D of the Act:
Same as above, this ground was treated as consequential and dismissed.

7. Consequential Relief:
This ground was also treated as consequential and dismissed.

8. Additional Ground: Depreciation on Goodwill:
The appellant claimed depreciation on goodwill acquired from the merger with FTAMC. The Tribunal noted that the AO had allowed depreciation on the reduced WDV of goodwill in subsequent years, accepting the claim in principle. The Tribunal referred to the Supreme Court judgment in the case of CIT vs. Smifs Securities Ltd, which allowed depreciation on goodwill. The Tribunal directed the AO to verify the factual assertions and grant depreciation if found correct, sending the issue back to the AO for fresh consideration.

Conclusion:
The appeal was partly allowed, with significant relief granted on the issues of launch expenses and depreciation on goodwill. The Tribunal directed the deletion of disallowance related to launch expenses and allowed the claim for depreciation on goodwill, subject to verification by the AO. Other grounds were either dismissed as not pressed or treated as consequential.