2018 (12) TMI 1891 - AT - Income Tax

Depreciation on goodwill - AO rejected the assessee s claim, observing that the assessee had not claimed any depreciation on goodwill, but had allocated the entire amount of share capital issued to the share holders of M/s JKSL free of cost, among all the fixed assets of the assessee company and has thus enhanced the value of the fixed assets, which is not permissible - HELD THAT - For all these years, the ld. CIT(A) reversed the orders of the AO on the ground that issuance of shares was towards part payment of purchase consideration and hence was included in the cost of acquisition of the cement undertaking; that therefore, the assessee could not be deprived of depreciation by merely debiting the issue of shares to the goodwill account. The CIT(A) held in the alternative that even if the consideration in the form of shares was paid for purchase of goodwill, this payment could be considered as payment for acquiring brands of the demerged company, on which depreciation was allowable u/s 32 - Tribunal followed CIT vs. Smifs Securities Ltd. , 2012 (8) TMI 713 - SUPREME COURT , CIT vs. Manipal Universal Learning Pvt. Ltd. , 2013 (7) TMI 169 - KARNATAKA HIGH COURT and CIT vs. Hindustan Coca-Cola Beverages (P) Ltd. 2011 (1) TMI 138 - DELHI HIGH COURT Claim of additional depreciation - HELD THAT - CIT(A) allowed the assessee s claim, following M/s Automotive Coaches Components Ltd. vs. DCIT , 2016 (4) TMI 34 - ITAT CHENNAI , for A.Y. 2008-09, wherein, it was held that if additional depreciation could not be allowed at the rate of 20% during the year in which the machinery was installed, the balance 50% has to be allowed in the subsequent year, and CIT vs. Rittal India (P) Ltd. , 2016 (1) TMI 81 - KARNATAKA HIGH COURT in which, it was held that the proviso to Section 32 (1)(iia) of the I.T. Act would not restrain the assessee from claiming the balance of the benefit of additional depreciation in the subsequent assessment year.No decision contrary to the above decisions has been brought to our notice. Hence, finding no error therein, the order under appeal on this issue is also confirmed. Receipt of interest subsidy from the Rajasthan Govt. - Revenue or capital receipt - HELD THAT - The case of the Department is that in Sahney Steel Pressing Works Ltd. 1997 (9) TMI 3 - SUPREME COURT as been held that in the case of subsidy, the assessee is free to use the money in its business entirely as it likes and it is not obliged to spent the money for a particular purpose. However, it has remained to be noted that this observation was in the context of the background that the subsidy in that case was given to the new industries at the commencement of business, to carry on their business and not as an aid for setting up of the industries. It was, therefore, that the subsidy was treated as operational subsidy and not a capital one. With regard to revenue subsidy, it was held that if it is given by way of assistance to carry on trade or business, it has to be treated as a trading receipt. In the present case, the interest subsidy was given only for the payment of loan acquired for acquisition of capital asserts. As such, it is a subsidy given for setting up of business. Hence, it has rightly been treated as a capital receipt.

Summary

Issues Involved:
1. Depreciation on goodwill.
2. Allocation of share capital to fixed assets.
3. Additional depreciation claim.
4. Treatment of interest subsidy from the Rajasthan Government.

Detailed Analysis:

1. Depreciation on Goodwill:
The Revenue contended that depreciation is not admissible on goodwill as per the Income Tax Act and rules. The assessee, a Public Limited Company, had acquired cement undertakings from J.K. Synthetics Ltd. and capitalized the goodwill, claiming depreciation on it. The Assessing Officer (AO) disallowed the claim, arguing the allocation of share capital to fixed assets was impermissible. However, the Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's decision, stating that the issuance of shares was part of the purchase consideration and thus included in the cost of acquisition, making the depreciation claim valid. The Tribunal upheld the CIT(A)'s decision, referencing judgments from higher courts, confirming that the cost of shares allotted is part of the payment for acquiring the cement undertaking, and even if considered as goodwill, it is eligible for depreciation.

2. Allocation of Share Capital to Fixed Assets:
The AO noted that the assessee had allocated the entire amount of share capital issued to the shareholders of J.K. Synthetics Ltd. free of cost among all fixed assets, which was not permissible. The CIT(A) and Tribunal, however, held that this allocation was part of the purchase consideration for the cement undertaking, and thus the depreciation claim was justified. The Tribunal reiterated this position for previous assessment years, and since no contrary decision was presented, the CIT(A)'s order was confirmed.

3. Additional Depreciation Claim:
The AO rejected the assessee's claim for additional depreciation on assets installed in the second half of the assessment year, arguing that the provision for carrying forward residual additional depreciation was not effective until 01-04-2015. The CIT(A) allowed the claim, following precedents where it was held that if additional depreciation could not be fully claimed in the year of installation, the balance could be claimed in the subsequent year. The Tribunal found no error in this decision and confirmed the CIT(A)'s order.

4. Treatment of Interest Subsidy from the Rajasthan Government:
The AO treated the interest subsidy received from the Rajasthan Government as a revenue receipt, while the assessee claimed it as a capital receipt. The CIT(A) sided with the assessee, referencing previous appellate orders and Tribunal decisions, which treated similar subsidies as capital receipts. The Tribunal upheld this view, noting that the subsidy was intended to assist in the repayment of loans for acquiring capital assets, thus qualifying as a capital receipt. The Tribunal distinguished this case from the 'Sahney Steel & Pressing Works Ltd. vs. CIT' case, where the subsidy was operational and not for setting up the business.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on all grounds. The depreciation on goodwill, allocation of share capital to fixed assets, additional depreciation claim, and treatment of the interest subsidy as a capital receipt were all upheld in favor of the assessee. The Tribunal's order was pronounced in the open court on 07/12/2018.