2019 (12) TMI 1518 - AT - Income Tax

Deprecation on purchase of goodwill or any other business or commercial rights in view of the amendment of Section 32(1)(ii) - Whether rights acquired for acquisition of Customer Contracts falls within the expression any other business or commercial rights of similar nature as defined in Explanation 3 to Section 32(1)(ii)? - HELD THAT - In view of the above factual aspects and legal position and the co-ordinate Bench decision in assessee s own case in . 2018 (8) TMI 2049 - ITAT MUMBAI for AY 2012-13 we are of the view that the contracts which are part of Slump sale agreement i.e. business purchase agreement form part of intangible assets in term of explanation 32(1)(ii) of the Act. Hence we find no infirmity in the order of CIT(A) allowing the claim of depreciation of the assessee we confirm the order of CIT(A). Addition made while computing book profit u/s 115JB - HELD THAT - Assessee has made claim of exclusion of amortization of intangible assets including goodwill fee paid to consultants and expenses incurred for acquisition of business of DC Gupta construction Pvt. Ltd while computing book profit under section 115JB of the Act. We noted that the AO made addition in the book profit of the assessee but the facts are that the provisions of Sec. 115JB of the Act requires that net profit should be prepared in accordance with Part II and III of Schedule VI to Companies Act. In the instant case because of specific accounting treatment followed by the assessee pursuant to High Court order the financial statements are not showing true and fair view and are contrary to Accounting Standards provisions of Companies Act and Schedule VI thereto. In the instant case what has been done pursuant to High Court scheme is not affect the accounting to be made as per companies Act while arriving at the true profit as per Part II of Schedule VI and hence the assessee is entitled to make necessary adjustment in order to incorporate the impact of the said observation to the Profit as shown in the profit Loss account to arrive at correct Book Profit under section 115JB of the Act. Hence the CIT(A) has rightly deleted the addition made by the AO. This ground of Revenue s appeal is dismissed. Reimbursement of expenses - AO disallowed the claim of reimbursement expenses by stating that the assessee has not filed the details including bills and vouchers by observing - HELD THAT - We noted that the assessee has filed details of reimbursement of expenses and this issue is covered by the decision in the case of Vazirani Lani Developers Pvt. Ltd. 2009 (2) TMI 904 - BOMBAY HIGH COURT . Hence we find no infirmity in the order of CIT(A) and the same is confirmed. This issue of Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Depreciation on purchase of goodwill or other business/commercial rights under Section 32(1)(ii) of the Income-tax Act, 1961.
2. Deletion of addition while computing book profit under Section 115JB of the Act.
3. Allowance of reimbursement of expenses to Blue Star Limited.

Detailed Analysis:

Issue 1: Depreciation on Purchase of Goodwill or Other Business/Commercial Rights

Facts:
The assessee, a wholly-owned subsidiary of Blue Star Limited, acquired intangible assets including customer contracts, non-compete fees, business and technical knowhow, trademarks, and goodwill for Rs. 60 crores. The assessee claimed depreciation under Section 32 of the Income-tax Act, 1961, on these intangible assets.

Assessment Officer's (AO) View:
The AO disallowed the depreciation claim on customer contracts, arguing that the terms, conditions, and values of the contracts did not change with the change of management. The AO also noted that there was no erosion of value over time and cited a pending departmental appeal in a similar case.

CIT(A)'s Decision:
The CIT(A) allowed the depreciation claim, relying on the Tribunal’s decision in the case of Indian Capital Market Pvt. Ltd. and the Supreme Court's decision in CIT vs. Smifs Securities Ltd. The CIT(A) held that customer contracts fall under "any other business or commercial rights of similar nature" as per Explanation 3 to Section 32(1)(ii).

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by the assessee's own case in the previous year and supported by the Supreme Court and Delhi High Court decisions. The Tribunal confirmed that customer contracts acquired as part of a slump sale agreement qualify as intangible assets eligible for depreciation under Section 32(1)(ii).

Issue 2: Deletion of Addition While Computing Book Profit Under Section 115JB

Facts:
The AO noticed that the assessee claimed exclusion of amortization of intangible assets, including goodwill, while computing book profit under Section 115JB, amounting to Rs. 42,38,11,308/-. The AO disallowed the claim, stating it was not made through a revised return.

CIT(A)'s Decision:
The CIT(A) admitted the claim and ruled in favor of the assessee, stating that the financial statements were not showing a true and fair view due to specific accounting treatment following a High Court order. The CIT(A) held that the appellant is entitled to make necessary adjustments to arrive at the correct book profit under Section 115JB.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, agreeing that the financial statements should reflect true profit as per Part II and III of Schedule VI to the Companies Act. The Tribunal confirmed that the assessee is entitled to make adjustments to the profit and loss account to compute the correct book profit under Section 115JB.

Issue 3: Allowance of Reimbursement of Expenses to Blue Star Limited

Facts:
The AO disallowed the reimbursement of expenses amounting to Rs. 1,15,98,917/- to Blue Star Limited, stating that the assessee failed to produce documentary proof such as agreements or bills.

CIT(A)'s Decision:
The CIT(A) allowed the claim, citing jurisdictional ITAT and High Court decisions that mere non-production of documentary evidence is insufficient to disallow reimbursement expenses. The CIT(A) directed the AO to delete the disallowance.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by the Bombay High Court's decision in Vazirani Lani Developers Pvt. Ltd. The Tribunal found no infirmity in the CIT(A)'s order and confirmed the allowance of reimbursement expenses.

Conclusion:
The Tribunal dismissed the Revenue's appeals on all issues, thereby allowing the depreciation on intangible assets, deleting the addition while computing book profit under Section 115JB, and confirming the allowance of reimbursement of expenses. The judgment was pronounced in the open court on 31.12.2019.