2016 (5) TMI 151 - AT - Income Tax

Depreciation on goodwill - Held that - The issue whether goodwill is an capital asset coming within the term intangible asset as provided u/s. 32(1)(ii) of the Act is no more res integra in view of the decision of the Hon ble Supreme Court in the case of CIT vs. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT ), wherein after interpreting the explanation (3) to section 32(1) held that goodwill would fall under the expression any other business or commercial right of a similar nature and, hence has to be considered as a asset under Explanation (3b) to section 32(1). If we examine the facts of the case with reference to the terms of business transfer agreement it is to be seen that the net current asset value of Studio 18 at the time of sale as per the balance sheet was ₹ 2,36,64,152/- The value of fixed asset is ₹ 1,07,36,157/-. Thus, the balance amount of ₹ 69,53,343/- out of the total consideration paid by the assessee of ₹ 4,13,56,352/- is obviously on account of goodwill. Even accepting that such amount is a balancing figure but still it being in the nature of goodwill, the assessee is eligible to claim depreciation. Further it is also in accordance with the accepted accounting principle and Accounting Standard as brought on record by the learned counsel for the assessee. Even otherwise such balancing figure is on account of goodwill. - Decided in favour of assessee. Allowance of distribution expenses - non-deduction of tax u/s. 40(a)(i) - Held that - On a perusal of the order passed by the co-ordinate Bench for A.Y. 2006-07 it is seen that as far as distribution expenses are concerned, at the time of hearing before the Tribunal the assessee made a specific claim that either they have to be allowed in A.Y. 2006-07 or in A.Y. 2008-09. Considering such claim of the assessee, the Tribunal remitted the matter back to the file of the AO for deciding assessee s claim afresh by considering additional evidence brought on record. The learned counsel for the assessee had submitted before us that the amount claimed towards distribution expenses which are subject matter of ground nos. 2 & 3 are also part of the expenditure claimed for A.Y. 2006-07. The aforesaid factual aspect has not been opposed or disputed by the learned DR. Considering the fact that similar issue has arisen in A.Y. 2006-07, which is pending for adjudication before the CIT(A), we deem it proper to remit this issue to the file of the CIT(A) for deciding afresh along with similar issues pending for AY 2006-07 - Decided in favour of assessee for statistical purposes. Addition on account of advertisement and sales promotion expenses - CIT(A) deleted the addition - Held that - Issue in dispute has been decided in favour of the assessee by Hon ble Jurisdictional High Court in assessee s own case for A.Y. 2003-04. Moreover, on a perusal of impugned assessment order, it is clearly evident that though the AO accepts the fact that the Hon ble Jurisdictional High Court has decided the issue in assessee s favour for A.Y. 2003-04, but stating that the department has preferred an SLP in the case of Star Plus India Pvt. Ltd. before the Hon ble Supreme Court has disallowed a part of the advertisement and sales promotion expenses amounting to ₹ 2,75,75,739/-. In our view, this is not a valid ground to disallow part of the expenditure when the issue has been decided in favour of the assessee by the decision of the Hon ble Jurisdictional High Court. It is mandatory principle of judicial discipline to accept the view of the Hon ble Jurisdictional High Court, which is of binding nature. Accordingly, we do not find any infirmity in the order of the learned CIT(A) in allowing the assessee s claim. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of claim of depreciation on goodwill.
2. Allowance of distribution expenses disallowed in the previous assessment year due to non-deduction of tax.
3. Deletion of addition made by the AO on account of advertisement and sales promotion expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Depreciation on Goodwill:
The assessee, an Indian company, claimed depreciation on goodwill amounting to Rs. 69,53,343/-. The AO rejected the claim on the grounds that goodwill is not a capital asset or an intangible asset under Section 32(1)(ii) of the Act, and the amount claimed was a balancing figure rather than an actual payment towards goodwill. The CIT(A) upheld the AO's decision, also noting that the claim was not made through a revised return as required under Section 139(5).

Upon appeal, the assessee argued that the business transfer agreement included business goodwill and IPR, and the amount of Rs. 69,53,343/- was indeed for goodwill. The assessee cited the Supreme Court decision in CIT vs. Smifs Securities Ltd. and the Delhi High Court decision in Areva T&D India Ltd. vs. DCIT, which recognized goodwill as an intangible asset eligible for depreciation.

The Tribunal held that goodwill is a capital asset under Section 32(1)(ii) based on the Supreme Court's interpretation. It further noted that even if the amount was a balancing figure, it still qualified as goodwill eligible for depreciation. The Tribunal also dismissed the CIT(A)'s reasoning regarding the revised return, citing the Supreme Court decision in Goetze (India) Ltd. vs. CIT and the jurisdictional High Court decision in CIT vs. Pruthvi Brokers & Shareholders Pvt. Ltd. The Tribunal directed the AO to allow the depreciation claim on goodwill.

2. Allowance of Distribution Expenses Disallowed in Previous Assessment Year:
The assessee claimed distribution expenses of Rs. 28,23,279/- and Rs. 20,47,237/- disallowed in AY 2006-07 due to non-deduction of tax under Section 40(a)(i). The AO had disallowed these expenses in AY 2006-07, and the CIT(A) upheld the disallowance. The ITAT remitted the matter back to the CIT(A) for fresh adjudication, considering additional evidence.

The Tribunal noted that the issues in ground nos. 2 & 3 were consequential to the assessment order for AY 2006-07. It observed that the Tribunal had earlier remitted the matter back to the AO for fresh consideration, including the assessee's claim that the expenses should be allowed either in AY 2006-07 or AY 2008-09. Since the CIT(A) had not yet adjudicated the matter for AY 2006-07, the Tribunal remitted the issue back to the CIT(A) for fresh consideration along with the pending issues for AY 2006-07.

3. Deletion of Addition on Account of Advertisement and Sales Promotion Expenses:
The department appealed against the deletion of an addition of Rs. 2,79,26,769/- made by the AO on account of advertisement and sales promotion expenses. The AO had disallowed part of the expenditure, arguing that it promoted the brand of the associated enterprise, benefiting the AEs in India, and was disproportionate to the income. The CIT(A) deleted the addition, noting that the jurisdictional High Court had decided the issue in favor of the assessee for AY 2003-04.

The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of judicial discipline to follow the jurisdictional High Court's binding decision. It noted that the AO's reliance on an SLP filed in a different case (Star India Pvt. Ltd.) was not a valid ground for disallowance. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the department's appeal.

Conclusion:
The assessee's appeal was partly allowed, granting the claim of depreciation on goodwill and remitting the issue of distribution expenses back to the CIT(A) for fresh consideration. The department's appeal was dismissed, upholding the deletion of the addition on account of advertisement and sales promotion expenses.