2016 (5) TMI 267 - AT - Income Tax

Depreciation on Goodwill - Held that - When the AO has not disputed the fact that the assessee has no goodwill to claim the depreciation disallowance made by the AO and affirmed by the CIT (A) is not sustainable in the eyes of law. Moreover in assessee s own case qua the AYs 2008-09 and 2009-10 has already held that the assessee is entitled to claim depreciation on goodwill which is an asset u/s Explanation (3b) to section 32(1) of the Act - Decided in favour of assessee Disallowance of expenditure on account of interest on prorata basis - Held that - AO has not disputed that the loan was advanced to M/s. Bharti Infotec Ltd. as per Memorandum and Articles of Association to promote business of its subsidiary the interest claimed by assessee thereon cannot be disallowed. Moreover it was commercial expediency of the assessee company to advance the loan to promote business of its subsidiary company. So we are of the considered view that the advances made to the subsidiary companies are to be treated as business advances. Moreover when the assessee company was carrying out its business activities through its subsidiaries and the assessee company was having interest free funds to the tune of 99.27 crores and 101.11 crores available with the assessee company in the beginning and end of the financial year respectively under consideration as per balance sheet not disputed by the AO when the assessee has claimed to have paid loan amount to its subsidiary from the mixed fund then it should be assumed that payment was made out of interest free funds. So when the AO has not disputed the fact that the assessee company has used interest free funds only for advancing money to M/s. Bharti Infotec Ltd. the question of making disallowance on prorata basis does not arise. Following the ratio of the judgment in the case of Hero Cycles Pvt. Ltd. (2015 (11) TMI 1314 - SUPREME COURT OF INDIA) we are of the considered view that when the assessee has made investment for business expediency to promote the business of its subsidiary the interest paid thereon has to be allowed and as such AO as well as CIT (A) have erred in making disallowance of assessee s claim of deduction on account of interest on prorata basis - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of depreciation on Goodwill under Section 32 of the Income Tax Act, 1961.
2. Disallowance of expenditure on account of interest paid for loans advanced to subsidiary companies.

Issue-wise Detailed Analysis:

Issue 1: Disallowance of Depreciation on Goodwill

The appellant, M/s. Bharti Teletech Limited, challenged the disallowance of depreciation on Goodwill amounting to ?1,26,56,250/- under Section 32 of the Income Tax Act, 1961. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the claim on the ground that Goodwill is not considered an intangible asset under Section 32(1)(ii) of the Act.

The Tribunal referred to Section 32(1)(ii), which includes "know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature" as intangible assets eligible for depreciation. The Tribunal also cited the Hon’ble Supreme Court's judgment in CIT vs. Smifs Securities Ltd., which clarified that Goodwill falls under the category of "any other business or commercial rights of similar nature" as per Explanation 3(b) to Section 32(1).

The Tribunal noted that the AO did not dispute the existence of Goodwill and concluded that the disallowance by the AO and CIT(A) was unsustainable. The Tribunal followed the precedent set in the assessee's own case for AYs 2008-09 and 2009-10, where it was held that Goodwill is an asset eligible for depreciation under Section 32(1). Consequently, the Tribunal determined this ground in favor of the assessee.

Issue 2: Disallowance of Expenditure on Account of Interest Paid

The assessee claimed an expenditure of ?91,40,242/-, out of which the AO disallowed ?48,08,518/- on account of interest on a prorata basis. The AO's disallowance was based on the assertion that the assessee used interest-bearing funds to advance loans to its subsidiary, M/s. Bharti Infotec Ltd.

The Tribunal noted that the assessee's Memorandum and Articles of Association permitted investments in subsidiaries for business purposes. It was undisputed that the assessee had sufficient interest-free funds as reflected in the balance sheet. The CIT(A) affirmed the AO's disallowance, arguing that the assessee failed to prove that interest-free funds were used for the advances and that the investment did not promote the business activities of the assessee.

The Tribunal referred to the Supreme Court's judgment in Hero Cycles Pvt. Ltd., which emphasized that loans advanced to subsidiaries for commercial expediency should not result in disallowance of interest. The Tribunal concluded that the advances to M/s. Bharti Infotec Ltd. were for business purposes and that the interest-free funds available should be presumed to have been used for the advances. Consequently, the Tribunal determined that the disallowance of interest on a prorata basis was not justified.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, setting aside the disallowance of depreciation on Goodwill and the disallowance of interest expenditure. The judgment emphasized the interpretation of intangible assets under Section 32(1) and the principle of commercial expediency in advancing loans to subsidiaries. The Tribunal's decision was pronounced in open court on April 29, 2016.