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2016 (8) TMI 222 - AT - Income TaxPre-payment of deferred sales tax - taxability of surplus arising to the assessee on repayment on deferred sales tax liability - AO held this surplus to be taxable as a revenue receipt liable to be taxed u/s 41(1) whereas Ld. CIT(A) has treated the same as benefit liable to be taxed u/s 28(iv) - Held that - By making payment of net present value of a future liability it cannot be said if any financial benefit, in real terms, has accrued to the assessee. It is noted that none of the authorities had gone into this aspect and did not quantify, in financial or monetary terms, if any amount could be worked out which could be said to be a benefit that had accrued to the assessee. Under these circumstances, we are of this considered opinion that the impugned amount cannot be brought into tax either u/s 41(1) or u/s 28(iv). Benefit of depreciation u/s 32 denied on intangible assets - Held that - There was a proper valuation report specifying separate value of each and every asset of tangible or intangible nature. It is also noted that the AO made direct inquiries with OAL in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 to the AO wherein it was inter alia confirmed that the said company transferred its abrasive division situated at Bhiwadi (Rajasthan) to the assessee company for a total consideration of ₹ 26.17 crores. It is also brought to our notice that subsequent to the take- over, the assessee company filed petitions with the concerned departments for registration of trademarks in the name of Assessee Company. It is further noted by us from the perusal of the order of Ld. CIT(A) wherein it has been accepted that the assessee had produced before him (i.e. CIT(A)) more than 26 files containing evidences with regard to acquisition of technical know-how. Under these circumstances, we find that there was no basis with the lower authorities to hold that no intangible assets were acquired by the assessee. Thus the assessee is eligible for the claim of depreciation u/s 32(1)(ii) on the amount of intangible assets acquired by it as per Business Transfer Agreement, and thus action of lower authorities was not factually or legally justified while making disallowance of the depreciation on the intangible assets. The AO is directed to grant the benefit of depreciation in terms of section 32(1)(ii) upon the intangible assets acquired by the assessee. Thus, these grounds are allowed in favour of the assessee. Disallowance made u/s 14A - Held that - The disallowance on account of expenses under section 14A should be restricted to 2% of the dividend income. The disallowance with regard to interest should be made after excluding those mutual funds which are debt funds. Thus, assessee gets part relief and these grounds are partly allowed in favour of assessee
Issues Involved:
1. Taxability of surplus arising from prepayment of deferred sales tax. 2. Eligibility for depreciation on intangible assets. 3. Disallowance under section 14A related to dividend income. Detailed Analysis: 1. Taxability of Surplus Arising from Prepayment of Deferred Sales Tax: The primary issue was whether the surplus of ?1,63,03,435/- arising from the prepayment of deferred sales tax should be treated as a revenue receipt taxable under section 28(iv) or section 41(1) of the Income-tax Act. The Assessing Officer (AO) treated this surplus as a revenue receipt taxable under section 41(1), while the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as a benefit taxable under section 28(iv). The assessee argued that this amount was a capital receipt and not taxable. Findings: - The Tribunal noted that the issue had been previously decided in favor of the assessee by the Tribunal and affirmed by the Hon’ble Bombay High Court for the assessment years 2005-06 and 2006-07, where it was held that the amount was not taxable under section 41(1). - The Tribunal further observed that the Hon’ble Bombay High Court had determined that no benefit had accrued to the assessee in financial terms, as the payment was made at the net present value of the future liability. - The Tribunal concluded that the impugned amount could not be taxed under either section 41(1) or section 28(iv), following the precedent set by the High Court and the Supreme Court. Conclusion: The Tribunal allowed the appeal in favor of the assessee, deciding that the surplus arising from the prepayment of deferred sales tax was not taxable under sections 41(1) or 28(iv). 2. Eligibility for Depreciation on Intangible Assets: The assessee claimed depreciation on various intangible assets acquired during the takeover of Grinding Wheel Business from M/s Orient Abrasive Ltd. (OAL). The AO disallowed the depreciation, questioning the genuineness and valuation of the intangible assets. Findings: - The Tribunal noted that the assessee had acquired the Grinding Wheel Business as a going concern, and the transaction was supported by a Business Transfer Agreement and a valuation report. - The Tribunal cited the Supreme Court judgment in CIT vs. Smiff Securities Ltd., which held that the difference between the book value of assets acquired and the amount paid represents goodwill, which is eligible for depreciation. - The Tribunal observed that in the subsequent year (AY 2008-09), the CIT(A) had allowed depreciation on goodwill, and the Revenue had not contested this decision. - The Tribunal also referred to various judgments affirming that goodwill and other intangible assets acquired under a slump sale are eligible for depreciation. Conclusion: The Tribunal directed the AO to allow depreciation on the intangible assets acquired by the assessee, following the legal precedents and the facts of the case. 3. Disallowance under Section 14A Related to Dividend Income: The AO made a disallowance under section 14A for expenses related to earning dividend income. The assessee argued that the disallowance was excessive and that certain mutual funds were debt funds, which should not be considered for disallowance. Findings: - The Tribunal noted that the Rule 8D was not applicable for the assessment year in question. - In the assessee’s own case for AY 2006-07, the Tribunal had restricted the disallowance under section 14A to 2% of the dividend income. - The Tribunal directed that the disallowance on account of interest should exclude debt funds and restricted the disallowance on expenses to 2% of the dividend income. Conclusion: The Tribunal partly allowed the appeal, restricting the disallowance under section 14A to 2% of the dividend income and excluding debt funds from the interest disallowance. Summary for AY 2008-09: 1. Taxability of Surplus from Prepayment of Deferred Sales Tax: - The Tribunal followed its decision for AY 2007-08 and directed that the surplus arising from prepayment of deferred sales tax was not taxable. 2. Depreciation on Intangible Assets: - The Tribunal directed the AO to allow depreciation on intangible assets, following the same reasoning as for AY 2007-08. 3. Disallowance under Section 14A: - The Tribunal directed the AO to give relief for the voluntary disallowance made by the assessee and deleted the disallowance of interest, considering the assessee had sufficient own funds. Revenue’s Appeal for AY 2008-09: - The Tribunal dismissed the Revenue’s appeal, following its decision for AY 2007-08, and held that the surplus from prepayment of deferred sales tax was not taxable under section 41(1). Final Order: - The appeals filed by the assessee were partly allowed, and the appeal filed by the Revenue was dismissed.
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