2017 (2) TMI 903 - AT - Income Tax

Depreciation on Goodwill - Held that - Explanation 3 states that the expression asset shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature . The principle of ejusdem generic would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act.

Issues Involved:

1. Validity of the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Applicability of sections 147 and 148 of the Income Tax Act for reopening assessments.
3. Allowability of depreciation on goodwill under section 32(1)(ii) of the Income Tax Act.
4. Addition of notional interest on advances to sister concerns.
5. Addition under section 68 of the Income Tax Act for unexplained cash credits.
6. Disallowance of prior period expenses.
7. Disallowance of job work income differences as per books and TDS certificates.
8. Deletion of additions related to unsecured loans and various expenses by CIT(A).

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by CIT(A):
The assessee contended that the order passed by CIT(A)-III, Baroda is bad in law and contrary to legal pronouncements. However, this ground was not pressed by the assessee in subsequent appeals, and thus, it did not require adjudication.

2. Applicability of Sections 147 and 148 for Reopening Assessments:
The assessee argued that the provisions of section 147 read with section 148 were not applicable as the reasons recorded for reopening were debatable and based on audit objections. This ground was also not pressed by the assessee in subsequent appeals, and hence, it did not require further adjudication.

3. Allowability of Depreciation on Goodwill:
The assessee claimed depreciation on goodwill, asserting it as an intangible asset eligible under section 32(1)(ii) of the Income Tax Act. The Assessing Officer (AO) disallowed this claim, but the ITAT referred to Explanation 3(b) of Section 32(1), which includes "any other business or commercial rights of similar nature" under intangible assets. The ITAT concluded that goodwill falls under this category, thus allowing the depreciation claim.

4. Addition of Notional Interest on Advances to Sister Concerns:
The AO added notional interest at 12% on advances given to sister concerns, arguing these were not for business purposes. The assessee contended that the advances were made out of self-generated funds and for business purposes. The ITAT, however, upheld the AO's addition, noting the lack of satisfactory explanation from the assessee.

5. Addition under Section 68 for Unexplained Cash Credits:
The AO made additions under section 68 for unexplained cash credits, including deposits from Suresh B Sheth and Khokhani Investment. The ITAT found that the assessee failed to provide sufficient evidence to prove the identity, creditworthiness, and genuineness of the transactions, thus upholding the AO's additions.

6. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses, which the assessee claimed were crystallized during the relevant year. The ITAT noted that the assessee accepted the disallowance of ?13,295 for previous year expenses but contended that ?12,795 was a double addition. The ITAT found no logic from the assessee to prove double addition, thereby upholding the AO's disallowance.

7. Disallowance of Job Work Income Differences:
The AO added ?1,81,359 due to differences in job work income as per books and TDS certificates. The ITAT allowed 20% of the addition and deleted the remaining 80%, considering the documents submitted by the assessee.

8. Deletion of Additions by CIT(A):
The Revenue appealed against the deletion of additions related to unsecured loans and various expenses by CIT(A). The ITAT found that part relief was already given to the assessee, and the appeal was consequential in nature, thus dismissing the Revenue's appeal.

Conclusion:
In conclusion, the ITAT partly allowed the appeals filed by the assessee for the assessment years 2004-05, 2005-06, and 2006-07, while dismissing the appeals filed by the Revenue. The key issues revolved around the applicability of sections 147 and 148, depreciation on goodwill, notional interest on advances, unexplained cash credits, prior period expenses, and job work income differences. The ITAT's decisions were based on the evidence and explanations provided by the assessee and the AO's findings.

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