2020 (10) TMI 402 - AT - Income Tax

Expenditure for cost of adhesive stamp in connection with preparation of deed of transfer and assignment of receivables - Revenue or capital expenditure - assessee had stated that the same was in connection with acquisition of business and was claimed as revenue expenditure - HELD THAT - This assignment is admittedly for facilitating the business of the assessee by assigning receivables and as the assessee has acquired the said industrial unit for a lump sum consideration. The expenditure is in connection with facilitating recovery of receivables which is a part of current asset - expenditure in this regard cannot be said to be in the capital filed of acquiring business. It is in fact for facilitating the business of the assessee and in this view of the matter expenditure is allowable as business expenditure. The case laws referred by learned counsel of the assessee in the case of Bombay Dyeing Mfg. 1996 (2) TMI 8 - SUPREME COURT and India Cements Ltd. 1965 (12) TMI 22 - SUPREME COURT are accordingly germane and support the case of the assessee. CIT(A) has been in error in holding that the case laws are not applicable here. - Decided in favour of assessee. Provision for warranty as claimed as expenditure - Claim denied by AO on the ground that it is an unascertained liability and a contingent liability - CIT(A) in principal upheld the action of AO but directed that only the provision made during the year should be disallowed - HELD THAT - As relying on case ROTORK CONTROLS INDIA (P) LTD. case 2009 (5) TMI 16 - SUPREME COURT authorities below have erred in considering the provisions of warranty as contingent liability. As already submitted by learned Counsel of the assessee in assessee's own case, subsequently revenue authorities have allowed the expenditure on the basis of same Hon'ble Supreme Court decision. Hence, we set aside the order of the authority below and decide the issue in favour of the assessee. Depreciation in respect of customer contracts - assessee had claimed that the customer contracts are valuable right and therefore capital asset - Claim denied by the authorities below it was held that the assessee cannot be allowed depreciation as intangible asset u/s 32(1)(ii) as this does not fall under the definition of intangible asset as contained in section 2(11) - HELD THAT - In case of Areva T D India Ltd. v. CIT 2012 (4) TMI 79 - DELHI HIGH COURT has held that excess amount paid over and above tangible asset for acquisition of various business and commercial rights and slump sale can be categorised under the goodwill and difference between purchase consideration and value of tangible asset taken over being the balancing figure was held to be goodwill and depreciation thereon was held to be allowable on the touchstone of decision of Techno Shares and Stocks Ltd. 2010 (9) TMI 6 - SUPREME COURT and CIT v. Simfs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT - The details of value of tangible assets taken over by the assessee by the slump sale agreement are necessary to be considered for adjudication of this issue - the issue of depreciation of goodwill and customer contracts being an intangible asset claimed in this case by the assessee needs to be examined by the Assessing Officer on the touchstone of the aforesaid decision. Accordingly the issue of depreciation of customer contracts and goodwill is remitted to the file of the AO.

Summary

Issues Involved:
1. Disallowance of rent.
2. Disallowance of special adhesive stamps expenses.
3. Disallowance of provision for warranty.
4. Disallowance of depreciation on customer contracts.
5. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Disallowance of Rent:
This issue was not pressed by the appellant during the proceedings, and hence, it was dismissed as not pressed.

2. Disallowance of Special Adhesive Stamps Expenses:
The assessee incurred ?59,17,000 on adhesive stamps for the conveyance deed related to the assignment of receivables. The claim was denied by the authorities as capital expenditure. The assessee argued that the expenditure was for business purposes and should be allowed as revenue expenditure, relying on Supreme Court decisions in CIT vs. Bombay Dyeing and Manufacturing Co. and India Cement Ltd. v. CIT. The Tribunal found that the conveyance deed was for assigning receivables, not acquiring a capital asset, and thus, the expenditure should be allowed as business expenditure. The Tribunal held that the CIT(A) erred in treating the expenditure as capital.

3. Disallowance of Provision for Warranty:
The assessee's provision for warranty of ?2,76,18,000 was disallowed by the Assessing Officer as unascertained and contingent. The CIT(A) upheld this but limited the disallowance to the provision made during the year. The Tribunal, referencing the Supreme Court's decision in Rotork Controls India (P.) Ltd. v. CIT, found that the provision for warranty met the criteria for recognition as a liability and should be allowed as an expenditure. The Tribunal set aside the lower authorities' orders and decided in favor of the assessee.

4. Disallowance of Depreciation on Customer Contracts:
The assessee claimed depreciation on customer contracts, arguing they were valuable rights and capital assets under sections 2(11) and 32(1)(ii) of the Act. The authorities below denied this, stating customer contracts did not qualify as depreciable intangible assets. The Tribunal referred to the Supreme Court's decision in CIT v. Smifs Securities Ltd., which allowed depreciation on goodwill and similar intangible assets. The Tribunal remitted the issue back to the Assessing Officer to examine the claim on the touchstone of the Supreme Court's decisions, emphasizing the need to consider the value of tangible assets taken over in the slump sale agreement.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not specifically address this issue as it was not commented on by the CIT(A) and was not pressed further during the proceedings.

Conclusion:
The appeals were partly allowed, with significant decisions favoring the assessee on the disallowance of special adhesive stamps expenses and provision for warranty. The issue of depreciation on customer contracts was remitted back for re-examination.