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2020 (11) TMI 809 - AT - Income TaxDisallowance of depreciation on intangible assets i.e. non-compete fees - HELD THAT - As decided in own case 2018 (8) TMI 1999 - ITAT MUMBAI assessee acquired 78% of the interest in the partnership firm, we are of the firm view that any payment which is made for not competing with the firm for the period of five years is evidently falls within the ambit of non compete fee as the payment was made to protect the business interest of the assessee as the assessee s cost of investment in the said firm was ₹ 91.51 crores which was made by way of capital contribution to the tune of ₹ 3.9 crores and ₹ 87.61 for acquiring the rights in the said partnership. Thus finding of the Ld. CIT(A) is fallacious and wrong and can not be sustained. In this case, the assessee has made payment of non compete fee and rightly treated and classified under intangible assets and claimed depreciation thereon @25%. We set aside the order of Ld. CIT(A) and direct the AO to allow the depreciation - Decided in favour of assessee. Disallowance made u/s. 14A - AO rejected the working of the assessee and by invoking provisions of Rule 8D worked out disallowance - HELD THAT - Since the revenue accepted the decision of the Ld.CIT(A) that the working of the assessee is more scientific than the adhoc estimation made by the Assessing Officer and such working of the assessee since made on scientific basis we do not see any reason to reject the computation of disallowance made by the assessee for the year under appeal. Thus, we direct the Assessing Officer to accept the working made for disallowance u/s. 14A by the assessee and restrict the disallowance u/s. 14A to the amount as adopted by the assessee. However, since the assessee had already made suomoto disallowance we direct the Assessing Officer to delete the disallowance made u/s. 14A r.w. Rule 8D of I.T. Rules. This ground is allowed. Disallowance u/s. 35D - expenses towards issue of shares to promoters and also for conversion of warrants and the expenses incurred for issue of shares/warrants - HELD THAT - In the facts and circumstances of the assessee s case which is engaged in the business of retailing of readymade garments, other accessories and household items through a chain of retail stores across the country and part of the garments sold are manufactured on job-work basis indicates that the assessee is doing business through all these departmental stores can be held to be an industry where a systematic economic activity is being carried on by the assessee - we direct the Assessing Officer to allow the claim for deduction u/s. 35D of the Act to the assessee. The decision relied by the Assessing Officer in the case of Vita (P.) Ltd. 1994 (11) TMI 117 - BOMBAY HIGH COURT is not applicable to the facts of the assessee s case as the same is not dealing with the provisions of section 35D of the Act and distinguishable even on facts. Disallowance towards Employees Stock Option Scheme ESOP expenses u/s. 37(1) - HELD THAT - In this case the assessee has amortized the expenses in connection with Employee Stock Options Scheme as per SEBI guidelines and claimed the same as revenue expenditure which according to the AO was not correct and he disallowed the same by holding that same is of capital in nature which was also affirmed by the CIT(A). We are not in agreement with the conclusion drawn by the Ld. CIT(A) on this issue that the amortization of expenditure claimed by the assessee is not admissible as revenue in nature and the issue is settled by the various judicial forums. As decided in own case 2018 (8) TMI 1999 - ITAT MUMBAI we allow the claim of the assessee for the year under appeal. This ground is allowed. Determination of Annual Letting Value (ALV) of the premises at Taj Building u/s. 23(1)(a) - HELD THAT - As decided in own case 2018 (8) TMI 1999 - ITAT MUMBAI we not in agreement with the conclusion drawn by the Ld. CIT(A) holding that the ALV determined on the basis of so called comparable cases which are not at all comparable due to the fact that there is no comparability between the two buildings at all and the locations and also in view of the fact that annual let out value is much lower than the actual rate received. The order of Ld. CIT(A) is set aside and AO is directed to accept the rent as shown by the assessee from the said property. Disallowance of expenditure incurred towards earning exempt income while computing its book profit taxable under section 115JB - HELD THAT - This issue has been decided by the Hon'ble Special Bench of Delhi in the case of Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it has been held that computation under clause (f) of explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s. 14A r.w. Rule 8D of the Act. In view of the decision above the claim of disallowance as computed under Rule 8D cannot be made while computing the book profits - assessee himself disallowed an amount of ₹.37,07,020/- as expenditure incurred towards earning exempt income while computing its book profits u/s. 115JB(2) - the assessee while computing the income under normal provisions of the Act had made suomoto disallowance u/s. 14A at ₹.37,66,085/-, as this computation of suomoto disallowance was made on a scientific basis we feel it appropriated to adopt the same even while computing the book profits u/s. 115JB. Disallowance made u/s. 36(1)(ii) - commission paid to the Directors on the ground that they hold equity shares of the company - HELD THAT - We noticed that Assessing Officer completely ignoring and without going into the submissions of the assessee made disallowance simply relying on the decision in the case of Loyal Motor Service Co. Ltd 1946 (3) TMI 17 - BOMBAY HIGH COURT . The decision in the case of New Silk Route Advisors Pvt. Ltd., 2018 (8) TMI 384 - BOMBAY HIGH COURT the Hon'ble Bombay High Court had also considered the decision in the case of CIT v. Shahzada Nand and Sons 1977 (4) TMI 4 - SUPREME COURT held that the payment made in the form of bonus to the employee Directors of the company is not a payment made in view of the dividend. Thus, following the decision of the Hon'ble Bombay High Court we direct the Assessing Officer to delete the disallowance made u/s. 36(1)(ii).
Issues Involved:
1. Disallowance of depreciation on intangible assets (non-compete fees). 2. Disallowance under Section 14A of the Income Tax Act. 3. Disallowance under Section 35D of the Income Tax Act. 4. Disallowance of expenses related to Employees' Stock Option Scheme (ESOP). 5. Determination of Annual Letting Value (ALV) of property. 6. Classification of interest income under the head "Income from other sources" instead of "Business income". 7. Disallowance of commission paid to directors under Section 36(1)(ii). 8. Adjustments to book profits under Section 115JB. Detailed Analysis: 1. Disallowance of Depreciation on Intangible Assets (Non-Compete Fees): - Facts: The assessee claimed depreciation on non-compete fees paid to partners, which was disallowed by the AO based on previous assessments. - Tribunal Decision: The Tribunal allowed the depreciation claim, following its own decision for A.Y. 2006-07, where it was held that non-compete fees fall within the ambit of intangible assets and are eligible for depreciation. - Outcome: The AO was directed to allow the depreciation on non-compete fees. 2. Disallowance under Section 14A: - Facts: The AO disallowed a significant amount under Section 14A using Rule 8D, which the assessee contested, claiming a more scientific method for disallowance. - Tribunal Decision: The Tribunal accepted the assessee's computation, which was consistent and scientific, and directed the AO to adopt the same. It was noted that the AO did not record proper satisfaction for rejecting the assessee's method. - Outcome: The disallowance under Section 14A was restricted to the amount computed by the assessee. 3. Disallowance under Section 35D: - Facts: The AO disallowed expenses claimed under Section 35D, arguing the assessee was not an industrial undertaking. - Tribunal Decision: The Tribunal held that the assessee, engaged in retailing and manufacturing on a job-work basis, qualifies as an industrial undertaking. It directed the AO to allow the deduction under Section 35D. - Outcome: The AO was directed to allow the claim for deduction under Section 35D. 4. Disallowance of ESOP Expenses: - Facts: The AO disallowed the amortized ESOP expenses, considering them capital in nature. - Tribunal Decision: Following its own decision for A.Y. 2006-07 and other judicial precedents, the Tribunal allowed the ESOP expenses as revenue expenditure. - Outcome: The AO was directed to delete the disallowance of ESOP expenses. 5. Determination of Annual Letting Value (ALV): - Facts: The AO determined a higher ALV for a property, which the assessee contested, arguing for the actual rent received or municipal value. - Tribunal Decision: The Tribunal directed the AO to accept the actual rent received as the ALV, following its own decision for A.Y. 2006-07 and other judicial precedents. - Outcome: The AO was directed to compute the ALV based on the actual rent received. 6. Classification of Interest Income: - Facts: The AO classified certain interest incomes under "Income from other sources" instead of "Business income." - Tribunal Decision: The assessee did not press this ground as it had no impact on the assessed income. - Outcome: The ground was dismissed as not pressed, with the issue kept open for future consideration. 7. Disallowance of Commission Paid to Directors under Section 36(1)(ii): - Facts: The AO disallowed commission paid to directors holding shares, considering it as dividend distribution. - Tribunal Decision: Following judicial precedents, the Tribunal held that the commission was performance-based and not in lieu of dividends. It directed the AO to delete the disallowance. - Outcome: The AO was directed to delete the disallowance under Section 36(1)(ii). 8. Adjustments to Book Profits under Section 115JB: - Facts: The AO added disallowances under Section 14A to book profits under Section 115JB. - Tribunal Decision: Following the Special Bench decision in Vireet Investments, the Tribunal held that disallowances under Section 14A should not be added to book profits under Section 115JB. - Outcome: The AO was directed to restrict the addition to the actual expenditure incurred for earning exempt income. Conclusion: The Tribunal provided detailed rulings on each issue, often following its own decisions from previous years and other judicial precedents. The decisions generally favored the assessee, directing the AO to accept the assessee's computations and claims where they were consistent and scientifically justified.
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