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2022 (8) TMI 745 - AT - Income TaxDisallowance of depreciation on the brand value - brand value introduced in the balance sheet by the assessee s firm before conversion into a Public Limited Company w.e.f.30.04.2008 - assessee s contention was that before undertaking the conversion of the partnership firm into public limited company, the transferor partnership firm valued all its assets and liabilities at net realizable value i.e. Fair Market Value (FMV) - HELD THAT - Before undertaking the transfer, the partnership firm valued all assets and liabilities at net realizable value as per valuation report submitted. The firm valued the registered brand name for its brand value of Rs.60,24,10,642/- independent and scientific method of valuation as per internationally expected standards using the double discount rate of the market, @ 28% 10% margin of errors in the present case, and transferred the same to the assessee company i.e. the transferee by satisfying all the conditions prescribed under the Act i.e.47(xiii) - According to us, now this value is found to be reasonable in regard to brand value and assessee is eligible for claim of depreciation acquired from the partnership firm in lieu of allotment of fully paid equity shares to the partners of the partnership firm. We noted that the authorities below have wrongly applied the provisions of section 55(2)(a) for determining the NIL value of the brand, which cannot be a case where all the materials was produced by the assessee before the authorities below and even now before us. According to us, the assessee has rightly computed depreciation on actual cost basis u/s.43(1) of the Act and not applied the provisions of Sec.55(2)(a) of the Act. Hence, we accept the value determined by the valuer at Rs.60,24,10,642/- and direct the AO to allow depreciation on the same as per law. Consequent to the above findings as regards the brand value accepted at Rs.60,24,10,642/-, insofar as claim of depreciation although conversion of partnership firm into private limited company took place in financial year 2009-10, the assessee has claimed depreciation only from AY 2013-14 onwards. The assessee claimed that as per fifth proviso to section 32(1) of the Act, in the year of succession he cannot claim depreciation because of overlapping of period of depreciation to be claimed by predecessor and successor. However, for remaining two assessment years the assessee by oversight has not claimed depreciation on brand value. But contended that even assessee has not claimed depreciation as per provisions of section 32, the AO should allow depreciation as per law. We find that even if the assessee does not claim depreciation on assets, the AO should allow depreciation in accordance with provisions of section 32 and thus, we direct the AO to allow depreciation on brand value from the year in which the assessee is entitled for such depreciation. Addition of construction expenses in regard to Anbu Illam Thulir School and RJ Mantra Thulir School and consequent interest disallowance on the same - HELD THAT - No doubt the assessee is not in the business of running an educational institute but the assessee s employees numbering more than 850 are residing in remote area where their children cannot go to school as there is no nearby school in the rural area. According to us, in such situation running a school is for the welfare of employees and providing education to children of the employees is an allowable expenditure in the hands of the assessee company. This issue has been dealt with by the Hon ble Karnataka High Court almost on the same facts in the case of CIT vs. Pandavapura Sahakara Sakkare Karkhane Ltd., 1988 (6) TMI 39 - KARNATAKA HIGH COURT wherein it is held that contribution by the co-operative society for the education fund under the provisions of Karnataka Cooperative Societies Act is held deductible as expenditure. Even Hon ble Bombay High Court in the case of Krishna Sahakari Sakhar Karkhana Ltd. 1997 (7) TMI 97 - BOMBAY HIGH COURT held that contribution made by the assessee under section 68 of the Maharashtra Cooperative Societies Act, 1960 for the education fund created for the purpose of the education of the children of the employees is held to be deductible. Since the issue is exactly identical here also, the assessee company has constructed the building for running a school in the vicinity of the factory building for the children of the employees of the assessee company. This according to us, is allowable expenditure and we direct the AO accordingly. This issue is arising in all the 7 assessment years in regard to construction expenses of Anbu Illam , construction of R.J. Mantra Tulir School and interest on loan taken for construction purposes for the building of R.J.Mantra English School, is allowable in all these assessment years. We direct the AO accordingly. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A r.w.r. 8D - HELD THAT - Assessee before us contended that he is not aggrieved by the order of CIT(A) and he is ready to accept the disallowance to the extent of exempt income in view of various decisions of Hon ble High Courts and particularly the Hon ble High Court of Madras in the case of CIT v. Chettinad Logistics (P) Ltd. 2017 (4) TMI 298 - MADRAS HIGH COURT and the Hon ble Supreme Court in the case of Maxopp Investment Ltd., 2018 (3) TMI 805 - SUPREME COURT To this, the ld. CIT-DR has not objected. Hence, we find no infirmity in the order of CIT(A) and accordingly this common issue in all these 7 assessment years of assessee s appeals is dismissed. Addition u/s 40A(2) - Allegation of Excessive price paid to related parties - HELD THAT - Price of the transaction entered into between these two parties is excessive and unreasonable and particularly in the hands of the firm in term of the provisions of section 40A(2)(a) of the Act. The provisions of section 40A(2) of the Act applies for making disallowance of expenses for payments, which have been claimed as deduction in computation of profit loss account of business and it shall not apply for income or gains under any circumstances. Further, we are of the view that as per income-tax law, the disallowance if the expenditure is excessive or unreasonable, can be made only in the hands of the receiver of the goods and not in the hands of the seller of the goods. In view of the above facts and circumstances, we cannot accept the argument of Revenue that the transaction is colourable device coming within the ambit of case law of Mcdowell supra. Further, we also point out that this transaction of sale and purchase although gives profit but it is taxed neutral from the point of view of the Revenue for the reason that the firms profit is taxable from Re.1 as the maximum marginal rate and even the profits of the assessee company is also taxable at the maximum margin rate. Once this is the situation, there is no impact on taxability of the profit and hence, we are of the view that the addition made by AO and confirmed by CIT(A) on account of shifting of profit of the assessee company to its sister concern M/s. Rasathe Garment, a partnership firm is without any basis and hence, deleted. For all these 5 assessment years, the additions made are deleted and the issue of assessee appeals is allowed. Disallowance of foreign tour expenses - HELD THAT - AO noted that the expenditure debited in the books of accounts of the assessee company on account of foreign tour expenses on 27.04.2011 was for some of the employees along with their spouse travelling to Thailand and Bangkok on a tour package. According to AO, the assessee is unable to correlate these expenses with the purpose of business. Hence, he disallowed the same. Aggrieved assessee preferred appeal before CIT(A). CIT(A) considering the submissions of the assessee and noted that in the absence of any documentation of the relation of the activities on this trip with the business of the appellant the assessing officer has disallowed the expenditure and according to him there is no reason to interfere with the order of the assessing officer for disallowing the expenditure. Hence the disallowance made is confirmed.
Issues Involved:
1. Depreciation on Goodwill and Brand Value. 2. Disallowance of Construction Expenses. 3. Disallowance of Expenses Relatable to Exempt Income. 4. Shifting of Profits to Sister Concern. 5. Disallowance of Foreign Tour Expenses. 6. Revision Order by PCIT. Issue-wise Detailed Analysis: 1. Depreciation on Goodwill and Brand Value: The primary issue was whether the assessee could claim depreciation on the brand value of Rs. 60,24,10,640/-. The assessee argued that the brand value was scientifically determined and transferred from a partnership firm to a public limited company, satisfying all conditions under Section 47(xiii) of the Income Tax Act. The AO and CIT(A) disallowed the depreciation, claiming the brand value was self-generated and had a nil cost of acquisition. However, the Tribunal accepted the valuation report, noting that the brand value was determined using internationally accepted standards and directed the AO to allow depreciation on the brand value. 2. Disallowance of Construction Expenses: The AO disallowed expenses for constructing buildings for Anbu Illam Thulir School and RJ Mantra Thulir School, arguing they were not for business purposes. The CIT(A) upheld the disallowance, considering the expenses as donations. The Tribunal, however, allowed the expenses, recognizing them as part of labor welfare measures and in line with the company's objectives to provide education to employees' children. 3. Disallowance of Expenses Relatable to Exempt Income: The AO made disallowances under Section 14A read with Rule 8D for expenses related to exempt income. The CIT(A) restricted the disallowance to the extent of the exempt income, which the Tribunal upheld, aligning with the decisions of higher courts. 4. Shifting of Profits to Sister Concern: The AO alleged that the assessee shifted profits to its sister concern, Rasathe Garments, to reduce tax liability. The CIT(A) confirmed this view. However, the Tribunal found that transactions were at arm's length and both entities were separate taxable entities. It noted that the transactions were tax-neutral as both entities were taxed at the maximum marginal rate, thus deleting the additions made by the AO. 5. Disallowance of Foreign Tour Expenses: The AO disallowed foreign tour expenses for employees, arguing they were not for business purposes. The CIT(A) upheld this disallowance. The Tribunal also confirmed the disallowance as the assessee could not substantiate the business purpose of the expenses. 6. Revision Order by PCIT: The PCIT revised the assessment order under Section 263, questioning the brand valuation accepted by the AO. The Tribunal quashed the revision order, noting that the issue had already been adjudicated in favor of the assessee regarding the brand value and depreciation. Conclusion: The Tribunal allowed the appeals related to depreciation on brand value and construction expenses, upheld the CIT(A)'s decision on disallowance of expenses related to exempt income, deleted the additions regarding profit shifting to the sister concern, confirmed the disallowance of foreign tour expenses, and quashed the revision order by the PCIT.
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