2023 (4) TMI 1378 - AT - Income Tax

Disallowance of depreciation on goodwill - allowability of amortization/depreciation of the goodwill emerged out of amalgamation of two entities with assessee - HELD THAT - Goodwill falls in the category of Intangible Assets but its advantages must be tangible and assessee has to establish on record that by virtue of Goodwill what are the financial and non-financial gains are accruing to him. In this case what we observed pre-merger and post-merger is simply a consolidation of figures of entities involved and not a percentage growth in terms of sales profitability net worth and customer base etc. post-merger. In view of the above discussion and legal history analysed we are of the considered view that order of Ld. CIT (A) is not sustainable in law and order of AO is restored as found to be based on sound legal logics. In the result Ground Nos. 1 2 of the Revenue is allowed. Disallowance of Expenses Attributable to Real Estate Project - We found that it s a settled legal position of law that Legal Professional Expenses and Marketing and Business Development Expenses are time related expenses and not related to any specific project. As far as Brokerage Expenses are concerned those were incurred only towards Dosti Ambrosia which has been completed during the year and revenue is also offered accordingly. For A.Y. 2014-15 also on the similar grounds claim of expenses was allowed by coordinate bench of ITAT Mumbai 2022 (9) TMI 1641 - ITAT MUMBAI - As revenue is failed to produce any evidence or argument which differentiates the facts of the of the assessee for current A.Y. vis- -vis A.Y. 2014-15 we respectfully follow the order of coordinate bench and dismiss the appeal of Revenue on this ground. As these are the revenue expenditure allowable u/s. 37 of the Act further disallowance of the same and capitalising the same will tantamount to double addition as on the one hand expenses claimed by the assessee is reduced on the other hand same are capitalised as work-in-progress will enhance the value of inventory and profits will be increased. Hence Ground No. 3 raised by the Revenue is dismissed. Provisions made for meeting expenses in future - Assessee s contention that since 49% of the total area is sold and a total consideration is offered to tax and a corresponding cost of construction of the total estimated cost has to be claimed following the Matching Concept . Regarding the balance 51% total estimated cost is carried to work-in-progress and will be claimed against the corresponding sales value - HELD THAT - A lot of water has flown since this matter reached to us and this issue has already been examined in depth in later years by the department itself. Now the only grievance of the revenue can be of deferment of profits which also became irrelevant/ academic only on the given facts. Law of land laid down by Hon ble Apex Court on this issue is very clear that on the issue of deferment of results no reopening or other actions can be taken if otherwise there is no loss to the revenue. We found force in the arguments of assessee on the pretext of double addition. As on the one hand revenue wants to disallow the provision and on the other hand they want to add the same to WIP of the assessee it clearly tantamount to double addition. Considering the facts of the matter along with legal principles laid down by Hon ble High Courts and Apex Court we found the order of Ld. CIT (A) as sustainable on above grounds and requires no interference from us. In the result Ground No. 4 raised by the Revenue is dismissed. Addition u/s. 14A - Suo moto addition made by assessee - HELD THAT - Before making disallowance the AO has not given any cogent reasons for rejecting the disallowance under section 14A made by the appellant itself and resorting to the provisions of section 14A (2) read with Rule 8D. A perusal of the impugned order reveals that the AO has not properly examined the suo-moto disallowance made by the assessee. Nor has the AO expressed any opinion on the correctness or otherwise of the appellant s claim in respect of aforesaid expenditure. Hon ble Apex Court in the case of M/s Maxopp Investments Limited 2018 (3) TMI 805 - SUPREME COURT held that the AO needs to record satisfaction before invoking provisions of Section 14A reads with Rule 8D. As far as investments in partnership forms are concerned assessee was only a partner and there is no active involvement at the end of the Assessee. Hence share of profit received by the Assessee which is exempt u/s 10(2A) cant trigger disallowance provisions of Section 14A. Decided against revenue.

Summary

Issues Involved:

1. Amortization/Depreciation of Goodwill
2. Deduction of Expenses Attributable to Real Estate Project
3. Disallowance of Provision for Future Expenses
4. Disallowance under Section 14A
5. Interest under Section 234A

Detailed Analysis:

1. Amortization/Depreciation of Goodwill:

The primary issue was whether the goodwill created by the amalgamation of two entities with the assessee could be amortized over four years and whether it was eligible for depreciation under Section 32 of the Act. The Tribunal found that the scheme of amalgamation was not fully observed by the assessee, particularly in considering reserve and surplus for the calculation of goodwill. It was held that in cases of amalgamation among closely held companies with the same owners/promoters, goodwill cannot emerge as no new entity is involved. The Tribunal emphasized that the accounting method used, "pooling of interests," did not support the creation of goodwill. It was concluded that the order of the CIT (A) allowing depreciation on goodwill was unsustainable, and the AO's order was restored.

2. Deduction of Expenses Attributable to Real Estate Project:

The issue pertained to the disallowance of Rs. 1,58,34,292/- as expenses attributable to a real estate project, which the CIT (A) allowed as a deduction instead of capitalizing. The Tribunal found that legal and professional expenses, marketing, and business development expenses are time-related and not specific to any project. Brokerage expenses were incurred for a completed project, and revenue was offered accordingly. The Tribunal upheld the CIT (A)'s order, dismissing the Revenue's appeal on this ground, stating that these expenses are revenue expenditures allowable under Section 37 of the Act.

3. Disallowance of Provision for Future Expenses:

The issue involved the disallowance of a provision made for future expenses amounting to Rs. 86,68,91,003/-. The Tribunal noted that the provision was either spent or reversed in subsequent years and that the expenses were considered genuine in assessments under Section 143(3). The Tribunal found the CIT (A)'s order sustainable, emphasizing that the Revenue's approach would result in double addition. The Tribunal dismissed the Revenue's ground, aligning with legal principles that prevent reopening or other actions if there is no loss to the Revenue.

4. Disallowance under Section 14A:

This issue concerned the disallowance made by the AO under Section 14A, which was deleted by the CIT (A). The Tribunal observed that the AO did not provide cogent reasons for rejecting the disallowance made by the assessee and did not record any satisfaction regarding the correctness of the assessee's claim. Citing judicial precedents, the Tribunal held that the AO must record satisfaction before invoking provisions of Section 14A read with Rule 8D. The Tribunal upheld the CIT (A)'s order, dismissing the Revenue's ground.

5. Interest under Section 234A:

The cross-objection by the assessee involved the upholding of interest under Section 234A due to alleged non-adherence to statutory time limitations. The Tribunal did not provide a detailed analysis of this issue, as it was not pressed during the hearing, and it was treated as dismissed.

Conclusion:

The Tribunal allowed the Revenue's appeal partially, specifically on the issue of goodwill amortization/depreciation, while dismissing other grounds raised by the Revenue. The cross-objections filed by the assessee were dismissed, with some issues already addressed in the Revenue's appeal.