2012 (12) TMI 132 - AT - Income Tax

Claim of Depreciation on goodwill - Scheme of Amalgamation - 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 as per decision of court in Commissioner of Income Tax, Kolkata Versus Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT Disallowance of prior period expenses - held that - An estimated income or liability, which is yet to be crystallized, can only be adjusted as a contingency item but not as an accrued income or liability of that year - restore the issue to CIT(A) for further adjudication.decision in Saurashtra Cement & Chemical Industries Ltd. vs. CIT, 1994 (10) TMI 30 - GUJARAT HIGH COURT is followed. Disallowance u/s 14A - held that - following the decision of court in case of Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - DELHI HIGH COURT it is fair and appropriate to set aside the order of CIT(A) and restore the matter to his file for deciding the issue, afresh in accordance with law in the light of aforesaid judicial pronouncements, after allowing sufficient opportunity to both the parties - In result, appeal for the AY 2004-05 is allowed but appeal for the AY 2005-06 is allowed partly for statistical purposes.

Issues Involved:

1. Validity of notice issued under section 148 and proceedings under section 147.
2. Entitlement to depreciation on goodwill under section 32 of the Income-tax Act.
3. Disallowance of certain items of expenditure/allowance.
4. Disallowance of prior period expenses.
5. Disallowance under section 14A of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued Under Section 148 and Proceedings Under Section 147:

The assessee contended that the notice issued under section 148 was invalid and that no income had escaped assessment. However, since the claim of depreciation on goodwill was allowed on merits, the grounds related to the validity of reopening the assessment for AY 2004-05 were treated as academic and therefore, infructuous.

2. Entitlement to Depreciation on Goodwill Under Section 32 of the Income-tax Act:

The assessee claimed depreciation on goodwill, which was disallowed by the AO and upheld by the CIT(A). The CIT(A) reasoned that goodwill did not fall under the specified categories of intangible assets eligible for depreciation under section 32(1)(ii). However, the Tribunal referred to the Supreme Court decision in CIT vs. Smifs Securities Ltd., where it was held that goodwill is an asset under Explanation 3(b) to Section 32(1) of the Act. Consequently, the Tribunal directed the AO to allow the claim of depreciation on goodwill, vacating the findings of the CIT(A).

3. Disallowance of Certain Items of Expenditure/Allowance:

For AY 2005-06, the AO disallowed prior period expenses and expenses incurred in earning exempt dividend income under section 14A. The CIT(A) upheld these disallowances. The Tribunal found that the AO did not analyze when the liability for these expenses crystallized and restored the issue to the CIT(A) for re-adjudication with specific findings on the crystallization of the liability.

4. Disallowance of Prior Period Expenses:

The AO disallowed prior period expenses without analyzing the crystallization of the liability. The CIT(A) upheld the disallowance without specific findings. The Tribunal vacated the findings of the CIT(A) and restored the issue to his file for re-adjudication, directing the CIT(A) to determine whether the liability for each item of the expenditure crystallized during the year under consideration.

5. Disallowance Under Section 14A of the Income-tax Act:

The AO disallowed expenses under section 14A following the decision in ITO vs. Daga Capital Management (P) Ltd. The CIT(A) upheld the disallowance. The Tribunal noted that Rule 8D, which prescribes the method for determining disallowable expenditure under section 14A, applies prospectively from AY 2008-09. For earlier years, the AO must determine the disallowable expenditure by a reasonable method. The Tribunal set aside the order of the CIT(A) and restored the matter to his file for fresh adjudication in light of judicial pronouncements, including the decision of the Hon'ble jurisdictional High Court in Maxopp Investment Ltd.

Conclusion:

The appeal for AY 2004-05 was allowed, directing the AO to allow the claim of depreciation on goodwill. The appeal for AY 2005-06 was partly allowed for statistical purposes, with issues related to prior period expenses and section 14A disallowance remanded to the CIT(A) for re-adjudication. The Tribunal emphasized the need for specific findings and adherence to judicial pronouncements in the re-adjudication process.

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