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2013 (7) TMI 12 - AT - Income TaxDisallowance of depreciation - as per Dept. the acquisition of client base of SKS society is neither an intangible asset nor a business or commercial right of similar nature - Held that - It is not disputed that the assessee has acquired the entire business and commercial asset of SKS on payment of lumpsum consideration which included the cost of acquisition of the existing customer base of SKS Society. It is also a fact that, the customer base acquired by the assessee has provided an impetus to the business of the assessee as the customers acquired are with proven track record since they have already been trained, motivated, credit checked and risk filtered. They are source of assured economic benefit to the assessee and certainly are tools of the trade which facilitates the assessee to carry on the business smoothly and effectively. Therefore, by acquiring the customer base the assessee has acquired business and commercial rights of similar nature. As decided in Areva T & D India Ltd. Vs. DCIT (2012 (4) TMI 79 - DELHI HIGH COURT) while interpreting the term business or commercial rights of similar nature by applying the principle of ejusdem generis held that the specified intangible assets acquired under slump sale agreement were in the nature of business or commercial rights of similar nature specified in section 32(1)(ii) and were accordingly eligible for depreciation under that section. Thus the MOU between the assessee and SKS Society cannot be said to be purely personal & the acquisition of rights over the assets of SKS Society including the customer base is an intangible asset against the entire World, therefore, client acquisition cost paid by the assessee is towards acquiring an intangible asset and therefore eligible for depreciation u/s 32(1)(ii). In favour of assessee. Proportionate expenditure u/s 14A r.w.r. 8D disallowed - Held that - As relying on Godrej Boyce Mfg. Co. Ltd vs. DCIT(2010 (8) TMI 77 - BOMBAY HIGH COURT) wherein held while making that determination the AO should provide a reasonable opportunity to the assessee for producing its accounts or relevant material having a bearing on the facts and the circumstances of the case. In the present case AO has not afforded adequate opportunity to the assessee and has not given any finding whether the assessee has incurred direct or indirect expenditure for earning dividend income from mutual fund. The CIT (A) has also not given any conclusive finding in this regard. Thus remit this issue to the file of the AO for reconsideration. Interest on loan to Managing Director and notional interest at the rate of 9% on account of advancing loans to employees welfare trust disallowed - Held that - From the assessment order of the CIT (A)no clear cut finding whether the assessee has utilised borrowed funds for giving loan to the MD or employees welfare trust aroses. In case of SSPDL Ltd. Vs. DCIT 2013 (7) TMI 18 - ITAT HYDERABAD held that unless interest payment is directly related to the diverted funds, it cannot be said that interest incurred by the assessee was for non business purpose - remit this issue to AO to decide afresh. De-recognition of interest on NPA disallowed - Held that - As decided in Southern Technologies Ltd. Vs. JCIT (2010 (1) TMI 5 - SUPREME COURT OF INDIA) that income recognition with regard to NPAs should be as per section 45Q of the RBI Act. & CIT vs. Vasisth Chay Vyapar Ltd., and another (2010 (11) TMI 88 - Delhi High Court) that where even the principal amount itself had become doubtful of recovery it cannot be said that interest thereupon had accrued & that having regard to the provisions of section 45Q of the RBI and prudential norms issued by the RBI in exercise of its statutory powers where interest was not received on non performing asset and the possibility of recovery was almost nil it could not be treated to have been accrued in favour of the assessee direct the AO to delete the amount as it cannot be said that interest amount has accrued to the assessee.
Issues Involved:
1. Disallowance of depreciation on intangible assets. 2. Disallowance of proportionate expenditure under section 14A of the Income Tax Act. 3. Disallowance of interest on loans to the Managing Director and employees' welfare trust. 4. Disallowance of de-recognition of interest on Non-Performing Assets (NPAs). 5. Levy of interest under section 234B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of Depreciation on Intangible Assets: The primary issue was whether the assessee was entitled to claim depreciation on the client base acquired from Swayam Krishi Sangam (SKS). The assessee argued that the client base was an intangible asset under section 32(1)(ii) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the depreciation, stating that the client base did not qualify as an intangible asset under the Act. The CIT (A) upheld this view, concluding that the client base did not relate to intellectual property. However, the Tribunal found that the client base acquisition provided economic benefits and facilitated business operations, thus qualifying as a business or commercial right of similar nature. The Tribunal referenced various judicial precedents, including the Delhi High Court's decision in Areva T&D India Ltd. v. DCIT and the Supreme Court's ruling in CIT v. Smifs Securities Ltd., to support its decision. Consequently, the Tribunal directed the AO to allow the depreciation claim. 2. Disallowance of Proportionate Expenditure under Section 14A: The AO disallowed Rs. 2,15,000 under section 14A, treating it as expenditure incurred for earning exempt income from mutual funds. The CIT (A) confirmed this disallowance, noting an increase in borrowed funds and applying the ratio of the Kerala High Court's decision in VI Baby & Co. The Tribunal, referencing the Bombay High Court's ruling in Godrej and Boyce Mfg. Co. Ltd. v. DCIT, noted that the AO had not adequately determined whether the assessee incurred any expenditure for earning the exempt income. The Tribunal remitted the issue back to the AO for fresh consideration, ensuring a reasonable opportunity for the assessee to present its case. 3. Disallowance of Interest on Loans to Managing Director and Employees' Welfare Trust: The AO disallowed interest on loans given to the Managing Director (MD) and the employees' welfare trust, arguing that these were not for business purposes. The CIT (A) upheld the disallowance, stating that the loans were for personal benefit and not for promoting the company's business. The Tribunal noted the assessee's contention that the loans were advanced for commercial expediency and directed the AO to verify whether borrowed funds were used for these loans. The Tribunal remitted the issue back to the AO for a fresh decision after providing the assessee with a reasonable opportunity to be heard. 4. Disallowance of De-recognition of Interest on NPAs: The AO added back Rs. 9,63,944, representing de-recognized interest on NPAs, arguing that the assessee followed the mercantile system of accounting. The CIT (A) upheld this addition. The Tribunal, referencing the Supreme Court's decision in Southern Technologies Ltd. v. JCIT and the Delhi High Court's ruling in CIT v. Vasisth Chay Vyapar Ltd., held that interest on NPAs should not be recognized on an accrual basis. The Tribunal directed the AO to delete the addition, recognizing that the interest had not actually accrued to the assessee. 5. Levy of Interest under Section 234B: The assessee challenged the levy of interest under section 234B. The Tribunal noted that the levy of interest is consequential and depends on the final tax computation by the AO. Therefore, this issue was not adjudicated at this stage. Conclusion: The Tribunal allowed the assessee's appeals on several grounds, directing the AO to allow depreciation on the client base, reconsider the disallowance under section 14A, verify the use of borrowed funds for loans to the MD and employees' welfare trust, and delete the addition of de-recognized interest on NPAs. The issue of interest under section 234B was deemed consequential and not adjudicated at this stage.
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