2013 (11) TMI 186 - AT - Income Tax

Disallowance of Depreciation on Goodwill Payment Made Over and Above the NAV Slump Sale Agreement Business Transfer - appellant contended that as part of business transfer there were certain other intangible assets that were acquired viz., knowhow, employees, business information, business records - 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) of the Act and were accordingly eligible for depreciation under that Section - Decided in favor of assessee. Areva T & D India Ltd. v. DCIT 2012 (4) TMI 79 - DELHI HIGH COURT - applying the principle of ejusdem generis, which provided that where there were general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression business or commercial rights of similar nature specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of knowhow, patents, trademarks, licenses or franchises but must be of similar nature as the specified assets Decided in faovur of Assessee. Provision for Liquidated Damages - Expenses Towards Information Technology & Marketing Support Activities - Disallowance of the share of common expenses Held that - Held that - Disallowance of warranty provision, the reasoning adopted by the Assessing Officer as well as CIT(A) was that the assessee had only followed approximation method instead of taking into consideration the liquidated damages as claimed by the concerned parties in the absence of any record maintained on the claim raised by the assessee, the CIT(A) had rightly held that the liability in question was an unascertained one and not allowable - Consequently, qua this ground of the assessee, we confirm the findings of the CIT(A). The CIT(A) s order that on the one hand he was directing the Assessing Officer to verify and allow the expenditure and on the other hand, he had disallowed the entire expenditure claimed by the assessee unmindful of the fact that the Assessing Officer himself had accepted the same - the findings of the CIT(A) in this regard were mutually contradictory. The whole expenditure claimed by the assessee as capital expenditure was disallowed and directed the Assessing Officer to pass a fresh order after due verification of the claim raised by the assessee in accordance with law by affording adequate opportunity of hearing. Accordingly, this ground is partly accepted for statistical purpose.

Issues Involved:
1. Disallowance of depreciation on goodwill.
2. Disallowance of provision for liquidated damages.
3. Disallowance of ISSCO and country network expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Goodwill:
The primary issue in I.T.A. No. 4330/Del/2009 was whether the depreciation on goodwill acquired as part of a business purchase from ALSTOM Projects should be allowed. The assessee argued that the goodwill was acquired by paying an amount over and above the net asset value, and this goodwill was intrinsically linked with the transfer of business operations. The assessee had claimed depreciation of Rs.3,11,01,728/- at 25% on this goodwill. However, the Assessing Officer disallowed this claim, referencing the previous assessment year where a similar claim was rejected on the basis that the goodwill was not included in the list of assets subject to the agreement and was not proven to be related to business or commercial rights like know-how, patents, etc.

In appeal, the assessee cited a Delhi High Court judgment which had accepted the depreciation claim on goodwill in the preceding assessment year. The Tribunal referred to the Delhi High Court's decision, which applied the principle of ejusdem generis to interpret "business or commercial rights of similar nature" in Section 32(1)(ii) of the Act. The High Court concluded that such rights need not be limited to know-how, patents, trademarks, etc., but could include other intangible assets that facilitate business operations. Consequently, the Tribunal allowed the assessee's appeal, accepting the claim for depreciation on goodwill.

2. Disallowance of Provision for Liquidated Damages:
In I.T.A. No. 1213/Mds/2010, the assessee contested the disallowance of a provision for liquidated damages amounting to Rs.18,92,000/-. The assessee argued that the provision was scientifically calculated based on past data and contractual terms, similar to the provision for warranty. The Assessing Officer, however, treated it as an unascertained liability and disallowed it, reasoning that it was only an approximation and not based on actual claims.

The CIT(A) upheld the disallowance, distinguishing the provision for liquidated damages from the provision for warranty. The CIT(A) reasoned that while the provision for warranty could be allowed if scientifically maintained, the provision for liquidated damages was not similarly ascertainable and should be treated as an unascertained liability. The Tribunal agreed with the CIT(A), noting that the assessee did not maintain records of claims raised by purchasers, thus failing to substantiate the provision scientifically. Consequently, the disallowance of the provision for liquidated damages was confirmed.

3. Disallowance of ISSCO and Country Network Expenses:
The assessee also challenged the disallowance of 50% of the expenses pooled and shared by all AREVA units towards Information Technology (ISSCO) and Marketing support activities, totaling Rs.75,34,297/-. The Assessing Officer had deemed these expenses excessive and unreasonable, particularly since they were paid to a sister concern, and restricted the claim to 50%.

The CIT(A) went further, disallowing the entire claim on the grounds that the expenses were capital in nature, related to the installation of hardware and servers, and should be treated as capital expenditure eligible for depreciation. The CIT(A) directed the Assessing Officer to allow depreciation as per law after verifying the details.

The Tribunal found the CIT(A)'s findings contradictory, as the CIT(A) both directed verification and disallowed the entire expenditure. The Tribunal deleted the CIT(A)'s disallowance of the entire expenditure and directed the Assessing Officer to pass a fresh order after due verification, allowing the claim in accordance with the law.

Conclusion:
The Tribunal allowed the appeal regarding the depreciation on goodwill (I.T.A. No. 4330/Del/2009) and partly allowed the appeal regarding the provision for liquidated damages and ISSCO and country network expenses (I.T.A. No. 1213/Mds/2010) for statistical purposes, directing further verification by the Assessing Officer.

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