2014 (6) TMI 330 - AT - Income Tax

Disallowance of depreciation on intangible asset Goodwill payment made Held that - Following India Capital Markets (P.) Ltd. Versus Deputy Commissioner of Income-tax. Range 4(2) Mumbai 2013 (1) TMI 646 - ITAT MUMBAI - Purchase of the clientele business by the assessee from M/s. AFC is a right which can be used as a tool to carry on the business Relying upon CIT vs. Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - goodwill is an asset eligible for depreciation thus, the assessee is entitled for depreciation on payment @ 25% as claimed by the assessee thus, the AO is directed to allow the claim made by it for depreciation on intangible asset Decided in favour of assessee. Disallowance u/s 40(a)(ia) of the Act - Bloomberg terminal charges Held that - Following India Capital Markets (P.) Ltd. Versus Deputy Commissioner of Income-tax. Range 4(2) Mumbai 2013 (1) TMI 646 - ITAT MUMBAI - assessee made the payment for terminal charges for on line information and data base access and retrieval services and therefore, no TDS was required to be deducted as the payment was for a subscription of financial e-magazin - Revenue could not bring any distinguishing facts which can suggest that the payment was liable for TDS - the payment is nothing but a subscription for e-magazine/journal thus, there was no infirmity in the finding of the CIT(A) Decided in favour of Assessee. Disallowance u/s 14A r.w Rule 8D of the Rules Held that -The Tribunal has restored back the matter of 14A disallowance to the AO for fresh adjudication -the assessee had not maintained separate accounts for exempt and taxable investments, that commons funds were used for making investments, that it had earned exempt income and the provisions of section 14A and rule 8D were applicable in the year - it had sufficient own fund for making investment - But, it was position as on 31st March of the year under appeal and the investments were not made on that day Relying upon The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - assessee had interest free funds thus, the matter is required to be remitted back to the AO for fresh adjudication Decided partly in favour of Assessee. Disallowance of prior paid expenses Held that - If the expenditure incurred in particular year are crystallised in a subsequent year because of certain reasons, same cannot be disallowed only on the ground that assessee is following Mercantile system of Accounting - If assessee is following a particular system of accounting and it is not distorting income, treatment of prior period expenses loses its importance - The allowability of such expenditure in a particular year has to be decided in pragmatic manner Relying upon COMMISSIONER OF INCOME-TAX Versus KHAITAN CHEMICALS AND FERTILIZERS LTD. 2008 (9) TMI 89 - DELHI HIGH COURT - from the details of the expenses that certain expenses related to the fees paid to the experts, out of pocket expenses incurred by the consultation firm and discharge of liability on account of demurrage claimed by the port authorities - prior period expenses can be allowed if bills are received in subsequent year - AS-5 stipulates that such expenditure should be given a particular treatment in the accounts - In the audit report, fact of prior period expenses was mentioned as required by the AS-5 - the expenditure incurred by the assessee for the earlier year is an allowable expenditure for the current year thus, the order of the FAA is reversed Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on intangible assets.
2. Disallowance of Bloomberg terminal charges under Section 40(a)(ia).
3. Disallowance under Section 14A applying Rule 8D.
4. Disallowance of prior period expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Intangible Assets:
The assessee challenged the disallowance of depreciation on an intangible asset amounting to Rs. 35,15,625/-. The Tribunal found that the issue was covered by its earlier orders in the assessee's own case for the Assessment Years 2006-07, 2007-08, and 2009-10. It was established that the payment to M/s. Ashmavir Financial Consultants P. Ltd. for acquiring retail clientele constituted an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. The Tribunal emphasized that the acquired clientele was a business or commercial right of similar nature to the specified intangible assets, thus qualifying for depreciation. The Tribunal directed the AO to allow the depreciation claim, thereby allowing Ground No. 1 in favor of the assessee.

2. Disallowance of Bloomberg Terminal Charges under Section 40(a)(ia):
The AO disallowed Bloomberg terminal charges of Rs. 8,67,196/- under Section 40(a)(ia) due to non-deduction of TDS. The FAA upheld this disallowance, considering the charges as fees for technical services under Section 194-J. However, the Tribunal noted that in earlier years, it had ruled in favor of the assessee, recognizing the payment as a subscription for an e-magazine/journal, not liable for TDS. Respectfully following its previous decisions, the Tribunal allowed Ground No. 2 in favor of the assessee.

3. Disallowance under Section 14A Applying Rule 8D:
The AO disallowed Rs. 14.99 lakhs under Section 14A read with Rule 8D for expenses related to earning exempt income. The FAA upheld the disallowance, noting the lack of separate accounts for exempt income and taxable investments. The Tribunal observed that the assessee had sufficient own funds for making investments, but the cash flow statement was necessary to prove the availability of tax-free funds at the time of investment. The Tribunal restored the matter to the AO for fresh adjudication, allowing Ground No. 3 partly in favor of the assessee.

4. Disallowance of Prior Period Expenditure:
The AO disallowed Rs. 11,820/- claimed as prior period expenditure, stating that it did not crystallize in the current year. The FAA upheld this view. However, the Tribunal noted that prior period expenses could be allowed if they crystallized in a subsequent year and were necessary for business operations. Referring to judgments by the Hon'ble High Courts, the Tribunal allowed the prior period expenditure, reversing the FAA's order and deciding Ground No. 4 in favor of the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the AO to allow depreciation on intangible assets and Bloomberg terminal charges while remanding the disallowance under Section 14A for fresh consideration and allowing the prior period expenditure. The order was pronounced in the open court on 28th May, 2014.