2014 (8) TMI 271 - AT - Income Tax

Enhancement of income No reasonableness of purchase consideration Held that - CIT(A) has not only upheld the disallowance of depreciation but he has held that the entire payment sum was to be disallowed u/s 40A(2) - CIT(A) has referred that Shri Binoy Jacob was main promoter of TPPL i.e. one company in which he holds 74% shares - in the assessee company which bought the ongoing business for TPPL Shri Binoy Jacob holds 50% share - Other investor M/s. Saipen Italy had acquired 50% share at a premium of 45,840 per share of ₹ 10 /- each - But Shri Binoy Jacob did not have to pay a single rupee as premium on acquisition of 50% equity - CIT(A) found that there is no plausible explanation as to why Saipen should pay such high premium for acquision of a startup company - CIT(A) has held that entire sum liable to be disallowed and he enhanced the assessment to that extent. Whether a payment made by the assessee which has neither been claimed as an expenditure or a loss can be disallowed and subject to taxation Held that - Assessee s counsel has fairly admitted that the valuation report was obtained post slump sale agreement in order to determine / record the values of various tangible and intangible assets acquired by the assesee - If there are defects in the valuation report, it cannot lead to conclusion that the whole agreement between the assesee and the other parties is bogus - tax planning through legitimate means is perfectly justified - it has never been the arguments of the revenue that the money paid by Saipen Italy was not paid or was of Mr. Binoy Jacob or was of TPPL own money routed through this manner - the conclusion by the authorities that the whole scheme was a colourable device cannot be sustained and is liable to be set aside. Depreciation of payment of intangibles Held that - CIT(A) has found that valuation report was prepared by a Chartered Accountant who was also appearing on behalf of the assessee in the appellate proceedings - numerous defects have been reported in the valuation report - the valuer has mentioned that in preparing the valuation report the valuer has relied upon and assumed without independent verification , the accuracy and completeness of all information provided by the company - the information provided there has not been verified by the valuer - the valuer is a Chartered Accountant and he made his valuation only by taking into account the economic data and the ratio of turnover and profits - there is lack of credibility on the valuation assigned by the valuer towards technical knowhow, valuation of business and price for non-compete clause - the main stay of the TPPL was consultancy and execution of FPSO projects though its skilled employee who were very much a part of assessee company - It has further been noted by the CIT(A) that the assessee has never engaged in any R & D activity - credible materials have not been brought out by the valuation report on which a specific valuation can be attributed to the intangible assets the authorities are justified in holding that assesee is not entitled to depreciation on the valuation of technical knowhow, valuation of business and non-compete fee mentioned - Relying upon CIT vs. Smith Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - good will is an asset under Explanation 3 (b) to section 32(1) of the I.T. Act. Whether the valuation of good will by the assesee at ₹ 40.58 crore is appropriate or not Held that - The valuation report submitted by the assesee does not deal with valuation of good will - no material has been brought on record which can aid into the computation of good will in this regard - revenue has submitted that the sum of ₹ 40.58 crore towards good-will was arrived at between the assessee and the TPPL before the agreement - there are proper and generally accepted methods of valuation of good-will and there was no method or procedure applied for valuation of good will has been brought on record the matter is remitted back to the AO for adjudication. Application of section 170 and Explanation 3 of section 43(1) Held that - The whole scheme in the case cannot be termed as sham transaction - while dealing with enhancement on account of disallowance of depreciation by invoking 5th proviso to section 32(1), CIT(A) has observed that there is no need to give separate opportunity for the enhancement - AO has not considered these aspects thus, the matter is remitted back to the AO for fresh consideration. Enhancement on account of rent for use of assets Held that - In the agreement the lease rent of ₹ 30 per sq. ft. p.m. was specified - The facilities in this regard included provision for air conditioning facilities through AC plant and also power back up facilities through DG sets - CIT(A) has found the sum paid is excessive and he had substituted the same with this figure of ₹ 6 sq. ft. there was no basis whatsoever for arriving at this figure of ₹ 6 per sq. ft. has been specified - even if the payment made is considered to be excessive and it cannot be substituted by any guess work or otherwise thus, the matter is remitted back to the AO for fresh consideration Decided partly in favour of assessee.

Summary

Issues Involved:
1. Exclusion of Rs. 18,07,786 from taxable income.
2. Disallowance of depreciation on intangible assets worth Rs. 10,14,46,882.
3. Enhancement of income by Rs. 30,44,06,647 under Section 40A(2).
4. Disallowance of depreciation on fixed assets acquired from the seller.
5. Enhancement of income by disallowing depreciation under Explanation 3 to Section 43(1).
6. Enhancement of income by disallowing lease rentals paid by the appellant.

Issue-wise Detailed Analysis:

1. Exclusion of Rs. 18,07,786 from Taxable Income:
The appellant did not press this ground during the hearing. Consequently, the ground was dismissed as not pressed.

2. Disallowance of Depreciation on Intangible Assets:
The appellant claimed depreciation on intangible assets acquired during a slump sale, including technical know-how, brand name, and non-compete rights. The Assessing Officer (AO) disallowed this depreciation, doubting the existence and valuation of these intangible assets. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, adding that the transaction appeared to be a colorable device to gain tax benefits. The CIT(A) also enhanced the income by Rs. 30,44,06,647, invoking Section 40A(2), arguing that the payment for acquiring the business was excessive and unreasonable.

Upon appeal, it was noted that the valuation report used by the appellant was undated and lacked credibility. The report was prepared by a Chartered Accountant who also represented the appellant, raising questions about its independence. The Tribunal found that the valuation of intangible assets was not substantiated with credible material, and thus, the disallowance of depreciation on these assets was justified. However, the Tribunal held that the entire payment made for acquiring the business could not be treated as the appellant's income, as it was a capital expenditure. The enhancement of income by Rs. 30,44,06,647 was set aside.

3. Enhancement of Income by Rs. 30,44,06,647 under Section 40A(2):
The CIT(A) invoked Section 40A(2) to disallow the entire sum of Rs. 40.58 crores paid for acquiring the business, arguing that it was excessive and unreasonable. The Tribunal found this invocation inappropriate, as the payment was capital in nature and not claimed as a revenue expenditure. The Tribunal set aside the enhancement, stating that even if the payment was considered excessive, it could not be added to the appellant's income.

4. Disallowance of Depreciation on Fixed Assets Acquired from the Seller:
The CIT(A) enhanced the assessment by disallowing depreciation on fixed assets to the extent of Rs. 16,86,487, arguing that the appellant, as a successor, was only entitled to depreciation apportioned to the number of days of use. The Tribunal remitted this issue to the AO for reconsideration, directing that the AO should examine the facts afresh and allow depreciation as per the law.

5. Enhancement of Income by Disallowing Depreciation under Explanation 3 to Section 43(1):
The CIT(A) invoked Explanation 3 to Section 43(1) to disallow depreciation on tangible assets, arguing that the appellant had acquired these assets at an enhanced cost to claim higher depreciation. The Tribunal remitted this issue to the AO, directing a fresh examination of the facts and allowing depreciation based on the written down value (WDV) as per the Income Tax Act.

6. Enhancement of Income by Disallowing Lease Rentals Paid by the Appellant:
The CIT(A) disallowed Rs. 55,79,200 out of the lease rentals paid by the appellant, arguing that the payment of Rs. 30 per sq. ft. was excessive. The Tribunal found that the CIT(A) had substituted the lease rental with an arbitrary figure of Rs. 6 per sq. ft. without any basis. The Tribunal remitted this issue to the AO for fresh consideration, directing that the AO should determine the reasonableness of the lease rental after giving the appellant an opportunity to present evidence.

Conclusion:
The Tribunal allowed the appeal partly, setting aside the enhancement of income by Rs. 30,44,06,647, and remitted several issues back to the AO for fresh consideration. The Tribunal directed the AO to examine the facts afresh and allow depreciation and lease rentals as per the law, ensuring that the appellant is given an adequate opportunity to present evidence.