2014 (9) TMI 315 - AT - Income Tax

Depreciation on goodwill Held that - The depreciation on goodwill is allowable - The objections of authorities below are not founded on sound legal principles - The authorities have misconstrued the provisions of section 32 of the Act, while rejecting the claim of the assessee - the authorities have doubted the transactions effected by the assessee-company - CIT(A) has proceeded on the assumption that the contracts as entered into by the assessee-company were not genuine - Such assumption was on the basis that the assignment agreement was executed on a plain-paper and termination agreement was executed on a stamp-paper - Under the Contract Act, there is no distinction between a contract executed on plain-paper and executed on a Stamp-paper. Both the contracts are enforceable under the Contract Act - Any non-payment of the stamp duty attracts the provisions of the respective Stamp Act - The authorities have not given any finding as to how this contract is the sham transaction without even examining the persons who have executed the same it could not be held that the transactions were sham or otherwise not for business purpose following the decision in CIT vs. Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT - the assessee is eligible for depreciation on goodwill as claimed and this addition made on this count is hereby directed to be deleted Decided in favour of assessee. Levy of interest u/s.234B Held that - The Finance Bill introduced was passed in both the Houses of Parliament, receiving the assent of the hon ble President of India, on May 11, 2001 - Till that time, the assessee could not have visualized that the individual liability would be fastened on him - the assessee fairly deposited a sum by way of self-assessment before the date of filing the return which also proved the bona fide credentials of the assessee - the authorities below were not justified in levying the interest u/s.234B of the Act, when the liability to pay the tax is due to retrospective amendment in the provisions of section 115JB of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation claimed on Goodwill.
2. Non-allowance of consideration paid to RKIT as revenue expenditure.
3. Computation of interest under Sections 234B and 234C.
4. Levy of interest under Section 234B on additions due to retrospective amendments.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation Claimed on Goodwill:
The Assessee challenged the disallowance of Rs. 5,758,019 related to depreciation on Goodwill of Rs. 25,609,516. The Assessing Officer (AO) disallowed this claim, considering the transaction of purchasing business rights as a sham. The AO argued that the goodwill was not an intangible asset similar to know-how, patents, copyrights, trademarks, licenses, or franchises, as required under Section 32 of the Income Tax Act. The CIT(A) upheld the AO's decision, stating that the goodwill created through the merger was beyond the meaning of assets contemplated by the section. The CIT(A) also questioned the genuineness of the transaction with RKIT, citing lack of contemporary evidence and common addresses of involved entities. However, the Tribunal found that the authorities below misconstrued the provisions of Section 32 and failed to provide evidence that the transactions were sham. It was held that depreciation on goodwill is allowable, following the Supreme Court's decision in CIT vs. Smifs Securities Ltd. and other relevant case laws.

2. Non-Allowance of Consideration Paid to RKIT as Revenue Expenditure:
The Assessee claimed Rs. 2,00,00,000 paid to RKIT as a revenue expenditure deductible under Section 37(1). The AO and CIT(A) rejected this claim, viewing the transaction as not genuine and part of a demerger scheme. The Tribunal, however, found no basis for the authorities' assumption that the transaction was not genuine. It was held that the payment to RKIT was a legitimate business transaction, and the Assessee's claim for depreciation on goodwill was allowed, rendering this ground moot.

3. Computation of Interest Under Sections 234B and 234C:
The Assessee contested the computation of interest under Sections 234B and 234C, which was consequential to the additions/disallowances made by the AO. The Tribunal did not specifically address this issue, as it was consequential to the primary issues being resolved in favor of the Assessee.

4. Levy of Interest Under Section 234B on Additions Due to Retrospective Amendments:
The Assessee argued against the levy of interest under Section 234B on additions made due to retrospective amendments, claiming it could not have foreseen such amendments at the time of paying advance tax. The Tribunal agreed, citing precedents from the Madras High Court and ITAT Ahmedabad, which held that interest under Section 234B is not applicable when the tax liability arises from a retrospective amendment. The Tribunal directed the AO to delete the interest levied under Section 234B.

Conclusion:
The Tribunal allowed the Assessee's appeal, directing the deletion of disallowances related to depreciation on goodwill and the levy of interest under Section 234B due to retrospective amendments. The Assessee's alternative claim and the computation of interest under Sections 234B and 234C were rendered moot and consequential, respectively.