2015 (12) TMI 1467 - HC - Income Tax

Disallowance u/s 40A(2)(b) - payment of sale value was in excess of the fair market value - related parties - Held that - Section 40A(2)(a) of the Act provides that where the assessee incurs expenditure in respect of which payment has been made to any person referred to in clause (b) of that sub-section, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefits derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Therefore, for the purpose of disallowing a deduction, the Assessing Officer has to form an opinion not only that the expenditure is excessive or unreasonable, but that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made. As noticed hereinabove, the Commissioner (Appeals) has recorded a categorical finding of fact to the effect that the Assessing Officer has not brought any material on record to show that the payments in question exceeded the fair value of the services received. Insofar as the legitimate needs of such services etc. is concerned, the Commissioner (Appeals) has found as the matter of fact that as a result of utilising the employees of its sister concerns and on payment of service charges, the assessee company started making operational profits from assessment year 2001-02. Under the circumstances, it cannot be said that the services were not availed for any legitimate need. The Tribunal has concurred with the aforesaid findings of fact recorded by the Commissioner (Appeals). Essentially, therefore, the conclusion arrived at by the Tribunal is based upon findings of fact to the effect that there is no material to show that the payments made exceed the fair market value and that the services have been availed for legitimate needs of the assessee company. On behalf of the appellant nothing has been pointed out to show that the Tribunal has placed reliance upon any irrelevant material or that any relevant material has been ignored. No contrary material has been brought to the notice of the court so as to dislodge the findings of fact recorded by the Tribunal. Under the circumstances, the conclusions arrived at by the Tribunal being based upon findings of facts recorded by it after appreciating the evidence on record.- Decided against revenue Depreciation on goodwill - ITAT allowed claim - Held that - Section 32 of the Act provides for the deductions to be allowed in respect of depreciation of - (a) buildings, machinery, plant or furniture, being tangible assets; and (b) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets being acquired on or after the 1st day of April, 1998. Explanation 3 to section 32 provides that for the purposes of that sub-section, the expressions assets and block of assets shall mean (a) tangible assets, being buildings, machinery, plant or furniture; (b)intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. (a) While goodwill has not been specifically mentioned in the category of intangible assets under clause (b), in the case of CIT v. Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT has held that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Under the circumstances, the controversy raised vide the second proposed question clearly stands concluded by the above decision. The Tribunal, therefore, did not commit any error in following the said decision. - Decided against revenue

Summary

Issues Involved:
1. Disallowance under Section 40A(2)(b) of the Income Tax Act.
2. Allowance of depreciation on goodwill.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(2)(b) of the Income Tax Act:
The primary issue was whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the disallowance made under Section 40A(2)(b) by not appreciating the facts brought out by the Assessing Officer (AO). The AO noticed that heavy amounts were paid by the assessee to various concerns, which were covered under Section 40A(2)(b). These payments were for royalty, commission, and service charges. The AO found these payments to be excessive compared to the nature of services received and added these expenses back to the income of the assessee.

The Commissioner (Appeals) found that the payments were justified by the results obtained and that no material was brought on record to show that the payments exceeded the fair value of the services received. The Tribunal concurred with the Commissioner (Appeals), noting that the AO had not provided any evidence to show that the payments were excessive or that the services were not required for legitimate business needs. The Tribunal found that the payments made were for legitimate needs and did not exceed the fair market value. The High Court upheld the Tribunal's decision, stating that the conclusions were based on findings of fact and did not give rise to any question of law.

2. Allowance of Depreciation on Goodwill:
The second issue was whether the ITAT erred in allowing depreciation on goodwill by relying on the Supreme Court decision in CIT v. Smifs Securities Limited. The AO had disallowed the depreciation claimed on goodwill, arguing that not all intangible assets qualify for depreciation under Section 32 of the Act. The Commissioner (Appeals) allowed the claim, and the Tribunal upheld this decision.

The Tribunal noted that both parties agreed that the issue was covered by the Supreme Court's decision in CIT v. Smifs Securities Ltd., where it was held that goodwill is an asset under Explanation 3(b) to Section 32(1) of the Act. The High Court found no error in the Tribunal's decision to follow the Supreme Court ruling, concluding that the controversy was settled by the decision in Smifs Securities Ltd., and no substantial question of law arose.

Conclusion:
The High Court dismissed the appeals, affirming the ITAT's decisions on both issues. The findings were based on factual determinations that the payments made under Section 40A(2)(b) were justified and that the depreciation on goodwill was allowable as per the Supreme Court's interpretation of Section 32(1).