2019 (5) TMI 1208 - HC - Income Tax

Allowability of legal professional fees pertaining to buyback of shares - HELD THAT - It is clear that expenditure incurred does not include the price paid to share holders for buying back the shares, but it only relates to expenditure incurred for carrying out buyback scheme. Assessee has claimed deduction in respect of expenditure incurred for proceeding of implementation of buyback of shares which would not in any manner enhance the capital structure of the assessee but there is outflow of capital and no deduction is claimed for outflow of capital. Therefore, Tribunal has rightly allowed such expenditure as revenue expenditure. Allowability of club membership fees - Chairman and the Managing Director for increasing its business and business development - HELD THAT - The Tribunal relied upon the decision of this Court in case of Gujarat State Export Corporation Ltd v. CIT 1993 (9) TMI 52 - GUJARAT HIGH COURT , wherein the payment of fees to the Sports Club of Gujarat Limited has been examined and it was held that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefits of the business, it is properly attributable to capital and is of the nature of capital expenditure. However, if it is made for running the business or working with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. In view of this test laid down, the court, therefore, held that the payment of entrance fee for becoming a member of the sports club cannot be termed as a capital expenditure. In view of above settled legal position, it cannot be said that the Tribunal has committed any error of law in allowing membership fees paid to club by the Chairman and the Managing Director as revenue expenditure. Allowability of depreciation intangible rights/assets - company had purchased Imidachlorpid business on slump sale - whether manufacturing rights, marketing rights, other commercial rights and other assets relating to development, manufacturing process, registration, use, sale marketing and distribution of product are intangible assets - HELD THAT - Assets acquired under slump sale were capitalized in books of account as per generally accepted accounting principles in a slump sale several assets are purchased for a consolidated price and price is paid for the entire business as a whole. Hence, value to individual assets cannot be assigned directly. The valuation of Intangible assets and marketing rights have been done in accordance with the Accounting Standard 10 (AS 10) issued by the Institute of Chartered Accountants of India (ICAI) the company has assigned the values to the various assets on a fair basis. The payments made for acquisition of lmidachloropid products business pursuant to transfer of Business Transfer Agreement and intangible assets was allocated on the basis of valuation report from independent valuer M/s. Bansi S. Mehta Et Co. who had assigned the value of individual assets in accordance with AS 10. In view of the findings of fact, arrived at by the Tribunal holding that the assessee having purchased various assets under the business transfer agreement by way of slump sale and further that Mitsu Industries Ltd. was not a related concern as per the provisions of section 40A(2)(b) at the point of sale, depreciation u/s 32 is allowable to the assessee company both on the intangible assets as well as marketing rights. The Tribunal has therefore, not erred in allowing depreciation both on intangible assets as well as marketing rights u/s 32. It is not possible to state that the Tribunal has committed any legal error so as to warrant interference. No question of law, as proposed or otherwise, much less, substantial question of law. The appeal is dismissed.

Issues Involved:
1. Disallowance of legal and professional fees related to buyback of shares.
2. Disallowance of club membership fees.
3. Eligibility of intangible assets for depreciation.
4. Disallowance of depreciation on intangible assets and marketing rights.

Detailed Analysis:

Issue 1: Disallowance of Legal and Professional Fees Related to Buyback of Shares

The first issue pertains to the deletion of disallowance of legal and professional expenses amounting to ?10,25,500 incurred by the assessee in relation to the buyback of shares. The Assessing Officer (AO) disallowed the expenditure, categorizing it as capital expenditure since it was related to the reduction of share capital, which is not a day-to-day business activity. The CIT (Appeals) upheld this disallowance. However, the Tribunal allowed the expenditure as revenue expenditure, reasoning that the expenses were incurred for the implementation of the buyback scheme and did not enhance the capital structure of the company. The Tribunal's decision was based on its earlier rulings for the assessment years 2000-2001 and 2002-2003. The High Court agreed with the Tribunal, stating that the expenditure was rightly allowed as revenue expenditure since it did not include the price paid to shareholders but only the procedural costs.

Issue 2: Disallowance of Club Membership Fees

The second issue involves the disallowance of club membership fees of ?22,000 paid by the Chairman and Managing Director of the assessee company. The AO disallowed the expenditure, considering it personal in nature. The CIT (Appeals) upheld this disallowance. The Tribunal, however, allowed the expenditure under section 37 of the Act, citing precedents such as the Gujarat State Export Corporation Ltd v. CIT and CIT v. Samtel Color Ltd., which held that such expenses are revenue in nature if incurred for business purposes. The High Court affirmed the Tribunal's decision, stating that the expenditure was for business development and thus allowable as revenue expenditure.

Issue 3: Eligibility of Intangible Assets for Depreciation

The third issue questions whether manufacturing rights, marketing rights, and other commercial rights are intangible assets eligible for depreciation. The assessee had purchased the Imidachlorpid business from Mitsu Industries Ltd. for ?27,50,38,000, which included various intangible assets. The AO disallowed the depreciation claimed on these intangible assets, arguing that the assessee failed to justify the payment and did not provide specific details of the assets. The CIT (Appeals) upheld this disallowance. The Tribunal, however, allowed the depreciation, noting that the lump-sum consideration included various rights and assets, and the valuation was done as per generally accepted accounting principles and supported by an independent valuer's report. The High Court upheld the Tribunal's decision, recognizing the intangible assets and marketing rights as eligible for depreciation under section 32 of the Act.

Issue 4: Disallowance of Depreciation on Intangible Assets and Marketing Rights

The fourth issue is closely related to the third and deals with the disallowance of depreciation on intangible assets and marketing rights. The AO disallowed the depreciation of ?2,25,14,448 on intangible assets and ?2,29,30,000 on marketing rights, questioning the justification for the payment made by the assessee. The CIT (Appeals) upheld this disallowance. The Tribunal, however, allowed the depreciation, citing the Business Transfer Agreement and the valuation report by M/s. Bansi S. Mehta & Co. The Tribunal also referenced several judicial precedents, including CIT v. Smifs Securities Ltd. and Areva T & D India Ltd. v. DCIT, which supported the depreciation claim on intangible assets. The High Court affirmed the Tribunal's decision, stating that the depreciation on intangible assets and marketing rights was rightly allowed under section 32 of the Act.

Conclusion:

The High Court concluded that the Tribunal did not commit any legal error in its decisions regarding the disallowance of legal and professional fees, club membership fees, and depreciation on intangible assets and marketing rights. No substantial question of law arose from the Tribunal's order, and the appeal was dismissed.

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