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2019 (11) TMI 803 - AT - Income TaxExpenditure incurred towards levy by EU Commission - whether incurred for the purpose of carrying on its business and, therefore, it cannot be disallowed u/s 37(1) ? - HELD THAT - What has to be disallowed under Explanation 1 to Sec.37(1) of the Act is a payment made, for contravention of laws in force in India and not of any foreign country. The laws are specific to each of the countries according to their rules and regulations and an offence in one country may not be so in another country. Therefore, we agree with the contentions of Ld.Counsel for the assessee that it is only payment made for contravention of laws in force in India that disallowance under Explanation 1 to Sec.37(1) of the Act is to be made. Whether the payment is compensatory or penal in nature? - We find that the European Commission had required the assessee to pay 1.18 crores of GBP which is equivalent to 141,50,90,000 INR which is the exact amount received by assessee from Niche. The assessee had claimed it to be disgorgement/compensatory, whereas the Revenue had pleaded that it is only by coincidence that the penalty levied by EU is also exactly the same amount which is received by the assessee. Ld.DR argued that it is not disgorgement because though the receipt is from Niche, the payment by the assessee is to European Commission. Therefore, we agree with the Ld.DR that it cannot be treated as disgorgement or compensatory in nature. The next contention of the assessee is that without such payment and without such agreement, the assessee could not have carried out its business in EU and therefore it is towards commercial expediency and to carry on business of assessee, and, therefore, it is business loss. However, we find that the authorities below have not examined this aspect of the issue. Therefore, we are of the opinion that the question as to whether it is to be allowed as business loss particularly when assessee has offered the receipt as income in earlier AY and the revenue has accepted it as business income is to be examined by the AO. Therefore, for this limited purpose, we set aside the issue to the AO with a direction to allow it as business loss if the income has been offered to tax in the earlier A.Y. In the result ground no.2 of the assessee is partly allowed for statistical purposes. Disallowance of depreciation claimed on goodwill arising out of scheme of amalgamatio n - HELD THAT - l. In the case before us, the goodwill on which depreciation is claimed by the assessee is arising out of the amalgamation scheme, but is not solely the self-generated goodwill as alleged by the AO. Further, the AO followed the decision Of United Breweries 2016 (9) TMI 1527 - ITAT BANGALORE to disallow the claim of depreciation on goodwill. The Tribunal had considered the judgment of the Hon ble Supreme Court in the case of Smiffs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT and has held that the Hon ble Supreme Court has only held that goodwill is an intangible asset and that depreciation is allowable thereon, but, that it does override the provisions of 5th Proviso to section 32(1) of the Act. We find that the facts of United Breweries 2016 (9) TMI 1527 - ITAT BANGALORE are distinguishable from the facts of the case before us, as in the case of United Breweries, there was a merger with its Wholly owned Subsidiary, whereas in the case of the assessee, it is amalgamation by purchase. Therefore, the decision in the case of United Breweries is not applicable to the case before us. Enhancement made by the Ld. CIT(A) u/s 68 - HELD THAT - We find that u/s 251(1) of the Act, the CIT(A) has the power to confirm, reduce, enhance or annul the assessment in an appeal against an order of assessment. In the case before us, the AO did not examine the allowability of the sum paid to settle the liabilities of Agila and Onco as part of the sale consideration. In fact, the AO accepted the payment. If the CIT(A) was of the opinion that the AO ought to have verified the genuineness of the same, the option available to the Department are under section 147 or under section 263 but, CIT(A) could not have embarked on bringing a new source of income to tax. Therefore we delete the income enhanced by the CIT(A) and brought to tax. The ground No. 4 is allowed. Disallowance of expenditure u/s 14A - HELD THAT - We find that the assessee has earned exempt income of ₹ 3,86,52,685/- during the relevant AY whereas the disallowance made by the AO is of ₹ 3,11,70,470/- and, therefore, as held by the Hon ble Delhi High Court in the case of Joint Investments (P) Ltd. Vs. CIT, 2015 (3) TMI 155 - DELHI HIGH COURT that the disallowance u/s 14A rwr 8D is to be restricted to the exempt income earned during the year. The AY before us is AY 2014-15 and therefore, Rule 8D is very much applicable to the assessee. Further, in a number of cases, it has been held that only the average of the investments which have yielded exempt income is to be considered for computation of 14 A disallowance. Finding of the CIT(A) that goodwill has to be amortized over a period of 5 years cannot be sustained. Particularly, when there is no provision for such amortization of goodwill and allowability of depreciation thereon over a period of 5 years. Thus, revenue appeal is dismissed.
Issues Involved:
1. Disallowance of fine levied by EU Commission. 2. Disallowance of depreciation on goodwill recorded on amalgamation. 3. Enhancement by CIT(A) under section 68 of the Act. 4. Disallowance under section 14A of the Act. 5. Interest levied under section 234C. Detailed Analysis: 1. Disallowance of fine levied by EU Commission: The assessee claimed a litigation cost of ?141.50 crores as a business expenditure under section 37(1). The AO disallowed this, treating it as a penalty for violating EU competition laws. The assessee argued that the amount was compensatory and not penal, as it was a return of income previously received and taxed. The Tribunal held that the disallowance under Explanation 1 to section 37(1) applies only to violations of laws in India, not foreign laws. The Tribunal directed the AO to examine if the amount could be allowed as a business loss under section 28(i), considering it was previously offered to tax. 2. Disallowance of depreciation on goodwill recorded on amalgamation: The assessee claimed depreciation on goodwill arising from the amalgamation of Agila Specialities Ltd. and Onco Therapies Ltd. The AO disallowed it, stating the goodwill was self-generated and not pre-existing in the amalgamating company's books. The CIT(A) partially upheld the AO's decision. The Tribunal, relying on the Supreme Court's decision in Smiff Securities Ltd., held that goodwill arising from amalgamation is eligible for depreciation under section 32(1). The Tribunal found the AO's interpretation incorrect and allowed the depreciation claim. 3. Enhancement by CIT(A) under section 68 of the Act: The CIT(A) enhanced the income by ?1,592.6 crores under section 68, treating the repayment of third-party loans and liabilities of Agila and Onco as unexplained creditors. The Tribunal held that the CIT(A) overstepped her jurisdiction by introducing a new source of income not considered by the AO. The Tribunal, citing Supreme Court precedents, stated that such enhancement is beyond the CIT(A)'s powers and deleted the addition. 4. Disallowance under section 14A of the Act: The AO disallowed ?3.11 crores under section 14A, attributing it to expenses incurred for earning exempt income. The assessee argued that it had sufficient interest-free funds and no actual expenditure was incurred for earning exempt income. The Tribunal noted that the disallowance should be restricted to the exempt income earned during the year, as per the Delhi High Court's decision in Joint Investments (P) Ltd. The Tribunal directed the AO to recompute the disallowance accordingly. 5. Interest levied under section 234C: The Tribunal did not provide a detailed analysis on this issue, implicitly suggesting no change to the AO's decision on levying interest under section 234C. Conclusion: The Tribunal allowed the assessee's appeal partly, directing the AO to reconsider certain disallowances and deleting the enhancement made by the CIT(A). The revenue's appeal was dismissed, affirming the Tribunal's stance on the amortization of goodwill.
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