2020 (2) TMI 936 - AT - Income Tax

Deduction u/s 36(1)(v) on payment basis - Gratuity contribution to the unapproved fund - claim was basically denied on account of non approval of the scheme by CIT - HELD THAT - We find that subsequently the CIT vide order dated 21.09.2016 has granted the approval to the gratuity scheme and it is effective from 27.03.2012, being the date falling in the assessment year. In such a situation we are of the view that the assessee is eligible for deduction. We therefore, direct the Assessing Officer to consider the claim of assessee on merits and allow the same in accordance with law. Thus, the ground Nos.1 and 2 are allowed. Denial of claim of deduction on intangible assets - HELD THAT - It is an undisputed fact that the assessee had acquired electroplating business of Chemetall India Pvt. Ltd. vide agreement dated 15.12.2011 for total consideration of ₹ 11.80 crores which included ₹ 11.51 crores on account of various intangibles, which were valued as per independent valuation. It is Revenue s case that intangibles cannot be considered to be intangible assets so as to eligible for depreciation. As far as the issue of allowing Non compete fee is considered, we find that the Hon ble Bombay High Court in the case of Pr.CIT Vs. Piramal Glass Limited 2019 (6) TMI 891 - BOMBAY HIGH COURT on an identical issue it was held that, .....It can thus be seen that the rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression or any other business or commercial rights of similar nature used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation Hon ble Delhi High Court in the case of Areva T D India Ltd. Vs. DCIT 2012 (4) TMI 79 - DELHI HIGH COURT has held that specified intangible assets, viz. business claims, business information, business records, contracts, employees and know-how acquired by assessee under slump sale agreement are in nature of business or commercial rights of similar nature specified in section 32(1)(ii) of the Act and are accordingly eligible for depreciation under that section. Thus the assessee is eligible for the claim of depreciation and therefore, be allowed and thus, the ground No.3 raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 36(1)(v) of the Income Tax Act for Gratuity contribution to an unapproved fund.
2. Deduction under Section 37 of the Income Tax Act for Gratuity contribution.
3. Depreciation on intangible assets under Section 32 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 36(1)(v) of the Income Tax Act for Gratuity contribution to an unapproved fund:

During the assessment proceedings, the Assessing Officer (AO) disallowed a deduction of ?85,000 claimed by the assessee under Section 36(1)(v) of the Income Tax Act, 1961, for contributions made to the Group Gratuity Scheme of LIC. The AO noted that the gratuity fund was not approved by the Commissioner of Income Tax (CIT) despite the application being made prior to the assessment year. The CIT(A) upheld this disallowance, stating that without the requisite approval, the contribution could not be allowed under Section 36(1)(v). However, the Tribunal found that the CIT had subsequently granted approval effective from 27.03.2012, which falls within the assessment year. Therefore, the Tribunal directed the AO to allow the deduction on merits, thus allowing the assessee's grounds 1 and 2.

2. Deduction under Section 37 of the Income Tax Act for Gratuity contribution:

The assessee alternatively claimed the deduction under Section 37 of the Act. The CIT(A) rejected this claim, stating that Section 37 is a residual section applicable only to expenses not covered under Sections 30 to 36. Since Section 36(1)(v) specifically covers gratuity contributions, Section 37 would not apply. The Tribunal, however, did not need to address this alternative claim in detail as it allowed the deduction under Section 36(1)(v) based on the subsequent approval of the gratuity fund.

3. Depreciation on intangible assets under Section 32 of the Income Tax Act:

The AO disallowed the depreciation of ?1,38,62,500 claimed on intangible assets acquired as part of the electroplating business purchase from Chemetall India Pvt. Ltd. The AO argued that the claimed intangibles, including non-compete fees, distribution network rights, and customer lists, did not qualify as intangible assets under Section 32(1)(ii) of the Act. The CIT(A) upheld the AO's view, noting that the agreement was unregistered and lacked enforceability. The CIT(A) also referenced the Delhi High Court decision in Sharp Business Systems vs. CIT, which held that non-compete fees do not qualify for depreciation.

The Tribunal, however, found that the non-compete fee qualifies as an intangible asset eligible for depreciation, citing the Bombay High Court's decision in Pr.CIT Vs. Piramal Glass Limited and the Pune Tribunal's decision in ACIT Vs. Johnson Matthey Chemicals India Pvt. Ltd. The Tribunal also referred to various other judicial precedents, including the Delhi High Court's decisions in CIT Vs. MIS Bharti Teletech Ltd. and Areva T&D India Ltd. Vs. DCIT, which supported the depreciation claims for distribution network rights and customer lists as intangible assets. Consequently, the Tribunal allowed the assessee's claim for depreciation on these intangible assets.

Conclusion:

The Tribunal allowed the appeal of the assessee for both assessment years, directing the AO to grant the deductions and depreciation claims as per the merits and in accordance with the law. The Tribunal's decision was based on subsequent approvals and relevant judicial precedents supporting the assessee's claims.