2020 (10) TMI 1009 - AT - Income Tax

Disallowance of special adhesive stamps expenses affixed on conveyance deed for assignment of business - assessee had stated that the same was in connection with acquisition of business and was claimed as revenue expenditure - HELD THAT - CIT(A) s conclusion that the expenditure is to cure and complete the title to capital is without appreciating the facts of the case. This assignment is admittedly for facilitating the business of the assessee by assigning receivables and as the assessee has acquired the said industrial unit for a lump sum consideration. The expenditure is in connection with facilitating recovery of receivables which is a part of current asset. Hence the expenditure in this regard cannot be said to be in the capital filed of acquiring business. It is in fact for facilitating the business of the assessee and in this view of the matter expenditure is allowable as business expenditure. The case laws referred by assessee in the case of Bombay Dyeing Mfg. 1996 (2) TMI 8 - SUPREME COURT and India Cements Ltd. 1965 (12) TMI 22 - SUPREME COURT are accordingly germane and support the case of the assessee. Provision for warranty claimed as expenditure - claim denied by AO on the ground that it is an unascertained liability and a contingent liability - CIT(A) in principal upheld the action of the Assessing Officer but directed that only the provision made during the year should be disallowed - HELD THAT - We find that the authorities below have erred in considering the provisions of warranty as contingent liability. As already submitted by learned Counsel of the assessee in assessee s own case, subsequently revenue authorities have allowed the expenditure on the basis of Rotork Controls India P. Ltd. case 2009 (5) TMI 16 - SUPREME COURT . Depreciation in respect of customer contracts - Assessee had claimed that the customer contracts are valuable right and therefore capital asset - HELD THAT - In the case of Areva T D India Ltd. Vs. CIT 2012 (4) TMI 79 - DELHI HIGH COURT has held that excess amount paid over and above tangible asset for acquisition of various business and commercial rights and slump sale can be categorised under the goodwill and difference between purchase consideration and value of tangible asset taken over being the balancing figure was held to be goodwill and depreciation thereon was held to be allowable on the touchstone of decision of Techno Shares and Stocks Ltd 2010 (9) TMI 6 - SUPREME COURT . The details of value of tangible assets taken over by the assessee by the slump sale agreement are necessary to be considered for adjudication of this issue. Hence, in our considered opinion the issue of depreciation of goodwill and customer contracts being an intangible asset claimed in this case by the assessee needs to be examined by the Assessing Officer on the touchstone of the aforesaid decision. Accordingly the issue of depreciation of customer contracts and goodwill is remitted to the file of the AO.

Summary

Issues Involved:
1. Disallowance of rent and special adhesive stamps expenses.
2. Disallowance of provision for warranty.
3. Disallowance of depreciation on customer contracts.
4. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Rent and Special Adhesive Stamps Expenses:
The assessee incurred expenses for adhesive stamps related to the preparation of a deed of transfer and assignment of receivables, claiming it as revenue expenditure. The CIT(A) and AO disallowed this claim, treating it as capital expenditure for acquiring a business. The Tribunal found that the expenditure was for the assignment of receivables (current assets) and not for acquiring a capital asset. Thus, the expenditure was deemed allowable as business expenditure, citing relevant case laws such as CIT vs. Bombay Dyeing and Manufacturing Co. and India Cements Ltd. The Tribunal concluded that the CIT(A) erred in disallowing the expenditure.

2. Disallowance of Provision for Warranty:
The assessee made a provision for warranty expenses which was disallowed by the AO as an unascertained and contingent liability. The CIT(A) upheld this disallowance but limited it to the provision made during the year. The Tribunal referred to the Supreme Court decision in Rotork Controls India P. Ltd. vs. CIT, which established criteria for recognizing provisions. The Tribunal found that the provision for warranty met these criteria and was not a contingent liability. Consequently, the Tribunal allowed the provision for warranty as a deductible expenditure.

3. Disallowance of Depreciation on Customer Contracts:
The assessee claimed depreciation on customer contracts, treating them as intangible assets under section 32(1)(ii). The AO and CIT(A) disallowed this, arguing that customer contracts do not qualify as intangible assets under the relevant sections. The Tribunal referred to the Supreme Court decision in CIT vs. Smifs Securities Ltd., which allowed depreciation on goodwill as an intangible asset. The Tribunal noted that customer contracts, akin to goodwill, should be eligible for depreciation. The matter was remitted to the AO to examine the claim based on the principles established in the cited Supreme Court decisions.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not provide a detailed discussion on this issue as it was not specifically addressed by the CIT(A). The Tribunal's focus remained on the substantive issues of disallowance and depreciation claims.

Conclusion:
The Tribunal allowed the appeals partly, remitting the issue of depreciation on customer contracts and goodwill to the AO for re-examination. The Tribunal allowed the provision for warranty as a deductible expense and ruled that the adhesive stamp expenses were revenue in nature, thus allowable. The appeals were disposed of with directions for re-evaluation by the AO where necessary.