2023 (3) TMI 83 - AT - Income Tax

Nature of expenditure - acquiring customer contracts and assembled workforce - Revenue or capital expenditure - HELD THAT - On perusal of materials placed before us, we are convinced that there is nothing therein which could even remotely suggest that the assessee, at any point of time, before acquiring the debt collection services business, was in the same line of business. It is a fact on record that the assessee has made payment for acquiring the customer contracts and assembled workforce, which are nothing but capital assets and would give enduring benefits to the assessee. In sum and substance, by incurring the expenditure, the assessee has acquired a completely new business set up, which is nothing but an income generation tool. Therefore, in our view, the expenditure incurred is in the nature of capital expenditure. To that extent, we agree with the view expressed by the departmental authorities. Enhancement of income by FAA - whether FAA was justified in reducing the value of customer related contracts and goodwill by tinkering with the value determined by registered valuer? - As observed assessee has paid the consideration for acquiring the business on the basis of value determined by an independent valuer. It is a fact that the assessee has paid the consideration as determined by the Valuer for acquiring the business. There is nothing on record to suggest that the payment claimed to have been made for acquiring the business is either non-genuine or doubtful. At least, no such view, either express or implied, can be found either in the observations of the Assessing or learned first appellate authority. Thus, when the payment made by the assessee is not disputed and is in terms of an agreement between two parties, learned Commissioner (Appeals) cannot arbitrarily and unitarily reduce a part of the payment made for computing depreciation. In any case of the matter, the consideration paid by the assessee is supported by valuation report of an independent Valuer, who is an expert in the field. In case, learned first appellate authority had any doubt regarding valuation report, he should have referred the valuation to an expert, instead assuming the role of Valuer himself and tinkering with valuation of certain assets made in the valuation report, viz., customer and contract goodwill. Thus, action of Commissioner (Appeals) in reducing the value of customer contract and goodwill, as determined by the independent Valuer is wholly inappropriate, hence, unsustainable. Accordingly, we reverse the decision of Commissioner (Appeals) on the issue of valuation. Consequently, the computation of the Assessing Officer in allowing depreciation at 25% is upheld. Grounds are partly allowed.

Summary

Issues:
1. Nature of expenditure incurred by the assessee for acquiring customer contracts and assembled workforce from another company.
2. Justification of reducing the value of customer-related contracts and goodwill determined by a registered valuer.

Analysis:
1. The appeal involved two primary issues for consideration. Firstly, whether the expenditure incurred by the assessee for acquiring customer contracts and assembled workforce should be treated as revenue or capital in nature. The Assessing Officer contended that the expenditure provided enduring benefits to the assessee, indicating capital nature. The assessee argued that no enduring benefit was derived, thus claiming it as revenue expenditure. The Assessing Officer referred to the accounting treatment and auditor's note to support the capital nature of the expenditure. Ultimately, it was concluded as capital expenditure, allowing depreciation at 25% and adding the balance to the income.

2. The second issue revolved around the reduction of the value of customer contracts and goodwill by the learned Commissioner (Appeals). The Commissioner found that the valuation included the value of trained workforce and assembled workforce, which he deemed inappropriate. He also questioned the enhancement of income due to valuation discrepancies. The Commissioner reduced the value of customer contracts and goodwill, disagreeing with the independent valuer's assessment. The Appellate Tribunal disagreed with the Commissioner's decision, stating that the payment for acquiring the business was based on a valuation report by an expert valuer. They deemed the reduction of value by the Commissioner as inappropriate and unsustainable, upholding the depreciation allowed by the Assessing Officer.

In conclusion, the Tribunal partly allowed the appeal, upholding the capital nature of the expenditure and rejecting the reduction in value of customer contracts and goodwill. The decision emphasized the importance of expert valuation reports and criticized arbitrary adjustments made by authorities without valid grounds.