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TMI Blog2010 (12) TMI 700X X X X Extracts X X X X X X X X Extracts X X X X ..... slump sale, depreciation has to be allowed on the assets sold in slump sale up to the date of transfer or no depreciation is to be allowed on assets transferred for the year in which such transfer takes place in terms of section 43(6)(c)(i)(C)(b). - Held that:- Assessing Officer was right in computing depreciation for the period from 1.4.2002 to 30.3.2003 and reducing the same while computing the value of assets transferred in slump sale. Whether in view of section 43(6)(c)(i)(C)(b) only depreciation actually absorbed against the profits is to be taken into consideration or allowable depreciation has to be computed for all the years after 1.4.1988 for computing value of assets to be reduced from block of asset irrespective of the fact whether in the books the assessee had charged depreciation or not. - Held that:- Depreciation is to be charged for the period from 1.4.2002 to 30.3.2003 while computing the actual cost of the assets transferred by way of slump sale. - The depreciation allowable on the assets for the period upto 31.3.2002 has to be taken into consideration while computing the actual cost of the assets transferred by way of slump sale. X X X X Extracts X X X X X X X X Extracts X X X X ..... d in treating the expenditure on advertisement of Rs.1,11,00,000/- and sales promotion expenses of Rs.1,72,00,000/- as capital expenditure, ignoring the fact that the said expenditure was incurred for building "Brand" and "Image" of the company, which gives enduring benefit to the company and thus the expenditure on advertisement and sales promotion is in the nature of capital expenditure." 5. Brief facts apropos this issue are that the assessee had claimed advertisement expenses of Rs.1.11.crores and sales promotion expenses Rs.1.72 crores. The Assessing Officer required the assessee to justify its claim. After considering the assessee's submissions, the Assessing Officer concluded that the assessee had incurred such heavy expenditure to propagate and build up Brands owned by it. He observed that in this era of free market economy and cut throat competition, to sustain in the market and to increase the market share, brand identity and brand popularity are very important. He did not accept the assessee's contention that the expenditure was only for the purpose of boosting its sales. The Assessing Officer after considering various case laws concluded that the expenditure was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 3063/Mum/2006 order dated 31.12.2009 for the Assessment Year 1999-00 and 2001-02. As regards reliance placed on the decision of the Hon'ble Bombay High Court in the case of Patel International Film Ltd. supra, the ld. Counsel for the assessee pointed out that the same is distinguishable on facts as in the said case the assessee had purchased a film as model to demonstrate to its customers the colour processing work at the laboratory. Thus, purchase of film resulted in the acquisition of asset of capital nature providing enduring benefit to the assessee. The ld. Counsel for the assessee further pointed out that the Tribunal had considered the decision of the Hon'ble Bombay High Court in the case of CIT vs. Geoffrey Manners and Co. Ltd. wherein the Hon'ble Bombay High Court had considered the decision in the case of Patel International Film Ltd. supra. In this case the assessee produced an advertisement film to promote its products. The expenditure was incurred on promotion of films, slides, advertisement films and the assessee claimed it as deduction in computing its profit. The Hon'ble Bombay High Court upheld the assessee's contention. 9. We have considered the submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o result in some benefits to its business and, the mere fact, that the benefit is not confined to one year, does not to our minds answer the question. Every businessman who carries on business wants to carry on his business not only at the scale at which he had been doing so but also wants to extend it as much as he can. It is one of the ordinary incidents of a business. ...... It is merely a case where for the purpose of extending the business new branches had been opened and certain expenses had been incurred by way of advertisement etc. We think that it cannot be said that an expenditure of this kind brings in an advantage for the enduring benefit of the trade and is, therefore, capital expenditure". At page 367 of the report, it was further observed that; "advertisement has now become a very common feature of every business and the amount is always spent to facilitate the business and to get better returns. No case has been cited before us in which it has been held that the amount spent in a special campaign of advertisement must necessarily be a capital expenditure". This decision of the Allahabad High Court has been referred to by the Gujarat High Court in DCIT vs. Core Healt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in such a case would be, that if the expenditure is in respect of an ongoing business of the assessee and there is no enduring benefit, it can be treated as revenue expenditure. If, however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be marketed". In the present case, there is no dispute that the assessee is in the line of manufacture and sale of the breath fresheners and chewing gums for many years and it is an ongoing business. The products are being sold by the assessee and the sales figures are also noted in the assessment orders. It is not therefore a case of a company which is yet to commence its business or market its products. We have already seen on the basis of the judgements of the Allahabad and Gujarat High Courts that there is no enduring benefit derived by the assessee by incurring the expenses on advertisement and sales promotion. In this view of the matter, we are of the view that the judgement of the Bombay High Court applies in favour of the assessee. 9. The learned CIT DR cited before us a ruling of Authority for Advance Ruling in Foster's Australia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the percentage of the expenditure to the sales is much lower at 11.08% and 13.61% respectively for the assessment years 1999-2000 and 2001-02. The expenditure does not appear to us to be unreasonably high or excessive so as to provoke further examination. 11. In the light of the discussion made above, it follows that the provisions of section 32(1)(ii) of the Act, as amended by the Finance (No.2) Act, 1988 with effect from 1.4.1999 are not applicable to the present case. The assessee has not acquired any intangible asset on or after 1.4.1998 so that only depreciation will be allowed on the same and not the expenditure incurred in acquiring them. The expenditure was incurred by the assessee in the revenue field and not in the capital field, nor did the assessee acquire any asset, tangible or intangible, by incurring the expenditure on advertisement and sales promotion." 10. The ld. Counsel for the assessee pointed out that the percentage of expenditure to the sales in Assessment Year 1999-00 2001-02 was 11.8% and 13.61 % respectively. However, in the current Assessment Year it is still much lower and, therefore, the decision is squarely applicable to the facts of the case. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business to CIL, the assessee had given options to its employees to take voluntary retirement who did not wish to join CIL or who had not been absorbed by CIL. Except Ms. Chitra Dhoke, all employees had been absorbed by CIL. She therefore, opted for voluntary retirement. It was submitted that there was no formal scheme of voluntary retirement and thus requirement of section 35DDA were not satisfied. It was further submitted that tax u/s. 192 had been deducted from payment of Rs.17.00 lacs made to Ms. Chitra Dhoke without giving exemption u/s.10(10C) of the Act. Ld. CIT(A) observed that the Assessing Officer has not brought any material on record to show that assessee had made any compensation under the existing Scheme after considering the provisions of section 35DDA. Ld. CIT(A) observed that the VRS should be in accordance with any Scheme or Schemes of Voluntary Retirement. Since the assessee has himself contended that payment was not under any form or in the form of Scheme of Voluntary Retirement, the applicability of provisions u/s.35DDA merely on presumption was not justified. Taking note of the fact that the assessee had deducted tax at source u/s.192, without, allowing any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, the ld. Counsel for the assessee submitted that no formal Scheme has been adopted by the company and only an option was given to those employees who were not absorbed by CIL to opt for VRS. The ld. Counsel for assessee referred to the assessment order and pointed out that in the submissions the assessee has used only loose language but same is to be considered in over all context. The ld. Counsel for the assessee submitted that VRS contemplated u/s.35DDA is same as in section 10(10C) and, therefore, for invoking Sec.35 DDA it is necessary that the Scheme adopted by the company conforms with the requirements set out in Rule 2BA. He submitted that formulate Scheme should set out the conditions in accordance with Rule 2BA to come within the ambit of section 35DDA. He pointed out that no such Scheme was formed. Therefore, the provisions of section 35 DDA are not applicable. 17. We have considered the submissions of both the parties. Section 35DDA (1) of the Act reads as under:- 35DDA. (1) Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement, in accordance with any scheme or schemes of vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the plea of the ld. Departmental Representative. In the present circumstances, in order to resolve the dispute, we are of the opinion that principles of harmonious construction of statute have to be applied. As per these principles a statute must be received as a whole and one provision of the Act should be conformed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. The provisions relating to voluntary retirement scheme are contained in section 10(10C) and all the conditions laid down therein have to be fulfilled before exemption can be availed under the said section. The income and expenditure go together and it is difficult to appreciate that while considering the expenditure part any kind of claim could be taken into consideration whereas while allowing exemption only those claims are to be taken into considerations which conform to the guidelines under Rule 2BA. The language in section 35DDA and section 10(10C), as noted above, clearly refers to Scheme or schemes of voluntary retirement. It is true that section 35 DDA does not specifically refer to section 10(10C) but principles of harmonious construction have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that since the payment had been made beyond due date, and the same pertains to employees' contribution, therefore, it cannot be allowed. Having heard both the parties, we do not find any reason to interfere with the order of the ld. CIT(A) in regard to payments at Sl.No.1 and 3 because the payment has been made on the very next day after the holiday. Therefore, this ground is dismissed. 23. Ground No.4 reads as under:- "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs.19.44 lacs representing stores and consumables." 24. The brief facts apropos the above issue are that from the details of assets transferred pursuant to slump sale of its unit the Assessing Officer noticed that the assessee had claimed the value of inventories transferred at Rs.294.75 crores. He noticed from details of closing stock that the stock transferred was as under:- a) Raw material: Rs.38.97 lacs b) Packing material: Rs.25.70 lacs c) Finished goods: Rs.210.64 lacs Totalling to: Rs.275.31 lacs 25. He, therefore, required the assessee to reconcile the difference in the value of assets transferred of Rs.19.44 lacs (294.75 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion had been made solely on account of non consideration of schedule-IV to the balance sheet wherein figures of inventory are mentioned. Out of the opening inventory of Rs.21.73 lacs on account of stores and consumable an amount of Rs.2.29 lacs was utilized upto the date of sale and the balance of Rs.19.44 lacs was transferred to CIL. This, the difference had duly been reconciled. We, therefore, do not find any reason to interfere with the order of the ld. CIT(A). 30. Ground No.5 reads as under:- "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the Assessing Officer to recompute the long term capital gain after considering the amount of Rs.23,45,000/- claimed towards bad debts but deduction disallowed by the Assessing Officer, even though as per Explanation-2 to section 50B, the book value of the assets is to be taken into account for computing the net worth." 31. The Assessing Officer noticed that the assessee had claimed bad debts and written off an amount of Rs.23,45,000/. He required the assessee to furnish the necessary details regarding write-off. However, no details were furnished. He, therefore, rejected the assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined at page-16 of assessment order to demonstrate that as per terms of accounting policy, the assessee had added back Rs.14,000/- being the provision of doubtful debts amount during the year while computing its total income. He further pointed out that Rs.23,45,000/- was reduced from business income. Accordingly, the ld. Counsel for the assessee pointed out that correct amount which should have been claimed was Rs.23.31 lacs (Rs.23,45,000 - Rs.14,000). He pointed out that this amount should have been written off against provision appearing in balance sheet made over the years. He submitted that the modus operandi adopted by the assessee meets the requirements of write-off of bad debts as held by the Hon'ble Supreme Court in T.R.F. Ltd. vs. CIT (2010) 323 ITR 397 (SC). 36. We have considered the rival submissions and have perused the record of the case. It is well settled law that entries, in the books of account can not decide the true nature of transaction and if in substance the assessee has written off the debts account then the assessee's clam cannot be denied. The assessee's methodology was to make provision for bad and doubtful debts in the account by debiting the P and L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No.3. We find that the amount of Rs.2,57,952/- was due for payment on 15.1.2003 but was paid on 16.1.2003. Thus, the payment in any case has been made within the grace period. Therefore, in view of the decision Hon'ble Supreme Court in CIT vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) wherein it has been held that no disallowance can be made under section 36(1)(va) or section 43B where employer's or employees' contribution is paid before the due date of filing the return under section 139(1) of the Act, this ground is allowable. In the result this ground is allowed. 41. Ground No.4 taken by the assessee in its cross objection reads as under:- "The ld. CIT(A) erred in holding that Assessing Officer was justified in determining the eligible depreciation for the year under appeal at Rs.8,61,26,465/- as against Rs.2,10,671/- claimed by the respondent. Your respondent submits that in accordance with the provisions of section 32 of the Act, the ld. CIT(A) ought to have held that eligible depreciation for the year under appeal amounts to Rs.2,10,671/- as claimed by your respondent. Your respondent prays that the Assessing Officer be directed accordingly." 42. Facts rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able provisions of depreciation as contained in section 32 of the Act provides an inherent right to the assessee to claim depreciation." 43. The Assessing Officer considered the decision of the Hon'ble Supreme Court in the case of Mahendra Mills supra, and pointed out that the said decision would not be applicable as section 34(1) was deleted w.e.f. 1.4.1988. He observed that the Hon'ble Supreme Court while delivering the judgment upheld the judgments of the Hon'ble Courts of Bombay, Punjab and Haryana, Karnataka, Andhra Pradesh, Calcutta and Kerala. He noted that in all these judgments the Hon'ble Courts have relied on the fact that as per section 34(1) of the Income tax Act, the assessee was required to furnish the particulars for claim of depreciation. Reliance was also placed on CBDT Circular dated 31.8.1965 wherein it has been stated that "where the particulars have not been furnished by the assessee and no claim of depreciation has been made in the return the Income Tax Officer should estimate the income without allowing depreciation allowance." He pointed out that in all the above judgments the main reason for upholding the assessee's contention that depreciation could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which for computing the net worth, the aggregate value of total assets of the unit is to be reduced by the value of liabilities of the unit. Further, he noted that as per Explanation 2(a) to section 50B, for computing the net worth, the aggregate value of total assets shall be the written down value of the block of assets as determined in accordance with the provisions contained in sub-item (C) of item (i) of sub clause (c) of clause (6) of section 43, and in the case of other assets, the book value of such assets. Accordingly, he determined the value of assets transferred after considering the depreciation allowable till the date of the transfer as under:- Sr.No. Nature of Asset Value as per assessee (Rs.) Value after considering depreciation allowable till the date of transfer (Rs.) 1. Land (Freehold) 1,00,03,766/- 1,00,03,766/- 2. Buildings (Factory) 12,20,35,935/- 7,26,15,296/- 3. Furniture and Fittings(General) 91,70,466/- 69,61,693/- 4. Plant and Machinery (General) 22,46,09,989/- 8,46,60,114/- 5. Computers 25,72,380/- 8,99,151/- 6. Motor vehicles 37,05,597/- 37,05,597/- 37,20,98,133/- 17,88,45,617/- 48. Being aggrieved by the order of the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WDV is to be computed as per the provisions contained in section 32 r.w.s. 43(6) of the Act. He referred to item (c) of clause 6 of section 43 which deals with written down value of block of assets. The ld. Counsel submitted that after the incorporation of block of assets concept, it is not material whether the asset is used or not for business but if it forms part of block of assets then, depreciation is to be allowed with reference to WDV of block of asset. Specific mode has been prescribed under section 43(6) for computing the WDV which is opening WDV as on 1st April + additions made during the year - subtractions by way of sale etc. The ld. Counsel for the assessee submitted that the Assessing Officer has not determined the WDV correctly on two counts: 51. Firstly, by thrusting depreciation for those years in which the assessee did not claim the same, and thereby reducing the opening WDV, and 52. Secondly, by charging depreciation upto the date of transfer viz 30.3.2003 in respect of assets transferred by way of slump sale. 53. The ld. Counsel referred to the additional ground and submitted that the main issue to be decided is regarding determination of the net worth for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st capital gain. He submitted that unabsorbed depreciation can be set off against profit in the subsequent years as per provisions under section32(2). 57. The ld. DR referred to page-12 of the assessment order and pointed out that the assessee had claimed deduction under section 80HHC i.e. under chapter VI-A, therefore, it is not correct to plead that there was insufficiency of profits. He submitted that the dispute at best can be actually with regard to the manner of computing WDV. He referred to page-11 of the assessment order and pointed out that manner of computation of WDV is not clear and, therefore, matter can be restored to Assessing Officer for re-computing the depreciation as per provisions of section 43(6)(c)(i)(c)(C). 58. In the rejoinder the ld. Counsel for the assessee submitted that Explanation-5 to section 32 is not retrospective as held in the following decisions:- 1) Ram Nath Jindal vs. CIT (2001) 252 ITR 590 (P and H), 2) CIT vs. Sree Senhavalli Textiles P. Ltd. (2003) 259 ITR 77 (Mad.) 3) CIT vs. Crompton Greaves Ltd. (Ker) and CIT vs. Kerala Electric Lamp Works Ltd. (2003) 261 ITR 721 (Ker) 59. The ld. Counsel submitted that on the one hand despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst we will consider the first issue. 65. The facts are not in dispute. The assessee had computed the depreciation at Rs.2,10,671/- after excluding the net depreciated value of such assets from the block of assets from WDV as on 1.4.2002 whereas the Assessing Officer computed the depreciation on the assets transferred pursuant to slump sale up to 30.3.2003 on the ground that the assets had been used by the assessee for the entire period. The assessee's contention is that after the introduction of block of asset concept w.e.f. 1.4.2000, the WDV has to be computed as per section 43(6)(c)(i) by adding purchases to the opening WDV as per sub item (A) and reducing the moneys payable in respect of any asset falling within that block which is sold or discarded or demolished or destroyed during the previous year in terms of sub item (B). The contention is that in the case of slump sale also as per sub-item (C) the value of asset net of depreciation is to be excluded from block of asset and in doing so the depreciation for the year in which the slump sale takes place is not to be taken into consideration. The contention is that the slump sale cannot be differently viewed from regular sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DV of all the assets falling within a particular block of asset, the adjustments as contemplated from sub-item A-B have to be carried out before arriving at WDV. These adjustments have to be carried out to the WDV as at the beginning of the relevant previous year. There is no dispute in the present case as regards the adjustment as contemplated in clause A and B. Thus, in case an asset is sold/discarded then the moneys payable in respect of such asset have to be reduced from the block of asset before arriving at WDV. Consequently, no depreciation is charged on the assets sold in the year of sale. However, in the present case the dispute is with regard to charging of depreciation for the year in which assets have been sold in slump sale particularly for computing net worth of assets sold for computing capital gain under section 50B. Section 50B(1) and (2) read as under:- "50B. Special provision for computation of capital gains in case of slump sale.- (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of longterm capital assets and shall be deemed to be the income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.4.1988, the depreciation allowable has to be taken into consideration. The provision has been made regarding charging of depreciation w.r.t. assets transferred for computing the net value to be reduced from actual cost. 72. A bare perusal of sub-item (C) makes it clear that allowable depreciation has to be computed in terms of clause (b) in respect of all the assets which have been transferred by way of slump-sale. The allowable depreciation is to be computed in terms of section 32 and if the asset is used for the purposes of business then depreciation is to be allowed. Full meaning has to be ascribed to the term "allowable depreciation'' and its application cannot be limited by referring to subitem (B). The contention of ld. Senior counsel that like sub-item (B), no depreciation is to be charged in the year of transfer cannot be accepted because the object of both the sub-items is different. The manner of computation as contemplated in sub-item (B) in case of sale of assets cannot be read into sub-item (C) merely on the ground that both deals with sale. In sub-item (C) the object is to compute net value of asset sold by way of slump-sale for the purposes of computing capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Finance Act, 1999 w.e.f. 1.4.2000which deals with such situations, does not refer to slump sale. He submitted that this could never be the intention of the legislature and therefore, the WDV has to be computed after adjusting the asset sold in slump sale. We are unable to accept this plea of ld. Senior counsel for the simple reason that in any case the purchaser will adopt the purchase consideration for purposes of charging depreciation and he is not concerned with the WDV of seller. Even in sub-item (B) this is not the basis for not charging depreciation in respect of particular asset sold. But the basis is to be found in the definition of Block of Asset as per which all assets in respect of which same rate of depreciation is prescribed is treated as one unit. In view of the above discussion we hold that the Assessing Officer was right in computing depreciation for the period from 1.4.2002 to 30.3.2003 and reducing the same while computing the value of assets transferred in slump sale. Accordingly, the first issue noted earlier stands dismissed.. 76. Now we take up the second issue. 77. The Assessing Officer while considering the assessee's claim of long term capital l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets. As per this provision irrespective of the fact whether the depreciation was claimed by the assessee or not, the depreciation has to be calculated. As discussed in detain with reference to first issue, this is a specific provision prescribing specific mode of computation and, therefore, has to be given full effect. This sub-item has been inserted along with insertion of section 50B and, therefore, both the sections have to be harmoniously construed. We are not inclined to accept the assessee's contention that such unabsorbed depreciation cannot be regarded to have been allowed as per section 43(6)(3) merely because Explanation 2 to section 50B makes reference to section 43(6) and not to Explanations therein. Different sections in a statute dealing with same issue have to be read in a manner so as to give complete effect to the legislative intent. Therefore, in our considered opinion the depreciation allowable on all the assets transferred by way of slump sale is to be allowed for the purpose of reducing the value of the asset from the said block. 79. The ld. Counsel for the assessee submitted that if the department's view is accepted it would result in a highly inequitabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et transferred by way of slump sale to be reduced from block of asset. This fiction cannot be extended beyond the limit for which it has been incorporated in the Act. The function of this provision is restricted only to the extent of determining the actual cost of the asset transferred by way of slump sale to be reduced from block of asset. As soon as it is done the purpose of this section is achieved. Therefore, the assessee's plea that it should be further extended for setting off unabsorbed depreciation cannot be accepted. As a matter of fact if this plea is accepted it would make the entire section otiose because on the one had depreciation allowable is calculated and in the same breath it is to be added back while computing the net worth of the unit transferred. Therefore, this plea of the assessee is clearly devoid of any merit and, accordingly, this ground is dismissed. 84. ITA No. 2503/Mum/07 85. The department has taken following ground of appeal:- "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the A.O. to give set off of brought forward depreciation of earlier years against the long term capita gains of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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