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TMI Blog2016 (1) TMI 755X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences submitted by the assessee company without being influenced by our observations in this appeal. - Decided in favour of assessee for statistical purposes. Disallowance of preliminary expenses written off u/s 35D - Held that:- The assessee company has incurred an amount of ₹ 70 lacs towards increase in authorized share capital, out of which 1/5th of such expenses i.e. ₹ 14 lacs was claimed as deduction u/s 35D of the Act. The assessee company has taken this plea before us for the first time that these expenses are relatable to extension of undertaking which has not been verified by the authorities below. We are also aware that the Hon'ble Supreme Court in the case of Brooke Bond India Ltd.(1997 (2) TMI 11 - SUPREME Court ) and Punjab State Industrial Development Corporation Limited (1996 (12) TMI 6 - SUPREME Court ) has held that these expenses incurred for increase in authorized capital are capital expenditure. This claim of the assessee company that these expenses incurred for increase in authorized capital are relatable to the extension of undertaking needs to be verified by the authorities below and accordingly we set aside the orders of authorities below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Intangible Asset covered by the Part B of the Appendix I of the Income Tax Rules, 1962 or within the meaning of the sec. 32(1)(ii) and thus not eligible for depreciation; and (ii) holding that the excess amount paid by the appellant for the purchase of business of Sangam Direct from Hindustan Lever Ltd., over the book value of the assets, is not goodwill. 2) The CIT (A) has further erred in law and in facts by disallowing Preliminary Expenses written off of ₹ 14,00,000/- u/s. 35D of the Income Tax Act, 1961, by holding that the expenditure incurred on fees paid to Registrar of Companies for increasing the authorized share capital after commencement of business is not covered by sub clause 2(c)(iv) of section 35D of the Income Tax Act, 1961. 3. The Brief facts of the case are that the assessee company is engaged in the business of retail store and trading business of staples food products, home and personal care products and general merchandise. The assessee company is operating the retail store chain Spinach and also running the 'Sangam Direct' direct to home non-store home delivery system. During the course of the assessment proceedings u/s 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Supreme Travels P. Ltd. v. DCIT (2009) 23 DTR (Bom) 215 and held that goodwill is not an intangible asset eligible for depreciation. Thus, the AO disallowed the claim of the assessee company for depreciation on goodwill amounting to ₹ 89,42,899/- and added the same to the total income of the assessee company vide assessment orders dated 06th May 2010 passed u/s 143(3) of the Act. 4. Aggrieved by the assessment orders dated 06th May 2010 passed by the AO u/s 143(3) of the Act, the assessee company preferred an appeal before the CIT(A) and submitted that the assessee company had paid excess amount than the value of the assets at the time of acquisition of the business of 'SANGAM DIRECT' from Unilever India Exports Ltd. and accordingly the difference between the acquisition cost and the book value of the assets was required to be termed as Goodwill or Capital Reserve as specified in the Accounting Standard. The assessee company submitted that the excess amount paid was towards use of brand name 'SANGAM', its reputation built up in the market and to effectively carry on the business of acquiring company. The valuation of the business was conducted by a worl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mat where the customer place orders by phone or through the website and company's network was delivering such items directly to the homes of the customers under the brand name 'Sangam Direct'. The CIT(A) observed that during the previous year, the assessee company has acquired business of 'Sangam Direct' from M/s Unilever India Export Limited for an amount of (figures not supplied by the assessee company (before the CIT(A))) and the assessee company claimed that amount paid in excess to the value of net asset at the time of acquisition of such business represents goodwill which is an intangible asset and eligible for claim of depreciation u/s 32(1)(ii) of the Act as claimed by the assessee company. The CIT(A) formulated two questions for determination (a) whether the excess amount paid by the assessee was representing goodwill and (b) if so the goodwill was intangible asset eligible for deduction u/s 32(1)(ii) of the Act. The first question for consideration before the CIT(A) was whether the assessee company acquired any goodwill and whether the excess amount paid by assessee company was representing goodwill. In this regard, the CIT(A) observed that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not a business or commercial rights similar in nature to know-how, patents, copyrights, trademarks, licenses and franchises. The six items are used in the business and these items generates income in future years and therefore the consideration paid against these items could be considered eligible for depreciation. However, in the case of assessee company the alleged goodwill amount was neither paid for these six items nor for any business or commercial right similar in nature of these six items was acquired by the assessee company. As explained above, the acquired business Sangam Direct was continuously running in losses and therefore, was not having any positive reputation built over a period of time. Such negative reputation was having no commercial value. The true basis of depreciation allowable is character of asset and not its description. The amount paid by assessee company for alleged goodwill was not fitting in the description of six items of intangible assets or any business or commercial rights of similar nature. The CIT(A) also held that without prejudice amount paid for goodwill is not eligible for depreciation u/s 32 of the Act. Thus the claim of the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all are placed in paper book at page 150-176. The ld. Counsel submitted that the amount in excess of assets acquired by the assessee represents the goodwill paid for acquiring for such acquisition and it is an intangible asset within the meaning of section 32(1)(ii) of the Act, hence, depreciation on the same should be allowed u/s 32 of the Act. The ld. Counsel relied upon the decision of Hon'ble Supreme Court in the case of CIT v. Smifts Securities Ltd. (2012) 348 ITR 302 (SC) whereby the Hon'ble Supreme Court held that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act and depreciation is allowable on goodwill. The ld. Counsel submitted that the CIT(A) doubted the valuation report and held that no goodwill is acquired by the assessee company as the business of 'SANGAM DIRECT' which was acquired is a loss making business and it cannot have any goodwill. He submitted that all the agreement's with respect to such acquisition are filed as additional evidence before us and the assessee company submitted that the amount paid in excess of the lumpsum payment made for the acquisition of the assets is goodwill paid for the acquisition of such busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' from Unilever India Export Limited along with the details of payments made and assets acquired, which in the opinion of the assessee company goes to the root of the matter and the same were never called by the authorities below. In our considered view and in the interest of justice, the request for admission of additional evidences by the assessee company under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 need to be accepted as these additional evidences so filed are vital and crucial to adjudicate the claim of the assessee company that it paid goodwill for acquisition of the business of SANGAM DIRCET from Unilever India Exports Limited. In our considered view, the claim of the assessee company needs to be verified with reference to the agreements and other documents which has now been filed as additional evidence before us and the books of account by the assessee company. As such, we remit the matter back to the file of A.O. for deciding the issue afresh after considering the agreements along with the assets acquired, other evidences as submitted by the assessee company and the books of accounts of the assessee company to arrive at the conclusion on the issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay fees to Registrar of Companies for increasing the authorized capital of the assessee company and are eligible for deduction under the provisions of subsec. 2(c)(iv) of section 35D of the Act. The CIT(A) observed that the assessee company has admittedly made payment to Registrar of Companies after the commencement of business for the purpose of increase in authorized capital and specific expenses incurred after commencement of business are allowed to be amortised u/s 35D of the Act which have specifically been incurred in connection with extension of undertaking or setting up of new unit. The CIT(A) held that any expenditure incurred before the commencement of business in connection with the issue for public subscription of shares or debentures are allowed to be amortized u/s 35D of the Act and such expenditure incurred after commencement of business are not covered under the provision of the Section 35D of the Act. The ld. CIT(A) held that in the facts and circumstances of the case, the A.O. was justified in disallowing the assessee's claim of deduction of ₹ 14 lacs u/s 35D of the Act vide orders dated 13-04-2012. 13. Aggrieved by the above decision of the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not been verified by the authorities below. We are also aware that the Hon'ble Supreme Court in the case of Brooke Bond India Ltd.(supra) and Punjab State Industrial Development Corporation Limited(supra) has held that these expenses incurred for increase in authorized capital are capital expenditure. This claim of the assessee company that these expenses incurred for increase in authorized capital are relatable to the extension of undertaking needs to be verified by the authorities below and accordingly we set aside the orders of authorities below and restore the matter back to the file of A.O. for necessary verification and decide the issue afresh on merits after considering the evidences filed by the assessee company. Needless to say the assessee company be granted sufficient opportunity of being heard by the AO in accordance with principles of natural justice. The AO shall readjudicate the matter afresh on merits un-influenced by our observations in this appeal. We order accordingly. ITA No. 4725/Mum/2012 (Revenue's appeal) 17. The Revenue has raised the following grounds of appeal in the memo of appeal filed with the Tribunal:- 1. On the facts and in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off in the books of accounts. This was standard accounting practice which was to be mandatorily followed in accordance with Accounting Standard-2 issued by ICAI. In support of its claim of necessity of following Accounting Standard, the assessee relied on the decision in the case of Madhu Rani Mehra v. CIT - 2011-TIOL-160-HC-DEL-IT, Rajasthan High Court in the case of Wolkem India Ltd. - 2009-TIOL-102-HC-RAJ. The assessee company explained that such discrepancy to the tune of ₹ 20,10,927/- was written off in the books of accounts as value of stock had gone down to that extent as on 31.03.2008. This fact had also been highlighted in the audited books of accounts. The assessee company relied on the decision of various courts and Tribunals on this issue. The CIT(A) after considering the submission and other case laws relied upon by the assessee company allowed the claim of the assessee company by observing as under:- 4.3 I have considered the facts of the case. The appellant company was dealing in supplying of FMCG staples, general merchandise, etc. The appellant was doing its business through its outlets at various places. The nature of items dealt with were prone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15) 121 DTR 151 (Bom.) wherein it was held that write off of slow moving items was justified. 22. We have considered the rival contentions and perused the material on record. We have observed that the assessee company is dealing in slow moving items which are prone to pilferage, wastage, breakage and damages etc. The items dealt with the assessee company are perishable in nature specially fruits, vegetables, liquid items etc. which could not have been sold to customers after the date of expiry as these items have limited life. The assessee company is stated to have claimed the write off of such stock based on applicable accounting standards which are mandatory in nature but failed to submit details of differences between physical stock and book stock before the authorities below, which is filed before us but the same need verification by the authorities below. In our considered opinion and in view of the interest of justice, this matter need to be restored to the file of A.O. for the limited purpose of verification of the genuineness of the claim of losses on account of slow moving perishable items between physical stock and book stock as claimed by the assessee company. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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