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TMI Blog2016 (8) TMI 222X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax (Appeals) erred in holding that the surplus of Rs. 1,63,03,435/- arising on prepayment of deferred sales tax was a revenue receipt liable to tax u/s.28(iv) of the Income-tax Act. 2. The learned Commissioner of Income-tax (Appeals) erred in holding that the appellant obtained a "benefit" in respect of the said pre-payment. 3. The learned Commissioner of Income-tax (Appeals) erred in applying section 28(iv) to tax the said amount. 4. Having regard to the facts and circumstances of the case, the Appellant submits that the addition of Rs. 1,63,03,435/- be deleted. 5. Both the lower authorities erred in holding that the Appellant was not entitled to depreciation under section 32 in respect of the following intangible assets: Assets Value (Rs.) Trade Mark 2,00,00,000 Technical Know- How 3,50,00,000 Goodwill 3,20,00,000 Marketing Network 3,75,00,000 Non-Compete fees 4,02,50,000 Total 16,47,50,000 6. The learned Commissioner of Income-tax (Appeals) erred in giving several findings which are either irrelevant or incorrect for allowing depreciation under section 32. 7. The learned Commissioner of Income-tax (Appeals) erred in holding that depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les tax amounting to Rs. 1,63,03,435/-. The assessee had claimed the same as capital receipt, and thus not liable to be taxed. The AO gave show cause notice to the assessee to treat the same as revenue receipt liable to be taxed u/s 41(1) of the Act. The AO also proposed to treat the same as revenue receipt taxable in the hands of assessee u/s 28(iv) of the Act. The assessee made detailed submissions before the AO to explain that surplus accruing on account of pre-payment of deferred sales tax was capital receipt not liable to tax. It was submitted that deferred sales tax was treated as unsecured loan in its books by the assessee and loan was not a trading liability. Thus, making full payment of loan at lesser account did not give rise to revenue receipts and therefore, it could not have been brought to tax u/s 41(1). No benefits had accrued to the assessee and therefore, it could not be brought to tax u/s 28(iv) of the Act also. But, the AO was not satisfied with the submissions of the assessee and therefore, he brought to tax the impugned amount as business income of the assessee u/s 41(1). 4.2. Being aggrieved, the assessee contested the matter before Ld. CIT(A) and made detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en held by the High Court also that this amount was not even a 'benefit' of the nature as envisaged u/s 28(iv) and thus, the order of the Hon'ble High Court squarely covers this issue. 4.4. Per contra, Ld. DR relied upon the orders of the lower authorities and submitted that amount not paid is a 'benefit'. Reliance was placed by the Ld. DR on the judgment of Amritsar Bench of the Tribunal in the case of Gurdaspur Co- op. Sugar Mills vs. Deputy Commissioner of Income Tax for the proposition that amount of loan constituted 'benefit' within the meaning of section 28(iv) and was thus taxable therein. 4.5. We have gone through the orders of the lower authorities, submissions made and judgments relied upon before us by both the parties. It is noted that the issue of taxability of surplus arising to the assessee on repayment on deferred sales tax liability has also arisen in earlier A.Y. i.e. A.Y. 2005-06 and 2006-07 wherein this issue has been decided in favour of the assessee by the Tribunal as well as by Hon'ble Bombay High Court. It has been contended by the Ld. DR before us that in earlier year, the taxability has been examined u/s 41(1) only and not with respect to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred sales tax incentive scheme as per Maharashtra 1993 package scheme of incentive were permitted to pre maturely pay the deferred sales tax liability by arriving at a net present value by applying a specific discount rate. The Company availed the benefit of the scheme announced on 12th December, 2002 and has during the year under consideration made a prematured payment of its deferred sales tax liability as under: Rs. Sales tax liability 2,26,45,595 Less: Premature pre-payment 63,42,160 Surplus on the above 1,63,031435 The company has treated the surplus accruing on premature repayment of deferred sales tax as a capital receipt not liable to income tax. 4.6. As discussed earlier also, the AO held this amount of surplus as remission of liability and brought to tax the same u/s 41(1). Ld. CIT(A) did not agree with the AO on this aspect and in view of decisions of the Tribunal and judgment of Hon'ble Bombay High Court of preceding year, and it was held by him that this is not equivalent to remissions of liability as envisaged u/s 41(1) and therefore, same is not taxable u/s 41(1). The decision of Ld. CIT(A) was not contested by the Revenue on this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomers is in no way wiped out or diluted. The obligation remains. All that has happened is an option is given to the Assessee to approach the SICOM and request it to consider the application of the Assessee of premature payment and discharge of the liability by finding out its NPV. If that was a permissible exercise and in terms of the settled law, then, we do not see how the Assessee can be said to have been benefited and as claimed by the Revenue. The argument of Mr. Gupta is not that the Assessee having paid Rs. 3.37 crores has obtained for himself anything in terms of section 41(1), but the Assessee is deemed to have received the sum of Rs. 4.14 crores, which is the difference between the original amount to be remitted with the payment made. Mr. Gupta terms this as deemed payment and by the State to the Assessee. We are unable to agree with him. The Tribunal has found that the first requirement of section 41(1) is that the allowance or deduction is made in respect of the loss, expenditure or a trading liability incurred by the Assessee and the other requirement is the Assessee has subsequently obtained any amount in respect of such loss and expenditure or obtained a benefit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then to what extent. Hon'ble High Court has held that in fact no benefit has been derived in any manner. In the case of Sulzer India Ltd. v. JCIT (42 SOT 457) (SB), Hon'ble Special Bench had held that surplus arising on repayment of sales tax liability is on account of difference between payment of net present value against the future liability and it can neither be termed as remissions/session of liability nor it gives rise to any benefit to the assessee. According to Hon'ble Special Bench, it is a simple case of collecting amount at net present value of future liability, which cannot be regarded as giving rise to any kind of benefit to the assessee. The Hon'ble special Bench has discussed law on this issue in detail and this decision was subsequently affirmed by Hon'ble High Court by passing detailed order which has been briefly discussed in our order above. It is further noted by us that Hon'ble High Court has also relied upon and discussed its earlier order in the case of Mahindra and Mahindra Limited 261 ITR 501, wherein it was held that waiver of the principal amount of loan did not give rise to 'benefit' as envisaged u/s 28(iv) and therefore it was not taxable u/s 28(iv). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. Thus, respectfully following the order of Hon'ble High Court, we find that no different decision can be taken; therefore, this issue is decided in favour of the assessee. Thus, ground nos. 1 to 4 are allowed. 5. Ground Nos.5 to 9:- In these grounds the assessee has challenged the action of lower authorities in denying the benefit of depreciation u/s 32 in respect of following intangible assets:- Assets Value (Rs.) Trade Mark 2,00,00,000 Technical Know how 3,50,00,000 Goodwill 3,20,00,000 Marketing Network 3,75,00,000 Non-Compete fees 4,02,50,000 Total 16,47,50,000 5.1. The brief background of the issue involved is that during the year under concern, the assessee had taken over Grinding Wheel Business of M/s Orient Abrasive Ltd. ('OAL') as a going concern on a slump sale basis under Business Transfer Agreement dated 18.04.2006 for a consideration of Rs. 26.17 crores. Out of the assets acquired from OAL, assets worth Rs. 16.86 crores were intangible assets and accordingly the assessee claimed depreciation amounting to Rs. 2.37 crores on the same. But, AO asked the assessee to establish the genuineness of the intangible assets in terms of their existence a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee in its books. It was also held by the Ld. CIT(A) that the assessee did not acquire any Goodwill as it did not get any legal rights which were enforceable under the law and therefore it could not be considered to be eligible for depreciation. 5.4. Being aggrieved, the assessee filed an appeal before the Tribunal. 5.5. During the course of hearing before us, it has been argued by the Ld. Counsel that now this controversy has become narrowed down because of judgment of Hon'ble Supreme Court in the case of CIT vs Smiff Securities Ltd. 348 ITR 302 (SC) wherein Hon'ble Apex Court has held that assessee is entitled to claim of depreciation on the amount of Goodwill. It was held that amount of difference between book value of assets acquired and amount paid by an assessee represents amount of Goodwill acquired by the assessee as part of take- over deal, upon which assessee would be entitled to claim depreciation. It was brought to our notice that in subsequent year i.e. in A.Y. 2008-09, Ld. CIT(A) has himself granted 'benefit' of depreciation on the amount of Goodwill which has not been challenged by the revenue before the Tribunal. Thus, revenue has accepted the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Valuers (enclosed at page no. 10 to 192 of the paper book) for ascertaining valuation of the business giving values of each and every fixed assets and other intangible assets acquired by the assessee under the aforesaid deal. It is noted by us that the lower authorities have granted the benefit of depreciation on the amount of fixed assets acquired i.e. plant and machinery etc. Thus, genuineness of transaction has not been doubted, but what has been doubted merely is the 'valuation' of intangible assets acquired under the deal. It is to be noted here that factum of acquisition of intangible assets has also not been disputed. Thus, under these circumstances, case made out by the lower authorities is that the amount paid by the assessee for its business is more than the appropriate value of its intangible assets. The assessee has also admitted this position that the assessee has paid an amount which is more than the amount of its tangible assets because of numerous intangible assets acquired by the assessee which were quite valuable in the opinion of the assessee. Under these circumstances, we can say that since the assessee had purchased the Grinding Wheel Business from OAL as a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. In view of Accounting Standard 10 as issued by the [CAI the assessee's contention was right that the consideration paid by the assessee in excess of value of tangible assets was rightly classified as goodwill. In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The agreement itself indicates that slump sale included sale of goodwill and the balance sheet specifically recorded goodwill at Rs. 40.58 crore. Goodwill includes a host of intang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f customers and dealers, entire data and information in relation to sales and distribution network, of technical know-how, Goodwill of Grinding Wheel Business, rights of non- competition etc were described in the said agreement. It is further noted that proper break-up and justification for the consideration has been narrated in the said agreement. The said agreement also contains lists of employees of OAL to be taken-over by the assessee company. It also containing the list of trademarks, particulars of goodwill of business of the OAL in the form of business data, customer details, specifications and quality requirement for the products, trade secrets and other confidential information, software process and similar other intangible assets. There was a proper valuation report specifying separate value of each and every asset of tangible or intangible nature. It is also noted that the AO made direct inquiries with OAL in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 to the AO wherein it was inter alia confirmed that the said company transferred its abrasive division situated at Bhiwadi (Rajasthan) to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 2011 in ITA No. 3447/Mum/2010 as under: "Vide ground Nos. 4 to 6 assessee contends that Rule 8D is not applicable retrospectively and disallowance under section 14A should be based on the facts and material circumstances of each case and in the light of decision of the ITAT in assessee's own case for the earlier year, we hold that it is reasonable to restrict disallowance to 2% of the dividend earning and we direct the Assessing Officer accordingly." 6.3. Thus, respectfully following the order of the Tribunal we hold that the disallowance on account of expenses under section 14A should be restricted to 2% of the dividend income. The disallowance with regard to interest should be made after excluding those mutual funds which are debt funds. Thus, assessee gets part relief and these grounds are partly allowed. 6.4. As a result appeal filed by the assessee is partly allowed. Now we shall take up assessee's appeal for A.Y. 2008-09 in ITA No.5800/Mum/2013 7. Ground Nos. 1 to 4: These grounds relate to taxation of surplus of Rs. 1,68,43,200/- arising on prepayment of deferred sales tax. It is noted that issue involved is identical to Ground Nos.1 to 4 of A.Y. 2007-08. No dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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