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TMI Blog2018 (2) TMI 1903X X X X Extracts X X X X X X X X Extracts X X X X ..... ned at Rs. 1,88,19,97,609/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who vide order dt.19.03.2013 (in appeal No.Nsk/CIT(A)-II/429/11-12) granted partial relief to the assessee. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us and has raised the following grounds : "1. Disallowance of premium of Rs. 4,94,72,088 on redemption of preference shares 1.1 The learned CIT (A) erred in' confirming the disallowance of premium' of Rs. ,94,72,088 on redemption of preference shares. On the facts and in the circumstances of the case, the disallowance of Rs. 4,94,72,088 be cancelled. 1.2 The learned CIT (A) failed to appreciate that in the facts of the case, the character of loan had not ceased on conversion into preference shares and as such so called premium must be taken as nothing but interest/fiance cost and consequently an admissible deduction u/s. 36 (i) (iii) or u/s. 28 or u/s. 37 (1) of the Act. 1.3 The sustaining of the disallowance of Rs. 4,94,72,088 without appreciating the facts of the case and merely relying upon the preceding year' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to appreciate that deposit shad been given in the course of and for the purpose of business only and that in the year in which there were adequate owned funds and/or cost" of borrowing was hardly around 6%p.a. 5. Disallowance of depreciation on non compete fee 5.1 The learned CIT(A) erred in confirming disallowance of depreciation of Rs. 18,28,125 on compete fee. 5.2 The learned CIT (A) erroneously concluded that the on compete fee was not an intangible asset and as such not subject to depreciation. 5.3 The learned CIT (A) in fact ought to have held that the expenditure in the form of non compete fee was of revenue nature and therefore fully allowable. 5.4 Assuming two view are possible, the learned CIT (A) ought to have followed view favourable to the assessee. 6. Carry forward of losses 6.1 The learned CIT (A) on the facts and in the circumstances of the case ought to have allowed the loss of Rs. 8,24,94,154 incurred by Orient Vegetexpo Ltd., an amalgamating company as the requisite conditions had been satisfied instead of giving direction to examine the issue again. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue considering the fact that premium paid for redemption of preferential shares is of capital nature and therefore the same is not an allowable expenditure in view of the Hon'ble Calcutta High Court judgment in the case of Hindustan Gas & Industries Ltd. Vs. CIT 117 ITR 549 (Cal.). 5. On this issue, we heard both the parties and finally Ground No.2 relating to premium paid on redemption of preferential shares is dismissed for the reasons specified by the CIT(A) in his order dated 2506-2010. Relevant operational paragraph in this regard is extracted as under : "9.2 I have carefully considered the submissions of the appellant and assessment order of the A.O. It is an undisputed fact that the amount of Rs. 1,18,10,000/- was paid on account of premium at the rate of Rs. 47.24 per preference share. The emphasis of the appellant was that the said premium in respect of the preference shares is in the nature of interest hence allowable u/s.36(1)(iii) of the Act. It is the contention of the appellant that the said premium is covered under "similar right or obligation" of the definition of "interest" u/s.2(28A) of the Act. The arguments of the appellant ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us shares. d. Such condition is laid down in order to restore the reduction in share capital caused due to redemption of preference shares. e. Therefore, though the preference shares are redeemable they assume nature of share capital only and not loans. A clear distinction has been made between a loan and redeemable preference shares by the Hon'ble Calcutta High Court in the case of Hindustan Gas and Industries Ltd. (117 ITR 549). The Hon'ble High Court categorically held that any expenses incurred for issue for redeemable preference shares cannot be allowed as they are in the nature of capital expenditure. The Hon'ble High Court held as under in this context: "On consideration of the provisions of the Companies Act, 1956 the contention of the assessee that when a company issues redeemable preference shares it is in fact obtaining a loan as it could by issuing debentures cannot be accepted. There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that none of the family members had shown any income from the aforesaid flat and no perquisite was shown by Mr. Anil Jain. The assessee was asked to justify the payments to which assessee inter-alia submitted that the flat was taken on leave and licence basis and was used by the assessee for its officers, associates. It was submitted that assessee had given interest free deposits in earlier years and during the year additional deposit was given which was commensurate with the higher valuation of the flat and that deposit was not increased since 1995. It was submitted that since interest free deposit was given in lieu of rent, assessee had claimed notional interest @ 5.50% p.a. (i.e. average cost of funds for the year under consideration) as eligible business expenses. The submissions of the assessee were not found acceptable to the AO. AO noted that assessee had borrowed funds and in majority of cases, the rate of interest was over 12%. According to the AO, had the assessee not given interest free deposits to the various persons of Jain family, the assessee would not have required to borrow loan at higher interest rate. He also concluded that the deposit paid to Director's a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant had taken huge loans from banks on which it is required to pay margin money. Hence, appellant's contention suggesting that its interest free funds/own funds were kept aside and the interest free loans/security, deposits were given out of these kept aside funds is devoid of merit. A perusal of Audit report for AY. 2008-09 reveals that the appellant company has taken total secured loans and unsecured loans at Rs. 907.04 crore in AY. 2008-09 as against Rs. 739.73 crore in AY. 2007-08. Schedule 19 of the Audit report reveals that the appellant company had debited Rs. 83.77 crore in P & L account on account of interest and finance charges (excluding interest received at Rs. 3.04 crore). Besides, the appellant company has debited Rs. 29.63 crore on account of discounting charges, bank. commission and charges. Taking into consideration the above stated figures, the cost of borrowing comes at 12.50%. As against this the AO has disallowed interest @ 12% on interest free loans/security deposits given by the appellant to it related concerns and directors. The appellant's calculation of cost of borrowing @ 5.3% is therefore, found contrary to the facts given above. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. 39. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (excluding interest received at Rs. 3.04 crore). Besides, the appellant company has debited Rs. 29.63 crore on account of discounting charges, bank commission and charges. Taking into consideration the above stated figures, the cost of borrowing comes at 12.50%. As against this the AO has disallowed interest @ 12% on interest free loans/security deposits given by the appellant to its related concerns and directors. The appellant's calculation of cost of borrowing @ 5.3% is found contrary to the facts given above. In the facts and circumstances of the case, I am of the view that AO was justified in disallowing interest of Rs. 10,20,000/-. The same is confirmed. 14. With respect to disallowance of interest of Rs. 28,87,625/- Ld.CIT(A) noted as under: "4.10.1 Here also the company had taken land on hire from Shri. B. H. Jain and bungalow from other directors (related parties) for which interest free deposits had given more than 10/12 years back. In addition, rent was also payable which is being adjusted against the said deposits. The appellant has made the same arguments as made against the disallowance of interest of Rs. 10,20,000 refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of the cases, the deposits have been given by the assessee to the various parties in earlier years and during the year under consideration to some of the parties, further deposits have been given. It is also an undisputed fact that in the assessments framed u/s 143(3) of the Act for AY 2006-07 and 2007-08, no disallowance of the interest on account of the deposits being excessive and unreasonable was made by the AO. The total deposit given by the assessee upto the year, as per the details as given on page 134 of the Paper Book is Rs. 13.26 crore as against which the availability of interest free funds in the form of Share capital and Reserves and Surplus as at the end of the financial year 31st March 2008 is in excess of Rs. 965 crores indicating that the availability of interest free funds with the assessee to be far in excess of the amounts given on deposits. When the availability of interest free funds are far in excess of the amounts given as deposits, then as per the decision of Hon'ble Bombay High Court in the case of Reliance Utilities (supra), a presumption arises that the deposits are out of interest free funds and no interest bearing funds are utilized for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to depreciation u/s 32(1)(iii) of the Act. Ld.CIT(A) therefore after giving enhancement notice, denied the claim of depreciation of Rs. 24,37,500/-. Aggrieved by the order of Ld.CIT(A), assessee carried the matter before ITAT. The Co-ordinate Bench of the Tribunal vide order dated 09.06.2017, decided the issue in favour of assessee. He therefore submitted that once an asset has entered in a block of asset, it loses it identity and has taken the shape of depreciable asset and thereafter the block of asset cannot be disturbed and the claim of depreciation on the WDV cannot be denied. He therefore relying on the decision of Co-ordinate Bench of the Tribunal, submitted that the claim of assessee of allowing depreciation be allowed. Ld.D.R. on the other hand, supported the order of lower authorities. 19. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to allowing depreciation on intangible assets. It is an undisputed fact that the claim of depreciation was allowed to the assessee in A.Y. 2006-07 and the intangible assets had entered into block of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the facts of the present case. Further, elaborating the facts, Ld. Counsel for the assessee submitted that this is a case of second year of claim of depreciation. AO is not allowed to take out this depreciable asset out of the block of assets created in the Assessment Year 2006-07, Relying on the Pune Bench decision in the case of Finolex Cables Limited Vs. DCIT and vice versa in ITA Nos. 360 and 564 & 565/PN/2014 order dated 31-08-2015 Ld. Counsel for the assessee submitted that Revenue authorities are prevented restructuring the plot for any reasons of decisions. Bringing our attention to contents of Para Nos. 11 to 13 the assessee is found eligible for claim of depreciation on the written down value of the intangible asset in the impugned assessment year. For the sake of completeness of this order, we proceed to extract the said paragraphs as under : "11. We have heard the submissions of rival sides at length and have examined the orders of the authorities below. As far as the facts are concerned, the Revenue has not raised any dispute. The only point of contention is; Whether the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no right has been acquired by the appellant and the same was paid merely to keep the purchase agreement alive and reduce the prices of preforms. Therefore, I do not find any infirmity in the order of Assessing Officer, The claim of the appellant that the amount was part of WDV brought down from earlier years is also unsustainable as wrongly brought down WDV cannot be accepted as sacrosanct. Therefore, I do not find any merit in the ground taken and therefore, the same is dismissed." 12. The assessee in the period relevant to assessment year 2004-05 had capitalized the amount of 285 million Japanese Yen and had claimed depreciation thereon year after year. This fact is evident from the balance sheet filed by the assessee for the financial year ending on 31-03-2004, 31-03-2005 and 3103-2006. Once, it has become the part of bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as allowed." 13. Thus, in view of the facts of the case, we are of the considered view that the assessee is eligible to claim depreciation on the written down value of intangible assets in the impugned assessment year. The appeal of the assessee is allowed, accordingly." 39. From the above contents, it is settled principle that the claim of depreciation needs to be allowed on the written down value of the intangible asset. Segregation of a depreciable asset out of block of assets is not permitted artificially. Denial of asset specific depreciation out of such block of assets is also not permitted. The said judgment of Delhi High Court in the case of Sharp Business System (Supra) was decided prior to the decision of the Tribunal. Therefore, we are of the view that Ground No.2 should be allowed in favour of the assessee in view of judgment of Apex Court in the case of Vegetable Products (supra). 20. Before us, no change in facts has be pointed out by Revenue. We therefore following the order of Co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2007-08 hold that assessee is eligible f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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