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TMI Blog2016 (9) TMI 1527X X X X Extracts X X X X X X X X Extracts X X X X ..... d final outcome on this issue for the Assessment Year 2006-07 [ 2014 (12) TMI 1010 - ITAT BANGALORE] . Since the said issue is also set aside to the record of the Assessing Officer therefore the issue of disallowance of interest expenditure under Section 14A of the Act to the extent of old investment is set aside to the record of the Assessing Officer with same direction as given for the Assessment Year 2006-07. Since there is a dividend income for the Assessment Year 2009-10 therefore the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT [ 2015 (9) TMI 238 - DELHI HIGH COURT] was not applicable for the Assessment Year 2008-09 regarding disallowance of administrative expenditure being 0.5% of the average investment. Assessee has submitted that the investment for the purpose of disallowance of administrative expenditure should be considered only on which the assessee has earned dividend from mutual funds. AR has submitted that only 90 Crores and 2,58,000 can be considered as investment for the purpose of disallowance as per Rule 8D(2)(iii). Accordingly, we direct the Assessing Officer to recompute the disallowance as per Rule 8D(2)(iii) by considering the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2007-08, the CIT (Appeals) has deleted disallowance on the ground that the borrowed fund has been utilized by the assessee for the business purpose and therefore the assessee has not used the borrowed fund for the purpose of investment in question. The CIT (Appeals) has also relied upon the order passed on the investment issue of disallowance under Section 14A for the Assessment Year 2006-07. 5. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The ld. DR has submitted that the CIT (Appeals) has not examined the direct nexus of assessee's own fund and investment made in this year and therefore the finding of the CIT (Appeals) is based on the presumption that the borrowed fund has been utilized by the assessee for the business purpose and not for the purpose of investment. He has further submitted that for the Assessment Year 2006-07, the Tribunal has set aside the order of the CIT (Appeals) vide order dt.24.11.2014 and remitted the issue to the record of the Assessing Officer for reconsideration of the issue without applying Rule 8D. 6. On the other hand, the learned Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed this issue in ITA Nos.84 & 85/Bang/2014 vide order dt.24.11.2014 in paras 6 & 7 as under : "6. With the assistance of the learned representatives, We have duly considered the rival contentions and gone through the record carefully. The Hon'ble Delhi High Court in the case of Maxopp Investments Ltd (Supra) has held that Rule 8D is applicable from assessment year 2008-09, that does not mean that prior to the introduction of this Rule, no amount can be considered as incurred for the purpose of earning tax free income. The disallowance has to be made, first examining the accounts of the assessee and if the Assessing Officer is satisfied that the accounts do not depict true picture, then he can work out the disallowance on the basis of a reasonable and acceptable method of apportionment. The learned CIT (A) ought to have not deleted the disallowance in Toto, rather ought to have examined whether any disallowance is possible or not. In other words, she should have examined whether any expenditure attributable to earning exempt income can be identified for disallowance u/s 14A of the Act. She has simply observed that Rule 8D is not applicable, therefore, addition by the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the words of the Supreme Court in Walfort (supra) to the following effect:- "The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section14A (1). In case, the assessing officer is not, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no dividend income the said interest expenditure is also not allowable under Section 57 of the Act as the purpose of taking the loan is not claimed by the assessee for the investment in shares. Therefore in any case, the interest expenditure on the borrowed fund which is not utilized for the purpose of assessee's business is not an allowable claim. Therefore without going into the controversy of whether the disallowance can be made under Section 14A on account of interest expenditure when the assessee has not earned any dividend income we would like to deal with the issue on the point that whether the assessee was having sufficient fund for making the investment in the shares and mutual funds. The assessee has filed the following details of investments and its own funds as well as the dividend income : Description 2007-08 (Rs.) 2008-09 (Rs.) 2009-10 (Rs.) 14A disallowance under Rule 8D(2)(ii) & (iii) 18,143,882 31,704,922 100,568,338 Own Funds 5,576,353,000 6,112,597,000 10,815,479,000 Total Investments 590,699,000 1,040,709,000 1,940,957,000 Investments made during the year 50,000 450,000,000 900,258,000 Investments made during the year for acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment for the purpose of disallowance of administrative expenditure should be considered only on which the assessee has earned dividend from mutual funds. Thus the ld. AR has submitted that only ₹ 90 Crores and ₹ 2,58,000 can be considered as investment for the purpose of disallowance as per Rule 8D(2)(iii). Accordingly, we direct the Assessing Officer to recompute the disallowance as per Rule 8D(2)(iii) by considering the investment in mutual funds which has yielded dividend income. 11. The next issue involved in the assessee's appeal is regarding the disallowance of claim of depreciation on goodwill as well as valuation of goodwill. The assessee is in the business of production and sale of Beer. During the previous year relevant to assessment year under consideration, the assessee's subsidiaries namely Karnataka Breweries & Distillery Ltd. (KBDL), London Draft Pubs Pvt. Ltd. (LDPPL) and London Pillsner Breweries Pvt. Ltd. (LPBPL) were amalgamated with the assessee. The assessee claimed depreciation of ₹ 15,57,54,392 on goodwill of ₹ 62,30,17,566. Thus goodwill was shown as a result of merger / amalgamation of KBDL. Therefore this dispute is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disallowed the depreciation on the goodwill on the ground that there is no goodwill if proper valuation is assigned to the tangible asset and land. On appeal, the CIT (Appeals) has concurred with the decision of the Assessing Officer by considering the fact that the value of the goodwill in the books of the KBDL is only ₹ 7.45 Crores which has been shown by the assessee at ₹ 62.30 Crores. The CIT (Appeals) was of the view that when the financial results of the KBDL shows that there was a profit of ₹ 2.14 Crores for the Assessment Year 2004-05 and loss of ₹ 1.89 Crores for the Assessment Year 2005-06 then the assessee has failed to justify the valuation of goodwill estimated at ₹ 62.30 Crores with reference to the average profit. Thus the CIT (Appeals) held that there is no justification for adopting the balance figure of excess consideration over the net asset without admitting to support the said valuation. 12. Before us, the ld. AR of the assessee has submitted that issue of depreciation on goodwill is concerned, the same is covered by the judgment of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. 252 CTR 233 (SC). He has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso to Section 32(1) of the IT Act. He has referred to the assessment order and submitted that the Assessing Officer has considered the said proviso while disallowing the claim of depreciation. The CIT (Appeals) has confirmed the action of the Assessing Officer and therefore the claim of depreciation is not allowable as per the 5th proviso to Section 13(2)(i) of the Act. The ld. DR has also referred to the Expln. 3 to Section 43(1) and submitted that the Assessing Officer has the power to examine the valuation of the assets acquired by the assessee if these assets were already in use for business purpose and if the Assessing Officer is satisfied that the main purpose of transfer of such assets was the reduction of the liability to Income-tax then the actual cost of the asset to the assessee shall be such an amount as the Assessing Officer determines. Therefore the Assessing Officer has rightly determined the valuation of the goodwill at NIL and the assessee has failed to substantiate the valuation of the goodwill. The ld. DR has relied upon the orders of the authorities below. 13.1 In a rejoinder the ld. AR of the assessee has submitted that when the assets are introduced in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer of such assets was the reduction of liability to income tax by claiming depreciation on the enhanced cost then the actual cost to the assessee shall be determined by the Assessing Officer. In the case on hand, since there is an amalgamation of the subsidiary with the assessee therefore all the assets which came to the assessee are already in use by the subsidiary and consequently the valuation of all the assets are subjected to the verification of the Assessing Officer as per Expl.3 of Section 43(1) of the Act. However, the Assessing Officer chose to examine the valuation of goodwill alone in order to disallow the claim of depreciation on the enhanced value of goodwill. We find that the Assessing Officer has not adopted any prescribed or well accepted method for valuation or actual cost of the goodwill in the hands of the assessee but he has doubted the valuation of the tangible assets and was of the view that the assessee has deflated the valuation of the tangible assets by the method of cost of replacement instead of FMV. The scope and objective of the Expl.3 of Section 43(1) of the Act is to check the excess claim of depreciation by enhancing cost of assets acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: ........... ........... Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets. In view of this explanation, KBDL was not claiming any goodwill as an asset eligible for depreciation. If amalgamation is not considered, there would not be any deduction of depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill." However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. It is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(ii) then the valuation issue become irrelevant. The CIT (Appeals) has also concurred with the view of the Assessing Officer regarding the applicability of the 5th proviso to Section 32(1) of the Act in para 5.4 as under : "5.4 It is also highlighted both in the assessment order and remand report that no depreciation on goodwill was claimed by KBDL before amalgamation. Therefore, as per the 5th proviso to Section 32(1)(ii), the appellant is not entitled to depreciation. This is a valid and relevant argument and appellant has not offered any rebuttal to this contention of the A.O." It is not the case of the assessee that the subsidiary has claime ..... 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