Minda Fiamm Acoustic Ltd., New Delhi vs Department Of Income Tax

I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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IN THE INCOME TAX APPELLATE TRIBUNAL DELHI E BENCH, NEW DELHI

[Coram: Pramod Kumar AM and A. T. Varkey JM]

I.T.A. No.: 1504/Del/11 Assessment year: 2007-08 Minda Acoustic Limited ...................Appellant (formerly known as Minda Fiamm Acoustic Limited) B 64/1, Wazirpur Industrial Area New Delhi 110 052 [PAN: AAACF8168K]

Vs.

Additional Commissioner of Income Tax Range 6, New Delhi ...................Respondent

I.T.A. No.: 1347/Del/11 Assessment year: 2007-08

Additional Commissioner of Income Tax Range 6, New Delhi ...................Appellant

Vs.

Minda Acoustic Limited ................Respondent (formerly known as Minda Fiamm Acoustic Limited) B 64/1, Wazirpur Industrial Area New Delhi 110 052 [PAN: AAACF8168K]

Appearances by: Pradeeep Dinodia, alongwith R K Kapoor, for the assessee J P Chandrakar, for the revenue

Per Pramod Kumar, AM:

1. These cross appeals call into question correctness of order dated 26 th November 2010, passed by the learned Commissioner (Appeals) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2007-08.

I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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2. We will first take up the ITA No. 1504/Del/11.

3. In the first ground of this appeal, the assessee has raised the following grievance:

1.0 That the learned CIT(A) has grossly erred in law and on the facts of the appellant's case in confirming the addition made by the AO on account of depreciation on goodwill amounting to Rs.5,48,622.

1.1 That the learned CIT(A) has failed to appreciate that on the facts and in the circumstances of the appellant case depreciation on the "bundle of business and commercial rights", which was titled as 'goodwill' in the books of the appellant was legally and properly allowable u/s 32(1)(ii) of the Income-tax Act.

4. So far as this grievance of the assessee is concerned, the relevant material facts are like this. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee had claimed depreciation, amount to Rs 5,48,622, on goodwill. The Assessing Officer was of the view that since goodwill does not form part of the intangible assets, which are eligible for deprecation, the depreciation on goodwill cannot be allowed. When this proposition was put to the assessee, it was explained by the assessee that goodwill in the present case is in the nature of business or commercial right as per section 32 of the Act. This plea was, however, rejected by the Assessing Officer. Aggrieved, assessee carried the matter in appeal but without any success. The assessee is not satisfied even with the stand so taken by the learned Commissioner (Appeals) and is in further appeal before us.

5. Learned representatives fairly agree that the issue is now covered, by a decision of the coordinate bench in assessee's own case for the assessment year 2006-07, in favour of the assessee. Vide order dated 19 th July 2013, the coordinate bench has, inter alia, held as follows:

10.4 We have carefully considered the submissions and perused the records. We find that the figure of the goodwill in the assessee's case has I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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arisen when the existing running unit was transferred by Minda Industries Ltd. to the assessee newly firm company i.e. the assessee for a consolidated consideration of Rs. 2.75 crores and the difference between the net value of assets, which assets were recorded at book value, was recognized as 'goodwill' in the books of accounts. We find that the transaction took place in the preceding assessment years and the figure of goodwill is coming from the previous balance sheet. We agree with the submissions of the ld. Counsel of the assessee that the Hon'ble Delhi High Court's decision in the case of Areva T & D India Ltd. vs. DCIT (2012) 345 ITR 421 supports the case of the assessee. The facts of this case before the Hon'ble High Court were as under:-

"The assessee vide a slump sale agreement required, as a going concern, the transmission and distribution business of the transferor- company. The book value of the net tangible assets (assets minus liabilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as RS.28.11 crores. The said assets and liabilities were recorded in the books of transferee at the same value as appeared in the books of the transferor. The balance payment of Rs.16,58,76,000/- over and above the book value of net tangible assets, was allocated by the assessee towards acquisition of bundle of business and commercial rights, compendiously termed as 'goodwill' in the books of account, which comprised, inter alia, the following: - (i) business claims, (business information, (iii) business records, (iv) contracts, (v) skilled employees, (vi) know-how. The assessee-company while filing its return claimed depreciation under section 32(1)(ii) with respect to the aforesaid amount of Rs.16,58,76,000/- as being a price paid for acquisition of above mentioned intangible assets. The Assessing officer disallowed the depreciation on 'goodwill' as claimed in the return. The Assessing Officer disallowed the claim of the assessee company on grounds, namely, (a) depreciation under section 32(2)(ii) is not available on goodwill; (b) the assessee was unable to demonstrate that the amount shown as goodwill in the books of account was in fact a payment made towards acquisition of 'certain business and commercial rights' and therefore eligible for depreciation in tax as per section 32(1)(ii)."

The Hon'ble Delhi High Court has further held as under: -

"Applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression 'business or commercial rights of similar nature' specified in section 32(1)(ii), it is seen that such rights need not answer the description of 'know- how, patents, trademarks, licenses or franchises' but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in section 32(1)(ii) preceding the term 'business or commercial rights of similar nature - it is seen that the aforesaid intangible assets are not of the I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words 'business or commercial rights of similar nature' have been additionally used, clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of 'business or commercial rights' cannot be restricted to only six categories of assets, viz ., know-how, patents, trademarks, copyrights, licenses or franchises. The nature of 'business or commercial rights' can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees and know-how, were all assets, which were invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets were, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor; in the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. [Para 13]

In view of the above discussion, it is held that the specified intangible assets acquired under slump sale agreement were in the nature of 'business or commercial rights of similar nature' specified in section 32(l)(ii) and were accordingly eligible for depreciation under that section. [Para 14].

10.5 In light of the above case laws, we are in agreement with the submissions of the ld. Counsel of the assessee that the goodwill that has been recognized in this case represents various assets in the nature of goodwill. We find considerable cogency in the submissions of the Ld. Counsel of the assessee as mentioned above. Thus, we hold that the assessee's case is covered by the decision in the Hon'ble Delhi High Court as above. The case laws relied upon by the Ld. Departmental Representative are not applicable as they are Tribunal's decisions and Hon'ble Jurisdictional High Court takes a precedence over the same.

6. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. Respectfully following the same, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 5,48,622 in respect of depreciation on goodwill.

I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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7. Ground no. 1 is thus allowed.

8. In second ground of appeal, the assessee has raised the following grievance:

2.0 That the CIT(A) has grossly erred in law and on the facts of the appellant's case in denying the depreciation on the vehicles which were admittedly used for the purpose of business and were owned by the appellant but however, these were not registered in the name of the appellant.

9. During the course of the assessment proceedings, the Assessing Officer disallowed depreciation of Rs 64,821 as the vehicles, in respect of which this depreciation was claimed, were registered in the name of Minda Industries Limited and not the assessee. In appeal, it was explained to the assessee that these vehicles were transferred to the assessee by Minda Industries Limited, as part of business on going concern basis, and as such the vehicles were de facto owned by the assessee. Learned CIT(A) did not accept this plea. He held that the ownership and usage of an asset is a sine qua non for claim of depreciation in respect of such an asset. In support of this proposition, he placed reliance on the judgments of Hon'ble Rajasthan High Court in the case of Changanlal Automobiles Vs CIT [(1985) 156 ITR 58]. A reference was also made to the decisions of Hon'ble Kerala High Court in the case of DCST Vs Jinachandran [(1994) 205 ITR 328] and of Hon'ble MP High Court in the case of Sardar Tara Singh Vs CIT [(1963)47 ITR 756]. The disallowance was thus upheld by the learned Commissioner (Appeals) as well. The assessee is aggrieved of the stand so taken by the learned Commissioner (Appeals) and is in further appeal before us.

10. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

11. We find that all the three decisions referred to and relied upon by the learned Commissioner (Appeals) refer to the situations in which the assessee I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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was using the assets under hire purchase agreement and the question arose whether the assessee is entitled to depreciation in respect of these assets or not. Hon'ble Courts were consistently of the view that until the point of time the ownership vests in the hirer, the hirer is not eligible for the depreciation. There cannot be any quarrel with this proposition but this proposition has nothing to do with the facts of the present case. Here is a case in which the assessee is a de facto owner of the vehicles, there is no dispute about the fact of ownership and the only hurdle in the way of the assessee's eligibility of depreciation is that the vehicles are not registered in his name. The ownership of a vehicle and the registration of a vehicle in someone's name are not exactly the same thing. There can be situations in which the assessee may be owner of an asset even as the asset may be not registered in the name of the assessee. Dealing with this kind of a situation, i.e. in which the assessee had purchased an asset but the said asset was not registered in the name of the assessee even as the assessee could exercise the rights of the owner qua the assets, Hon'ble Supreme Court has, in the case of Mysore Minerals Limited Vs CIT [(1999) 239 ITR 775], observed that, " The intention of the legislature in enacting s. 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession.

Assigning any different meaning would not subserve the legislative intent". It is thus clear that the technicality of an asset being registered in the name of the asset can not come in the way of an assessee's eligibility for depreciation as long as such an asset is de facto owned by the assessee and is used for the purposes of the business. In the present case, in the light of the business transfer agreement, there is no doubt that the asset was owned by the assessee. It is not even in dispute that the asset was used for the purposes of the business, nor has that been the case of the Assessing Officer. The conditions for eligibility to claim depreciation are thus satisfied on the facts of the present case. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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and direct the Assessing Officer to delete the impugned disallowance of Rs 64,821. The assessee gets the relief accordingly.

12. Ground No. 2 is thus allowed.

13. No other ground of appeal was pressed before us.

14. In the result, the appeal filed by the assessee is allowed.

15. We now take up ITA No. 1347/Del/11.

16. Ground nos.1 & 4 are general in nature, as such, require no specific adjudication.

17. In the second ground of appeal, the A.O. has raised the following grievance.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,30,09,738/- made by Assessing Officer disallowing the 50% of legal and professional fees.

2.1 The Ld. CIT(A) ignored the finding recorded by the Assessing Officer and the fact that the assessee did not file evidence in support of its claim during the assessment proceedings.

18. Briefly stated, the relevant material facts are like this. During the course of assessment proceedings, the A.O. noted that the assessee has inter alia made the payment of Rs.60,19,476 in respect of "legal and professional charges" to Minda Industries Limited. The A.O. noted that the assessee is incurring this heavy expenditure without any specific mention of the work undertaken by Minda Industries Limited, and that there is no business prudence in this expenditure. It was also noted that no businessman would spend such huge amount for services mentioned as "time to time assistance, handling corporate I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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matters etc. with expert knowledge". It was in this backdrop the A.O. came to the conclusion that the amount of Rs.60,19,476/- paid to Minda Industries Limited is excessive and unreasonable, and is, therefore, hit by provisions of section 40A(2)(a)/(b) of the Act. He then proceeded to disallow 50% of the expenditure by observing as follows:-

In the present case the facts clearly bring out that the payment made to MIL is excessive and unreasonable. The assessee has to substantiate the claim of expenditure made. He has neither specified the services rendered by MIL nor the rates at which payments were made. It is due to these heavy payments made/expenses incurred in favour of related party that the N.P. rate is only 0.88%, while the GP rate is 25.80%. Considering that assessee has failed to justify these expenses, 50% of Rs.60,19,476/- i.e. the expenses under this head are disallowed.

19. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) noted that there is no dispute about the factum of rendering of services as the A.O. himself allowed 50% of the amount paid by the assessee, and that the only question which needs to be analysed and adjudicated upon is whether the payments made by the assessee to M/s. Minda Industries Limited for the services so rendered was excessive or unreasonable. The learned CIT(A) was of the view that it is incorrect to come to the conclusion that there is no basis for the said payment as the payment has been made pursuant to the agreement entered into at the time of getting into the joint venture, and that, according to the said agreement only the payment has been made. He also noted that it is a common practice in the large corporate houses to centralise certain services and employ personnel in the corporate office to carry out certain common functions for all the group entities. The learned CIT(A) was of the view that there is no tax avoidance involved in the present case as both the companies have taxable income and are taxed at the same rate in the same assessment year. He was thus of the view that the shifting of expenses, even if that be so, is completely revenue neutral exercise. He came to the conclusion that the disallowance made by the A.O. is devoid of legally sustainable basis and I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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accordingly he deleted the same. While doing so, he inter alia concluded as follows:-

6.7 Therefore, keeping in view the totality of the facts and circumstances, I am of the view that the Assessing Officer was not justified in making the disallowance out of the payments made to M/s Minda Industries Limited, especially in the light of the fact that there is no dispute about the services rendered by the said M/s. Minda Industries Limited and no tax avoidance has been attempted in this arrangement and the whole arrangement is tax/revenue neutral. Therefore, I direct that the disallowance of Rs.30,09,738/- be deleted. The ground no.4 is allowed to the appellant

20. The Assessing Officer is aggrieved and is in appeal before us.

21. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that the disallowance under section 40A(2)(a)/(b) can be invoked when the A.O. is of the opinion that, inter alia, such expenditure is "excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee". In the present case, the disallowance has been made on the ground that the payment is excessive or unreasonable having regard to the fair market value and the services for which the payment is made but then there is no finding by the A.O. as to what according to him is fair market vale of the services in question. A disallowance under section 40A(2), on percentage basis, is inherently contrary to the Act in as much as it is a condition precedent for invoking section 40A that the benchmark to be set as to what is a fair market value of the services question and then the expenditure in excess of the said benchmark is to be disallowed but then such benchmark cannot be in terms of percentage of payment by the assessee. For this reason alone, the impugned disallowance indeed deserves to be disallowed. We have also noted that in the present case, there is no dispute about the facts of service being rendered and there is no benchmark set for as to what would constitute a fair market value of the services in question. Unless there is a clear finding that the market value of the services taken from the sister-concern is less than the I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of s. 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. There is no such finding in the present case. In these circumstances as also bearing in mind entirety of the case, we are of the considered view that the disallowance made by the A.O. was devoid of legally sustainable basis. The learned CIT(A) was thus quite justified in deleting the same. Ground no.2 is thus dismissed.

22. In the third ground of appeal, the A.O. has raised the following grievance:

3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.1,00,000/- made by Assessing Officer disallowing the foreign travelling expenses.

3.1 The Ld. CIT(A) ignored the finding recorded by the Assessing Officer and the fact that the foreign tour in question was not undertaken exclusively for business purposes.

23. So far as this disallowance is concerned, the A.O. has made the lump sum disallowance of Rs.1,00,000/- on the ground that the details of foreign travelling submitted by the assesses are very general in nature, and that the trip to Japan undertaken for the current year must have been undertaken to explore new market as there was no such trip in the immediately preceding year. However, when assessee appealed against this disallowance before the ld. CIT(A), the learned CIT(A) held that the impugned disallowance has been made purely on the basis of assumption not borne out of the record, and without any legally sustainable basis. Learned CIT(A) also noted that the assessee had filed complete details in respect of expenses and no specific defects were pointed out in the same. Aggrieved by this deletion of disallowance of Rs.1,00,000/-, the A.O. is in appeal before us.

24. Having heard the rival submissions and perused the material on record, we see no reason to interfere in the matter, since, as rightly noted by the I.T.A. No.: 1504 and 1347/Del/11 Assessment year: 2007-08

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learned CIT(A), the impugned disallowance is indeed devoid of any legally sustainable basis. No disallowances can be made simply on the basis of assumptions, surmises and conjectures. We have noted that no specific requisitions were made by the A.O. for further information in respect of details of foreign travel expenses and yet the A.O. has disallowed the expenses for want of full and complete details. As regards the A.O.'s observation of earlier expenditure incurred on exploring new market, we are in complete agreement with the learned+ CIT(A) that there is no basis whatsoever to come to this conclusion and it is purely an inference drawn on the basis of assumption. Clearly, therefore, the learned CIT(A) was justified in deleting this disallowance as well. We approve his action and decline to interfere in the matter.

25. Ground no.3 is also dismissed.

26. In the result, appeal filed by the A.O. is dismissed.

27. To sum up, while appeal of the assessee is allowed, appeal filed by the Assessing Officer is dismissed. It is so pronounced in the open court today on 16 th January, 2015.

Sd/xx Sd/xx A. T. Varkey Pramod Kumar (Judicial Member) (Accountant Member)

New Delhi, the 16 th day of January, 2015.

Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File

By order etc

Assistant Registrar Income Tax Appellate Tribunal Delhi benches, New Delhi