M/s Millennium Beer Industries Ltd., New Delhi V. DCIT, New Delhi

ITA 2889/DEL/2009

• Counselvise Citation: 288920114 RSA 2009
• Duration Of Justice: 3 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 31-10-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 15-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANOOP KR SINGHDR
• Keywords: Depreciation; Earning of tax free income; Retrospective amendment; Question of law; Scheme of amalgamation; Reassessment proceedings
• Section: 143(3); 14A; 32; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI E BENC H BEFORE SHRI RAJPAL YADAV, JM & SHRI A.N. PAHUJA, AM ITA NOS.2889 & 2890/DEL/2009 ASSESSMENT YEARS:2004-05 & 05-06 M/S MILLENNIUM BEER INDUSTRIES LTD., 1002, BHIKAJI CAMA BHAVAN, 10 TH FLOOR, BHIKAJI CAMA PLACE, NEW DELHI V/S . DEPUTY CIT,CIRCLE-6(1) RANGE 6, NEW DELHI [PAN : AAACI 1281 F] (APPELLANT) (RESPONDENT) ASSESSEE BY NONE REVENUE BY SHRI ANOOP KR. SINGH,DR DATE OF HEARING 31-10-2012 DATE OF PRONOUNCEMENT 02-11-2012 O R D E R A.N.PAHUJA:- THESE TWO APPEALS FILED ON 15 TH JUNE, 2009 BY THE ASSESSEE AGAINST TWO SEPARATE ORDERS DATED 23-03-2009 & 26 .3.2009 OF THE LD. CIT(A)-IX, NEW DELHI, FOR THE AYS 2004-05 & 2005-06 RESPECTIVE LY, RAISE THE FOLLOWING GROUNDS:- I.T.A. NO.2889/DEL./2009 AY 2004-05 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) ERRED IN HOLDING THAT NOTICE U/S 148 WAS ISSUED VALIDLY AND PROCEEDINGS U/S 147 ARE IN ORDER . 2. THAT THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT ON THE FACTS NO INCOME HAS ESCAPED ASSESSMENT AND HENCE THE NOTI CE ITA N OS.2889&2890 /DEL./2009 2 ISSUED BY ASSESSING OFFICER IS TOTALLY ILLEGAL AND CONTRARY TO THE PROVISION OF THE LAW, AND THE SAME OUGHT TO HAV E BEEN QUASHED. 3. THAT THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT THE PAYMENT OF GOODWILL AROSE IN THE APPELLANTS CASE A T THE TIME OF ACQUISITION OF A RUNNING BUSINESS AND IT BEING A VALUABLE INTANGIBLE ASSET, THE APPELLANT IS ENTITLED TO DEPR ECIATION AS PERMITTED U/S 32 OF THE INCOME-TAX ACT. 4. THAT THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT THE DEFINITION OF BLOCK OF ASSETS: READ WITH APPENDIX 1 OF INCOME TAX RULES CLEARLY PERMITS THE APPELLANT TO AVAIL DE PRECIATION ON INTANGIBLE ASSETS DEPLOYED BY IT IN ITS BUSINESS . I.T.A. NO.2890/DEL./2009-AY 2005-06 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE REDUCTIO N OF LOSS DECLARED BY THE APPELLANT, BY CONCURRING WITH THE A SSESSING OFFICER THAT CERTAIN ITEMS OF EXPENDITURE/ALLOWANCE ARE NOT ALLOWABLE TO IT. 2. THAT THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT THE PAYMENT OF GOODWILL AROSE IN THE APPELLANTS CASE A T THE TIME OF ACQUISITION OF A RUNNING BUSINESS AND IT BEING A VALUABLE INTANGIBLE ASSET, THE APPELLANT IS ENTITLED TO DEPR ECIATION AS PERMITTED U/S 32 OF THE I.T. ACT. 3. THAT THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT THE DEFINITION OF BLOCK OF ASSETS READ WITH APPENDIX 1 OF INCOME TAX RULES CLEARLY PERMITS THE APPELLANT TO AVAIL DE PRECIATION ON INTANGIBLE ASSETS DEPLOYED BY IT IN ITS BUSINESS . 4. THAT IN ANY VIEW OF THE MATTER, THE ACTION OF TH E LEARNED CIT(A) IN DENYING THE ALLOWANCE OF DEPRECIATION ON GOODWILL IS CONTRARY TO THE PROVISIONS OF LAW AND HENCE DESE RVES TO BE SET ASIDE. 2. AT THE OUTSET, NONE APPEARED BEFORE US ON BEHAL F OF THE ASSESSEE NOR SUBMITTED ANY REQUEST FOR ADJOURNMENT .CONSIDER ING THE NATURE OF ISSUES, THE BENCH PROCEEDED TO DISPOSE OF THE APPEAL AFTER HEAR ING THE LD. DR. ITA N OS.2889&2890 /DEL./2009 3 3. ADVERTING FIRST TO GROUND NOS. 3 & 4 IN THE A PPEAL FOR THE AY 2004-05 & GROUND NOS. 2 TO 4 IN THE APPEAL FOR THE AY 2005-06 , FACTS, IN BRIEF, AS PER RELEVANT ORDERS FOR THE AY 2004-05 ARE THAT ASSESS MENT IN THIS CASE WAS COMPLETED ON A LOSS OF ` ` 45,66,16,150/- VIDE ORDER DATED 12 TH DECEMBER, 2006 U/S 143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), IN PURSUANCE TO RETURN DECLARING LOSS OF ` ` 45,66,66,147/- FILED ON 01.11.2004. SUBSEQUENTLY, THE ASSESSING OFFICER (A.O. IN SHORT) NOTICED THAT THE ASSESSEE CLAIMED DEPRECIATION AMOUNTING TO ` ` 42,68,583/- ON GOODWILL WHICH WAS INTANGIBLE ASSET AND IN HIS OPINION THE SAID DEPREC IATION WAS WRONGLY ALLOWED. ACCORDINGLY, THE AO AFTER RECORDING REASONS IN WRIT ING IN TERMS OF PROVISIONS OF SECTION 148(2) OF THE ACT, ISSUED A NOTICE DATED 1 7.4.2008 IN TERMS OF PROVISIONS OF SEC. 147/148 OF THE ACT. IN RESPONSE, THE ASSESS EEE SOUGHT A COPY OF REASONS RECORDED WHICH WERE SUPPLIED ON 23.04.2008. DURING THE COURSE OF REASSESSMENT PROCEEDINGS, TO A QUERY BY THE AO, THE ASSESSEE RE PLIED THAT THE ASSESSEE[MBIL] ,IN THE BUSINESS OF MANUFACTURING BE ER, IN 2002 TOOK OVER THE ASSETS AND LIABILITIES OF MILLENIUM ALCOBEV PVT. LT D.[MAPL] AND PAID GOODWILL, BEING DIFFERENCE BETWEEN THE ASSETS AND LIABILITIES , MAPL WAS TRADING IN BREWERIES GOODS AND HAD DISTRIBUTION NETWORK ALL OV ER INDIA. ACCORDINGLY, THE ASSESSEE CLAIMED THAT IN TERMS OF PROVISIONS OF SEC TION 32 OF THE ACT, THE ASSESSEE WAS ENTITLED TO DEPRECIATION ON THE AMOUNT PAID FOR GOODWILL. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESS EE AND ADDED BACK DEPRECIATION ON GOODWILL, IN THE LIGHT OF PROVISION S OF SECTION 2(11) AND SECTION 32(1) OF THE ACT, RELYING, INTER ALIA, ON THE DECIS IONS IN POLESTAR ELECTRONIC PVT. LTD. VS. ADDL. CST (1978) 41 STC 409, 421 (SC); JAG DISH CH. PATNAIK VS. STATE OF ORISSA, JT. 1998 (3) S 105; AZAD TOBACCO (P) LTD . VS. CIT, (1997) 225 ITR 1002 (ALL), RELYING ON CST VS. MODI SUGAR MILLS LTD ., AIR 1961 SC1047, RELATING TO INTERPRETATION OF STATUTES.. 3.1 SIMILARLY, IN THE AY 2005-06, THE AO DISALLOWE D THE CLAIM FOR DEPRECIATION OF ` ` 32,01,477/- ON GOODWILL. ITA N OS.2889&2890 /DEL./2009 4 4 ON APPEAL, THE LD CIT(A) DECIDED THE APPEAL FOR THE AY 2005-06 FIRST AND UPHELD THE FINDINGS OF THE AO IN THE FOL LOWING TERMS:- 4.4 I HAVE CONSIDERED THE SUBMISSIONS MADE BY TH E LEARNED AR. FIRST OF ALL, IT SHALL BE NECESSARY TO LOOK INTO THE FACTS OF THE CASE LAWS ON WHICH THE APPELLANT RELIED. IN THE CASE OF S.C. CAMBATTA & CO. PVT. LTD. VS. COMMISSIONER OF EXCESS PROFIT TAX (SUPRA), THE ISSUE RELATED TO EXCESS PROFIT TAX ACT AND THE ISSUE IN THAT CASE IS NOT AT ALL RELEVANT AND APPLICABLE TO THE FACTS OF THE INSTANT CASE. IN THE CASE OF CIT VS. B. C. SRINIVAS A SHETTY (SUPRA), THE ASSESSMENT YEAR INVOLVED WAS 1966-67 AND THE IS SUE AT HAND WAS WHETHER TRANSFER OF THE GOODWILL OF A NEWLY COM MENCED BUSINESS CAN GIVE RISE TO A CAPITAL GAIN TAXABLE UN DER SECTION 45 OF THE ACT. THERE IS NO DISCUSSION ON THE PROVISIONS O F SECTION 32 AND WHETHER DEPRECIATION IS ALLOWABLE ON GOODWILL OR NO T. IN VIEW OF THE ABOVE, I HOLD THAT THE RATIOS OF THESE TWO CASE LAW S ARE NOT APPLICABLE TO THE INSTANT CASE. 4.5 THE STATUTORY EXPRESSION OF THE PROVISION GRA NTING DEPRECIATION ON INTANGIBLE ASSET IS THAT:- 'KNOWHOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES , FRANCHISES OF ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1998.' A PLAIN READING OF THE ABOVE STATUTORY EXPRESSION B RINGS HOME THE POINT THAT THE LAW HAS SPECIFIED SIX CATEGORIES OF INTANGIBLE ASSETS WHICH ARE ELIGIBLE FOR DEPRECIATION I.E. (I) KNOWHOW (II) PATENTS (III) COPYRIGHTS (IV) TRADE MARKS (V) LICENCES (VI) FRANCHISES THE ABOVE MAKES IT VERY OBVIOUS THAT ALL INTANGIBLE ASSETS ARE NOT ELIGIBLE FOR DEPRECIATION ALLOWANCE. IF TH E APPELLANT COMPANY HAD PAID AMOUNT TOWARDS THE ACQUISITION OF GOODWILL THEN THE SAID PAYMENT DOES NOT COME UNDER EITHER KNOWHOW , PATENTS, ITA N OS.2889&2890 /DEL./2009 5 COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES. THE O NLY REMAINING CATEGORY IS THE RESIDUAL ONE 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE'. IT IS TO BE SEEN THAT A NY OTHER BUSINESS OR COMMERCIAL RIGHTS ARE NOT BY THEMSELVES INTANGIBLE ACQUISITION OF GOODWILL THEN THE SAID PAYMENT DOES NOT COME UNDER EITHER KNOWHOW, ASSETS ELIGIBLE FOR DEPRECIATION. THOSE RI GHTS MUST BE OF SIMILAR NATURETO KNOWHOW, PATENTS, COPYRIGHTS, TRAD EMARKS, LICENCES, FRANCHISES. ANY BUSINESS OR COMMERCIAL RI GHTS NOT SIMILAR IN NATURE TO THE ABOVE MENTIONED SIX ITEMS CANNOT B E TREATED AS INTANGIBLE ASSETS QUALIFIED FOR DEPRECIATION. 4.6 THIS IS BECAUSE 'ANY OTHER BUSINESS OR COMMER CIAL RIGHTS OF SIMILAR NATURE' PROVIDED AS A RESIDUAL CA TEGORY IS FOUND IN THE COMPANY OF EXPRESSION LIKE KNOWHOW, PATENTS, CO PYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES, AND THEREFORE, IN VIEW ,OF THE PRINCIPLE OF 'EJUSDEM GENERIS', THE ABOVE EXPRESSIO N ''ANY OTHER BUSINESS OR COMMERCIAL RIGHTS' HAS TO BE READ IN TH E CONSONANCE WITH PRECEDING WORDS. 'EJUSDEM GENERIS' RULE IS THE RULE OF GENERIC WORDS FOLLOWING MORE SPECIFIC ONE. THE RULE IS THAT WHEN GENERAL WORDS FOLLOW SPECIFIC WORDS OF SAME NATURE, THE GEN ERAL WORDS MUST BE CONFINED TO THE THINGS OF THE SAME KIND AS THOSE SPECIFIED. THIS RULE OF INTERPRETATION MAKES AN ATTEMPT TO RECONCIL E INCOMPATIBILITY BETWEEN THE SPECIFIC AND GENERAL WORDS. THE FIRST C ATEGORY OF WORDS LIKE KNOWHOW, PATENTS, COPYRIGHTS, ETC. FORM A DIST INCT GENESIS OR CATEGORY INASMUCH AS ALL THOSE ITEMS ARE SPECIFIC A ND ELUCIDATED RIGHTS OF BUSINESS OR COMMERCIAL NATURE. IN SUCH CI RCUMSTANCES, THE EXPRESSION 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' ALSO MUST BE IN THE SAME GENESIS OR, CATEGO RY WITH SPECIFIC AND ELUCIDATED IDENTITY OF COMMERCIAL OR BUSINESS N ATURE. THEREFORE, IN THE LIGHT OF THE STATUTORY PROVISIONS CONTAINED IN SECTION 32(1) (II), THE GOODWILL ACQUIRED BY THE AS SESSEE DOES NOT COME UNDER THE EXPRESSION OF ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF THE NATURE SIMILAR TO KNOWHOW, PATENTS, C OPYRIGHTS, ETC. ANOTHER ARGUMENT ADVANCED BY THE LEARNED AR IS THAT EVEN THOUGH THE CONSIDERATION IS STATED TO BE PAID FOR ACQUIRIN G THE GOODWILL, THE ASSESSEE HAS SPECIFIED THE RIGHTS ACQUIRED BY THE A SSESSEE, MORE PARTICULARLY, IN THE AGREEMENT WHICH INCLUDED ALL B USINESS AND COMMERCIAL RIGHTS'. THE EXPRESSION 'ALL BUSINESS AN D COMMERCIAL RIGHTS' USED IN THE AGREEMENT IS TOO A GENERIC EXPR ESSION WHICH DOES NOT FIND SIMILARITY WITH THE SPECIFIC EXPRESSI ONS LIKE KNOWHOW, PATENTS, LICENCES, ETC. THEREFORE, SUCH A VERY GENE RAL EXPRESSION OF BUSINESS AND COMMERCIAL RIGHTS CANNOT BE EQUATED WI TH THE EXPRESSION OF 'ANY OTHER BUSINESS OR COMMERCIAL RIG HTS OF SIMILAR NATURE' OCCURRING IN SECTION 32(1) (II). IN SUPPORT OF ABOVE, REFERENCE CAN BE MADE TO THE CASE LAW OF R.G. KESWA NI VS. ACIT 308 ITR 271 (MUM-ITAT) WHERE WHILE DECIDING THE ISS UE OF ITA N OS.2889&2890 /DEL./2009 6 DEPRECIATION ON GOODWILL AS AN INTANGIBLE ASSET, I TAT, MUMBAI HELD THAT NO DEPRECIATION IS ALLOWABLE ON THE COST OF GO ODWILL ACQUIRED BY THE ASSESSEE AND WHILE DECIDING THE ISSUE, THE HON' BLE BENCH ALSO REFERRED TO THE CASE LAWS OF BHARATBHAI J. VYAS V. ITA 97 ITD 248 (AHD), GURUJI ENTERTAINMENT NETWORK LTD. V. ACIT 14 SOT 556 (DEL) AND CIT V. MANGAHRE GANESH BEEDI WORKS 264 ITR 142 (KAR.). IN VIEW OF ABOVE ARGUMENTS, THE DISALLOWANCE OF DEPREC IATION IS UPHELD AND THIS GROUND OF APPEAL IS TAKEN AS REJECT ED. 4.1 FOLLOWING HIS AFORESAID ORDER, THE LD. CIT(A ) UPHELD THE DISALLOWANCE IN AY 2004-05 ALSO. 5. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR MERELY SUPPO RTED THE IMPUGNED ORDERS OF THE LD. CIT(A) IN THESE TWO YEARS, EVEN WHEN HE WA S POINTED OUT A DECISION DATED 22.8.2012 OF THE HONBLE APEX COURT IN . CIT VS SMIFS SECURITIES LTD. IN CIVIL APPEAL NO.5961 OF 2012 6. WE HAVE HEARD THE LEARNED DR AND GONE THROUGH T HE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION OF THE HONBLE APEX COURT.. WE FIND THAT IN THE CASE OF SMIFS SECURITIES LTD.(SUPRA) ,INTER ALI A, FOLLOWING QUESTION OF LAW WAS PLACED FOR ANSWER BY THE HONBLE COURT:- QUESTION NO.[B]: 'WHETHER GOODWILL IS AN ASSET WITH IN THE MEANING OF SECTION 32 OF THE INCOME TAX ACT, 1961, AND WHETHER DEPRECIATION ON ` GOODWILL' IS ALLOWABLE UNDER THE SAID SECTION?' 6.1 HONBLE APEX COURT ANSWERED THE QUESTION IN THE FOLLOWING TERMS: IN THE PRESENT CASE, THE ASSESSEE HAD CLAIM ED DEDUCTION OF ` .54,85,430/- AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING, THE EXPLANATION REGARDING ORIGIN OF SUCH GOODWILL WAS GIVEN AS UNDER: 'IN ACCORDANCE WITH SCHEME OF AMALGAMATION OF YSN SH ARES & SECURITIES (P) LTD WITH SMIFS SECURITIES LTD (DULY SANCTIONED BY HON'BLE HIGH COURTS OF BOMBAY AND CALCUTTA) WITH RETROSPECTIVE EFECT FROM 1ST APRIL, 1998, ASSE TS AND LIABILITIES OF YSN SHARES & SECURITIES (P) LTD WERE TRANSFERRED TO AND VEST IN THE COMPANY. IN THE PROCESS GOODWILL HAS ARISEN IN THE BOOKS OF THE COMPANY.' IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATI ON PAID BY THE ASSESSEE OVER THE VALUE OFNET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES PRIVATE LIMITED [AMALGAMATING COMPANY] SHOULD BE CONSIDERED AS GOODWILL ARISING O N AMALGAMATION. IT WAS CLAIMED ITA N OS.2889&2890 /DEL./2009 7 THAT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE R EPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTIN G CLIENTELE. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT, 1961 [`ACT', F OR SHORT]. WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: ' EXPLANATION 3.-- FOR THE PURPOSES OF THIS SUB-SECTI ON, THE EXPRESSIONS `ASSETS' AND `BLOCK OF ASSETS' SHALL MEAN-- [A] TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE; [B] INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COP YRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE.' EXPLANATION 3 STATES THAT THE EXPRESSION `ASSET' SH ALL MEAN AN INTANGIBLE ASSET, BEING KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES , FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING THE WORDS `ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION `ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STR ICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT `GOOD WILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IN THE PRE SENT CASE, THE ASSESSING OFFICER, AS A MATTER OF FACT, CAME TO THE CONCLUSION THAT NO AMOU NT WAS ACTUALLY PAID ON ACCOUNT OF GOODWILL. THIS IS A FACTUAL FINDING. THE COMMISSION ER OF INCOME TAX (APPEALS) [`CIT(A)', FOR SHORT] HAS COME TO THE CONCLUSION TH AT THE AUTHORISED REPRESENTATIVES HAD FILED COPIES OF THE ORDERS OF THE HIGH COURT ORDERI NG AMALGAMATION OF THE ABOVE TWO COMPANIES; THAT THE ASSETS AND LIABILITIES OF M/S. YSN SHARES AND SECURITIES PRIVATE LIMITED WERE TRANSFERRED TO THE ASSESSEE FOR A CONS IDERATION; THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTE D GOODWILL AND THAT THE ASSESSEE- COMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE A SSESSEE-COMPANY STOOD INCREASED. THIS FINDING HAS ALSO BEEN UPHELD BY INCOME TAX APP ELLATE TRIBUNAL [`ITAT', FOR SHORT]. WE SEE NO REASON TO INTERFERE WITH THE FACTUAL FIND ING. ONE MORE ASPECT WHICH NEEDS TO BE MENTIONED IS THAT , AGAINST THE DECISION OF ITAT, THE REVENUE HAD PREFERRED AN APPEAL TO THE HIGH COURT I N WHICH IT HAD RAISED ONLY THE QUESTION AS TO WHETHER GOODWILL IS AN ASSET UNDER S ECTION 32 OF THE ACT. IN THE CIRCUMSTANCES, BEFORE THE HIGH COURT, THE REVENUE D ID NOT FILE AN APPEAL ON THE FINDING OF FACT REFERRED TO HEREINABOVE. ITA N OS.2889&2890 /DEL./2009 8 FOR THE AFORE-STATED REASONS, WE ANSWER QUESTION NO .[B] ALSO IN FAVOUR OF THE ASSESSEE. 7. IN THE LIGHT OF VIEW TAKEN BY THE HONBLE APEX COURT THAT GOODWILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT, WE HAVE NO HESITATION IN VACATING THE FINDINGS OF THE LD. CIT(A) AND ACCORDI NGLY, DIRECT THE AO TO ALLOW THE CLAIM OF DEPRECIATION ON GOODWILL IN TERMS OF AFORE SAID DECISION OF THE HONBLE APEX COURT. CONSEQUENTLY, GROUND NOS.3 AND 4 IN THE APPEAL FOR THE AY 2004-05 AND GROUND NOS. 2 TO 4 IN THE APPEAL FOR THE AY 20 05-06 ARE ALLOWED. SINCE WE HAVE ALLOWED THE CLAIM OF THE ASSESSEE ON MERITS IN THE AY 2004-05, GROUND NOS. 1 & 2 RELATING TO VALIDITY OF REOPENING OF THE ASS ESSMENT BECOME ACADEMIC IN NATURE AND ARE, THEREFORE, TREATED AS INFRUCTUOUS. 8. AS REGARDS GROUND NO.1 IN THE APPEAL FOR THE AY 2005-06, RELATING TO DISALLOWANCE OF EXPENSES, WE FIND THAT THE AO DISA LLOWED PRIOR PERIOD EXPENSES OF ` 9,60,563/- ON ACCOUNT OF FREIGHT AND BREAKAGE WITHO UT ANALYZING TO AS TO WHEN THE LIABILITY FOR THESE EXPENSES CRYSTALLIZED. SIMILARLY AN AMOUNT OF ` 50,000 WAS ADDED BACK TOWARDS EXPENSES INCURRED IN EARNING EXEMPT DIVIDEND INCOME OF ` 3,67,288/- IN TERMS OF PROVISIONS OF SEC. 14A OF TH E ACT ,FOLLOWING HIS DECISION IN THE PRECEDING ASSESSMENT YEAR. 9. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLOW ANCE OF PRIOR PERIOD EXPENSES ON THE GROUND THAT THE ASSESSEE WAS FOLLOWING MERCA NTILE SYSTEM OF ACCOUNTING. AS REGARDS DISALLOWANCE IN TERMS OF PROVISIONS OF S EC.14A OF THE ACT, THE LD. CIT(A) FOLLOWED THE DECISION IN ITO VS. DAGA CAPITA L MANAGEMENT (P) LTD.,26 SOT 603(MUMBAI)(SB) AND UPHELD THE DISALLOWANCE. 10. WE HAVE HEARD THE LD. DR AND GONE THROUGH THE F ACTS OF THE CASE.AS REGARDS DISALLOWANCE OF PRIOR PERIOD EXPENSES, AS IS APPARE NT FROM THE AFORESAID FACTS, THE AO DISALLOWED THE AMOUNT WITHOUT ANALYZING AS TO HOW THE LIABILITY FOR EACH OF THE EXPENDITURE COMPRISED IN THE AMOUNT OF ` ` 9,60,563/- CRYSTALLISED IN THE YEAR UNDER CONSIDERATION . THERE IS NOTHING TO SUGG EST AS TO WHETHER OR NOT ANY QUERY WAS RAISED BY THE AO AND IF SO, ANY DETAILS O R REPLY WAS FILED BEFORE THE ITA N OS.2889&2890 /DEL./2009 9 AO; THE ASSESSMENT ORDER IS SILENT ON THIS ASPECT. THE LD. CIT(A) ALSO UPHELD THE DISALLOWANCE ,WITHOUT RECORDING HIS SPECIFIC FINDI NGS AS TO HOW THE LIABILITY FOR EACH OF THE EXPENDITURE COMPRISED IN THE AMOUNT OF ` ` 9,60,563/- CRYSTALLISED IN THE YEAR UNDER CONSIDERATION OR OTHERWISE. ADMITTED LY, THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IT IS WELL SETTLED THAT ACCRUAL OF A STATUTORY LIABILITY DEPENDS UPON THE TERMS OF THE RELEVANT S TATUTE. THE QUANTIFICATION OR ASCERTAINMENT CANNOT POSTPONE ITS ACCRUAL TO THE EX TENT OF ADMITTED LIABILITY. ON THE OTHER HAND, CONTRACTUAL LIABILITY ACCRUES WHEN THE BASIS FOR ITS QUANTIFICATION IS SETTLED BY AN AGREEMENT OR OTHERWISE. AS HELD BY TH E HONBLE GUJRAT HIGH COURT IN THEIR DECISION IN SAURASHTRA CEMENT & CHEMICAL I NDUSTRIES LTD. VS. CIT, 213 ITR 523(GUJ) ,MERELY BECAUSE AN EXPENSE RELATES TO A TRANSACTION OF AN EARLIER YEAR IT DOES NOT BECOME A LIABILITY PAYABLE IN THE EARLIER YEAR UNLESS IT CAN BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALLIZED IN THE YEAR IN QUESTION ON THE BASIS OF MAINTAINING ACCOUNTS ON THE MERCANTILE BAS IS. IN EACH CASE WHERE THE ACCOUNTS ARE MAINTAINED ON THE MERCANTILE BASIS IT HAS TO BE FOUND IN RESPECT OF ANY CLAIM, WHETHER SUCH LIABILITY WAS CRYSTALLIZED AND QUANTIFIED DURING THE PREVIOUS YEAR SO AS TO BE REQUIRED TO BE ADJUSTED I N THE BOOKS OF ACCOUNT OF THAT PREVIOUS YEAR. IF ANY LIABILITY, THOUGH RELATING TO THE EARLIER YEAR, DEPENDS UPON MAKING A DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILITY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOU S YEARS IT CANNOT BE DISALLOWED AS DEDUCTION MERELY ON THE BASIS THE ACCOUNTS ARE M AINTAINED ON MERCANTILE BASIS AND THAT IT RELATED TO A TRANSACTION OF THE P REVIOUS YEAR, THE HONBLE HIGH COURT OBSERVED. IT WAS FURTHER CONCLUDED THAT IT I S ACTUALLY KNOWN INCOME OR EXPENSES, THE RIGHT TO RECEIVE OR THE LIABILITY TO PAY WHICH HAS COME TO BE CRYSTALLIZED, WHICH IS TO BE TAKEN INTO ACCOUNT UND ER THE MERCANTILE SYSTEM OF MAINTAINING BOOKS OF ACCOUNT. AN ESTIMATED INCOME O R LIABILITY, WHICH IS YET TO BE CRYSTALLIZED, CAN ONLY BE ADJUSTED AS A CONTINGENCY ITEM BUT NOT AS AN ACCRUED INCOME OR LIABILITY OF THAT YEAR. 10.1. IN THE INSTANT CASE, THE LD. CIT(A) DID NOT ANALYSE THE ISSUE IN THE PROPER PERSPECTIVE NOR RECORDED HIS SPECIFIC FINDINGS AS T O HOW THE LIABILITY FOR EACH OF ITA N OS.2889&2890 /DEL./2009 10 THE EXPENDITURE COMPRISED IN THE AMOUNT OF ` ` 9,60,563/- CRYSTALLISED IN THE YEAR UNDER CONSIDERATION OR OTHERWISE. IN THESE CIRCUMST ANCES AND IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE VACATE THE FINDINGS OF T HE LD. CIT(A) AND RESTORE THE ISSUE RAISED IN GROUND NO.1 OF APPEAL TO HIS FILE , WITH THE DIRECTIONS TO READJUDICATE THE ISSUE IN THE LIGHT OF OUR AFORESAI D OBSERVATIONS AND THE JUDICIAL PRONOUNCEMENTS AND THEREAFTER, DISPOSE OF THE MA TTER IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE P ARTIES ,BRINGING OUT CLEARLY AS TO WHETHER OR NOT THE LIABILITY FOR EACH ITEM OF THE EXPENDITURE COMPRISING THE AMOUNT OF ` ` 9,60,563/- , REALLY CRYSTALLIZED IN THE HANDS OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. NEEDLESS TO SAY THAT WHILE REDECIDING THE APPEAL, THE LD. CIT(A) SHALL PASS A SPEAKING ORDER, KEEPING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6 ) OF THE ACT. WITH THESE DIRECTIONS, GROUND NO. 1 IN THE APPEAL O RELA TING TO PRIOR PERIOD EXPENSES IS DISPOSED OF, AS INDICATED HEREINBEFORE. 11. AS REGARDS DISALLOWANCE IN TERMS OF PROVISIONS OF SEC. 14A OF THE ACT, HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BO YCE MANUFACTURING CO. LTD. VS. DCIT IN (I.T.A. NO.626 AND WP 2010) WHILE ADJU DICATING A SIMILAR ISSUE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF T HE ACT AND RULE 8D OF THE IT RULES,1962 CONCLUDED THAT RULE 8D, INSER TED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAU SE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATING EXPENDITURE RELATAB LE TO TAX-FREE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR THE A SSESSMENT YEARS WHERE RULE 8D DOES NOT APPLY, THE AO WILL HAVE TO D ETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL THE FACTS AND CIRCUMSTANCES, THE HON BLE HIGH COURT CONCLUDED. 11.1 HONBLE SUPREME COURT IN THEIR DECISION DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD.,326 ITR 1, INTER ALIA, OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE ITA N OS.2889&2890 /DEL./2009 11 A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RE LATIONSHIP WITH THE TAX EXEMPT INCOME. 11.2 HONBLE PUNJAB & HARYANA HIGH COURT IN TH EIR DECISION IN CIT VS. HERO CYCLES LTD.,323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDE R SECTION 14A CANNOT STAND. 11.3 IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS, HONBLE JURISDICTIONAL HIGH COURT IN A RECENT DECISION DATED 18.11.2011 IN MAXOPP INVESTMENT LTD. VS. CIT,[2011] 15 TAXMANN.COM 390 (DELHI) HELD AS UNDE R: 35. WE ARE OF THE VIEW THAT RULE 8D WOULD OPERATE PROS PECTIVELY. WE AGREE WITH THE SUBMISSIONS MADE BY DR RAKESH GUPTA THAT I F THE SAID RULE WERE TO HAVE RETROSPECTIVE EFFECT, NOTHING PREVENTED THE CE NTRAL BOARD OF DIRECT TAXES FROM SAYING SO, PARTICULARLY, IN VIEW OF THE FACT T HAT IT HAD THE POWER TO MAKE A RULE RETROSPECTIVE BY VIRTUE OF SECTION 295(4) OF T HE SAID ACT. INSTEAD OF MAKING RULE 8D RETROSPECTIVE, CLAUSE 1(2) OF THE INCOME-TA X (FIFTH AMENDMENT) RULES, 2008 MADE IT CLEAR THAT THE RULES WOULD COME INTO F ORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. IT IS, THEREFO RE, CLEAR THAT RULE 8D, WHICH WAS INTRODUCED BY VIRTUE OF THE NOTIFICATION NO.45/2008 DATED 24.03.2008, WAS PROSPECTIVE IN OPERATION AND CANNOT BE REGARDED AS BEING RETROSPECTIVE. WE MAY ALSO POINT OUT THAT WE HAVE HAD THE BENEFIT OF THE DECISION OF THE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V DY. CIT [20 10] 328 ITR 81 / 194 TAXMAN 203 , WHEREIN IT HAS, INTER ALIA, BEEN HELD THAT THE PR OVISIONS OF RULE 8D OF THE SAID RULES HAS PROSPECTIVE EFFECT AND SHALL APPLY WITH E FFECT FROM ASSESSMENT YEAR 2008-09 ONWARDS. 36. INSOFAR AS SUB-SECTIONS (2) AND (3) OF SECTION 14A ARE CONCERNED, THEY HAVE ALSO BEEN INTRODUCED BY VIRTUE OF THE FINANCE ACT, 2006 WITH EFFECT FROM 01.04.2007. THIS IS APPARENT, FIRST OF ALL, FROM TH E NOTES ON CLAUSES OF THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAG ES 139-140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUSE 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE SAID ACT. IT IS SPECIFICALLY MENTIONED IN TH E SAID NOTES ON CLAUSES THAT:- 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 2007-08 AN D SUBSEQUENT YEARS.' ITA N OS.2889&2890 /DEL./2009 12 37. FURTHERMORE, IN THE MEMORANDUM EXPLAINING THE PROV ISIONS IN THE FINANCE BILL, 2006 [281 ITR (ST) AT PAGES 281-281], IT IS O NCE AGAIN STATED WITH REFERENCE TO CLAUSE 7 WHICH PERTAINS TO THE AMENDMENT TO SECT ION 14A OF THE SAID ACT THAT:- 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 2007-08 AN D SUBSEQUENT YEARS.' 38. WE MAY ALSO REFER TO THE CBDT CIRCULAR NO.14/2006 DATED 28.12.2006 AND TO PARAGRAPHS 11 TO 11.3 THEREOF. PARAGRAPH 11 DEALT W ITH THE METHOD FOR ALLOCATING EXPENDITURE IN RELATION TO EXEMPT INCOME AND PARAGR APHS 11.1 AND 11.2 EXPLAINED THE BASIS AND LOGIC BEHIND THE INTRODUCTI ON OF SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. PARAGRAPH 11.3 SPECIFICALLY PR OVIDED FOR APPLICABILITY OF THE PROVISIONS OF SUBSECTION (2) AND IT CLEARLY INDICAT ED THAT IT WOULD BE APPLICABLE 'FROM THE ASSESSMENT YEAR 2007-08 ONWARDS'. 39. IT IS, THEREFORE, CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INTRODUCED WITH PROSPECTIVE EFFECT FROM THE ASSESSM ENT YEAR 2007-08 ONWARDS. HOWEVER, SUB-SECTION (2) OF SECTION 14A REMAINED AN EMPTY SHELL UNTIL THE INTRODUCTION OF RULE 8D ON 24.03.2008 WHICH GAVE CO NTENT TO THE EXPRESSION 'SUCH METHOD AS MAY BE PRESCRIBED' APPEARING IN SEC TION 14A(2) OF THE SAID ACT. 40. FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT, IN EF FECT, THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTION 14A WOULD BE WORKAB LE ONLY WITH EFFECT FROM THE DATE OF INTRODUCTION OF RULE 8D. THIS IS SO BECAUSE PRIOR TO THAT DATE, THERE WAS NO PRESCRIBED METHOD AND SUB-SECTIONS (2) AND (3) O F SECTION 14A REMAINED UNWORKABLE. 12. SINCE THE THE LD. CIT(A) DID NOT HAVE THE BE NEFIT OF AFORESAID DECISIONS INCLUDING THAT OF THE HONBLE JURISDICTIONAL HIGH C OURT IN MAXOPP INVESTMENT LTD.(SUPRA), WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FIL E FOR DECIDING THE ISSUE, AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT O F AFORESAID JUDICIAL PRONOUNCEMENTS, AFTER ALLOWING SUFFICIENT OPPORTUNI TY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE APPEAL, THE LD. CIT(A) SHALL PASS A SPEAKING ORDER, KEEPING IN MIND , INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT. W ITH THESE OBSERVATIONS, GROUND NO. 1 IN THE APPEAL IS DISPOS ED OF. 13. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. ITA N OS.2889&2890 /DEL./2009 13 14.. IN RESULT, APPEAL FOR THE AY 2004-05 IS ALLO WED BUT APPEAL FOR THE AY 2005-06 IS ALLOWED PARTLY FOR STATISTICAL PURPOS ES. SD/- SD/- (RAJPAL YADAV) (A.N. PAHUJA) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. ASSESSEE 2. DEPUTY CIT,CIRCLE-6(1),RANGE 6,NEW DELHI 3. CIT CONCERNED 4. CIT(A)-IX, NEW DELHI 5. DR, ITAT,E BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT