Dy. CIT, Circle-10, Pune V. Sandvik Mining & Construction Tools India Ltd., Pune

ITA 403/PUN/2013

• Counselvise Citation: 40324514 RSA 2013
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 08-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L PATHADE
• Assessee Lawyers: ANUJ DESHMUKH
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 403/PN/2013 (ASSESSMENT YEAR 2004-05 ) DY.CIT, CIRCLE-10, PUNE .. APPELLANT VS. SANDVIK MINING & CONSTRUCTION TOOLS INDIA LTD., MUMBAI PUNE ROAD, DAPODI, PUNE 411012 PAN NO. AAHCS9249R .. RESPONDENT ASSESSEE BY : SHRI ANUJ DESHMUKH REVENUE BY : SHRI P. L. PATHADE DATE OF HEARING : 25-03-2014 DATE OF PRONOUNCEMENT : 26-03-2014 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 01-11-2012 OF THE CIT(A)-V, PUNE RELATING TO ASSESS MENT YEAR 2004-05. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF MIN ING AND CONSTRUCTION TOOLS. IT FILED ITS RETURN OF INCOME ON 30-10-2004 DECLARING TOTAL LOSS OF RS.4,46,16,350/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS IN CURRED EXPENDITURE OF RS.11,03,922/- ON VALUATION OF ASSETS OF BUSINESS, THE DETAILS OF WHICH ARE AS UNDER : I. VALUATION OF ASSET OF THE ACQUIRED BUSINESS RS.8,60,4 30/- II. TAX ADVICE FOR ACQUISITION OF BUSINESS RS.1,64,10 0/- III. LICENSE FEE RS. 7,926/- 2 IV. CERTIFICATION FEES RS.3,000/- V. ENVIRONMENT ANALYSIS REPORT RS.20,469/- VI. FINANCIAL CONSULTANCY RS.48,000/- ---------------- TOTAL: RS.11,03,922/- ---------------- 2.1 THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXP LAIN THE JUSTIFICATION OF THE SAME AND ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE SAME SHOULD NOT BE TREATED AS CAPITAL IN NATURE. IT WAS EXPLAINED BY THE ASSESSEE THAT SSAL ACQUIRED THE M&C BUSINESS OF KWIL BY WAY OF SLUMP S ALE. SUBSEQUENTLY, SSAL ENGAGED AN INDEPENDENT VALUER TO VALUE THE ASS ETS TAKEN OVER BY IT PURSUANT TO THE ACQUISITION WITH THE OBJECTIVE OF A CCOUNTING THE ASSETS AT FAIR VALUES IN THE BOOKS OF ACCOUNTS. SSAL PAID FEES AMO UNTING TO RS. 860,430 TO THE INDEPENDENT VALUER WHICH HAS BEEN CLAIMED AS BUSINESS EXPENDITURE, DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT. 2.2 IT WAS SUBMITTED THAT UNDER SECTION 37(1) OF TH E ACT, DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE, NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE, L AID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS OR PROFESSION OF THE ASSESSEE. IN THE INSTANT CASE, THE EXPENDITURE ON V ALUATION OF ASSETS IS UNDOUBTEDLY NOT PERSONAL IN NATURE AND IS WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND PROFESSION OF SSAL. 2.3 IT WAS SUBMITTED THAT THE EXPENDITURE INCURRED ON VALUATION OF ASSETS TAKEN OVER FROM KWIL IS REVENUE IN NATURE. SUCH EXP ENDITURE DID NOT RESULT IN SSAL ACQUIRING ANY NEW ASSET OR BENEFIT OF AN EN DURING NATURE AND IS THEREFORE NOT IN THE NATURE OF CAPITAL EXPENDITURE. THE VALUATION WAS DONE, POST ACQUISITION OF THE BUSINESS, ONLY WITH THE OBJ ECTIVE OF RECORDING ASSETS 3 AT CORRECT VALUES. ACCORDINGLY, IT WAS SUBMITTED TH AT EXPENDITURE INCURRED ON VALUATION OF ASSETS IS NOT CAPITAL IN NATURE AND SH OULD BE ALLOWED AS REVENUE EXPENDITURE UNDER SECTION 37(1). SIMILAR ARGUMENTS WERE ADVANCED FOR THE OTHER PAYMENTS. VARIOUS DECISIONS WERE ALSO RELIED UPON BY THE ASSESSEE FOR THE PROPOSITION THAT THE EXPENDITURE INCURRED ON VA LUATION OF ASSETS HAS TO BE ALLOWED AS REVENUE EXPENDITURE. 2.4 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND DISALLOWED THE EXPENDITUR E TREATING THE SAME CAPITAL EXPENDITURE. WHILE DOING SO, HE OBSERVED T HAT SUCH EXPENDITURE WAS INCURRED IN CONNECTION WITH THE PURCHASE OF BUSINES S AND NOT POST ACQUISITION OF THE BUSINESS. FURTHER, THE ASSESSEE IN THE INST ANT CASE HAD GOT VALUED ITS TANGIBLE AND INTANGIBLE ASSETS BEFORE STARTING THE BUSINESS. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE THE ASSE SSING OFFICER DISALLOWED AN AMOUNT OF RS.11,03,922/- TREATED THE SAME AS CAP ITAL EXPENDITURE. 3. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THE AS SESSEE ENGAGED AN INDEPENDENT VALUER TO DETERMINE FAIR ALLOCATION OF PURCHASE PRICE CONSIDERATION BETWEEN VARIOUS ASSETS TAKEN OVER BY IT PURSUANT TO THE ACQUISITION. IT PAID FEES AMOUNTING TO INR 860,430 TO THE INDEPENDENT VALUER. SUCH EXPENDITURE WAS INCURRED POST ACQUISIT ION OF BUSINESS FROM KWIL WITH THE OBJECTIVE OF RECORDING THE ASSETS TAK EN OVER AT CORRECT VALUES IN THE BOOKS OF ACCOUNT. THE SAID EXPENDITURE DID N OT RESULT IN AN ENDURING NATURE AND IS THEREFORE NOT IN THE NATURE OF CAPITA L EXPENDITURE. FURTHER, THE SAME IS NOT IN THE NATURE OF PERSONAL EXPENDITURE O F THE ASSESSEE AND WAS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ITS BUSINESS. ACCORDINGLY, THE ASSESSEE CLAIMED THE ABOVE EXPENDI TURE AS BUSINESS 4 EXPENDITURE, DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT. IT WAS ARGUED THAT THE AO HAS ERRONEOUSLY CONTENDED THAT THE EXPENDITU RE WAS MADE IN CONNECTION WITH THE PURCHASE OF BUSINESS ON SLUMP S ALE BASIS. THE CORRECT FACT IS THAT THE EXPENDITURE WAS INCURRED POST ACQU ISITION, DURING THE COURSE OF BUSINESS FOR THE PURPOSE OF ASSIGNING THE PURCHA SE CONSIDERATION BETWEEN TANGIBLE AND INTANGIBLE ASSETS SO THAT THE ASSETS C OULD BE RECORDED IN THE BOOKS OF ACCOUNT AT CORRECT VALUES: 3.1 IT WAS SUBMITTED THAT IN CASE OF SLUMP SALE, TH E ASSETS TO BE TRANSFERRED ARE NOT VALUED INDIVIDUALLY. IF THE ASS ETS ARE VALUED INDIVIDUALLY THE PROVISIONS OF SLUMP SALE- WOULD NOT APPLY AND T HE CAPITAL GAINS ON EACH ASSET WOULD BE COMPUTED SEPARATELY IN THE HANDS OF THE SELLER. ACCORDINGLY, IN VIEW OF THE SAME THE PARTIES TO THE TRANSACTION WOULD NOT AGREE ON ASSET VALUATION PRE SLUMP SALE. 3.2 THE ASSESSEE FURTHER SUBMITTED THAT IT HAS INCU RRED EXPENDITURE AMOUNTING TO INR 164,100 TOWARDS TAX ADVICE OBTAINE D FROM A CONSULTANT IN RESPECT OF MATTERS INCIDENTAL TO THE ACQUISITION OF MINING AND CONSTRUCTION BUSINESS OF KWIL. FURTHER, CERTAIN MISCELLANEOUS E XPENSES OF INR 79,395 WERE INCURRED ON THE FOLLOWING : PARTICULARS AMOUNT (INR) LICENSE FEE 7,926 CERTIFICATION FEE 3,000 ENVIRONMENT ANALYSIS REPORT 20,469 FINANCIAL CONSULTANCY 48,000 TOTAL 79,395 3.3 THE ABOVE EXPENSES WERE INCURRED POST ACQUISITI ON OF THE DIVISION FROM KWIL AND DID NOT RESULT IN THE ASSESSEE ACQUIR ING ANY NEW ASSET OR BENEFIT OF AN ENDURING NATURE AND HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY 5 FOR THE PURPOSES OF ITS BUSINESS. ACCORDINGLY, THE ASSESSEE CLAIMED THE SAME AS BUSINESS EXPENDITURE DEDUCTIBLE U/S.37(1) OF THE ACT. RELYING ON VARIOUS CASE DECISIONS IT WAS ARGUED THAT THE ASSESSING OFF ICER WAS NOT JUSTIFIED IN DISALLOWING THE EXPENDITURE OF RS.11,03,922/-. 4. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITI ON OF RS.11,03,922/- BY OBSERVING AS UNDER : 11. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AS WELL AS DETAILED SUBMISSIONS MADE BY THE APPELLANT. IN THIS CASE THE EXPEN DITURE HAS BEEN INCURRED FOR VALUATION OF ASSETS AFTER ACQUISITION OF M & C DIVISION OF KWIL FOR PROPER ALLOCATION OF THE VALUE IN THE BOOKS OF ACCOUNT. HAD THE VALUATION BEEN DONE FOR THE PURPOSE OF DETERMINING THE ACQUISIT ION COST I.E. SLUMP SALE PRICE BEFORE PURCHASE AGREEMENT DATED 20.02.2004, TH EN THE ASSESSING OFFICER WOULD HAVE BEEN JUSTIFIED IN TREATING THE SAM E AS CAPITAL EXPENDITURE. BUT IN THE PRESENT CASE THE FACTS ARE DIFFERENT. IN T HIS CASE M & C DIVISION OF KWIL WAS ACQUIRED BY THE APPELLANT COMPANY VIDE PURC HASE AGREEMENT DATED 20.02.2004 FOR RS. 64.4 CRORES. THE DIVISION WAS ACQUIRED AS ON GOING CONCERN BASIS AND THEREFORE THE BUSINESS OF THE APPELLAN T COMPANY CAN BE SAID TO BE STARTED ON THE DATE OF PURCHASE AGREEMENT D ATED 20.02.2004. THEREAFTER, VALUER WAS ENGAGED TO VALUE TANGIBLE AND INTANGIBLE ASSETS FOR THE PURPOSE OF ALLOCATION OF VARIOUS ASSETS IN THE BOOKS OF A CCOUNTS WHICH IS NECESSARILY DONE DURING THE COURSE OF THE BUSINESS. THERE FORE, IN MY OPINION THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THE E XPENDITURE OF RS.11,03,922/- AS CAPITAL EXPENDITURE, ALSO GETS SUPPORT FROM VARIOUS CASE LAWS CITED AS ABOVE. THEREFORE, IN VIEW OF THE ABOVE POSITION, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS.11, 03,922/-. THUS, THE GROUND IS ALLOWED. 5. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE EXPENDITURE INCURR ED ON VALUATION OF ASSETS, TAX ADVICE FOR ACQUISITION OF BUSINESS, FINANCIAL CONSU LTANCY ETC OF NEWLY ACQUIRED BUSINESS AS 'REVENUE EXPENDITURE' 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE ABOVE SAID EXPENSE S WERE INCURRED AFTER POST ACQUISITION OF THE BUSINESS IGNORING THE FACT THAT THE SAME INCLUDES PAYMENT MADE TOWARDS TAX ADVICE FOR ACQUISITION OF BUSINESS, LICENSE FEES, CERTIFICATION FEES, ENVIRONMENT ANALYSIS REPORT, FINANCIAL CONSULTANCY A LONGWITH FEES FOR VALUATION OF ASSET, WHICH ARE OBVIOUSLY INCURRED FOR THE PURPOSE OF ACQUIRING THE BUSINESS AND HENCE CAPITAL IN NATURE. 6 6. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THE LD. DEPARTMENTAL RE PRESENTATIVE COULD NOT CONTROVERT THE FINDING GIVEN BY THE LD.CIT(A) THAT THE EXPENDITURE HAS BEEN INCURRED FOR VALUATION OF ASSETS AFTER ACQUISITION OF M&C DIVISION OF KWIL FOR PROPER ALLOCATION OF THE VALUE IN THE BOOKS OF ACCOUNTS. THE LD. DEPARTMENTAL REPRESENTATIVE ALSO COULD NOT CONTROVE RT THE FINDING GIVEN BY THE CIT(A) THAT THE M&C DIVISION OF KWIL WAS ACQUIR ED BY THE ASSESSEE COMPANY VIDE PURCHASE AGREEMENT DATED 20-02-2004 FO R RS.64.4 CRORES AS ON-GOING CONCERN AND THEREFORE THE ASSESSEE HAS STA RTED ITS BUSINESS ON THE DATE OF PURCHASE AGREEMENT DATED 20-02-2004. SINCE THE VALUER WAS ENGAGED AFTER THE ACQUISITION OF BUSINESS TO VALUE TANGIBLE AND INTANGIBLE ASSETS FOR THE PURPOSE OF ALLOCATION OF VARIOUS ASSETS IN THE BOOKS OF ACCOUNTS WHICH IS USUALLY DONE DURING THE COURSE OF THE BUSINESS, THE REFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) HOLDING THE SA ME TO BE REVENUE EXPENDITURE IN NATURE. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. PRONOUNCED IN THE OPEN COURT ON 26-03-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEM BER PUNE, DATED 26 TH MARCH, 2014 SATISH 7 COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-V, PUNE 4. THE CIT-V, PUNE 5. D.R. A BENCH, PUNE 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE