KEC INTERNATIONAL LTD, MUMBAI V. ADDL CIT RG 8(2), THANE

ITA 4420/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1556 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-05-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 22-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Assessee Lawyers: S E DASTUR; N D SHETH
• Keywords: Capital asset; Depreciation; Transfer pricing; Cost of acquisition; Valuation report; Capital Gains
• Section: 43B; 40(b)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI. BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER I.T.A. NO. 4420 /MUM/2009. ASSESSMENT YEA R : 2006-07. M/S KEC INTERNATIONAL LIMITED, ADDL . COMMISSIONER OF CEAT MAHAL, 463, VS. INCOME TAX, RANGE-8(2), DR. ANNIE BESANT ROAD, WORLI, MUM BAI. MUMBAI 400 030. PAN : AACCK5599H APPELLANT RESPONDENT I.T.A. NO. 49 66/MUM/2009 ASSESSMENT Y EAR : 2006-07. DY. COMMISSIONER OF KEC INTERNATIONAL LIMITED, INCOME TAX-8(2), VS. MUMBAI. MUMBAI. APPELLANT RESPONDENT ASSESSEE BY : SHRI S.E. DASTUR, AND SHRI N.D. SHETH. DEPARTMENT BY : SHRI S.S. RANA. O R D E R PER J. SUDHAKAR REDDY, A.M. THESE ARE CROSS APPEALS AND ARE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-VIII, MUMBAI DATED 05-06-2009 FOR THE ASSESSMENT YEAR 2006-07. 2. THE SOLE ISSUE THAT ARISES IN THE ASSESSEES AP PEAL, IS THE ALLOWABILITY OF DEPRECIATION ON BRAND RECEIVED BY THE ASSESSEE UNDER THE 2 SCHEME OF ARRANGEMENT U/S 391 TO 394 OF THE COMPANI ES ACT, 1956. IN THE REVENUE APPEAL, THE FIRST GROUND RELATES TO DEP RECIATION ALLOWED BY THE CIT(APPEALS) ON CERTAIN ASSETS AND SECOND GROUN D IS ON THE ISSUE OF DELETION OF ADDITION MADE UNDER THE PROVISO OF SECT ION 40(A) AND SECTION 43B, BY THE CIT(APPEALS). 3. FACTS IN BRIEF: THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DESIGNING, FABRICATION, GALVANIZING AND TESTING OF POWER TRANSMISSION LINE TOWERS, ERECTION OF COMPLETE TRANSMISSION LINES, SU PPLY AND ERECTION OF SUBSTATION STRUCTURES AND OVERHEAD EQUIPMENT FOR RA ILWAY ELECTRIFICATION. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 30-11-2006 DECLARING A TOTAL INCOME AT A SUM OF RS. 9,39,13,086/-. 2. THE AO AT PARA 3.2, 3.3 AND 3.4 BROUGHT OUT THE FACTS OF THE COMPOSITE SCHEMES OF ARRANGEMENT WHICH ARE EXTRACTE D FOR READY REFERENCE : 3.2 A COMPOSITE SCHEME OF ARRANGEMENT (HEREAFTER K NOWN AS THE SCHEME BETWEEN THE ASSESSEE COMPANY, KEV INFR ASTRUCTURE LTD (FORMERLY KEC INTERNATIONAL LTD.), BESPOKE FINV EST LTD., KEC HOLDINGS LTD. AND THE RESPECTIVE SHAREHOLDERS UNDER SECTION 391 TO 394 OF THE COMPANIES ACT, 1956 WAS SANCTIONED BY TH E HONBLE HIGH COURT OF JUDICATURE AT MUMBAI ON 27.09.2005. T HE COMPOSITE SCHEME FOR THE SALE OF INVESTMENT BY THE KEC INFRAS TRUCTURE LTD. TO KEC HOLDINGS LTD AND THE SALE OF THE POWER TRANSMIS SION BUSINESS OF KEC INFRASTRUCTURE LTD. TO THE ASSESSEE I.E. KEC INTERNATIONAL LTD., THE MERGER OF THE BESPOKE FINVE ST LTD WITH KEC HOLDINGS LTD WAS PRESENTED TO THE HIGH COURT OF MUM BAI ON 28.06.2005 AND THE SCHEME WAS APPROVED BY THE HIGH COURT ON 27.09.2005 FROM THE CLOSURE OF THE BUSINESS HOURS O N 31.03.2005 OR W.E.F. 01.04.2005. THE APPROVED SCHEME WAS RECEIVED BY THE COMPANY AND BECAME OPERATIONAL ON 26.12.2005. 3.3 PURSUANT TO THE SCHEME, THE WHOLE OF THE UNDERT AKING AND PROPERTIES INCLUDING ALL THE MOVABLE AND IMMOVABLE ASSETS AND ALL 3 DEBTS, LIABILITIES, CONTINGENT LIABILITIES, DUTIES AND OBLIGATIONS OF EVERY KIND OF THE POWER TRANSMISSION BUSINESS OF KEC INFRASTRUCTURE LTD WAS ACQUIRED BY ASSESSEE FOR A T OTAL CONSIDERATION OF RS.143.00 CR. AT THE TIME OF ACQUI SITION, THE NET WORTH OF THE UNDERTAKING WAS QUANTIFIED AT A NEGATI VE SUM OF RS.157.19 CR. BY THE AUDITORS OF THE KEC INFRASTRUC TURE LTD U/S 50B(3) OF THE INCOME TAX ACT (THE ACT). IN TERMS OF THE SCHEME, THE ASSESSEE COMPANY HAS PAID THE SALE CONSIDERATIO N OF RS. 143 CR. BY WAY OF EQUITY AND PREFERENCE SHARES. THE ASSESSE E COMPANY ISSUED 3,76,35,858 EQUITY SHARES OF RS.10 EACH FULL Y PAID UP AT A TOTAL PREMIUM OF RS.92.36 CR. FURTHER, THE ASSESSEE COMPANY HAS ISSUED 12,99,966 PREFERENCE SHARES OF RS.100 EACH T OWARDS THE SALE CONSIDERATION OF THE POWER TRANSMISSION BUSINESS. 3.4 AT THE TIME OF TRANSFER OF THE POWER TRANSMISSI ON BUSINESS, THE BOOK VALUES OF ASSETS ACQUIRED FROM KEV INFRAST RUCTURE LTD WAS A SUM OF RS.35,43,13,504/-. AFTER TRANSFER OF THE UNDERTAKING THE ASSESSEE COMPANY HAS REVALUED THE SAME ASSETS W HICH WERE ACQUIRED FROM THE KEC INFRASTRUCTURE LTD FOR A SUM OF R.339.82 CR. THE DETAILS OF BOOK VALUE OF ASSETS ACQUIRED FR OM KEC INFRASTRUCTURE LTD AND THE REVALUED SUMS OF THE SAM E ASSETS ARE AS UNDER : SR. NO. PARTICULARS OF ASSETS. BOOK VALUES OF ASSETS FROM SELLER (RS.) ASSESSEES BOOK VALUE AMOUNT (RS.) DEPRECIATION CLAIMED (RS.) (A) INTANGIBLE ASSETS NIL 240,00,00,00 0 60,00,00,000 (B) TEMPORARY STRUCTURE 50,20,294 1,54,25,156 1,85,36,777 (C) PLANT & MACHINERY 1,174 64,55,82,440 9,70,00,260 (D) PLANT & MACHINERY 25,71,12,860 (E) COMPUTERS 63,84,852 5,10,22,064 3,45,26,906 (F) MOTOR CARS 4,16,25,935 4,70,28,237 95,41,739 (G) MOTOR CARS 3,07,680 (H) COMMERCIAL VEHICLES 2,75,512 NIL ------ (I) FURNITURE & FITTING 4,35,85,196 1,44,10,307 18,34,970 4 (J) BUILDINGS OTHER THAN RESIDENTIAL ------ 16,46,11,308 1,92,41,105 (K) BUILDINGS RESIDENTIAL ------ 6,01,45,478 30,14,446 (L) P & M 9,39,20,266 TOTAL 35,43,13,504 339,82,24,990 87,76,16,369 THE AO DISALLOWED THE DEPRECIATION ON THE ASSETS PU RCHASED BY THE ASSESSEE COMPANY IN A SLUMP SALE. THE REASONS GIVEN BY THE AO ARE BROUGHT OUT BY THE CIT(APPEALS) AT PAGES 4 AND 5 OF HIS ORDER WHICH ARE EXTRACTED BELOW FOR READY REFERENCE : I) THE AO HAS OBSERVED THAT THE SCHEME APPROVED BY THE HONBLE HIGH COURT U/S 391 TO 394 OF THE COMPANIES ACT FULFILS ALL THE CONDITIONS STIPULATED U/S.2(19AA) O F THE ACT. HENCE, HE HAS TREATED IT AS A DEMERGER OF PTB FRO M KEC INFRASTRUCTURE LTD. THE AO HAS ALSO REPRODUCED THE PROVISIONS OF SECTION 2(19AA) OF THE I.T. ACT AT PA GE NOS. 10 TO 12 OF THE ASSESSMENT ORDER. II) THE AO HAS DISCUSSED THE SCOPE OF SECTION 2(19AA) A S EXPLAINED IN CIRCULAR NO. 779 DATED 14.09.1999 OF C BDT AND REPRODUCED THE RELEVANT PORTION AT PAGE NOS. 12 & 13 OF THE ASSESSMENT ORDER. III) THE AO HAS HELD THAT THE APPELLANT COMPANY IN THE S CHEME HAS ACQUIRED PTB AND FULFILLED ALL THE CONDITIONS S TIPULATED U/S.2(19AA) OF THE I.T. ACT. FURTHER, HE HAS HELD T HAT SECTION 43(6) OF THE ACT DEFINES THE TERM WRITTEN DOWN VAL UE. HE HAS ALSO RELIED ON THE EXPLANATION 2A AND EXPLANATI ON 2B TO SECTION 43(6) BY HOLDING THAT THESE ARE RELEVANT FO R THE APPELLANTS CASE. IV) THE AO HAS ALSO OBSERVED THAT IN THE BOOKS OF KEC INFRASTRUCTURE LTD., THE INTANGIBLE ASSETS SUCH AS BRAND AND GOODWILL WERE NOT THERE. THE ASSESSEE COMPANY HAS VALUED THE BRAND AT A SUM OF RS.240 CRORES AND GOODWILL AT RS.3.63 CRORES. THE AO HAS ALSO HELD THAT UNDER THE EXPLANATION 2B TO SECTION 43(6), THE DEPRECIATION R EQUIRES TO BE ALLOWED ON THE WDV ON THE TRANSFERRED ASSETS OF THE DEMERGED COMPANY. V) THE AO HAS CONCLUDED THAT THE APPELLANT COMPANY CAN NOT INCREASE THE ACTUAL COST OF BLOCK OF ASSETS IN THE DEMERGER. 5 THE WORD ACTUAL COST IS DEFINED IN SECTION 43(1) OF THE I.T. ACT. VI) THE AO HAS FURTHER HELD THAT S PER EXPLANATION 7A T O SECTION 43(1), THE ACTUAL COST TO THE ASSESSEE SHAL L BE TAKEN TO BE SAME AS IT WOULD HAVE BEEN IF THE DEMERGED COMPA NY HAD CONTINUED TO HOLD THE CAPITAL ASSET FOR THE PURPOSE OF ITS OWN BUSINESS. THUS, HE HAS CONCLUDED THAT THE ASSESSEE IS NOT ELIGIBLE FOR THE DEPRECIATION ON THE ENHANCED VALUE IN ITS BOOKS OF ACCOUNTS AND IT IS ALLOWABLE ONLY ON THE W DV. VII) FINALLY, THE AO HAS HELD THAT THE PURPOSE OF ENHANC EMENT OF THE ACTUAL COST TO THE ASSESSEE IS FOR THE PURPOSE OF REDUCTION OF TAX LIABILITY BY CLAIMING HIGH DEPRECIATION. 3. THE AO FURTHER MADE A DISALLOWANCE OF A DEDUCTI ON OF RS.6,94,02,867/- U/S 40(A). THE ASSESSEE CLAIMED T HAT CERTAIN DISALLOWANCES WERE MADE FOR EXPENDITURE IN THE EARL IER YEARS IN THE CASE OF KEC INFRASTRUCTURE LTD. AND AS THE PAYMENTS OF T HESE DISALLOWED EXPENDITURE WERE MADE DURING THE YEAR, THE ASSESSEE CLAIMS THAT THE SAME SHOULD BE ALLOWED IN ITS HANDS. IN THE COMPUTATION OF INCOME THE ASSESSEE HAD CLAIMED DEDUCTION U/S 43B ON THE SAME GROUND. THE AO OBSERVED THAT THE DISALLOWANCE OF EXPENDITURE EITHE R U/ 40(A) OR U/S 43B RELATED TO AN OTHER COMPANY THE KEC INFRASTRUCTURE LTD. AND THAT THE ASSESSEE COMPANY IS FORMED ONLY IN THIS YEAR AND HE NCE THERE IS NO QUESTION OF EXPENDITURE IN THE EARLIER YEAR WHICH C OULD HAVE BEEN DISALLOWED. THUS HE DID NOT ALLOW THIS CLAIM. AGGRI EVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL. THE FIRST APPELLATE A UTHORITY ON THE ISSUE OF DISALLOWANCE OF DEPRECIATION FOR THE DETAILED REASO NS GIVEN, CONCLUDED AT PARA 1.15 AT PAGE 9 AS FOLLOWS : 1.15 KEEPING IN VIEW THESE FACTS AND CIRCUMSTANCE S, IT IS HELD THAT THE ACTION OF THE AO IS NOT JUSTIFIED BY HOLDING THAT THE COMPANY HAS FULFILLED THE CONDITION LAID DOWN U/S.2 (19AA) OF THE I.T. ACT. HOWEVER, AS DISCUSSED ABOVE, THE COMPANY IS NOT FULFILLING THE CONDITIONS LAID DOWN AT CLAUSE (III) , (IV) & (V) TO SECTION 2(19AA), THEREFORE, IT CANNOT BE HELD AS A CASE OF DEMERGER. 6 THEREFORE, THE VALUE ADOPTED BY THE COMPANY ON THE BASIS OF REVALUATION OF THE ASSETS IS TO BE CONSIDERED FOR D EPRECIATION PURPOSE. THUS, THE ORDER OF THE AO IS MODIFIED TO T HIS EXTENT THAT THE VALUE OF ASSETS MAY BE TAKEN AS PER THE VALUER S REPORT ON TANGIBLE ASSETS. THIS FINDING OF THE FIRST APPELLATE AUTHORITY THAT THIS IS NOT A CASE OF DEMERGER, IS NOT CHALLENGED BY THE REVENUE. 4. ON THE SECOND ASPECT REGARDING THE CLAIM OF DEP RECIATION, THE FIRST APPELLATE AUTHORITY AT PARA 1.18 HELD AS FOLL OWS : 1.18 KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES AND THE LEGAL POSITION OF THE CASE THAT BRAND ACCOUNT AND G OODWILL ACCOUNT ARE NOT REFLECTED IN THE BOOKS OF ACCOUNTS OF THE T RANSFEROR COMPANY AND SECONDLY, THE PROVISIONS OF SECTION 32(1)(II) H AS NOT ALLOWED DEPRECIATION ON BRAND ACCOUNT AND GOODWILL AND THIR DLY, THE HONBLE TRIBUNAL IN THE ABOVE SAID CASE HAS HELD TH AT THE DEPRECIATION IS NOT ALLOWABLE ON GOODWILL AND OTHE R INTANGIBLE ASSETS WHICH ARE NOT COVERED IN SECTION 32(1)(II) O F THE I.T. ACT, THEREFORE, THE CLAIM OF DISALLOWANCE MADE BY THE AO ON THE CLAIM OF DEPRECIATION ON INTANGIBLE ASSETS IS UPHELD. FIN ALLY, THE AO IS DIRECTED TO RECOMPUTE THE DEPRECIATION ACCORDINGLY. THUS, THE GROUND IS PARTLY ALLOWED. 5. ON THE ISSUE OF DISALLOWANCE OF EXPENDITURE, TH E FIRST APPELLATE AUTHORITY APPLIED THE DECISION OF THE JUR ISDICTIONAL TRIBUNAL IN THE CASE OF M/S ANIL ENGINEERING CORPORATION VS. I TO 50 ITD 99 AND HELD THAT THE TRANSFEREE OF THE BUSINESS WOULD BE E LIGIBLE TO CLAIM DEDUCTION IN RESPECT OF THE LIABILITY TAKEN OVER FR OM THE TRANSFEROR FOR WHICH THE PAYMENT WAS MADE BY THE TRANSFEREES SUBSE QUENTLY. AGGRIEVED ON THE ISSUE OF DISALLOWANCE OF DEPRECIATION ON BRA ND, THE ASSESSEE FILED AN APPEAL ON THE FOLLOWING GROUND : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VII UP HELD THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME TAX , RANGE 8(2), 7 MUMBAI IN DISALLOWING DEPRECIATION CLAIMED BY THE A PPELLANT ON BRAND RECEIVED BY IT UNDER A SCHEME OF ARRANGEMENT UNDER SECTION 391 TO 394 OF THE COMPANIES ACT, 1956. 6. THE REVENUE ALSO FILED AN APPEAL ON THE FOLLOWI NG TWO GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN ALLOWING RS.87.76 CRORE S AS DEPRECATION TO THE ASSESSEE WHEREAS THE SAME WAS RE STRICTED TO R.16.98 (15.98) CRORES BY THE A.O. WITHOUT APPRE CIATING THE FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION M ADE BY THE A.O. UNDER THE PROVISO TO SECTION 40(A) AND 43B AS THE SAME WERE NOT THE LIABILITY INCURRED BY THE ASSESSE E WITHOUT APPRECIATING THE FACTS OF THE CASE. 7. SHRI S.E. DASTUR, LEARNED SENIOR ADVOCATE, APPE ARING ON BEHALF OF THE ASSESSEE, ALONG WITH SHRI N.D. SHETH, TOOK THIS BENCH THROUGH THE FACTS OF THE CASE AND SUBMITTED THAT TH E ONLY ISSUE, THAT IS BEFORE THE TRIBUNAL IN THIS APPEAL, IS WHETHER THE FIRST APPELLATE AUTHORITY WAS RIGHT IN HOLDING THAT THE PROVISIONS OF SECTION 32(1)(II) DOES NOT ALLOW DEPRECIATION ON BRAND ACCOUNT AND GOODWILL ACCO UNT BY RELYING ON THE DECISION OF MUMBAI BENCH OF THE ITAT IN THE CA SE OF R.G. KESWANI VS. ACIT IN ITA NO. 1463/MUM/2005 DATED 19-02-2008. HE SUBMITTED THAT THE ASSESSEE COMPANY HAD TAKEN OVER, AS A SLU MP SALE, THE POWER BUSINESS OF THE RELATED CONCERN, UNDER THE COMPOSIT E SCHEME U/S 391 TO 394 OF THE COMPANIES ACT AND THAT THIS COMPOSITE SC HEME WAS SANCTIONED BY THE HONBLE BOMBAY HIGH COURT. HE SUBMITTED THAT THE PURCHASE CONSIDERATION WAS ABOUT RS.143 CRORES PLUS THE TAKI NG OVER OF ALL THE LIABILITIES. HE SUBMITTED THAT THE AO DISALLOWED TH E CLAIM OF DEPRECIATION ON TWO GROUNDS, THE FIRST BEING THAT THIS IS NOT A CASE OF SLUMP SALE BUT ONLY A CASE OF DEMERGER AND HENCE THE WRITTEN DOWN VALUE OF THE 8 TRANSFEROR COMPANY HAS TO BE TAKEN AND THE SECOND G ROUND IS THAT BRAND IS NOT COVERED WITHIN THE AMBIT OF SECTION 32(1)(II ) OF THE ACT. HE POINTED OUT THAT THE FIRST APPELLATE AUTHORITY REVERSED THE DECISION OF THE AO WITH RESPECT TO THE FIRST GROUND I.E. WHETHER THE TAKE O VER IN QUESTION, IS A SLUMP SALE OR A DEMERGER. THE FIRST APPELLATE AUTHO RITY WAS OF THE VIEW THAT THIS IS A SLUMP SALE AND NOT A CASE OF DEMERGE AND THAT THE ASSESSEE COMPANY HAS NOT FULFILLED THE CONDITIONS LAID DOWN U/S 2(19AA) OF THE ACT. ON THE SECOND REASON, HE SUBMITTED THAT THE FI RST APPELLATE AUTHORITY HAS NOT ACCEPTED THE CONTENTION OF THE ASSESSEE AND THE ASSESSEE IS IN APPEAL ON THIS ISSUE. 8. MR. DASTUR SUBMITTED THAT BRAND IS NOTHING B UT A RADE MARK AND THAT IT IS COVERED BY THE WORD TRADE MAR K. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION, HE SUBMITTED THA T BRAND CAN BE CONSIDERED AS ANY OTHER BUSINESS OR COMMERCIAL RI GHTS OF SIMILAR NATURE. HE POINTED OUT THAT THE OWNER OF THE BRAN D CAN PREVENT THE USE OF THE BRAND BY ANOTHER PARTY, BY WAY OF A LEGAL ACTION, JUST AS IN THE CASE OF COPY RIGHT, TRADE MARK OR KNOWHOW. HE TOOK THIS BENCH TO PAGE 12 OF THE ASSESSEES PAPER BOOK, WHICH CONSISTS OF THE COMPOSITE SCHEME OF ARRANGEMENT AND SPECIFICALLY PARA 13.1, 13.4, 14, 1 4.2, 15.3, 15.4, TO DRIVE HOME HIS ARGUMENT THAT, THIS IS A COMPOSITE SCHEME, THAT THE ASSETS WILL BE DEBITED IN THE TRANSFEREES BOOK, LIABILITIES WILL BE CREDITED, SHARE CAPITAL WILL BE CREDITED AND THE DIFFERENCE WILL BE GOODWIL L OR CAPITAL RESERVE AND THAT THE ASSESSEE SHALL GET THE ASSETS VALUED AND REFLECT THE SAME IN ITS BOOKS. HE ALSO POINTED OUT THAT THE MOVABLE ASSETS ARE TRANSFERRED BY HANDING OVER OF THE SAME, INTERSE THE PARTIES BY DE LIVERY. HENCE THERE IS NO ORDER OF THE COURT ON MOVABLE ASSETS. HE POINTED OUT THAT THE COURT STATED THAT BRAND SHALL BE REFLECTED IN THE BOOK S AS PER VALUATION. HE POINTED OUT THAT THE VALUATION IS DONE BY N.M. RAIJ I & CO. UNDER THREE METHODS AND THE VALUE ASSESSED BY THEM WAS REFLECTE D BY THE ASSESSEE 9 COMPANY. HE TOOK THIS BENCH THROUGH THE VALUATION R EPORT WHICH IS AT PAGE 39 OF THE PAPER BOOK. 9. MR. DASTUR POINTED OUT THAT BRAND IS, A PART ICULAR MANNER OR WAY IN WHICH THE ENTERPRISE HAS A LOGO. HE SUBMI TTED THAT THE CIT(APPEALS) ERRONEOUSLY RELIED ON THE JUDGMENT OF THE TRIBUNAL IN THE CASE OF R.G. KESWANI (SUPRA), WHICH IS RELATING TO GOODWILL AND FURTHER ADDED THAT THE OBSERVATIONS IN THIS DECISION ARE IN FAVOUR OF THE ASSESSEE. 10. MR. DASTUR SUBMITTED THAT THE BRAND RELATED TO TRADE MARK. HE FURNISHED THE COPY OF THE TRADE MARKS ACT, 1999 AND POINTED OUT TO THE DEFINITION AT SECTION 2(ZB) AND SECTION 2(M) AN D SUBMITTED THAT MARK INCLUDES BRAND AND THAT THE TRADE MARK ACT PUT BOTH MARK AND BRAND IN THE SAME CATEGORY. HE REFERRED TO TH E DICTIONARY MEANING OF THE TERM BRAND IN P. RAMANATHA AIYAR DICTIONA RY AND THE JUDICIAL DICTIONARY OF K.J. AIYAR. HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TECHNO SHARES AND STOCKS LTD. (2009) 184 TAXMAN 103 (BOM.) AND SUBMITTED THAT THE HONBL E BOMBAY HIGH COURT HAS UNDERSTOOD THE TERM BRAND AS AN INTELLE CTUAL PROPERTY RIGHT AND HAS EQUATED BRAND WITH TRADE MARK. THUS HE SUBMITTED THAT THE ISSUE IS IN FACT COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT. HE TOOK THIS BENCH THROU GH THE FINANCE BILL WHICH INTRODUCED SECTION 32(1)(II), AS WELL AS WHE N SECTION 55(2)(A) WAS INTRODUCED AND SUBMITTED THAT GOODWILL WAS TREATED DIFFERENTLY FROM THE BRAND NAME AND THE INTENTION OF THE LEGISLATURE W AS TO EQUATE THE TRADE MARK WITH A BRAND NAME. THUS HE SUBMITTED THAT THE BRAND FALLS WITHIN THE AMBIT OF SECTION 32(1)(II) OF THE ACT AND THE ASSESSEE SHOULD BE GRANTED DEPRECIATION. 10 11. THE LEARNED SR. DR, MR. S.S. RANA, SUBMITTED THAT THE AO CONSIDERED THE TRANSFER AS A DEMERGER BUT THE LEARN ED CIT(APPEALS) HAS NOT APPROVED THIS FINDING OF THE AO AND HAD ACCEPT ED THE CONTENTION OF THE ASSESSEE THAT THIS IS A CASE OF SLUMP SALE. HE SUBMITTED THAT THE REVENUE HAS NOT FILED AN APPEAL AGAINST THIS FINDIN G OF THE FIRST APPELLATE AUTHORITY AND HENCE THE ISSUE WHETHER THE TRANSFER IS A SLUMP SALE OR A DEMERGER IS NOT BEFORE THE BENCH. THUS HE AGREED TH AT THE ISSUE BEFORE THE TRIBUNAL IS WHETHER THE BRAND FALLS WITHIN THE AM BIT OF SECTION 32(1)(II) OF THE ACT. MR. RANA RELIED BOTH ON THE REASONS GIV EN BY THE AO AS WELL AS THE CIT(APPEALS) AND VEHEMENTLY CONTENDED THAT BRAND IS NOTHING BUT GOODWILL. HE SUBMITTED THAT IN THE CASE OF CH ITRA PUBLICITY CO. P. LTD. VS. ACIT 127 TTJ (AHD.) (T.M.), THE TRIBUNAL HAS LOOSELY USED BRAND IN CONJUNCTION WITH GOODWILL. HE RELIED O N THE DECISION OF R.G. KESWANI (SUPRA) AND SUBMITTED THAT THE VALUATI ON IN QUESTION IS IN FACT A VALUATION OF GOODWILL AND BY APPLYING THE RATIO OF THIS DECISION OF THE TRIBUNAL, THE ASSESSEE IS NOT ENTITLED TO AN Y DEPRECIATION. HE RELIED ON A NUMBER DECISIONS IN SUPPORT OF HIS CONTENTION THAT NO DEPRECIATION CAN BE GRANTED ON GOODWILL. HE POINTED OUT THAT T HE ASSESSEE IN FACT HAS TRANSFERRED GOODWILL AT A SEPARATE VALUE AND ALTERN ATIVELY NO DEPRECIATION SHOULD BE ALLOWED ON THE GOODWILL. 12. MR. DASTUR, IN REPLY, SUBMITTED THAT IN THE CA SE OF CHITRA PUBLICITY CO. P. LTD., THE ONLY ISSUE THAT WAS BEFO RE THE BENCH IS WHETHER THE VALUATION REPORT CAN BE IGNORED, IF NOT PROPERL Y DISLODGED BY THE REVENUE. HE SUBMITTED THAT THIS CASE LAW IS GOOD ON LY FOR THE PROPOSITION THAT WHEN ARMS LENGTH PRICE IS DETERMINED IN THE VA LUATION REPORT, IT MUST BE REGARDED AS ACTUAL COST. HE SUBMITTED THAT NOWHE RE IN THIS DECISION IT IS STATED THAT GOODWILL IS SAME AS TRADE MARK OR BRAND. 11 13. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONTENTI ONS OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSAL OF T HE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED, WE HOLD AS FOLLOWS. 14. BOTH THE PARTIES AGREED THAT THE ISSUE WHETHER THE TRANSFER IN QUESTION IS A SLUMP SALE OR A DEMERGER IS NOT BEFOR E THE TRIBUNAL. THUS THE UNDISPUTED FACTS IN THIS CASE ARE (A) THIS IS A CASE OF SLUMP SALE AND (B) THE VALUATION IS DONE BY AN APPROVED RECOGNIZED VALUER AND THE SAME IS AN ARMS LENGTH AND HAS NOT BEEN DISPUTED OR DISL ODGED BY THE REVENUE. ON THIS FACTUAL MATRIX, AS POINTED OUT BY BOTH THE PARTIES, THE ONLY ISSUE IS WHETHER THE TERM BRAND FALLS WITHIN THE AMBIT OF SECTION 32(1)(II) OF THE ACT. SECTION 32(1)(II) READS AS FOLLOWS : 32. (1) [IN RESPECT OF DEPRECIATION OF (I) - - - - - - - - ( II ) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICEN CES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATU RE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1 998, 15. UNDER THE TRADE MARKS ACT, 1999 (47 OF 1999), SECTION 2(ZB) READS AS FOLLOWS : TRADE MARK MEANS A MARK CAPABLE OF BEING REPRESENTED GRAPHICALLY AND WHICH IS CAPABLE OF DISTINGUISHING THE GOODS OR SERVICES OF ONE PERSON FROM THOSE OF OTHERS AND MAY INCLUDE SHAPE OF GOODS, THEIR PACKAGING AND COMBINATION OF COLOUR S; AND- (I) IN RELATION TO CHAPTER XII (OTHER THAN SECTION 107) , A REGISTERED TRADE MARK OR A MARK USED IN RELATION TO GOODS OR SERVICES FOR THE PURPOSE OF INDICATING OR SO AS TO INDICATE A CONNECTION IN THE COURSE OF TRADE BETWEEN THE GOODS OR SERVICES, AS THE CASE MAY BE, AND SOME PERSON HAVIN G THE RIGHT AS PROPRIETOR TO USE THE MARK ; AND 12 (II) IN RELATION TO OTHER PROVISIONS OF THIS ACT, A MARK USED OR PROPOSED TO BE USED IN RELATION TO GOODS OR SERVICE S FOR THE PURPOSE OF INDICTING OR SO TO INDICATE A CONNECTIO N IN THE COURSE OF TRADE BETWEEN THE GOODS OR SERVICES, AS T HE CASE MAY BE, AND SOME PERSON HAVING THE RIGHT, EITHER AS PROPRIETOR OR BY WAY OF PERMITTED USER, TO USE THE MARK WHETHER WITH OR WITHOUT ANY INDICATION OF THE IDENT ITY OF THAT PERSON, AND INCLUDES A CERTIFICATION TRADE MARK OR COLLECTIVE MARK ; SECTION 2(M) READS AS FOLLOWS : MARK INCLUDES A DEVICE, BRAND , HEADING, LABEL, TICKET, NAME, SIGNATURE, OR ANY COMBINATION THEREOF.(UNDER LINING OURS) 16. AS TRADEMARK INCLUDES A MARK AND MARK INCLUDES A BRAND, WE HAVE TO NECESSARILY CONCLUDE THAT TRADEMARK INCLUDE S BRAND. 16.1 IN K.J. AIYARS JUDICIAL DICTIONARY, BRAND I S DEFINED AS FOLLOWS : BRAND. A DISTINGUISHING NAME, DESIGN OR TRADE-M ARK, USED, FOR PUTTING ON GOODS OR ON CASES IN WHICH THEY ARE ENCL OSED TO DEFINE AND DISTINGUISH OWNERSHIP, CLASS OR QUANTITY [PEARS ]. IN RAMANATHA AIYARS LAW LEXICON VOLUME 12005, DEFI NES BRAND AS FOLLOWS : BRAND. TO BURN OR IMPRESS OR MAKE A MARK UPON WIT H A HOT IRON. A DISTINGUISHING NAME. DESIGN, OR TRADE MARK USED F OR PUTTING ON GOODS OR PACKAGES. IT GENERALLY DEFINES OWNERSHIP, CLASS, OR QUALITY OF THE GOODS. TO PUT A NAME (THE BRAND NAME) ON SOMETHING OR TO D ESIGN AND PACKAGE A PRODUCT SO THAT IT IS EASILY RECOGNIZABLE BY A CONSUMER. A BRAND NAME CAN BE PROTECTED BY LAW AGAINST MISUSE BY COMPETITORS HOPING TO BENEFIT FROM THE REPUTATION ASSOCIATED WITH A PARTICULAR BRANDED PRODUCT (BANKING). BRAND, IN PATENTS ACT, 1883 (46 AND 47 VICT., C. 57 ), S. 64, MEANS A DEVICE APPLIED TO AN ARTICLE BY BURNING, A ND NOT A DEVICE WOVEN OR INCORPORATED INTO THE SUBSTANCE OF THE ART ICLE. [PIRIE V. GOODALL, (1892), I CH 35]. INCORPORATION OF A MARK (BY A WATER- 13 MARK) WOULD SUFFICE TO CONSTITUTE A TRADE MARK BRAN D (PIRIE V. GOODALL, 1892, 1 CH. 35); BUT MERE WORDS IN COMMON USE WOULD NOT AMOUNT TO A TRADE MARK BRAND. 17. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF T ECHNO SHARES AND STOCKS LTD. (SUPRA) WAS CONSIDERING A CA SE WHETHER, DEPRECIATION WAS ALLOWABLE ON A BOMBAY STOCK EXCHAN GE CARD U/S 32(1)(II) OF THE ACT. IT HELD THAT BSE CARD IS ONLY PERSONAL PRIVILEGE GRANTED TO A MEMBER TO TRADE IN SHARES ON THE FLOOR OF THE STOCK EXCHANGE AND SUCH A PRIVILEGE CANNOT BE EQUATED WITH THE EXP RESSION LICENCE OR AN EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIG HT OF SIMILAR NATURE ENUMERATED IN SECTION 32(1)(II) OF THE ACT. WHILE H OLDING SO, THE HONBLE HIGH COURT AT PARA 23 HELD AS FOLLOWS : THE EXPRESSION FRANCHISES IS NEITHER DEFINED IN THE ACT NOR THERE IS ANY SPECIFIC LEGISLATION IN INDIA RELATING TO FRANCHISES. AS PER BLACKS LAW DICTIONARY, 8 TH EDITION, THE EXPRESSION FRANCHISE DENOTES :- 1.****** WHEN REFERRING TO GOVERNMENT GRANTS (OTHER THAN PA TENTS, TRADEMARKS, AND COPYRIGHTS), THE TERM FRANCHISE I S OFTEN USED TO CONNOTE MORE SUBSTANTIAL RIGHTS, WHEREAS THE TERM LICENSE CONNOTES LESSER RIGHTS. THUS, THE RIGHTS NECESSARY FOR PUBLIC UTILITY COMPANIES TO CARRY ON THEIR OPERATIONS ARE GENERALL Y DESIGNATED AS FRANCHISE RIGHTS. ON THE OTHER HAND, THE RIGHTS TO CONSTRUCT OR TO REPAIR, THE RIGHTS TO PRACTICE CERTAIN PROFESSIONS AND THE RIGHTS TO USE OR TO OPERATE AUTOMOBILES ARE GENERALLY REFERRE D TO AS LICENSES. 3. THE SOLE RIGHT GRANTED BY THE OWNER OF A TRADEM ARK OR TRADENAME TO ENGAGE IN BUSINESS OR TO SELL A GOOD O R SERVICE IN A CERTAIN AREA. 4. THE BUSINESS OR TERRITORY CONTROLLED BY THE PER SON OR ENTRY THAT HAS BEEN GRANTED SUCH A RIGHT. 14 COMMERCIAL FRANCHISE.- A FRANCHISE USING LOCAL CAP ITAL AND MANAGEMENT BY CONTRACTING WITH THIRD PARTIES TO OPE RATE A FACILITY IDENTIFIED AS OFFERING A PARTICULAR BRAND OF GOODS OR SER VICES. SPORTS FRANCHISE.- (1)_ A FRANCHISE GRANTED BY A P ROFESSIONAL SPORTS LEAGUE TO FIELD A TEAM IN THAT LEAGUE. (2) THE TEAM ITSELF. TRIAL FRANCHISE. A FRANCHISE HAVING AN INITIAL TE RM OF LISMITED DURATION, SUCH AS ONE YEAR. FRANCHISE, VB. TO GRANT (TO ANOTHER) THE SOLE RIGH T OF ENGAGING IN A CERTAIN BUSINESS OR IN A BUSINESS USING A PARTICULA R TRADEMARK IN A CERTAIN AREA. THUS, FRANCHISING IS A KIND OF BUSINESS WHERE FRANC HISOR GRANTS A LICENCE TO THE FRANCHISEE TO USE FRANCHISORS INTEL LECTUAL PROPERTY RIGHTS SUCH AS KNOW-HOW, PATENTS, TRADEMARKS, BRAND NAME, ETC. TO MARKET THE FRANCHISORS PRODUCTS OR SERVICES FOR CO NSIDERATION. AT PARA 34, IT HELD AS FOLLOWS : - - - - - - - - - - - - - WHEREAS, THE INTANGIBLE ASSETS ENUMERATED IN SECT ION 32(1)(II) OF THE ACT FORM A CLASS OF INTELLECTUAL PROPERTY AND S INCE THE COMMON THREAD FLOWING IN ALMOST ALL THE SAID EXPRESSIONS I S THE INTELLECTUAL PROPERTY RIGHTS, THE EXPRESSION LICENCES WOULD TA KE COLOUR FROM OTHER EXPRESSIONS WHICH ARE ALL REFERABLE TO INTELL ECTUAL PROPERTY RIGHTS. THUS, THE DECISION OF THE APEX COURT IN THE CASE OF SCIENTIFIC ENGG. HOUSE (P) LTD. (SUPRA) DOES NOT SU PPORT THE CASE OF THE ASSESSEES. 18. FROM THE ABOVE IT IS CLEAR THAT THE JURISDICTI ONAL HIGH COURT HAS HELD THAT BRAND NAME IS AN INTELLECTUAL PROPERT Y RIGHT SIMILAR TO KNOW- HOW, PATENTS AND TRADEMARKS ETC.. 19. WHILE INTRODUCING THE FINANCE ACT, 2001, THE EXPLANATORY NOTES ON PROVISION RELATING TO DIRECT TAXES PARA 42 READS AS FOLLOWS : 15 42. PROVIDING FOR COST OF ACQUISITION OF CERTAIN INTANGIBLE CAPITAL ASSETS UNDER SECTION 55 42.1 UNDER THE EXISTING PROVISIONS OF SUB-SECTION (2) OF SECTION 55 OF THE INCOME-TAX ACT, THE COST OF ACQUISITION OF AN INTANGIBLE CAPITAL ASSET, BEING GOODWILL OF A BUSIN ESS OR A RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICL E OR THING, TENANCY RIGHTS, STAGE CARRIAGE PERMITS OR LO OM HOURS, IS THE PURCHASE PRICE IN CASE THE ASSET IS PURCHASE D BY THE ASSESSEE FROM A PREVIOUS OWNER, AND NIL IN ANY OTHE R CASE. IT WAS POINTED OUT THAT CERTAIN SIMILAR SELF-GENERA TED INTANGIBLE ASSETS LIKE BRAND NAME OR A TRADE MARK M AY NOT BE CONSIDERED TO FORM PART OF THE GOODWILL OF A BUS INESS, AND CONSEQUENTLY IT MAY NOT BE POSSIBLE TO COMPUTE CAPITAL GAINS ARISING FROM THE TRANSFER OF SUCH ASSETS. 42.2 THE ACT HAS THEREFORE AMENDED CLAUSE (A) OF SUB-SEC TION (2) TO PROVIDE THAN THE COST OF ACQUISITION IN RELATION TO TRADE MARK OR BRAND NAME ASSOCIATED WITH A BUSINESS SHALL ALSO BE TAKEN TO BE THE PURCHASE PRICE IN CASE THE ASSET IS PURCHASED FROM A PREVIOUS OWNER AND NIL IN ANY OTHE R CASE. 20. FROM THE ABOVE IT CAN BE SEEN THAT TRADE MARK OR BRAND NAME HAS BEEN USED IN CONJUNCTION AND AS AN ALTERNATIVE TO EACH OTHER. THUS IT CAN BE CONCLUDED THAT EVEN THE LEGISLATURE HAS INTE NDED THAT BRAND NAME OR TRADE MARK ARE SIMILAR INTELLECTUAL PROPERTIES. 21. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT WE HAVE TO INVARIABLY AGREE WITH THE ARGUMENT OF SH RI S.E. DASTUR THAT THE TERM BRAND FALLS WITHIN THE AMBIT OF SECTION 32(1 )(II) OF THE I.T. ACT AND THAT THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION ON T HE SAME. 22. COMING TO THE DECISION IN THE CASE OF CHITRA P UBLICITY CO. P. LTD. (SUPRA) RELIED UPON BY THE LEARNED DR, THE ONL Y PROPOSITION IS THAT THE VALUATION REPORT CANNOT BE IGNORED IF NOT PROPE RLY DISLODGED BY THE REVENUE. IT HELD THAT THE AO DID NOT CONSIDER THE R EPORT OF THE REGISTERED VALUER WHICH WERE PLACED BEFORE HIM, IN SUPPORT OF THE VALUE OF THE 16 HOARDINGS AND GOODWILL. IT WAS ALSO HELD THAT THE A O HAS NOT POINTED OUT THE DEFECTS IN THE VALUE OF HOARDINGS SHOWN BY THE ASSESSEE. IT HELD THAT NO FAULT HAS BEEN FOUND WITH THE VALUATION REPORT A ND, THEREFORE, THE SAME CANNOT BE REJECTED. THERE IS NO PROPOSITION THAT TR ADEMARK OR TRADE NAME CAN BE EQUATED WITH GOODWILL. 23. COMING TO THE DECISION OF THE TRIBUNAL IN THE CASE OF R.G. KESWANI VS. ACIT IN ITA NO. 1463/MUM/2005 DATED 19- 02-2008, RELIED UPON BOTH BY THE CIT(APPEALS) AS WELL AS BY THE LEA RNED DR, IT IS HELD THAT ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SI MILAR NATURE IS PROVIDED AS A RESIDUAL CATEGORY, IS FOUND IN THE CO MPANY OF EXPRESSION LIKE, KNOW-HOW, PATENTS, COPY RIGHTS, TRADE MARKS, LICENCES, FRANCHISES, AND, THEREFORE, IN VIEW OF THE PRINCIPLE OF EJUSDEM GENERIS, THE ABOVE EXPRESSION HAS TO BE READ IN THE COMPANY OF THE PRE CEDING WORKS. IT HELD THAT IN SUCH CIRCUMSTANCES, THE EXPRESSION ANY OTH ER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE ALSO MUST BE I N THE SAME GENESIS OR CATEGORY WITH SPECIFIC AND ELUCIDATED IDENTITY OF C OMMERCIAL OR BUSINESS NATURE. 24. NOWHERE IN THIS JUDGMENT IT IS GIVEN THAT BRAN D DOES NOT FALL IN ANY OF THE CATEGORY SPECIFIED IN SECTION 32(1)(I I) OF THE ACT. THIS CASE LAW IS ONLY LIMITED TO THE ISSUE WHETHER THE ASSESS EE IS ENTITLED TO DEPRECIATION ON GOODWILL. IT HAS NO APPLICATION IN THE PRESENT CASE, EXCEPT TO THE EXTENT THAT THE ASSESSEE SHALL NOT BE ENTITL ED TO DEPRECIATION ON THE GOODWILL TRANSFER. 25. THUS, WE DIRECT THE AO TO ALLOW DEPRECIATION T O THE ASSESSEE ON THE BRAND RECEIVED BY IT UNDER THE SCHEME OF AMA LGAMATION. AS FAR AS GOODWILL IS CONCERNED, THE ASSESSEE SHALL NOT BE ENTITLED TO DEPRECIATION. 17 26. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED IN PART. 27. ITA NO. 4966/MUM/2009. THIS BRINGS US TO THE REVENUES APPEAL WHICH IS O N TWO ISSUES, THE FIRST BEING THE DIRECTION OF THE CIT(AP PEALS) TO ALLOW DEPRECIATION AT R.87.76 CRORES AS AGAINST DEPRECIAT ION OF RS.15.98 CRORES ALLOWED BY THE AO AND THE SECOND BEING DELETION OF DISALLOWANCES MADE UNDER THE PROVISO TO SECTION 40(A) AND SECTION 43B BY THE CIT(APPEALS). 28. AFTER HEARING RIVAL CONTENTIONS, WE HOLD AS FO LLOWS. 29. ON THE FIRST GROUND, THE REVENUE HAS NOT DISPU TED THE FINDINGS OF THE FIRST APPELLATE AUTHORITY THAT THE TRANSFER IN QUESTION IS A CASE OF SLUMP SALE AND NOT A CASE OF DEMERGER. THE VALUATION HAS ALSO NOT BEEN DISPUTED. UNDER THESE CIRCUMSTANCES, FOR THE R EASONS NOTED IN THE ASSESSEES APPEAL, WE HAVE TO NECESSARILY UPHOLD TH E ORDER OF THE FIRST APPELLATE AUTHORITY AND DISMISS GROUND NO. 1 OF THE REVENUE. 30. COMING TO GROUND NO. 2, THE FACTS ARE BROUGHT OUT AT PARA 2.5 AND 2.6 OF THE CIT(APPEALS) ORDER AT PAGE 12 WHICH ARE EXTRACTED BELOW FOR READY REFERENCE : 2.5 THE AO HAS NOTICED THAT IN THE COMPUTATION OF INCOME, THE APPELLANT COMPANY HAS CLAIMED DEDUCTION OF RS.6,94, 02,867/- U/S 40(A) WHICH WAS DISALLOWED IN EARLIER YEARS AND OFF ERED IN THE CASE OF KEC INFRASTRUCTURE LTD. IN F.Y. 2004-05. THE CLA IM OF DEDUCTION WAS MADE BY STATING THAT THE PAYMENTS MAD E OUT OF DISALLOWANCE OF EARLIER YEARS. THE AO HAS DISALLOWE D THE CLAIM OF THE APPELLANT COMPANY BY HOLDING THAT THE DISALLOWA NCE IN EARLIER YEARS WAS RELATED TO ANOTHER COMPANY M/S KEC INFRAS TRUCTURE LTD. THE ASSESSEE COMPANY WAS FORMED IN THE YEAR UNDER C ONSIDERATION, THEREFORE, NO QUESTION OF EXPENDITURE INCURRED IN E ARLIER YEARS CAN BE CONSIDERED. HENCE, HE HAS DISALLOWED THE DEDUCTI ON OF RS.6,94,02,867/- U/S.40(A) OF THE I.T. ACT. 18 2.6 SIMILARLY, THE APPELLANT COMPANY HAS CLAIMED DE DUCTION OF R.7,04,869/- AND RS.3,10,79,751/- U/S.43B WHICH WAS STATED TO BE CLAIMED ON ACTUAL PAYMENTS. THE AO HAS TAKEN THE SA ME STAND THAT THIS EXPENDITURE WAS RELATING TO ANOTHER COMPANY M/ S.KEC INFRASTRUCTURE, THEREFORE, IT IS NOT ALLOWED IN THE CASE OF THE APPELLANT. HENCE, HE HAS DISALLOWED THE DEDUCTION O F RS.3,10,79,751/- U/S. 43B OF THE ACT. 31. THE ASSESSEE SUBMITTED THAT THERE IS NO DISPUT E ON THE FACT THAT THE ASSESSEE HAD DEDUCTED AND PAID THE TAX IN RESPECT OF LIABILITY PERTAINING TO THE EXPENSES SO DISALLOWED IN THE HAN DS OF THE TRANSFEROR COMPANY AND DISCHARGED THE LIABILITY SO ASSUMED PUR SUANT TO THE ACQUISITION IN QUESTION. HE FURTHER SUBMITTED THAT THE AMOUNTS DISALLOWED U/S 43B IN THE HANDS OF THE TRANSFEROR COMPANY, HAV E BEEN PAID BY THE ASSESSEE COMPANY AND THE ONLY ISSUE IS WHETHER THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. IT RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. T. VEERABHADRA RAO 155 ITR 152 (SC) AND THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ANIL ENGINEERING CORPORATIO N VS. ITO 50 ITD 99. THE LEARNED CIT(APPEALS) AT PARA 2.8 HELD AS FOLLOW S : 2.8 I HAVE GONE THROUGH THE SUBMISSIONS OF THE APP ELLANT AND THE ORDER OF THE AO. IT IS NOTICED THAT THE EXPENDITURE DISALLOWED U/S. 40(B) AND 43B OF THE I.T. ACT WAS RELATING TO THE T RANSFEROR COMPANY. THE APPELLANT COMPANY PURSUANT TO THE SCHE ME OF ARRANGEMENT ACQUIRED THE POWER TRANSMISSION BUSINES S OF KEC INFRASTRUCTURE LTD. ON A GOING CONCERN BASIS. SINCE THE PTB DIVISION WAS ACQUIRED BY THE APPELLANT COMPANY AS A GOING CONCERN ALONG WITH ALL ASSETS AND LIABILITIES, THEREFORE, T HE APPELLANT HAS PAID THE TAX IN RESPECT OF THE LIABILITY PERTAINING TO E XPENSES SO DISALLOWED IN THE HANDS OF THE TRANSFEROR COMPANY U /S. 40(A) AND 43B OF THE I.T. ACT. THE AO HAS DISALLOWED THE CLAI M OF THE APPELLANT COMPANY ON THE PLEA THAT THE COMPANY WAS STARTED IN THE YEAR UNDER CONSIDERATION AND THE QUESTION OF ALLOWI NG THE EXPENDITURE INCURRED IN THE EARLIER YEARS DOES NOT ARISE. SINCE THE EXPENDITURE DISALLOWED U/S. 40(A) AND 43B OF THE I. T. ACT IS TO BE 19 ALLOWED ON ACTUAL PAYMENT BASIS, THEREFORE, IT HAS TO BE ALLOWED EITHER IN THE CASE OF THE TRANSFEROR COMPANY OR THE TRANSFEREE COMPANY. IN THIS REGARD, THE HONBLE MUMBAI TRIBUNA L HAS DECIDED THE ISSUE IN THE CASE OF M/S ANIL ENGINEERING CORP ORATION VS. ITO 50 ITD 99 WHERE IT IS HELD THAT THE TRANSFEREE OF T HE BUSINESS WOULD BE ELIGIBLE TO CLAIM THE DEDUCTION IN RESPECT OF TH E LIABILITY TAKEN OVER FROM THE TRANSFEROR FOR WHICH THE PAYMENT WAS MADE BY THE TRANSFEREE SUBSEQUENTLY. THE FACTS OF THIS CASE ARE SQUARELY COVERED BY THIS DECISION OF THE HONBLE TRIBUNAL. THEREFORE , THE AO IS DIRECTED TO ALLOW THE EXPENDITURE CLAIMED BY THE A PPELLANT COMPANY U/S. 40(A) AND 43B OF THE I.T. ACT. IT IS M ENTIONED HERE THAT ALTERNATELY , THE TRANSFERRED COMPANY M/S.SUMM IT SECURITIES LTD. (FORMERLY KNOWN AS KEC INFRASTRUCTURE LTD.) HA S ALSO CLAIMED THIS EXPENDITURE BEING THE TRANSFEROR COMPANY. I HA VE DECIDED THE APPEAL OF THE TRANSFEROR COMPANY AND DISMISSED THE APPEAL OF THE APPELLANT THERE. THEREFORE, THIS GROUND OF APPEAL I S ALLOWED IN APPELLANTS CASE. 32. THE HONBLE SUPREME COURT IN THE CASE OF T.VEE RBHADRA RAO K. KOTESWARA RAO & CO. (SUPRA) HELD AS FOLLOWS : IF A BUSINESS, ALONG WITH ITS ASSETS AND LIABILITI ES, IS TRANSFERRED BY ONE OWNER TO ANOTHER, A DEBT SO TRANSFERRED WOULD BE EN TITLED TO THE SAME TREATMENT IN THE HANDS OF THE SUCCESSOR. THE RECOVE RY OF THE DEBT IS A RIGHT TRANSFERRED ALONG WITH THE NUMEROUS OTHER RIG HTS COMPRISING THE SUBJECT OF THE TRANSFER. IF THE LAW PERMITS THE TRA NSFEROR TO TREAT THE WHOLE OR PART OF THE DEBT AS IRRECOVERABLE AND TO C LAIM A DEDUCTION ON THAT ACCOUNT, THE SAME RIGHT SHOULD BE RECOGNIZED I N THE TRANSFEREE. IT IS MERELY AN INCIDENT FLOWING FROM THE TRANSFER OF THE BUSINESS, TOGETHER WITH ITS ASSETS AND LIABILITIES, FROM THE PREVIOUS OWNER TO THE TRANSFEREE. IT IS A RIGHT WHICH SHOULD, ON A PROPER APPRECIATIO N OF ALL THAT IS IMPLIED IN THE TRANSFER OF A BUSINESS, BE REGARDED AS BELON GING TO THE NEW OWNER. IT IS NOT IMPERATIVE THAT THE ASSESSEE REFERRED TO IN SUB-CL. (A) MUST NECESSARILY MEAN THE IDENTICAL ASSESSEE REFERRED TO IN SUB-CL. (B). A SUCCESSOR TO THE PERTINENT INTEREST OF A PREVIOUS A SSESSEE WOULD BE COVERED WITHIN THE TERMS OF SUB- CI. (B). THE SUCCE SSOR ASSESSEE, IN EFFECT, STEPS INTO THE SHOES OF HIS PREDECESSOR. UNLESS THE LANGUAGE OF THE STATUTE PLAINLY AND CLEA RLY COMPELS A CONSTRUCTION TO THE CONTRARY, THE NORMAL RULE OF TH E LAW SHOULD BE GIVEN ITS PROPER PLAY. 20 THE ASSESSEE HAD SPENT A SUM OF RS.6,880 AS LEGAL E XPENSES IN CONNECTION WITH AN APPEAL FILED IN THE SUPREME COUR T ARISING OUT OF A SUIT WHICH WAS FILED BY THE PREDECESSOR TO RECOVER AN AMOUNT DUE FROM THE CENTRAL GOVERNMENT AND CONTINUED BY THE ASSESSE E ON TAKING OVER THE ASSETS AND LIABILITIES OF THE PREDECESSOR. HELD, THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCTI ON OF THE SUM OF RS. 6,880 SPENT BY IT TOWARDS LEGAL EXPENSES. DECISION OF THE ANDHRA PRADESH HIGH COURT IN CIT VS . T. VEERABHADRA RAO, K. KOTESWARA RAO & CO. (1976)102 ITR 604 (AP) AFFIRMED. 33. IN THE CASE OF ANIL ENGINEERING, THE TRIBUNAL FOLLOWED THE JUDGMENT OF HONBLE SUPREME COURT REFERRED ABOVE AN D HELD THAT THE TRANSFEREE OF THE BUSINESS SHOULD BE ELIGIBLE TO CL AIM THE DEDUCTION IN RESPECT OF THE LIABILITY TAKEN OVER FROM THE TRANSF EROR FOR WHICH THE PAYMENT WAS MADE BY THE TRANSFEREE SUBSEQUENTLY. 34. AS THE FINDINGS OF THE FIRST APPELLATE AUTHORI TY ARE IN LINE WITH THE PROPOSITION LAID DOWN BY THE HONBLE SUPRE ME COURT IN THE CASE OF T. VEERBHADRA RAO K. KOTESWARA RAO & CO. (SUPRA) , WE UPHOLD THE SAME AND DISMISS GROUND NO. 2 OF THE REVENUE. 35. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED AND THE APPEAL OF THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED ON THIS 4 TH DAY OF JUNE, 2010. SD/- SD/- (D. MANMOHAN) (J. SUDHAKAR REDDY) VICE PRESIDENT. ACCOUNTANT MEMBER. MUMBAI, DATED : 4 TH JUNE, 2010. WAKODE 21 COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, B-BENCH. (TRUE COPY) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI BENCHES, MUMBAI.