VALIANT ORGANICS P.LTD, MUMBAI V. ACIT 15(3), MUMBAI

ITA 5709/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88664 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2006-2007
• Appeal Filed On: 10-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: AJAY R SINGH; SHIVARAM
• Keywords: Depreciation; Valuation report; Capital expenditure
• Section: 32

Judgement Text

, , ,, , INCOME TAX APPELLATE TRIBUNAL,MUMB AI - F BENCH , !' , ! BEFORE S/SH. I P BANSAL,JUDICIAL ME MBER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.5608/MUM/2012, # # # # $ $ $ $ / ASSESSMENT YEAR-2006-07 ACIT 10(3), R.NO. 451, 4TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 # VS M/S VALIANT ORGANICS PVT. LTD. 109, UDYOG KSHETRA, 1ST FLOOR, MULUND-GOREGAON LINK ROAD, MULUND(W), MUMBAI-400080 PAN:AACCV0024A ( %& / ASSESSEE) ( '(%& / RESPONDENT) /. ITA NO.5709/MUM/2012, # # # # $ $ $ $ / ASSESSMENT YEAR-2006-07 M/S VALIANT ORGANICS PVT. LTD. 109, UDYOG KSHETRA, 1ST FLOOR, MULUND-GOREGAON LINK ROAD, MULUND(W), MUMBAI-400080 PAN:AACCV0024A # VS ACIT 15(3), MATRU MANDIR, NANA CHOWK, OPP. BHATIA HOSPITAL, TARDEO ROAD, MUMBAI-400034 ( %& / ASSESSEE) ( '(%& / RESPONDENT) ) * ! / REVENUE BY :SHRI PAWAN KUMAR BEERLA # +, # +, # +, # +, * * * * ! !! ! /ASSESSEE BY :SHRI SHIVARAM & AJAY R. SINGH # # # # ) )) ) ,- ,- ,- ,- / DATE OF HEARING :24 - 03 -2015 ./$ ) ,- / DATE OF PRONOUNCEMENT :24 -03-2015 # # # # , 1961 ) )) ) 254(1) ! !! ! ,0, ,0, ,0, ,0, !1 !1 !1 !1 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM ! ! ! ! !' !' !' !' ! !! ! # # # # : CHALLENGING THE ORDER DATED 01.06.12 OF THE CIT(A)- 26, MUMBAI, THE ASSESSEE AND THE ASSESSING OFFICER (AO) HAVE FILED CROSS-APPEALS RAISING VARIO US GROUNDS OF APPEAL FOR THE ABOVE MENTIONED ASSESSMENT YEAR (AY.).THE ASSESSEE HAS FILED FOLLOW ING GROUNDS OF APPEAL: ITA/5709/MUM/2012: L. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING DISAL LOWANCE OF DEPRECIATION ON GOODWILL CLAIMED AT RS.25,00,000/- ON THE GROUND THAT GOODWILL IS NO T A DEPRECIABLE ASSET. A. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE GOODWILL WOULD FALL UNDER THE EXPRESSION 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATU RE' IN CLAUSE (B) OF EXPLANATION 3 OF SECTION 32(1) BY THE VIRTUE OF PRINCIPLE OF EJUSDEM GENERIS . B. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE GOODWILL WAS ACQUIRED BY YOUR APPELLANT AS PER MUTUAL AGREEMENT AND VALUATION OF GOODWILL ARE DULY SUPPORTED BY VALUATION REPORT GIVEN BY APPROVED VALUERS. 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT ALL EXPENSES DEBITED TO REPAIRS & MAINTENANCE ARE THE EXPENSES THAT ARE INCURRED FOR DAY TO DAY R UNNING OF BUSINESS AND ERRED IN CONFIRMING THE TREATMENT OF REPAIRS & MAINTENANCE EXPENSES AMOUNTI NG TO RS.33,31,276/- AS CAPITAL EXPENDITURE. 3. YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER , MODIFY OR DELETE ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. FOLLOWING ARE THE GROUNDS FILED BY THE AO: 2 ITA NOS. 5608 & 5709/MUM/12 M/S VALIANT ORGANICS PV T. LTD. ITA/5608/MUM/2012: 'ON THE FACTS & IN CIRCUMSTANCES OF THE CASE THE LD . CIT(A) ERRED IN HOLDING THAT THE DEPRECIATION CLAIMED BY THE ASSESSEE OF RS.37,50,00 0/- ON TECHNICAL KNOW HOW OF RS.1,50,00,000/- IS CORRECT WITHOUT APPRECIATING TH E FACT THAT HIS PREDECESSOR VIDE HIS ORDER DATED 10/09/2009 HAS MADE ENHANCEMENT TO THE TOTAL INCOME AFTER FINDING THE FACT THAT NO ACTUAL ACQUISITION OF KNOW HOW WAS MADE BY THE ASSESSEE & HENCE WAS NOT ELIGIBLE FOR ANY DEPRECIATION ON THE SAME.' BRIEF FACTS: 2. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MANUFAC TURING OF CHEMICALS AND TRADING ACTIVITIES, FILED ITS RETURN OF INCOME ON 22.10.200 6, DECLARING TOTAL INCOME AT RS. 63,46,752/-THE AO COMPLETED THE ASSESSMENT ON 13.03.2008,U/S.143(3 ) OF THE ACT,DETERMINING THE INCOME OF THE ASSESSEE AT RS. 1.83 CRORES.AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED AN APEPAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA), WHO NOT ONLY DISMISSED THE APPEAL BUT ALSO ENHANCED THE INCOME OF THE ASSESSEE IN RESPECT OF D ISALLOWANCE OF DEPRECIATION AND TECHNICAL KNOWHOW.VIDE ITS ORDER,DATED 21.05.2010,THE TRIBUNA L SET-ASIDE THE ORDER OF THE FAA ON THE GROUND THAT THE ASSESSEE WAS DENIED THE OPPORTUNITY OF EFFECTIVE HEARING. ACCORDINGLY, THE FAA RE-HEARD THE MATTER.THE ASSESSEE,VIDE ITS LETTER DA TED 03.11.11,MADE WRITTEN SUBMISSION INCLUDING THE EVIDENCES SUBMITTED BY IT BEFORE THE TRIBUNAL. THE FAA FORWARDED THE SUBMISSIONS TO THE AO TO PROVIDE AN OPPORTUNITY TO EXAMINE THOSE ADDIT IONAL EVIDENCES.BUT,HE DID NOT RECEIVE ANY REPORT FROM THE AO TILL 05.01.2012. HE AGAIN SENT A REMINDER ON 09.01.2012 TO THE AO,GIVING HIM FURTHER OPPORTUNITY TO SUBMIT THE REPORT BY 30. 10.2010.AS PER THE FAA,THE AO DID NOT SUBMIT ANY REPORT TILL THE END OF JANUARY 2012.HE D ECIDED THE APPEAL ON THE BASIS OF AVAILABLE MATERIAL. 3. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF DEP RECIATION OF GOODWILL, AMOUNTING TO RS. 25 LAKHS.DURING THE ASSESSMENT PROCEEDINGS,THE AO MADE A DISALLOWANCE WITH REGARD TO DEPRECIATION CLAIMED ON GOODWILL AT RS. 25 LAKHS. W HILE MAKING THE DISALLOWANCE,HE OBSERVED THAT GOODWILL WAS NOT A DEPRECIABLE ASSET,THAT IT D ID NOT FORM PART OF THE APPENDIX-I TO RULE 5 TO THE INCOME-TAX RULES, 1962. THE ASSESSEE MADE DETAI LED SUBMISSION BEFORE THE FAA AND RELIED UPON FIVE CASES,INCLUDING THE CASE OF HINDUSTAN COC A-COLA BEVERAGES PVT. LTD. (331 ITR 192 OF DELHI HIGH COURT),IN THIS REGARD. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE,TH E FAA HELD THAT THE RELIANCE PLACED BY THE ASSESSEE ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT WAS MISPLACED, THAT THE ISSUE OF GOODWILL WAS NOT BEFORE THE HONBLE COURT,THAT SECT ION 32 OF THE ACT, DEALING WITH THE ALLOWABILI -TY OF DEPRECIATION WAS QUITE EXHAUSTIVE,THAT IT IN CLUDED TECHNICAL KNOWHOW PATENTS, COPYRIGHT TRADEMARKS, LICENSES, ETC., THAT IT DID NOT INCLUDE GOODWILL AT ALL, THAT THE NATURE OF GOODWILL ALSO DID NOT FIT INTO THE ITEMS WHICH HAD BEEN DELIBERAT ELY KEPT IN SECTION 32(1)(II). FINALLY, ENDORSING THE VIEW OF THE AO,THE FAA CONFIRMED THE ADDITION. 4. DURING THE COURSE OF HEARING BEFORE US, AUTHORISED REPRESENTATIVE (AR) SUBMITTED THAT THE GOODWILL WAS REFLECTED IN THE BALANCE-SHEET OF THE COMPANY,THAT THE VALUATION OF GOODWILL WAS DONE BY AN AUTHORISED REGISTERED VALUER,THAT THE VA LUATION REPORT WAS SUBMITTED TO THE FAA. HE RELIED UPON THE CASE OF SMIFS SECURITIES LTD.(348 I TR 302).DR SUPPORTED THE ORDER OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ISSUE OF ALLOWING DEPRECIATION ON GOODWILL HAS BEEN FINAL LY DECIDED BY THE HONBLE APEX COURT IN THE CASE OF SMIFS SECURITIES LTD.(SUPRA). IN THAT MATTE R THE HONBLE COURT HAS HELD AS UNDER: 3 ITA NOS. 5608 & 5709/MUM/12 M/S VALIANT ORGANICS PV T. LTD. A READING OF THE WORDS ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 TO SECTION 32(1) INDICATES THAT GO ODWILL WOULD FALL UNDER THE EXPRESSION. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY W HILE INTERPRETING THE EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). GOODWILL IS AN ASSET UND ER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. RESPECTFULLY,FOLLOWING THE ABOVE JUDGMENTS, WE DECI DE GROUND NO.1 IN FAVOUR OF THE ASSESSEE. 6. GROUND NO.2 IS ABOUT REPAIR AND MAINTENANCE EXPENSE S.DURING THE ASSESSMENT PROCEEDING, THE AO FOUND THAT THE ASSESSEE HAD CLAIMED FOLLOWING EX PENDITURE UNDER THE HEAD REPAIR AND MAINTENANCE EXPENSES. S.NO. PARTY'S NAME DATE NET AMOUNT (RS.) 1 ADINATH ENTERPRISES 13.04.05 68,788 2 ADINATH ENTERPRISES 23.04.05 40,848 3 SHREE KRISHAN ENGG. 30.06.05 3,11,521 4 FINE PACK STRUCTURES PVT. LTD. 30.06.05 9,97,080 5 DILIP STEELS (INDIA) 16.07.05 1,62,968 6 SHREE KRISHAN ENGG. 17.10.05 87,991 7 LEELA TUBES PVT. LTD. 01.01.06 7,31,380 8 NAVNIDHI STEEL & ENG. CO. 13.01.06 6,97,312 9 SUZLER INDIA LTD. 14.01.06 1,48,109 10 SUZLER INDIA LTD. 28.02.06 3,17,035 TOTAL 35,63,032 BEFORE HIM, IT WAS STATED THAT THE EXPENSES UNDER T HE HEAD REPAIRS OF PLANT AND MACHINERY WERE IN THE NATURE OF CURRENT REPAIRS, THAT THE BUSINESS OF THE ASSESSEE WAS OF SUCH NATURE THAT THE ITEMS WOULD GET CORRODED, THAT REPLACEMENT OF THOSE PARTS WAS NECESSARY, THAT NO NEW ASSET CAME INTO EXISTENCE, NOR WOULD THOSE ITEMS FUNCTIONS ON ITS O WN AS AN INDEPENDENT ASSET. HOWEVER, THE AO TREATED THE EXPENDITURE IN QUESTION AS CAPITAL EXPE NDITURE. THE ALLOWED DEPRECIATION ON THE VARIOUS ITEMS @ 15%. 7. AGGRIEVED BY THE ORDER OF THE AO, THAT ASSESSEE PRE FERRED AN APPEAL BEFORE THE FAA. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER, THE FAA HELD THAT A PERUSAL OF VARIOUS ITEMS INDICATED THAT THE ASSESSEE HAD MA DE MAJOR PURCHASES ON VARIOUS ITEMS LIKE HEAT EXCHANGER, NEW TUBE/SHEETS, FLANGE, ACCESS PIPES AN D ACCESS HR CE SHEETS. THE FAA HELD THAT EXPENDITURE INCURRED ON PURCHASE OF CONSUMABLES (RS .68,788/-) AND FOR REPAIRING OF TRAYS(RS. 1.62 LAKHS),THAT THE ASSESSEE HAD NOT BEEN ABLE TO GIVE ANY CONVINCING REASON AS TO HOW THE OTHER ADDITIONS/REPLACEMENTS HAD NOT RESULTED IN BENEFIT OF ENDURING NATURE. ACCORDINGLY, HE HELD THAT EXCEPT FOR THE TWO ITEMS AT SERIAL NO.1 AND 5 OF TH E PAPER REST OF THE EXPENDITURE WAS OF CAPITAL NATURE. 8. BEFORE US,THE AR CONTENDED THAT THE EXPENDITURE WAS OF REVENUE NATURE, THAT IT WAS INCURRED FOR RUNNING THE DAY TO DAY BUSINESS OF THE ASSESSEE, ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING 4 ITA NOS. 5608 & 5709/MUM/12 M/S VALIANT ORGANICS PV T. LTD. CHEMICALS,THAT DUE TO CORROSION IT HAD TO REPLACE T HE ITEMS.THE DR ARGUED THAT DETAILS FILED BY THE ASSESSEE DID NOT PROVE THAT EXPENDITURE INCURRED WA S OF REVENUE NATURE,THAT THE FAA HAD ALLOWED PARTIAL RELIEF TO THE ASSESSEE,THAT DEPRECIATION WA S ALSO ALLOWED BY THE AO AND BY THE FAA. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD NOT FILED NATURE OF THE EXPENSES AND T HE MANNER IN WHICH THE ITEMS PURCHASED DURING THE YEARS WERE USED.IT WAS FAIRLY ADMITTED B Y THE AR THAT ASSESSEE HAD FILED GENERAL EXPLANATION ONLY AND SPECIFIC EXPLANATION BEFORE TH E AO AND THE FAA. WE FIND THAT VOUCHERS FOR LABOUR JOB WAS NOT MADE AVAILABLE TO ANY OF THE AUT HORITIES TO ARRIVE AT THE NATURE OF THE EXPENDITURE.THUS,THERE IS TOTAL LACK OF POSITIVE EV IDENCE PROVING THAT EXPENDITURE WAS OF REVENUE NATURE.CONSIDERING THE NON-AVAILABILITY OF DETAILS AND FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT THE ORDER OF THE FAA,PARTLY ALL OWING RELIEF TO THE ASSESEE,DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.HENCE,CONFIRMING THE SAME, WE D ECIDE GROUND NO.2 AGAINST THE ASSESSEE. ITA NO. 5709/MUM/12 10. THE SOLITARY GROUND OF APPEAL,RAISED BY THE AO IS A BOUT DEPRECIATION CLAIMED BY THE ASSESSEE AMOUNTING TO RS. 73.50 LAKHS ON TECHNICAL KNOWHOW O F RS. 1.50 CRORES.DURING THE ASSESSMENT PROCEEDINGS, THE AO HAD NOT MADE ANY ADDITION ABOUT THE DEPRECIATION CLAIMED ON TECHNICAL KNOWHOW. HOWEVER, THE FAA ISSUED AN ENHANCEMENT NOT ICE IN THIS REGARD IN THE FIRST ROUND OF APPELLATE PROCEEDINGS AND DISALLOWED THE CLAIM,MADE BY THE ASSESSEE,OF RS. 30.75 LAKHS. AS STATED EARLIER THE TRIBUNAL SET-ASIDE THE MATTER TO THE FILE OF THE FAA FOR FRESH ADJUDICATION.IN THE SECOND ROUND OF APPEAL,THE FAA HELD THAT DEPRECIATI ON ON KNOWHOW WAS SPECIFICALLY ALLOWABLE UNDER THE PROVISIONS OF SECTION 32(1)(II) OF THE AC T, THAT NO ENHANCEMENT WAS REQUIRED, THAT THE APPEAL FILED BY THE ASSESSEE HAD TO BE ALLOWED. 11. BEFORE US, THE DR ARGUED THAT DURING THE COURSE OF APPELLATE PROCEEDINGS OF FIRST ROUND THE THEN FAA HAD ENHANCED THE INCOME OF THE ASSESSEE.AR CONTENDED THAT AO HIMSELF HAD NOT MADE ANY DISALLOWANCE,THAT VALUATION OF THE TECHNICAL KN OWHOW WAS PLACED BEFORE THE FAA, THAT AS PER THE PROVISIONS OF SECTION 32((1)(II) ASESSEE WA S ENTITLED FOR DEPRECIATION. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT WHILE COMPLETING THE ASSESSMENT THE AO HAD NOT DISALLOWED DEPRECIATION ON TECHNICAL KNOWHOW THOUGH HE HAD DISALLOWED THE DEPRECIATION ON GOODWI LL. THE ENHANCEMENT MADE BY THE FAA WAS SET-ASIDE BY THE TRIBUNAL FOR FRESH ADJUDICATION AN D THE FAA HAS CLEARLY HELD THAT THE ASSESSEE WAS ENTITLED FOR DEPRECIATION.AT THE CURSORY GLANCE AT THE PROVISIONS OF SECTION 32(1)(II) OF THE ACT CLEARLY SHOW THAT DEPRECIATION HAS TO BE ALLOWE D FOR TECHNICAL KNOWHOW. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION, THAT THE ORDE R OF THE FAA DOES NOT REQUIRE ANY INTERFERENCE FROM OUR SIDE. UPHOLDING HIS ORDER, WE DECIDE THE E FFECTIVE GROUND OF APPEAL AGAINST THE AO. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PA RTLY ALLOWED AND THE APPEAL OF THE AO STANDS DISMISSED. ,2 # +, 3 4 ) 0 1,2 5 ) , 67 8 # +, - 3 4 ) 0 # 5 ) , 67 . ORDER PRONOUNCED IN THE OPEN COURT ON 24TH,MARCH,20 15. !1 ) ./$ ! 9 :# 24, ; ,2015 / ) 0 < 5 ITA NOS. 5608 & 5709/MUM/12 M/S VALIANT ORGANICS PV T. LTD. SD/- SD/- ( /I P BANSAL) ( !' / RAJENDRA) / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER / MUMBAI, :# /DATE:24.03.2015 SK !1 !1 !1 !1 ) )) ) ',= ',= ',= ',= >!=$, >!=$, >!=$, >!=$, / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / %& 2. RESPONDENT / '(%& 3. THE CONCERNED CIT(A)/ ? @ , 4. THE CONCERNED CIT / ? @ 5. DR F BENCH, ITAT, MUMBAI / =A0 ',# , ,Q ,Q ,Q ,Q , . . . 6. GUARD FILE/ 0 (=, ', //TRUE COPY// !1# / BY ORDER, B / 6 DY./ASST. REGISTRAR , /ITAT, MUMBAI.