BLISS GVS PHARMA LTD, MUMBAI V. ASST CIT RG 8(3), MUMBAI

ITA 7546/MUM/2010

• Counselvise Citation: 754619914 RSA 2010
• Duration Of Justice: 4 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 21-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 03-11-2010
• Court: TRIBUNAL
• Department Lawyers: YOGESH KAMAT SR
• Assessee Lawyers: SUNIL BHANDARI
• Keywords: Depreciation; Business expenditure; Bad and doubtful debts; Valuation report
• Section: 143(3); 37(1)

Judgement Text

IN THE INCO ME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ./I.T.A. NO.7546/M/2010 ( AY: 2007 - 2008 ) BLISS GVS PHARMA LIMITED, 6/29A, UDIT MITTAL INDUSTRIES ESTATE, ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI - 90 / VS. ASST. COMMISSIONER OF INCOME TAX, RANGE 8(3), R.NO.210, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400 020. ./ PAN : AABCB 1382 J ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI SUNIL BHANDARI / RESPONDENT BY : SHRI YOGESH KAMAT, SR. AR / DATE OF HEARING : 21.5 .2015 / DATE OF PRONOUNCEMENT : 19 .6.2015 / O R D E R PER G.S. PANNU, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT (A) - 16, MUMBAI DATED 12.08.2010 FOR THE ASSESSMENT YEAR 2007 - 2008 IN THE MATTER OF ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME TAX ACT 1961 (IN SHORT THE ACT), DATED 23.12.2009. 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF DEPRECIATION ON THE BRANDS AMOUNTING TO RS. 3,27,50,000/ - . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF PROVISION FOR DOUBTFUL ADVANCES OF RS. 16,91,384/ - . 3. BRIEFLY STATED, RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICAL PRODUCTS. ASSESSEE FILED THE RETURN OF INCOME ON 8.11.2007 DECLARING THE TOTAL INCOME OF RS. 5,67,48,990/ - . ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S 143(3) OF THE A CT AND THE ASSESSED INCOME WAS DETERMINED AT RS. 9,27,07,170/ - . IN THE ASSESSMENT, ASSESSING OFFICER MADE 2 CERTAIN DISALLOWANCES I.E., (I) DEPRECIATION ON BRANDS RS. 3,37,50,000/ - ; (II) PRIOR PERIOD EXPENSES AMOUNTING TO RS. 37,145/ - ; (III) DISALLOWANCE OF RS. 3,51,122/ - ON ACCOUNT OF EXPENSES FOR INCREASE IN AUTHORIZED SHARE CAPITAL; (IV) PROVISION FOR DOUBTFUL DEBTS OF RS. 16,19,384 AND (V) AN AMOUNT OF RS. 11,28,530/ - WAS DISALLOWED ON ACCOUNT OF EXCESS CLAIM OF DEDUCTION. AGGRIEVED, ASSESSEE CARRIED TH E MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) CONFIRMED THE DECISION OF THE ASSESSING OFFICER IN RESPECT OF THE DISALLOWANCES ON ACCOUNT OF DEPRECIATION ON BRANDS AMOUNTING TO RS. 3,27, 50,000/ - AND DISALLOWANCE OF PROVISION FOR DOUBTFUL ADVANCES OF RS. 16,91,384/ - AND PARTLY ALLOWED THE APPEAL. AGAIN AGGRIEVED AND DISSATISFIED WITH THE DECISION OF THE CIT (A), ASSESSEE IS IN FURTHER APPEAL BEFORE US BY RAISING THE AFOREMENTIONED GROUNDS OF APPEAL. 4. GROUND NO.1 RELATES TO THE DISALLOWANCE OF DEPRECIATION ON THE BRANDS AMOUNTING TO RS. 3,27,50,000/ - . BRIEFLY STATED, RELEVANT FACTS IN THIS REGARD ARE THAT THE ASSESSEE TOOK OVER THE ASSETS AND LIABILITIES OF GVS LABS (A PROPRIETARY CONCER N), VALUING THE BUSINESS AT RS. 16 CRS, AS ON 1.4.2006 AT THEIR BOOK VALUES, EXCEPT THE BRANDS TRANSFERRED WHICH WERE TAKEN AND VALUED AT RS. 13.10 LAKHS BASED ON THE VALUATION OF THE INDEPENDENT VALUER NAMED M/S. NISSIM & CO. THE DIFFERENCE BETWEEN THE TANGIBLE NET ASSETS AND THE CO NSIDERATIONS PAID TO PROPRIETOR, GVS LABS BY WAY OF ISSUE OF EQUITY SHARES, WAS SHOWN AS GOODWILL AT RS. 13.62 LAKHS AND THE VALUE OF THE BRANDS WAS NOT THERE IN THE BOOKS OF ACCOUNT OF THE GVS LABS. ASSESSEE HAD TAKEN THE VALUE OF BRANDS AT RS. 13.10 CRS AND CLAIMED DEPRECIATION @ 25% ON THE SAME TREATING IT AS AN INTANGIBLE ASSET. FOR SUCH TREATMENT, ASSESSEE RELIED ON THE VALUATION REPORT OF THE AFORESAID INDEPENDENT VALUER M/S. NISSIM & CO. THE AFORESAID VALUE OF BRANDS OF RS. 13.10 LAKHS WERE SHOWN IN THE BOOKS OF ACCOUNT OF THE ASSESSEE A ND THE BALANCE DIFFERENCE OF RS. 13.61 LAKHS WAS RECORDED IN THE BOOKS OF ACCOUNT AS GOODWILL. ON THE BACKGROUND OF THE ABOVE, ASSESSING OFFICER OBSERVED THAT THE BRANDS ARE NOT APPEARING ON THE BOOKS OF ACCOUNT OF GVS LABS AND DOUBTED THE METHODOLOGY O F THE VALUERS, WHO VALUED THE BRANDS AS WELL AS THE BUSINESS OF THE GVS LABS. HE FURTHER OBSERVED THAT THE EXPENSES INCURRED BY GVS LABS WERE ALREADY CLAIMED AS REVENUE. FINALLY, ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE BRAND SHOULD BE TAKEN AS NIL AND THE DIFFERENCE BETWEEN NET 3 ASSET VALUE OF GVS LABS AND CONSIDERATION PAID SHOULD BE CONSIDERED AS GOODWILL. ACCORDINGLY, HE MADE DISALLOWANCE TO THE EXTENT OF RS. 327.50 LAKHS. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APP ELLATE AUTHORITY. \ 5. DURING THE PROCEEDINGS BEFORE THE CIT (A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) UPHELD THE DECISION TAKEN BY THE ASSESSING OFFICER . WHILE CONFIRMING THE DECISION OF THE ASSESSING OFFICER, CIT (A) HELD THAT THE VA LUABLE ASSETS PURCHASED BY THE ASSESSEE CONSTITUTE LICENSES AND NOT BRANDS AS CLAIMED BY THE ASSESSEE. HE FURTHER HELD THAT THE LICENSES ARE INTANGIBLE ASSETS AND NOT ELIGIBLE FOR DEPRECIATION, AND IN THIS REGARD HE RELIED ON THE JUDGMENT OF THE HONBL E JURISDICTIONAL HIGH COURT IN THE CASE OF TECHNO SHARES AND STOCKS LTD [225 CIT 337 (BOM.)]. TO SUPPORT HIS VIEW THAT GOODWILL IS NOT AN INTANGIBLE ASSET U/S 32(1)(II), CIT (A) RELIED ON THE JUDGMENT OF THE HONBLE AHMADABAD HIGH COURT IN THE CASE OF BHA RATHAI J. VYAS VS. ITO [97 ITD 248 (AHD.)]. AGGRIEVED WITH THE SAID DECISION OF THE CIT (A), ASSESSEE IS IN FURTHER APPEAL BEFORE US. 6. DURING THE PROCEEDINGS BEFORE US, A T THE OUTSET, LD REPRESENTATIVE FOR THE ASSESSEE MENTIONED THAT THE FIRST ISSUE RAI SED IN GROUND NO.1 , RELATES TO THE DISALLOWANCE OF DEPRECIATION OF CLAIM ON GOODWILL . IN THIS REGARD, IT IS THE CASE OF THE ASSESSEE THAT GOODWILL BEING AN INTANGIBLE ASSET IS ENTITLED TO DEPRECIATION AND RELIED ON VARIOUS DECISIONS. IN SUPPORT OF HIS CONTENTION, LD REPRESENTATIVE RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD, 348 ITR 302 (SC). FURTHER, HE MENTIONED THAT THE SAID JUDGMENT OF THE APEX COURT WAS NOT AVAILABLE TO THE CIT (A) AT THE RELEVAN T POINT OF TIME. THEREFORE, THE CIT (A) DID NOT GRANT THE DEPRECIATION ON GOODWILL. SINCE, THE ISSUE OF ALLOWING OF DEPRECIATION ON GOODWILL IS NOW REACHED FINALITY AND IN FAVOUR OF THE ASSESSEE. THEREFORE, THE ORDER OF THE CIT (A) IS REQUIRED TO BE REVERSED. 7. ON THE OTHER HAND, LD DR RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 8 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT MATERIAL PLACED BEFORE US. WE HAVE ALSO PERUSED THE CITED J UDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SMIFS SECURITIES LTD (SUPRA). ON HEARING BOTH THE PARTIES ON THE LIMITED ISSUE, WE ARE OF THE OPINION THAT THE ORDER OF THE CIT (A) HAS TO BE REVERSED FOLLOWING THE SAID JUDGMENT OF THE 4 HONBLE APEX COURT IN THE CASE OF SMIFS SECURITIES LTD (SUPRA), WHEREIN IT WAS HELD THAT THE GOODWILL CONSTITUTES AN ASSET UNDER EXPLANATION 3(B ) TO SECTION 32(1) OF THE ACT. RELEVANT PORTION FROM THE SAID SUPREME COURT JUDGMENT READS AS UNDER: 8. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT, 1961 (THE ACT, FOR SHORT). 9. WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: EXPLANATION 3 - FOR THE PURPOSES OF THIS SUB - SECTION, THE EXPRESSIONS ASSET AND BLOCK OF ASSETS SHALL MEAN - (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE; (B) INTANGIBLE ASSETS, BEING KNOW - HOW PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR C OMMERCIAL RIGHTS OF SIMILAR NATURE. EXPLANATION 3 STATES THAT THE EXPRESSION ASSET SHALL 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 GEN ERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. 9. IT IS ALSO PERTINENT TO OB SERVE THAT THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TECHNO SHARES AND STOCKS LTD (SUPRA) , RELIED BY THE CIT (A) HAS SINCE BEEN REVERSED BY THE HONBLE SUPREME COURT VIDE ITS JUDGMENT IN THE CASE OF TECHNO SHARES AND STOCKS LTD. V. CIT REPORTED AT [2010] 327 ITR 323 (SC). 10 . CONSIDERING THE ABOVE SETTLED POSITION OF THE ISSUE, IN OUR CONSIDERED OPINION, THE ASSESSEE IS ENTITLED TO DEPRECIATION. ACCORDINGLY, ON G ROUND NO.1 ASSESSEE SUCCEEDS. 11 . GROUND NO.2 RELATES TO THE DISALLOWANCE O F PROVISION FOR DOUBTFUL ADVANCES AMOUNTING TO RS. 16.91 LAKHS. B RIEFLY STATED, RELEVANT FACTS OF THE CASE ARE THAT IN THE RETURNED INCOME, ASSESSEE MADE A PROVISION FOR DOUBTFUL DEBTS OF RS. 16.91 LAKHS. IN THIS REGARD, ASSESSEE WAS ASKED TO SUBSTANTIAT E THE CLAIM. IN RESPONSE, ASSESSEE STATED THAT AN ADVANCE WAS GIVEN TO A FOREIGN PARTY IN CHINA FOR PURCHASING RAW MATERIAL. ASSESSEE FURTHER SUBMITTED THAT THE AFORESAID PROVISION DOES NOT QUALIFY AS PROVISION FOR DOUBTFUL DEBTS U/S 36(2) OF THE ACT, AND HENCE, IS ALLOWABLE 5 AS EXPENDITURE UNDER SECTION 37(1) AS BUSINESS EXPENDITURE . NOT SATISFIED WITH THE SAID EXPLANATION OF THE ASSESSEE, ASSESSING OFFICER HELD THAT THE PROVISIONS FOR DOUBTFUL ADVANCES IS NOT ALLOWABLE ITEM UNDER SECTION 36 OR 37, A ND HENCE, THE CLAIM OF PROVISION ON DOUBTFUL TRADE ADVANCES TO THE TUNE OF RS. 16,91,384/ - WAS DISALLOWED AND ADDED TO THE RETURNED INCOME OF THE ASSESSEE. AGGRIEVED WITH THE SAID DECISION OF THE ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER IN APPEAL BE FORE THE FIRST APPELLATE AUTHORITY. 12 . DURING THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) DISMISSED THE APPEAL VIDE PARA 4.1 OF THE IMPUGNED ORDER. AGAIN AGGRIEVED WITH THE DECISION OF THE CIT (A), ASSESSEE IS IN FURTHER APPEAL BEFORE US. 13 . DURING THE PROCEEDINGS BEFORE US, LD REPRESENTATIVE FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. IT WAS HIS CONTENTION THAT THE CLAIM IS NOT A PROVISION FOR BAD D EBTS BUT A PROVISION ON DOUBTFUL TRADE, THEREFORE, THE SAME IS ALLOWABLE. IN THIS REGARD, HE FURTHER SUBMITTED THAT THE SAID ADVANCE WAS RECOVERED IN THE LATER YEARS AND OFFERED TO TAX. AT THE TIME OF HEARING, IT WAS ALTERNATIVELY SUBMITTED BEFORE US THAT IN CASE, CLAIM OF THE ASSESSEE IS NOT ALLOWED IN ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER MAY BE DIRECTED TO GIVE RELIEF IN THE YEAR OF RECOVERY OF SAID DOUBTFUL ADVANCE SO THAT THERE IS NO DOUBLE TAXATION. 14 . ON THE OTHER HAND, LD DR APPEARING FOR THE REVENUE RELIED ON THE ORDER OF THE ASSESSING OFFICER. 15 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT MATERIAL PLACED BEFORE US. ON PERUSAL OF THE ORDER OF THE CIT (A) IN GE NERAL AND PARA 4.1 OF HIS ORDER IN PARTICULAR, WE FIND THE SAME IS RELEVANT IN THIS REGARD. IN OUR CONSIDERED OPINION, THE CONTENTION OF THE ASSESSEE THAT THE PROVISION FOR DOUBTFUL DEBTS QUALIFIES U/S 37(1) OF THE ACT AND THE SAID PROVISION IS NOT A PROV ISION FOR BAD DEBTS BUT A PROVISION ON DOUBTFUL TRADE IS NOT ACCEPTABLE . CONSIDERING THE SAME, IN OUR VIEW, THE DECISION TAKEN BY THE CIT (A) IS 6 FAIR AND REASONABLE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, ON GROUND NO.2, ASSESSEE FAILS. 16 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUN CED IN THE OPEN COURT ON 19 TH JUNE, 2015. SD/ - SD/ - ( SANJAY GARG ) ( G.S. PANNU ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 19 .6 .2015 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI