2011 (6) TMI 403 - AT - Income Tax

Tribunal Decision: Full Depreciation, Interest Disallowed, Non-Compete Fees, Miscellaneous Expenses Allowed

The Tribunal directed the AO to allow full depreciation for six months on assets acquired from HLL, rejecting the apportionment based on usage days. The ... Proportionate depreciation for six months - Amalgamation - appellant has used the assets acquired from Hindustan lever Limited (HLL) only for one month - Held that:- Assets have been acquired and used from 29-8-2003 in this case, therefore, proportion adopted by the assessee as fifty fifty seems to be correct. Though this proportion can be changed 1/7 to amalgamating company and 6/7 to amalgamated company because the amalgamating company has used the assets only for one month out of the total usage of seven months. However, this apportionment has to be done out of the total depreciation which was allowable at 100% in view of the second proviso. Thus assessee i.e. amalgamating company has rightly claimed the depreciation for the first six months because only depreciation of six months has been claimed in the case of amalgamated company. Provision for trade discount disallowed - year of allowability - Held that:- In the documents filed a note on temporary price reduction process, flow chart and internal working of the provision have been filed. Some sample documents prepared by the sales department and sample of temporary price reduction from bakery fats division submitted by the distributors, as well as sample price circulars have been filed. Though these documents relate to later year, but it was mentioned that in earlier years also similar issue was involved and the allowability can be considered on the basis of these documents for the later year - remand the issue to the file of the AO for re-examination of the issue in the light of the additional documents filed vide letter dated 16th May, 2011. Proportionate interest expenses out of expenses incurred on establishment - Dis-allowance under section 14A - Held that:- If there were funds available, both interest free and interest bearing, then a presumption would arise that interest free funds have been generated for investments, interest could not have been disallowed u/s.14A as decided in Reliance Utilities & Powers Ltd.(2009 (1) TMI 4 - HIGH COURT BOMBAY). In any case, it has already been held in the case of Godrej & Boyce Mfg. Co.Ltd. v. Dy. CIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] that Rule 8D is not of retrospective application and cannot be applied before A.Y 2007-08. Therefore, interest could not have been disallowed u/s.14A and, accordingly, we delete the addition on account of interest. Non compete fees - Capital or Revenue - Held that:- Business expenditure incurred on warding off of competition in business from a rival dealer would constitute a capital expenditure and is not allowable business expenditure, issue decided in favour of the Revenue [Tecumseh India (P.) Ltd. [2010 (7) TMI 685 - ITAT, DELHI] Issues Involved:1. Proportionate Depreciation on Assets Acquired from Hindustan Lever Limited (HLL)2. Disallowance of Provision for Trade Discount3. Disallowance of Proportionate Interest Expenses under Section 14A4. Treatment of Non-Compete Fees as Revenue Expenditure5. Disallowance of Various Miscellaneous Expenses6. Depreciation on Effluent Treatment Plants and Boilers7. Depreciation on Assets Taken Over from HLLIssue-wise Detailed Analysis:1. Proportionate Depreciation on Assets Acquired from HLL:The assessee purchased the edible oils and bakery fats division of HLL for Rs. 93.07 crores and claimed depreciation for six months. The AO allowed depreciation only for the period the assets were used by the assessee (33 days), citing the fifth proviso to section 32(1). The CIT(A) upheld this decision, stating that depreciation should be apportioned between the amalgamating and amalgamated companies based on usage days. The Tribunal found that the assets were used for more than 180 days, entitling the assessee to full depreciation as per the second proviso to section 32(1). The Tribunal directed the AO to allow the depreciation for six months.2. Disallowance of Provision for Trade Discount:The assessee claimed a provision for trade discount of Rs. 1,14,64,800, which the AO disallowed due to lack of detailed evidence. The CIT(A) upheld the disallowance. The Tribunal admitted additional evidence provided by the assessee, which was previously unavailable due to records being destroyed in floods. The Tribunal remanded the issue back to the AO for re-examination in light of the new evidence.3. Disallowance of Proportionate Interest Expenses under Section 14A:The AO disallowed Rs. 12,20,171 as interest expenses related to exempt income. The CIT(A) confirmed this disallowance. The Tribunal found that the assessee had sufficient accumulated profits to cover the investments in mutual funds, following the principle established in CIT v. Reliance Utilities & Powers Ltd. The Tribunal deleted the disallowance of interest expenses.4. Treatment of Non-Compete Fees as Revenue Expenditure:The AO disallowed the non-compete fee of Rs. 9,69,833, treating it as capital expenditure. The CIT(A) upheld this decision. The assessee conceded that the issue was covered by the Special Bench decision in Tecumseh India (P) Ltd., which held non-compete fees as capital expenditure. The Tribunal confirmed the CIT(A)'s order, disallowing the non-compete fee as business expenditure.5. Disallowance of Various Miscellaneous Expenses:The AO disallowed Rs. 72,84,308 under various heads due to lack of details. The CIT(A) deleted the disallowance, noting that the assessee had provided necessary details in letters dated 13th September, 2003, and 24th November, 2003. The Tribunal upheld the CIT(A)'s decision, finding no justification for the AO's disallowance.6. Depreciation on Effluent Treatment Plants and Boilers:The AO restricted depreciation on Effluent Treatment Plants to 25% due to insufficient details. The CIT(A) allowed full depreciation, noting that the plants were taken over from HLL and Prestige Foods and that relevant details were provided. The Tribunal confirmed the CIT(A)'s decision, allowing full depreciation.7. Depreciation on Assets Taken Over from HLL:The AO restricted depreciation to 25% on assets taken over from HLL, arguing that no new machinery was purchased. The CIT(A) allowed full depreciation. The Tribunal clarified that the restriction under clause (iia) of section 32 applies only to additional depreciation and not to normal depreciation. The Tribunal confirmed the CIT(A)'s decision, allowing full depreciation.Separate Judgments:- The Tribunal delivered a separate judgment for the assessee's appeal (ITA No. 1779/Mum./2008), partly allowing the appeal.- In the revenue's appeal (ITA No. 384/M/09), the Tribunal partly allowed the appeal, addressing various grounds raised by the revenue.The detailed analysis preserves the legal terminology and significant phrases from the original text, ensuring a comprehensive understanding of the judgment.