2012 (8) TMI 276 - AT - Income Tax

ITAT upholds disallowance of goodwill depreciation & liability claim under section 41

The ITAT dismissed both appeals, upholding the disallowance of depreciation on goodwill and the disallowance of the liability claim under section 41 for ... Disallowance of depreciation on goodwill - scheme of amalgamation - Held that:- As the assets and liabilities have not been valued in this case the consideration in the form of cancellation of investments cannot be said to have been made for purchase of assets at book value, when the fair value of each asset and liability is much higher - As the primary asset was land and a building thereon thus, the market value of this asset should have been considered. If the assessee had paid more than the fair market value of assets minus the fair market value of liabilities, then the company would have a case to claim that certain amounts were incurred for goodwill. In the absence of such an exercise there is no goodwill in the nature of commercial rights purchase by the assessee. This is only a book entry and it is only another way of disclosing the intrinsic value of the fixed asset of the company - the very purchase of goodwill is not proved by the assessee - Disallowance of depreciation is thus warranted - against assessee. Disallowance of claim of cessation of liability - Held that:- Provisions of sec. 41(1) will apply when the liability provided has ceased and assessee gets benefit whereas in this case in the amounts were provided as a liability to pay rent in respective assessment years as a ‘provision’ and the assessee has not paid the amounts due to disputes with the land owner and it was informed that no deduction was claimed/allowed in the respective years. Therefore, question of addition u/s 41 does not arise - as the amount has to be considered in AY 2008-09 as the relevant date on which the liability will crystallized and the liability does not pertain to the year under consideration - against assessee. Issues Involved:1. Disallowance of depreciation on goodwill.2. Disallowance of liability under section 41 of the Income Tax Act.Detailed Analysis:1. Disallowance of Depreciation on Goodwill:In ITA No.1040/M/2010, the primary issue was the disallowance of depreciation on goodwill. The assessee claimed depreciation at 25%, amounting to Rs. 79,81,031/- on goodwill valued at Rs. 3,19,24,125/-. The Ld CIT (A) previously opined that the goodwill in the books could not be classified as an intangible asset, thus making the assessee ineligible for depreciation. The ITAT upheld this view, referencing a detailed discussion in ITA No. 3279/Mum./2008.The facts highlighted included the amalgamation of Casablancas Gannon Engineering Ltd. (CGEL), a wholly-owned subsidiary, with the assessee. The investment in CGEL was Rs. 7,81,72,000, and the difference between the value of assets and liabilities taken over was transferred as goodwill, with depreciation claimed. The ITAT noted that CGEL's primary asset was land and that it had no intangible assets. The amalgamation scheme approved by the High Court did not specifically address the valuation of goodwill.The ITAT emphasized that under the 'Purchase' method per AS/14, assets and liabilities should be valued at fair values, not book values. The market value of CGEL's assets was not considered, and the ITAT concluded that the goodwill claimed was merely a book entry, not a commercial right. The High Court's approval of the amalgamation scheme did not validate the goodwill claim. Consequently, the ITAT confirmed the CIT (A)'s order, rejecting the depreciation claim on goodwill.In ITA No.3834/M/2011, the same issue was raised and dismissed following the findings in ITA No.1040/M/2010.2. Disallowance of Liability under Section 41 of the Income Tax Act:In ITA No.3834/M/2011, the second issue was the disallowance of liability under section 41. The assessee had provided for rent payable to UCO Bank for a Delhi office, totaling Rs. 32,03,460/- up to FY 2000-2001. This provision was not allowed in respective years as it was only a provision. The assessee claimed this amount as a deduction under 'cessation of liability' following a compromise order by the Delhi High Court dated 21.5.2007.The Assessing Officer disallowed the amount, citing a lack of explanation, and the CIT (A) confirmed this disallowance. The ITAT clarified that section 41(1) applies when a liability ceases and the assessee benefits, typically when previously allowed expenditures are no longer payable. In this case, the provisions were not allowed as expenditures in earlier years.The ITAT noted that the liability crystallized in FY 2007-08 (AY 2008-09) per the High Court's order. Thus, the claim should be considered in AY 2008-09, not AY 2007-08. The ITAT upheld the CIT (A)'s direction to consider the claim in AY 2008-09, as the liability did not pertain to the year under consideration. The Revenue did not appeal this finding. Therefore, the ITAT confirmed the disallowance for AY 2007-08.Conclusion:Both appeals were dismissed, with the ITAT upholding the disallowance of depreciation on goodwill and the disallowance of the liability claim under section 41 for the year under consideration.