2014 (5) TMI 83 - AT - Income Tax

ITAT upholds goodwill depreciation deletion, disallows Section 14A, allows prior period expenses deduction

ACIT, Circle 2(1), New Delhi Versus M/s Bharti Teletech Ltd, Beetel Teletech Ltd.

The ITAT dismissed the revenue's appeal challenging the deletion of depreciation on goodwill, following the precedent set by the Supreme Court. Regarding ... Deletion on account of depreciation of goodwill – Held that:- Since the issue about allowability of depreciation on goodwill as claimed by the assessee has been allowed by ITAT in a series of earlier years judgment and is also covered in CIT vs. Smifs Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] – Decided against Revenue. Disallowance of expenses u/s 14A of the Act – Held that:- AO has nowhere commented about this working being unsatisfactory or questionable - The addition has been made by summarily applying Rule 8D which was not applicable in this year - Thus, the assessee’s working remains unchallenged in effective terms - on merits also CIT(A) has merely made some further ad hoc estimate out of director’s remuneration, administrative expense and other heads - Thus, a partial addition has been sustained not on any cogent reasons but on ad hoc estimate - the addition deserves to be deleted on both counts i.e. non recording of satisfaction and on merits also - the partial addition u/s 14A retained by the CIT(A) is deleted. Leave encashment expenses – Held that:- There was merit in the contention of the assessee that the leave encashment though pertaining to earlier year is allowable on actual payment basis in the year of payment i.e. assessment year in question - It has not been disputed that assessee has not claimed the expenditure in earlier year - the assessee is eligible for deduction of leave encashment payment u/s 43B – Decided in favour of Assessee. Issues Involved:1. Allowability of depreciation on goodwill.2. Disallowance under Section 14A.3. Treatment of prior period expenses.Analysis:Issue 1: Allowability of Depreciation on GoodwillThe appeals were filed by both the assessee and the revenue against the order of CIT(A)-V, New Delhi for A.Y. 2006-07. The revenue's appeal challenged the deletion of the addition made on account of depreciation on goodwill. The ITAT Delhi Bench considered the issue based on earlier judgments and the decision of the Hon'ble Supreme Court in CIT vs. Smifs Securities Ltd. The ITAT dismissed the revenue's appeal, following the precedent set by the Supreme Court and previous decisions in favor of the assessee.Issue 2: Disallowance under Section 14AIn the assessee's appeal, the contention was regarding the disallowance under Section 14A. The assessee argued that Rule 8D was not applicable for that year and provided a detailed working of indirect expenses for disallowance. The AO had not challenged the working provided by the assessee, yet made a substantial addition under Section 14A. The CIT(A) upheld the AO's decision without proper adjudication. The ITAT found that the AO did not record satisfaction about the working of the assessee and the CIT(A) made ad hoc estimates without a cogent basis. Therefore, the ITAT deleted the partial addition made by the CIT(A) under Section 14A.Issue 3: Treatment of Prior Period ExpensesRegarding the treatment of prior period expenses, the assessee argued that leave encashment expenses paid in the current year for earlier years were allowable on actual payment basis as per the provisions of sec. 43B. The authorities below had misconceived the issue, but the ITAT agreed with the assessee's argument. The ITAT held that the leave encashment expenses, though pertaining to earlier years, were allowable in the year of payment. As the assessee had not claimed these expenses in earlier years, the ITAT allowed the deduction of leave encashment payment under sec. 43B.In conclusion, the ITAT dismissed the revenue's appeal and allowed the assessee's appeal based on the detailed analysis and legal interpretations provided for each issue.