2014 (5) TMI 926 - AT - Income Tax

Appeal Allowed for Re-examination of Expenses with Emphasis on Correct Legal Provisions

Sumitomo Chemical India Private Limited Versus Dy. Commissioner of Income-tax Range 3(3), Mumbai

Sumitomo Chemical India Private Limited Versus Dy. Commissioner of Income-tax Range 3(3), Mumbai - TMI Issues Involved:1. Disallowance of deduction claimed under Section 35D of the Income-tax Act, 1961.2. Disallowance of legal and professional fees under Section 37(1).3. Disallowance of incidental expenses capitalized with assets.4. Disallowance of professional fees reimbursed to SCCL due to non-deduction of taxes at source.5. Additional grounds regarding capitalization of legal and professional fees and depreciation on goodwill and non-compete fees.Issue-wise Detailed Analysis:1. Disallowance of Deduction Claimed Under Section 35D:The assessee claimed Rs. 14,27,727/- under Section 35D for expenses incurred on acquiring a manufacturing unit from Bilag Industries Pvt Ltd. The Assessing Officer (AO) disallowed this claim, stating that the assessee failed to provide evidence to satisfy the conditions under Section 35D. The CIT(A) upheld this disallowance, ruling the expenses as capital in nature and not allowable as revenue expenses. The ITAT directed the AO to re-examine the nature of the expenses and determine if they qualify under Section 35D or are capital expenses eligible for depreciation.2. Disallowance of Legal and Professional Fees Under Section 37(1):The assessee claimed Rs. 53,88,637/- as legal and professional fees under Section 37(1). The AO disallowed this due to non-deduction of taxes at source (TAS), invoking Section 40(a)(ia). The CIT(A) also disallowed the claim, treating the expenses as capital in nature. The ITAT noted the conflicting treatments by revenue authorities and remanded the issue to the AO for a definitive finding on whether the expenses qualify under Section 35D or as revenue expenses subject to TAS.3. Disallowance of Incidental Expenses Capitalized with Assets:The assessee capitalized incidental expenses of Rs. 1,13,57,742/- incurred on acquiring assets from Bilag and claimed depreciation. The AO disallowed this, applying Explanation 4A to Section 43(1), restricting the cost to the written-down value in Bilag's hands. The CIT(A) upheld this disallowance. The ITAT, referencing the Bombay High Court's decision in Ciba of India Ltd. vs CIT, ruled that incidental expenses should be capitalized and depreciation allowed accordingly. The ITAT directed the AO to allow depreciation on the machinery acquired from Bilag, including incidental expenses.4. Disallowance of Professional Fees Reimbursed to SCCL:The assessee reimbursed Rs. 23,74,987/- to SCCL for services provided by Ernst & Young, without deducting TAS. The CIT(A) disallowed this, stating that the payment to E&Y required TAS deduction. The ITAT noted the need for additional evidence to determine the nature of the payment and remanded the issue to the AO for a definitive view, considering the legal provisions and the nature of the transaction.5. Additional Grounds:The assessee raised additional grounds for capitalizing legal and professional fees and claiming depreciation on goodwill and non-compete fees. The ITAT directed the AO to allow depreciation on goodwill, referencing the Supreme Court's decision in Smifs Securities Ltd. However, the non-compete fee was deemed revenue in nature under Section 28(va) and should be allowed as revenue expenditure.Conclusion:The ITAT allowed the appeal for statistical purposes, directing the AO to re-examine the nature of expenses and apply the correct legal provisions, ensuring that depreciation on capitalized expenses and goodwill is appropriately allowed. The ITAT emphasized the need for a thorough and consistent approach in determining the eligibility of deductions and depreciation claims.