2014 (8) TMI 271 - AT - Income Tax

Tribunal partially allows appeal, remits depreciation issues back to Assessing Officer for reconsideration.

Saipem Triune Engineering Pvt. Ltd. Versus DCIT Circle 7(1), New Delhi

Saipem Triune Engineering Pvt. Ltd. Versus DCIT Circle 7(1), New Delhi - TMI Issues Involved:1. Exclusion of Rs. 18,07,786 from taxable income.2. Disallowance of depreciation on intangible assets worth Rs. 10,14,46,882.3. Enhancement of income by Rs. 30,44,06,647 under Section 40A(2).4. Disallowance of depreciation on fixed assets acquired from the seller.5. Enhancement of income by disallowing depreciation under Explanation 3 to Section 43(1).6. Enhancement of income by disallowing lease rentals paid by the appellant.Issue-wise Detailed Analysis:1. Exclusion of Rs. 18,07,786 from Taxable Income:The appellant did not press this ground during the hearing. Consequently, the ground was dismissed as not pressed.2. Disallowance of Depreciation on Intangible Assets:The appellant claimed depreciation on intangible assets acquired during a slump sale, including technical know-how, brand name, and non-compete rights. The Assessing Officer (AO) disallowed this depreciation, doubting the existence and valuation of these intangible assets. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, adding that the transaction appeared to be a colorable device to gain tax benefits. The CIT(A) also enhanced the income by Rs. 30,44,06,647, invoking Section 40A(2), arguing that the payment for acquiring the business was excessive and unreasonable.Upon appeal, it was noted that the valuation report used by the appellant was undated and lacked credibility. The report was prepared by a Chartered Accountant who also represented the appellant, raising questions about its independence. The Tribunal found that the valuation of intangible assets was not substantiated with credible material, and thus, the disallowance of depreciation on these assets was justified. However, the Tribunal held that the entire payment made for acquiring the business could not be treated as the appellant's income, as it was a capital expenditure. The enhancement of income by Rs. 30,44,06,647 was set aside.3. Enhancement of Income by Rs. 30,44,06,647 under Section 40A(2):The CIT(A) invoked Section 40A(2) to disallow the entire sum of Rs. 40.58 crores paid for acquiring the business, arguing that it was excessive and unreasonable. The Tribunal found this invocation inappropriate, as the payment was capital in nature and not claimed as a revenue expenditure. The Tribunal set aside the enhancement, stating that even if the payment was considered excessive, it could not be added to the appellant's income.4. Disallowance of Depreciation on Fixed Assets Acquired from the Seller:The CIT(A) enhanced the assessment by disallowing depreciation on fixed assets to the extent of Rs. 16,86,487, arguing that the appellant, as a successor, was only entitled to depreciation apportioned to the number of days of use. The Tribunal remitted this issue to the AO for reconsideration, directing that the AO should examine the facts afresh and allow depreciation as per the law.5. Enhancement of Income by Disallowing Depreciation under Explanation 3 to Section 43(1):The CIT(A) invoked Explanation 3 to Section 43(1) to disallow depreciation on tangible assets, arguing that the appellant had acquired these assets at an enhanced cost to claim higher depreciation. The Tribunal remitted this issue to the AO, directing a fresh examination of the facts and allowing depreciation based on the written down value (WDV) as per the Income Tax Act.6. Enhancement of Income by Disallowing Lease Rentals Paid by the Appellant:The CIT(A) disallowed Rs. 55,79,200 out of the lease rentals paid by the appellant, arguing that the payment of Rs. 30 per sq. ft. was excessive. The Tribunal found that the CIT(A) had substituted the lease rental with an arbitrary figure of Rs. 6 per sq. ft. without any basis. The Tribunal remitted this issue to the AO for fresh consideration, directing that the AO should determine the reasonableness of the lease rental after giving the appellant an opportunity to present evidence.Conclusion:The Tribunal allowed the appeal partly, setting aside the enhancement of income by Rs. 30,44,06,647, and remitted several issues back to the AO for fresh consideration. The Tribunal directed the AO to examine the facts afresh and allow depreciation and lease rentals as per the law, ensuring that the appellant is given an adequate opportunity to present evidence.