2016 (4) TMI 583 - AT - Income Tax

Tribunal decision: Depreciation on non-compete fees allowed, interest on borrowed funds upheld

The Tribunal allowed the appeals in part, directing the Assessing Officer to permit depreciation on non-compete fees as an intangible asset. It also ... Eligible for claim of depreciation on non-compete fee - Held that:- In the case of Ind. Global Corporate Finance Pvt. Ltd. [2013 (9) TMI 600 - ITAT MUMBAI ] held that the non compete fee is not a deductible expenditure since it is capital in nature. However, the non compete right is an 'intangible asset' eligible for depreciation under the Income-tax Act, 1961. - Decided in favour of assessee Disallowance on interest - Held that:- The purpose for which advance were made is covered by the principle of commercial expediency, therefore, following the decision of Hon’ble Supreme Court in the case of S.A.Builders (2006 (12) TMI 82 - SUPREME COURT ), we direct the AO to allow the same. - Decided in favour of assessee Disallowance of foreign travel expenses - Held that:- CIT(A) deleted the disallowance in respect of visit to subsidiary company in Sri Lanka and expenditure incurred on travelling for machinery inspection, however, the CIT(A) confirmed the disallowance in respect of visit to USA where the assessee has not done any export. The CIT(A) has given due justification for the disallowance so made. Accordingly, we do not find any justification for interfering in the order of CIT(A). Addition invoking provisions of Section 41(1) - Held that:- Remission or cessation of a liability is pre-requisite for invoking the provisions of section 41(1) of the Act. In the absence of any such remission/cessation, the liability on the part of the appellant towards a creditor continues to persist, notwithstanding pendency of any dispute . Merely because a liability is outstanding for more than 3 years, the same cannot be added back as the income of the appellant, invoking the provisions of section 41(1) of the act. In this view of the matter the addition in this behalf is deleted. - Decided in favour of assessee MAT computation - Excluding the provisions made for redemption of debentures while calculating book profit u/s.115JB - Held that:- Sum appropriated by the assessee in the P&L account towards @ debentures redemption reserve cannot be held to a reserve within the meaning of clause (b) or amount set apart to meet unascertained liabilities within the meaning of clause (c) of the Explanation to Section 115J(1), and as such the said amount was not to be added to the net profit as computed by the assessee to arrive at the book profit for the purpose of Section 115J. Issues Involved:1. Disallowance of depreciation on non-compete fee.2. Disallowance of interest on borrowed funds under Section 36(1)(iii).3. Disallowance of interest on amounts given to sister concerns and directors.4. Disallowance of foreign travel expenses.5. Write-off of payments of non-compete fees.6. Fair market value for depreciation on assets acquired on slump sale.7. Addition under Section 41(1) for outstanding amounts.8. Exclusion of provisions for redemption of debentures while calculating book profit under Section 115JB.Detailed Analysis:1. Disallowance of Depreciation on Non-Compete Fee:The Assessing Officer (AO) disallowed the claim of depreciation on non-compete fee paid by the assessee, holding that the expenditure was not connected with the acquisition of various assets. The Tribunal, however, found that the non-compete fee is in the nature of commercial rights and eligible for depreciation. This conclusion was supported by the decisions of the Hon'ble Madras High Court and Hon'ble Karnataka High Court, as well as various judicial pronouncements, including the Hon'ble Supreme Court's decision in Smifs Securities Pvt. Ltd. The Tribunal directed the AO to allow the claim of depreciation on the non-compete fee, treating it as an intangible asset.2. Disallowance of Interest on Borrowed Funds under Section 36(1)(iii):The AO disallowed interest on borrowed funds, estimating the cost of borrowing at 13%, and disallowed Rs. 3,36,32,300/- on the ground that it was capital expenditure. The Tribunal found that the investment in Ceylon Glass Company Limited, Sri Lanka, was for controlling interest in the associate concern and was made for commercial expediency. Citing decisions from the Hon'ble Bombay High Court and Hon'ble Supreme Court in S.A. Builders, the Tribunal directed the AO to allow the claim of interest on the funds acquired for controlling interest.3. Disallowance of Interest on Amounts Given to Sister Concerns and Directors:The AO disallowed interest of Rs. 99,49,264/- on amounts outstanding to sister concerns and directors, estimating the cost of borrowing at 13%. The Tribunal, following the principle of commercial expediency as established in S.A. Builders, directed the AO to allow the interest claim.4. Disallowance of Foreign Travel Expenses:The AO disallowed foreign travel expenses amounting to Rs. 5,82,525/-, including visits to a subsidiary company in Sri Lanka, machinery inspection, and a trip to the USA. The CIT(A) deleted the disallowance for the visit to the subsidiary company and machinery inspection but confirmed the disallowance for the USA trip due to lack of export activity. The Tribunal upheld the CIT(A)'s decision.5. Write-off of Payments of Non-Compete Fees:The Tribunal directed the AO to allow depreciation on non-compete fees, rendering the revenue's grievance on this issue infructuous.6. Fair Market Value for Depreciation on Assets Acquired on Slump Sale:The Tribunal restored the issue of considering fair market value for depreciation on assets acquired from NPIL back to the AO, following the order of the Tribunal for the assessment year 1999-2000.7. Addition under Section 41(1) for Outstanding Amounts:The AO added Rs. 38,71,638/- under Section 41(1), citing outstanding amounts due for more than three years. The CIT(A) deleted this addition, stating that remission or cessation of liability is required for invoking Section 41(1), and mere outstanding liability for more than three years does not warrant addition. The Tribunal upheld the CIT(A)'s decision, referencing the Hon'ble Supreme Court's decision in Sugauli Sugar Works (P) Ltd.8. Exclusion of Provisions for Redemption of Debentures while Calculating Book Profit under Section 115JB:The AO included Rs. 2.25 crores, being provisions made for redemption of debentures, in the book profit calculation. The CIT(A) directed the exclusion of this amount, considering it an ascertained liability. The Tribunal upheld the CIT(A)'s decision, citing relevant case law, including the Hon'ble Bombay High Court's decision in Raymond Ltd.Conclusion:The appeals were allowed in part, with specific directions for the AO to follow the Tribunal's findings on each issue. The order was pronounced in the open court on 02/03/2016.