2021 (11) TMI 146 - AT - Income Tax

Excess paid over net asset value treated as goodwill; s.32(1) proviso limited; s.201(1A) interest deduction denied; s.40(a)(ia) remitted

TUV Rheinland NIFE Academy Private Limited Versus ACIT Circle-7 (1) (1) Bangalore

ITAT BANGALORE held that the excess paid over net asset value on acquiring a business constitutes goodwill (following Delhi HC), distinguishing facts from ... Disallowance of depreciation on goodwill - whether the payment made over and above the net asset value, while acquiring a business concern, shall constitute good will or not? - HELD THAT:- As discussed in the preceding paragraph about the observation made by Chennai bench in the above said case in respect of the decision rendered in the case of Toyo Engineering India P Ltd [2012 (7) TMI 686 - ITAT, MUMBAI] i.e., the assets acquired by the above said assessee predominantly consisted of huge land and building. In the instant case, we notice that no land/building has been purchased and hence the facts prevailing in the Toyo Engineering India Pvt. Ltd were different from the facts of the present case. Accordingly, we are of the view that the decision rendered in the case of Toyo Engineering India Pvt. Ltd. will not apply to the facts of the present case. Accordingly, following the decision rendered by Hon’ble Delhi High Court in the case of Truine Energy Services Pvt. Ltd. [2015 (11) TMI 1218 - DELHI HIGH COURT], we hold that the amount paid in excess of the net asset value for acquiring a business concern shall constitute goodwill. Applicability of proviso to sec.32 (1) - It is not the case of the revenue that this transaction is between two related parties. Hence this purchase would not fall under the categories of succession, amalgamation and demerger. We have noticed that the tax authorities have observed that the spirit of the above said provisions should be applied to the present case. We are unable to agree. It is well settled proposition of law that the Income tax provisions should be construed strictly. Hence the scope of the above said proviso cannot be extended to the transaction of purchases between two unrelated parties. Eligibility of the assessee to claim depreciation on Goodwill cannot be decided unless the above said factual aspects are clarified. We have held, following the decision rendered in Truine Energy Services Pvt. Ltd. [2015 (11) TMI 1218 - DELHI HIGH COURT], that the excess amount paid over and above the net asset value on acquiring a business concern shall constitute goodwill. However, the said legal principle can be applied only if the facts relating to the case are clear. We have noticed that the facts are not clear in the instant case. Accordingly, in the interest of natural justice, we are of the view that the assessee should be provided with an opportunity to present the relevant facts. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore the same to the file of the A.O. for examining afresh in the light of observations made (supra). After considering the information and explanations furnished by the assessee and also after affording adequate opportunity of being heard, the A.O. may take appropriate decision in accordance with law. Disallowance of interest paid u/s 201(1A) - assessee had paid interest u/s 201(1A) for the delay in payment of TDS - assessee claimed the same as deduction. The AO disallowed the above said claim and the Ld CIT(A) also confirmed the same - HELD THAT:- Identical issue has been considered by Delhi bench of Tribunal in the case of New Modern Bazaar [2021 (4) TMI 395 - ITAT DELHI] and it was decided against the assessee Disallowance of interest on bank overdraft u/s 40(a)(ia) - HELD THAT:- Admittedly, the interest paid on bank loans is not liable to TDS deduction and hence disallowance u/s 40(a)(ia) is not called for. However, we notice that the Ld CIT(A) has confirmed the disallowance only for want of evidence. Accordingly, in the interest of natural justice, we are of the view that the assessee should be provided with an opportunity to produce evidences in support of its claim. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it with the evidences that may be furnished by the assessee. After hearing the assessee, the AO may take appropriate decision in accordance with law. Issues Involved:1. Disallowance of depreciation on goodwill.2. Disallowance of interest paid under Section 201(1A) of the Income-tax Act, 1961.3. Disallowance of interest on bank overdraft under Section 40(a)(ia) of the Act.Issue-wise Detailed Analysis:1. Disallowance of Depreciation on Goodwill:The assessee claimed depreciation on goodwill amounting to Rs. 6,99,31,440/-. The AO disallowed the claim, arguing that the goodwill did not exist in the depreciation chart of the seller, NIFE Academy, and hence could not be claimed by the buyer. The AO also noted that the assessee did not provide a valuation for the goodwill and suggested that the payment was a colorable device to reduce tax liability. The Ld. CIT(A) upheld the AO's decision, noting that the agreement to acquire NIFE Academy was made by the holding company before the assessee was incorporated and that the payment was likely a non-compete fee to Shri M.V. Thomas rather than for goodwill.The Tribunal referred to the decision of the Hon’ble Delhi High Court in Truine Energy Services Pvt. Ltd., which established that the excess amount paid over the net asset value when acquiring a business constitutes goodwill. However, the Tribunal noted that the assessee failed to clarify how the rights acquired by the holding company were transferred to it and did not provide a clear net asset value of NIFE Academy. The Tribunal set aside the order of the Ld. CIT(A) and remanded the matter to the AO for a fresh examination, requiring the assessee to clarify ownership, operational details, and payment specifics related to NIFE Academy.2. Disallowance of Interest Paid under Section 201(1A) of the Act:The assessee claimed a deduction for interest paid under Section 201(1A) amounting to Rs. 7,56,653/- for the delay in TDS payment. The AO disallowed the claim, and the Ld. CIT(A) upheld the decision. The Tribunal referred to the decision of the Hon’ble Madras High Court in CIT Vs. Chennai Properties & Investment Ltd., which held that such interest does not qualify as a business expenditure and is not compensatory in nature. The Tribunal followed this precedent and decided the issue against the assessee, upholding the disallowance.3. Disallowance of Interest on Bank Overdraft under Section 40(a)(ia) of the Act:The AO disallowed 30% of the interest payments amounting to Rs. 65,66,637/- for non-deduction of TDS. The assessee argued that Rs. 52,56,362/- was paid as interest on bank loans, which is not liable to TDS, and voluntarily disallowed the remaining Rs. 13,10,274/-. The Ld. CIT(A) confirmed the disallowance of Rs. 52,56,362/- due to lack of evidence. The Tribunal acknowledged that interest on bank loans is not subject to TDS and thus should not be disallowed under Section 40(a)(ia). However, it noted the need for evidence to support the claim and remanded the matter to the AO for re-examination, allowing the assessee to present the necessary evidence.Conclusion:The appeal was partly allowed. The Tribunal remanded the issues related to the disallowance of depreciation on goodwill and the disallowance of interest on bank overdraft to the AO for fresh examination, while upholding the disallowance of interest paid under Section 201(1A) of the Act.