2022 (8) TMI 745 - AT - Income Tax

Tribunal's Decision: Depreciation on Brand Value, Construction Expenses Allowed

The Tribunal allowed depreciation on the brand value, construction expenses, and restricted disallowance of expenses related to exempt income. It deleted ... Depreciation on goodwill and brand value acquired on succession - transfer as a going concern under section 47(xiii) and its effect on cost to successor - fifth proviso to section 32(1) - applicability limited to year of succession - determination of actual cost under Explanation 3 to section 43(1) - valuation of intangible assets by independent valuer and admissibility of such valuation - expenditure for employee welfare (establishing schools) deductible as business expenditure - section 14A and Rule 8D - disallowance limited to extent of exempt income - shifting of profits to related concerns - requirement of proof of non-arm's-length/colourable device - condonation of delay in filing appealDepreciation on goodwill and brand value acquired on succession - transfer as a going concern under section 47(xiii) and its effect on cost to successor - determination of actual cost under Explanation 3 to section 43(1) - valuation of intangible assets by independent valuer and admissibility of such valuation - fifth proviso to section 32(1) - applicability limited to year of succession - Whether depreciation is allowable to the assessee-company on brand/goodwill transferred from the predecessor partnership firm and if so at what value and from which year - HELD THAT: - The Tribunal held that the transfer of the business as a going concern from the partnership firm to the company satisfied the conditions of section 47(xiii). The brand valuation prepared by the independent valuer was examined and found supported by projections, discounting methodology and actual sales data; Revenue failed to demonstrate defects sufficient to reject the valuation. The Tribunal rejected the approach of treating the brand at nil value, overruled the view taken below and accepted the brand value at the amount determined by the valuer. The Tribunal further held that the fifth proviso to section 32(1) applies only to the previous year of succession and does not preclude depreciation in subsequent years; where the successor is entitled to depreciation, the AO must allow depreciation from the year in which the successor is entitled, even if the assessee omitted to claim it for earlier years. Accordingly the AO was directed to allow depreciation on the accepted brand value in accordance with law.Brand/goodwill value accepted as per valuer; depreciation to be allowed on that value and from the year the successor is entitled; AO directed to compute accordingly.Expenditure for employee welfare (establishing schools) deductible as business expenditure - Whether construction expenditure incurred by the assessee for schools for employees' children is deductible as business expenditure or disallowable as expenditure for another entity - HELD THAT: - On the facts the Tribunal found that the schools (Anbu Illam and RJ Mantra Tulir School) were established to provide education and welfare to the employees' children in a remote area where no nearby schools existed; the company had an object in its memorandum permitting establishment of educational institutions and the facilities served the business by providing welfare to the workforce. Considering authorities on employee-welfare expenditure and the factual matrix (longstanding welfare activity, number of employees served, use of premises in connection with business), the Tribunal held the expenditure to be in the course of business and directed the AO to allow the construction costs and related interest.Construction expenses for the employee schools and related interest are allowable as business expenditure; additions deleted/directions issued to AO.Section 14A and Rule 8D - disallowance limited to extent of exempt income - Whether disallowance under section 14A read with Rule 8D as made by the AO is sustainable or requires restriction - HELD THAT: - The assessee did not challenge the CIT(A)'s restriction of disallowance to the extent of exempt income and accepted the position in light of binding authorities. The Tribunal found no infirmity in the CIT(A)'s order and confirmed that the disallowance under section 14A/Rule 8D is to be limited to the extent of exempt income as directed by the appellate authority.CIT(A)'s order restricting the section 14A/Rule 8D disallowance to the extent of exempt income is sustained.Shifting of profits to related concerns - requirement of proof of non-arm's-length/colourable device - Whether additions made by AO treating profit as diverted to sister concern on account of alleged book-entry sales are sustainable - HELD THAT: - The Tribunal examined the material and noted that the assessee and the sister concern were distinct taxable entities, that the sales documentation, tax audits and transfer-pricing scrutiny did not show that the transaction price was excessive or not at arm's length, and that Revenue did not demonstrate that the arrangement produced any tax benefit in an overall sense (since the firm's profits were taxable). The Tribunal observed that disallowance for excessive/colourable transactions must be founded on proof that prices were not arm's length or that the device altered tax liability; where no such infirmity was shown, the AO's addition based on alleged profit shifting was untenable. On the facts the additions were deleted.Additions on account of alleged shifting of profit to sister concern deleted; AO's treatment held without basis.Deductibility of foreign tour expenses - Whether foreign tour expenses claimed by the assessee are deductible as incurred wholly and exclusively for business - HELD THAT: - The assessee failed to establish the business nexus of the foreign tour expenditure. In absence of documentary evidence connecting the trip to business purposes or demonstrating one of the recognized tests for employee-related payments, the Tribunal upheld the AO and CIT(A) in disallowing the foreign tour expenses.Disallowance of foreign tour expenses confirmed.Condonation of delay in filing appeal - Whether the short delay (five days) in filing the appeal against the revision order is to be condoned - HELD THAT: - The Tribunal considered the explanation for the five-day delay (year-end work, audits, local festivals) and, viewing the delay as short and the reasons satisfactory, exercised discretion to condone the delay and admit the appeal.Delay of five days condoned and appeal admitted; revision order of PCIT quashed in light of merits adjudicated.Final Conclusion: The appeals arising from AYs 2010-11 to 2016-17 were partly allowed: the Tribunal accepted the independent valuer's brand valuation and directed allowance of depreciation to the successor company (with the fifth proviso to section 32(1) not restricting subsequent years), allowed construction costs for employee schools as business expenditure, sustained CIT(A)'s limitation of section 14A/Rule 8D disallowance to exempt income, deleted additions for alleged profit shifting to the sister concern, and confirmed disallowance of unexplained foreign tour expenses. In the separate appeal against the PCIT's revision for AY 2009-10 the Tribunal condoned the short delay and quashed the revision order. Issues Involved:1. Depreciation on Goodwill and Brand Value.2. Disallowance of Construction Expenses.3. Disallowance of Expenses Relatable to Exempt Income.4. Shifting of Profits to Sister Concern.5. Disallowance of Foreign Tour Expenses.6. Revision Order by PCIT.Issue-wise Detailed Analysis:1. Depreciation on Goodwill and Brand Value:The primary issue was whether the assessee could claim depreciation on the brand value of Rs. 60,24,10,640/-. The assessee argued that the brand value was scientifically determined and transferred from a partnership firm to a public limited company, satisfying all conditions under Section 47(xiii) of the Income Tax Act. The AO and CIT(A) disallowed the depreciation, claiming the brand value was self-generated and had a nil cost of acquisition. However, the Tribunal accepted the valuation report, noting that the brand value was determined using internationally accepted standards and directed the AO to allow depreciation on the brand value.2. Disallowance of Construction Expenses:The AO disallowed expenses for constructing buildings for Anbu Illam Thulir School and RJ Mantra Thulir School, arguing they were not for business purposes. The CIT(A) upheld the disallowance, considering the expenses as donations. The Tribunal, however, allowed the expenses, recognizing them as part of labor welfare measures and in line with the company's objectives to provide education to employees' children.3. Disallowance of Expenses Relatable to Exempt Income:The AO made disallowances under Section 14A read with Rule 8D for expenses related to exempt income. The CIT(A) restricted the disallowance to the extent of the exempt income, which the Tribunal upheld, aligning with the decisions of higher courts.4. Shifting of Profits to Sister Concern:The AO alleged that the assessee shifted profits to its sister concern, Rasathe Garments, to reduce tax liability. The CIT(A) confirmed this view. However, the Tribunal found that transactions were at arm's length and both entities were separate taxable entities. It noted that the transactions were tax-neutral as both entities were taxed at the maximum marginal rate, thus deleting the additions made by the AO.5. Disallowance of Foreign Tour Expenses:The AO disallowed foreign tour expenses for employees, arguing they were not for business purposes. The CIT(A) upheld this disallowance. The Tribunal also confirmed the disallowance as the assessee could not substantiate the business purpose of the expenses.6. Revision Order by PCIT:The PCIT revised the assessment order under Section 263, questioning the brand valuation accepted by the AO. The Tribunal quashed the revision order, noting that the issue had already been adjudicated in favor of the assessee regarding the brand value and depreciation.Conclusion:The Tribunal allowed the appeals related to depreciation on brand value and construction expenses, upheld the CIT(A)'s decision on disallowance of expenses related to exempt income, deleted the additions regarding profit shifting to the sister concern, confirmed the disallowance of foreign tour expenses, and quashed the revision order by the PCIT.