Company wins on provision expenses and TDS credit; goodwill depreciation and foreign tax claims remanded for verification

ITAT Mumbai ruled on multiple tax issues for the assessee company. On goodwill depreciation acquired through demerger, the matter was remanded to AO to verify if the transferor company had claimed depreciation under Indian tax law. The tribunal deleted 70% disallowance of provision for outstanding expenses, holding that liability duration is irrelevant if genuinely incurred. TDS credit was allowed despite certificates being in the amalgamated company's name, following established precedents. The foreign tax deduction claim was restored to AO for proper examination per HC guidelines.

---

---

Issues Involved:
1. Depreciation on Goodwill
2. Disallowance of Provision for Expenses
3. Non-granting of TDS Credit
4. Charging of Interest under Section 234B
5. Deduction of Foreign Taxes under Section 37(1)

Issue-wise Detailed Analysis:

1. Depreciation on Goodwill:
The assessee, SPN India, acquired the broadcasting business of its wholly-owned subsidiary MSM Singapore through a demerger effective from April 1, 2014. The assets acquired included goodwill valued at Rs. 61.148 crores. The assessee claimed depreciation on this goodwill. The AO, however, allowed depreciation only on the written down value (WDV) computed by deducting notional depreciation since AY 2006-07, resulting in a significant reduction of the claimed depreciation. The Ld DRP upheld this view, stating that the goodwill amount should be taken as NIL.

The Tribunal examined the applicability of the 6th proviso to sec. 32(1) and Explanation 5 to sec. 32(1) and concluded that these provisions were not applicable to the facts of the case. The Tribunal noted that MSM Singapore was not assessed under the Indian Income tax Act for its business profits, and therefore, there was no occasion for MSM Singapore to claim depreciation. Consequently, the Tribunal directed the AO to verify whether MSM Singapore had claimed or been allowed depreciation under the Indian Income tax Act. If not, the assessee should be allowed depreciation on the original cost of goodwill.

2. Disallowance of Provision for Expenses:
The assessee provided for outstanding expenses amounting to Rs. 156.38 crores and claimed it as a deduction. The AO disallowed the entire provision, considering it as unascertained liabilities. The Ld DRP confirmed this disallowance.

The Tribunal emphasized that under the mercantile system of accounting, the provision for all known expenses and losses must be made, even if the exact amount is not known. The Tribunal cited the Supreme Court's rulings in Bharat Earth Movers vs. CIT and Rotork Controls India P Ltd vs. CIT, which support the concept of making provisions for accrued liabilities. The Tribunal held that the provision for outstanding expenses is an ascertained liability and deleted the disallowance made by the AO.

3. Non-granting of TDS Credit:
The assessee claimed TDS credit of Rs. 8,13,81,645/-, which was not granted by the AO because the TDS certificates were in the name of the amalgamated/demerged company. The Tribunal referred to decisions from coordinate benches, which held that the resulting company in a demerger or the transferee company in a transfer is eligible to claim TDS credit even if the TDS certificates are in the name of the demerged/transferor company. The Tribunal directed the AO to allow TDS credit after verifying that the relevant income has been assessed in the hands of the assessee.

4. Charging of Interest under Section 234B:
The issue of charging interest under Section 234B was restored to the file of the AO for computation in accordance with the law.

5. Deduction of Foreign Taxes under Section 37(1):
The assessee claimed deduction for foreign taxes under Section 37(1), which the AO did not discuss. The Tribunal restored this issue to the AO with directions to examine the claim in accordance with the decision of the Bombay High Court in Reliance Infrastructure Ltd vs. CIT and Bank of India vs. ACIT.

Conclusion:
The Tribunal allowed the appeals of the assessee, directing the AO to verify specific facts and recompute the depreciation on goodwill, allow the provision for outstanding expenses, grant TDS credit, compute interest under Section 234B, and examine the claim for deduction of foreign taxes as per relevant judicial precedents.

---