Tribunal: Disallowance of Depreciation & Tax on Compensation Upheld

The Tribunal upheld the disallowance of initial depreciation for the power generation unit, stating that the installation was not for the business of generation or distribution of electricity. Additionally, the Tribunal ruled that the amount received from Honeywell Inc., USA, was taxable under section 28(ii)(c) as compensation for the termination of the agency agreement, not for the transfer of goodwill. The appeal was dismissed, affirming the decisions of the lower authorities.

---

---

Issues Involved:
1. Disallowance of initial depreciation claimed for the power generation unit.
2. Taxability of the amount received from Honeywell Inc., USA.

Issue-wise Detailed Analysis:

1. Disallowance of Initial Depreciation Claimed for the Power Generation Unit:

The main appeal raised an objection to the disallowance of initial depreciation claimed by the assessee for its power generation unit amounting to Rs. 23,170. The Income Tax Officer (ITO) disallowed the claim on two grounds: (i) the assessee did not manufacture items covered by the Ninth Schedule of the Income-tax Act, 1961, and (ii) the machinery or plant was not installed for the purpose of the business of generation or distribution of electricity.

On appeal, the Commissioner (Appeals) upheld the ITO's decision, stating that initial depreciation under section 32(1)(vi) of the Income-tax Act, 1961, is allowable only if the purpose is the business of generation and distribution of electricity.

Before the Tribunal, the assessee's counsel argued that the power generation unit was installed to generate and supply electricity to the assessee's factories, which amounted to carrying on the "business of generation of electricity" as contemplated by section 32(1)(vi). The counsel cited various judicial decisions to support the broad interpretation of "business" in taxing statutes.

The departmental representative countered that the generation of electricity for the assessee's own consumption did not constitute a business of generation of electricity as specified in section 32(1)(vi). The emphasis of the provision was on the business aspect, not merely on a particular activity.

The Tribunal held that the appellant did not carry on any business of generation of electricity but installed the power generation unit to supplement the power shortage in its main business of manufacturing air-conditioning products. The generation of electricity was incidental to the main business and could be described as a feeding activity. The Tribunal concluded that the mere installation of a power generation unit did not amount to carrying on the business of generation of electricity as required by section 32(1)(vi). Consequently, the disallowance of initial depreciation was justified.

2. Taxability of the Amount Received from Honeywell Inc., USA:

The assessee received Rs. 4 lakhs from Honeywell Inc., USA, as consideration for assigning its rights and responsibilities to Honeywell India Ltd. The ITO included this amount in the assessee's commission income and taxed it under section 28(ii)(c) of the Act, stating that it was received in connection with the termination of the agency.

The Commissioner (Appeals) upheld the ITO's decision, noting that the assessee did not provide detailed evidence to support its claim that the amount was for goodwill and not taxable.

Before the Tribunal, the assessee's counsel conceded that Rs. 1,03,000 and Rs. 80,000, for inventories and business in the pipeline, were taxable business receipts. However, the counsel argued that the remaining Rs. 2,17,000 was received for the transfer of goodwill and was not taxable, citing the Supreme Court decision in CIT v. B.C. Srinivasa Setty.

The departmental representative objected to the admission of new evidence and argued that the sum of Rs. 2,17,000 was remuneration for building up goodwill for Honeywell products, not for transferring any goodwill. The representative contended that the amount was compensation for the termination of the agency agreement and fell within the provisions of section 28(ii)(c).

The Tribunal found that the assessee acted as a representative of Honeywell Inc., USA, for nearly 19 years, and the goodwill belonged to Honeywell Inc., not the assessee. The sum of Rs. 2,17,000 was for services rendered in building up this goodwill and not for transferring any goodwill. The Tribunal concluded that the amount represented compensation for the termination of the agency and was rightly taxed under section 28(ii)(c).

Conclusion:

The Tribunal dismissed the appeal, upholding the disallowance of initial depreciation for the power generation unit and the taxability of the amount received from Honeywell Inc., USA, under section 28(ii)(c).

---