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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & MS. ASTHA CHANDRA
The appeal by the assessee is directed against the order dated 05.12.2016 of the Ld. Commissioner of Income Tax (Appeals)-9, New Delhi [“CIT(A)”] pertaining to assessment year (“AY”) 2012-13.
The assessee company is engaged in the business of customer acquisition, marketing, procurement, sales promotion, brand management and website hosting. It filed its return of income for AY 2012-13 on 29.09.2012 declaring loss of Rs. 29,43,94,121/-. The case was taken up under scrutiny. Notices under section 143(2) and questionnaire under section 142(1) of the Income Tax Act, 1961 (the “Act”) were issued and complied with. The Ld. Assessing Officer (“AO”) completed the assessment on 09.02.2015 on total loss of Rs.23,25,36,845/- under section 143(3) of the Act disallowing claim of Rs. 6,11,49,132/- being depreciation on customer list and Rs. 7,08,144/- being provision for leave encashment.
The assessee filed appeal before the Ld. CIT(A). Series of notices issued fixing the date of hearing ranging from 19.05.2016 to 24.11.2016 remained uncomplied with. Since none attended, the Ld. CIT(A) proceeded to decide the appeal on the basis of facts available on record.
3.1 As regards the disallowance of claim of depreciation of Rs. 6,11,49,132/- the Ld. CIT(A) in para 3.2.1 of his appellate order reproduced the findings of the Ld. AO as under:-
3.2.1 The reply of the assessee has been examined. Besides claiming depreciation on brand name, customer list, etc. the assessee is also claiming depreciation on goodwill acquired from M/s Living India Media Ltd. Assessee paid cash consideration of Rs. 13.53 crores and balance of Rs. 14.50 crores was paid by issuing equity shares of even amount. After assessee assigned value of Rs.12.20 crores to the customer list and Rs.6.76 crores to the brand name, the balance amount of Rs.9,06,51,000/- has been attributed to goodwill. It needs to be emphasized that assessee has not paid anything in cash to acquire this goodwill. Therefore, for acquiring goodwill no expenditure has been laid out. In these circumstances the claim of depreciation on goodwill is highly controversial. In this regard it is to state that term “Goodwill has not been defined in the IT Act, 1961. However, u/s 55(2)(a) of the Act it has been recognized as a capital asset for purposes of computation of capital gains. The cost of acquisition in case of purchased goodwill is to be taken as the amount of purchase price and the cost is taken to be Nil when it is self generated. Purchased goodwill is generally ‘goodwill embedded with intangible assets’. As per accounting standard only the purchased goodwill is recognized in the financial statements. It is valued as the excess of price paid for business as a whole over the agreed value of all tangible net assets purchased, unless any specific value has been allocated to it. Further like self-generated goodwill, the intangible assets which cannot be identified separately or cannot be reliably measure are also not recognized in the financial statements. Therefore, when a business is purchased such intangible assets are not assigned separate value, but are embedded together ad recognized as goodwill. The appellant failed to state before the AO that how the goodwill was valued and how it is similar in nature to the intangible asset as specified u/s 32(1 )(iii).
In subsequent para 3.2.2 of his order, the Ld. CIT(A) confirmed the findings of the Ld. AO observing as follows :-
3.2.2 Considering the fact, I find that the appellant failed to explain before the AO that how, the brand name, customer list, logo etc were put to use in enhancing the value of the business. In the past also, the assessee had shown only income from commission received from today Retail Network Pvt. Ltd. and interest income. The assessee failed to explain before the AO that how the intangible assets were utilized for the purpose of business. This is basic condition for claiming a depreciation as per provision of section 32(1)(i) depreciation in respect of any tangible or intangible asset by the assessee can be allowed when the same is used for the purpose of business. So, the utilization of intangible asset were not explained. During the course of appellate proceedings also sufficient opportunities were granted but no compliance was made. So, in the absence of any details and explanation regarding use of asset the finding of the AO is hereby confirmed. Hence, the ground of appeal is dismissed.
3.2 Regarding disallowance of Rs. 7,08,144/- towards leave encashment in view of the provision of section 43B(f), the Ld. CIT(A) reproduced the facts as mentioned by the Ld. AO and recorded his findings in para 4.1 of his order confirming the impugned disallowance as under :-
4.1 I have considered the facts on record and I find that appellant has claimed the provision for leave encashment of amounting to Rs.708144/- as expense. The appellant has submitted before the AO that the claim has been made of leave encashment on accrual basis in the ROI by relying the judgment of Hon’ble Kolkata High Court in the case of CIT vs. Exide Industries Ltd reported in 292 ITR 407 where it is held that leave encashment is neither a statutory liability nor a contingent liability. It is just a provision to be made for entitlement of an employee achieved in particular financial year. It is just a provision to be made for entitlement of an employee achieved in a particular financial year. An employer is entitled to deduction for the expenditure he incurs for running a business which includes payment of salary and other perquisites to its employees. Hence, it is clearly a trading liability out of provision of section 43B. The submission of the appellant was not found acceptable by the AO being the judgment of Hon’ble Kolkata High Court has been stayed by the Hon’ble Supreme Court and it has been clarified that the assessee must pay tax with section 43B(f) is on the statue though it is entitled to make a claim in its return. It is provided in section 43B that any sum payable by the assessee as an employer in view of an lieu at the credit of its employees shall be allowed as deduction only in the year of actual payment. The appellant failed to explain before the AO that the actual payment has been made. During the course or appellate proceeding also the appellant has not made any compliance in the above circumstances the disallowance made by the AO is hereby confirmed. Hence, the ground of appeal is dismissed.
3.3 Aggrieved, the assessee is in appeal before the Tribunal.
We have heard the Ld. Representative of the parties. The Ld. AR of the assessee brought it to our notice that the preceding AY 2011-12 was the first year of the business of the company in which the assessee claimed similar depreciation which was disallowed by the Ld. AO. The first appeal of the assessee filed before the Ld. CIT(A) is sub-judice before him. Regarding disallowance under section 43B(f), no arguments were advanced before us.
On consideration of the facts and in the circumstances of the case, we deem it fit to restore the appeal for AY 2012-13 to the file of the Ld. CIT(A) for decision afresh along with the appeal for AY 2011-12 sub-judice before him as no representation was made by the assessee during appellate proceedings relating to AY 2012-13. We order accordingly.
In the result, the appeal of the assessee is treated as allowed for statistical purposes.