ACIT - 1(1)(1), MUMBAI vs. BLUE STAR ENGINEERING & ELECTRONICS LTD. (FORMERLY BLUE STAR ELECTRO MECHANICAL LTD.), MUMBAI

आयकर अपीलीय अधिकरण “B” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI श्री महावीर ससिंह, न्याययक सदस्य एविं श्री मनोज कुमार अग्रवाल, लेखा सदस्य के समक्ष । BEFORE SRI MAHAVIR SINGH, JM AND SRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सुं./ ITA No. 5242/Mum/2017 (यनर्ाारण वर्ा / Assessment Year 2013-14) The Dy. Commissioner of M/s Blue Star Engineering & Income Tax-1(1)(1), Electronics Ltd. 579, Aayakar Bhawan, M.K. (Formerly M/s Blue Star road, Mumbai-400 020 बनाम/ Electro Mechanical Limited) Kasturi Building, Mohan T. Vs. Advani Chowk, Jamshedji Tata Road, Mumbai-400 020 (अपीलार्थी / Appellant) (प्रत्यर्थी/ Respondent) स्र्थायी लेखा सुं./PAN No. AAECB1558M

आयकर अपील सुं./ ITA No. 6412/Mum/2016 (यनर्ाारण वर्ा / Assessment Year 2011-12) The Asst. Commissioner of M/s Blue Star Engineering & Income-Tax 1(1)91), Electronics Ltd. 579, Aayakar Bhawan, M.K. (Formerly M/s Blue Star Road, Mumbai-400 020 Electro Mechanical Limited) बनाम/ Kasturi Building, Mohan T. Vs. Advani Chowk, Jamshedji Tata Road, Mumbai-400 020 (अपीलार्थी / Appellant) (प्रत्यर्थी/ Respondent) अपीलार्थी की ओर से / Appellant by : Ms. Kavita P. Kaushik, DR प्रत्यर्थी की ओर से / Respondent by : Shri Niraj Sheth, AR सुनवाई की तारीख / Date of hearing: 25.11.2019 घोर्णा की तारीख / Date of pronouncement : 31.12.2019

2 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 आदेश / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM: These appeals of Revenue are arising out of the different orders of the Commissioner of Income Tax (Appeals)]-2, Mumbai [in short CIT(A)], in appeal No. CIT(A)-2/IT-193/16-17 vide dated 20.04.2017. The Assessments were framed by the Income Tax officer, Ward 1(1)(2) Mumbai (in short ITO/ AO) for the A.Ys. 2011-12 & 2013-14 vide orders dated 17.03.2016, 27.03.2014 under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’). 2. The first common issue in these two appeals of Revenue is against the order of CIT(A) allowing deprecation on purchase of goodwill or any other business or commercial rights in view of the amendment of Section 32(1)(ii) of the Act. For this, in both the years, facts and circumstances are exactly identical and Revenue has raised identically worded grounds. Hence, we will take the facts and grounds raised in AY 2011-12 in ITA No. 6412/Mum/2016, the relevant ground Nos 1 and 2 read as under: - “i. Whether, on the facts and circumstances of the case, the CIT(A) was justified in holding that rights acquired for acquisition of Customer Contracts falls within the expression “any other business or commercial rights of similar nature” as defined in Explanation 3 to Section 32(1)(ii)

3 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 of the Income-tax Act, 1961 and thus eligible for depreciation under section 32 of the Income-tax Act, 1961. ii. Whether, on the facts and in the circumstances of the case, the CIT(A) was justified in allowing depreciation on amount paid by the assessee company for acquiring Customer Contracts even though such payment made by the assessee company could not be considered as purchase of goodwill or any other business or commercial right within the meaning of Section 32(1)(ii) of the Income-tax Act, 1961?” 3. Briefly stated facts are that the assessee is a Public Limited Company and wholly owned subsidiary of Blue Star Limited which is incorporated on 22.06.2010. The assessee is engaged in the business of providing contractual services relating to plumbing and fire-fighting projects acquired by its parent company from DS Gupta Constructions Private Limited (DSGCPL) on a slump sale basis via business purchase agreement dated 31.05.2010 and later assigned to the assessee under the Deed of Adherence dated 01.09.2010. Under the business projects agreement dated 01.09.2010 intangible assets comprising of customer contracts, non-compete fee, business and technical knowhow, trade mark, goodwill will acquire by assessee for a sum of ₹60 crores and recorded in the

4 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 books of accounts of the assessee based on valuation report from an independent valuer. The assessee claimed depreciation under section 32 of the Act for an amount of ₹15 crores computed at the rate of 25% on the above intangible assets acquired. During the course of assessment proceedings, the AO required the assessee to file the details of the intangible assets acquired and justification on the claim of deprecation on intangible assets. The assessee before the AO claimed that the depreciation is clamed on knowhow, copy rights, patents, trade mark, license, franchise agreement or any other business or commercial rights of similar nature being intangible assets acquired on or after 01.04.1998 owned, wholly or partly, by the assessee in term of explanation 3(b) of section 32(i) of the Act. The AO of the view, the assessee accounted for customer contracts valued at 29,99,75,000/- as intangible assets in its books of accounts out of the total business purchase agreement dated 31.05.2010 of ₹60 crores. According to AO, the assessee’s claim of deprecation on customer contracts cannot be allowed and for this, he observed as under: -

“5……………………………………………………………… ……..I have examined the assessee’s claim and found its argument not tenable. The customer contract of the previous owner that has been passed on to the current owner continues to have the same terms, conditions, time-frame for execution and value as it existed before the change of

5 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 management unless the same was re- negotiated. There is no erosion of value as the time progresses. On completion of contract, the assessee is to entitled to get the same amount that was agreed upon between the previous management and the client/customer. Therefore, the assessee’s claim depreciation on customer contracts is not acceptable. Further, the decision cited in the case of Indian Capital Market Pvt. Ltd. has not been accepted by the department. The departmental appeal is pending before the Hon’ble High Court, Bombay.

6 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 allowed the claim of the assessee by observing in Para 5.11 as under: - “5.11 I have carefully considered the submission made on behalf of the appellant. In the instant case, the appellant has claimed depreciation on the customer contracts being intangible asset. Considering the relevant judicial decisions cited by the AR, it is clear that, the Customer contract falls under the expression "any other business or commercial rights of similar nature" as defined in Explanation 3 to Sec. 32(1)(ii) at hence eligible for depreciation. Respectfully following jurisdictional ITAT, Mumbai in the case of Indian Capital Markets P. Ltd. and also following the Hon'ble in the case of Smifs Securities Ltd. 2012 348 ITR. I am of the considered the opinion that the contract ratio agreed by the appellant company is found to be untangible asset and therefore depreciation should be allowed and accordingly this ground of appeal is allowed. The aforesaid view is in accordance with the decision of the jurisdictional Tribunal in the case of

7 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 Indian Capital Markets P. Ltd (Supra). Thus, the appellant is eligible for depreciation and the addition made by the A.O. is hereby deleted. This ground is thus allowed.”

Aggrieved, now Revenue is in appeal before us.

8 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 of the Act considered the business contracts as intangible assets and allowed the claim of the assessee by observing in Para 5 and 6 as under: -

“5. On appraisal of the above said finding,we noticed that the CIT(A) has decided the matter of controversy on the basis of the decision of the CIT(A) in the earlier year order dated 29.07.2016 of the assessee which has been mentioned while passing the order and highlighted as italic above.The CIT(A) has decided the matter of controversy on the basis of decision in the case ofIndia Capital Markets P. Ltd. Vs. DCIT (2013) 56 SOT 32 (Mum), Brembo Brake India (P.) Ltd. Vs. DCIT (2015) 68 SOT (Pune) & CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC). The relevant finding has been given in para no. 20 which is reproduced below: -

“20. It is not in doubt or dispute that purchase of the clientele business by the assessee from M/s. AFC is a right which can be used as a tool to carry on the business. It canalso be seen from the angle of purchase of entire marketing net work by the assessee from M/s. AFC even if considered from this angle the assessee

9 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 is eligible for depreciation as held by the Tribunal. In ITA.181/M/2008 in the case of M/s. Jyoti India Metal Industries P. Ltd. Vs. ACIT. The Hon’ble Supreme Court in the case of CIT Vs Smifs Securities Ltd. (2012) 24 Taxmann.com 222 has held that goodwill is an asset eligible for depreciation. After considering the entire gamut of facts of instant case, it was held that the assessee is entitled for depreciation on payment of Rs.2.50 crores at 25 percent which comes to Rs.62,50,000/-as claimed by the assessee. The AO is accordingly, directed to allow the depreciation Ground No.1 is accordingly allowed. 6. It is specifically held that the customer contract falls under the expression any other business or commercial right on similar nature as defined in explanation-3 to Section 32 (1)(ii) of the Act and hence eligible for depreciation. The factual position is also the same in the instant case also wherein the assessee company which is subsidiary of Blue Star Ltd. (including Rs.60 Crs. for Intangible Assets & Goodwill) from D.S. Gupta Construction Pvt. Ltd. and thereafter the Blue Star Ltd. under a

10 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 Deed of Adherence, assigned the business to the assessee company and the assessee company claimed the depreciation on the intangible and goodwill acquired out of the aforesaid acquisition. Since the nature of the case and transaction are the same, therefore, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere at this appellate stage. Accordingly, this issue is being decided in favour of the assessee against the revenue.”

“12. In the present case, it is seen that the assessee vide slump sale agreement dated 30th June, 2004, acquired, as a going concern, the

11 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 transmission and distribution business of the transferor Company w.e.f. 1st April, 2004. As a result thereof, the running business of transmission and distribution was acquired by the transferee lock, stock and barrel minus the trademark of the transferor which was retained by the transferor, for lump sum consideration of Rs.44.7 Crores. It is further seen that the book value of the net tangible assets (assets minus liabilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as Rs.28.11 Crores. The said assets and liabilities were recorded in the books of transferee at the same value as appeared in the books of the transferor. The balance payment of Rs.16,58,76,000/- over and above the book value of net tangible assets, was allocated by the transferee towards acquisition of bundle of business and commercial rights, clearly defined in the slump sale agreement, compendiously termed as "goodwill" in the books of accounts, which comprised, inter alia, the following:- (i) Business claims, (ii) Business information, (iii) Business records, (iv) Contracts, (v) Skilled employees, (vi) knowhow. It is also observed that the AO accepted the allocation of the slump

12 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 consideration of Rs.44.7 Crores paid by the transferee, between tangible assets and intangible assets (described as goodwill) acquired as part of the running business. The AO, however, held that depreciation in terms of Section 32(1)(ii) of the Act was not, in law, available on goodwill. The CIT(A) and the ITAT approved the reasoning of the AO thereby holding disallowance of depreciation on the amount described as goodwill. It was thus argued on behalf of the assessee Company that Section 32(1)(ii) would mean rights similar in nature as the specified assets, viz., intangible, valuable and capable of being transferred and that such assets were eligible for depreciation. On behalf of the respondent it was argued that applying the doctrine of noscitur sociis the expression "any other business or commercial rights of similar nature" used in Explanation 3(b) to Section 32(1) has to take colour from the preceding words "knowhow, patents, copyrights, trademarks, licenses, franchises". It was urged that the Supreme Court had clearly held in Techno Shares & Stocks Ltd. ( supra) that "Our judgment should not be understood to mean that every business or commercial right would constitute a "licence" or a

13 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 "franchise" in terms of section 32(1)(ii) of 1961 Act".”

“iii. Whether, on the facts and circumstances of the case and in law, the CIT(A) is erred in holding that the Assessing Officer has power to recast the profit and loss account even when the same is, according to the assessee, not correctly prepared in accordance with

14 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 Schedule VI to the Companies Act, 1956 in view of the law laid down by Hon’ble Bombay High Court in the case of CIT vs. Forever Diamonds Pvt. Ltd. (ITA No. 1609 of 2013) delivered on 12.08.2015 and by the Hon’ble Supreme court in the case of Apollo Tyres Ltd. Vs. CIT 255 ITR 273 (SC)?”

15 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 gone through the relevant judicial decisions cited by the appellant with respect to the admissibility of fresh claims. In view of the various judicial decisions, it is clear that the Commissioner of Income Tax (Appeals) has plenary power in disposing off an appeal. Similar view has been taken by the Apex Court in Jute Corporation (supra), wherein the Apex court, in the context of section 251(1)(a) of the 1961 Act, held that there is no reason as to why the appellate commission cannot modify the assessment order or admit an additional ground even if not raised before the ITO. According to the Apex Court, no exception could be taken to this view as the Act does not place any restriction nor limitation on the exercise of appellate power Thus, additional claim of the appellant is admitted and is decided below on merits.

7.10 After perusing the submissions made and judicial decisions relied on by the appellant, it is being prepared in noted that the provisions of Sec. 115JB requires that net profit should be prepared in

16 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 accordance with Part II and III of Schedule VI to Companies Act. In the instant case, because of specific accounting treatment followed by the appellant pursuant to High Court order, the financial statements are not showing true and fair view and are contrary to Accounting Standards, provisions of Companies Act and Schedule VI thereto. The appellant has rightly contended that the scheme sanctioned by Hon’ble High court, do not have any over-riding effect in computing Book Profit. In the instant case, what has been done pursuant to High Court scheme is irrelevant while arriving at the true profit as per Part II of Schedule VI and hence the appellant is entitled to make necessary adjustment in order to incorporate the impact of the said observation to the Profit as shown in the profit & Loss account to arrive at correct Book Profit under section 115JB. Hence, the addition made by the AO is hereby deleted. This ground is thus allowed.”

17 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 13. We noted that assessee has made claim of exclusion of amortization of intangible assets, including goodwill, fee paid to consultants and expenses incurred for acquisition of business of DC Gupta construction Pvt. Ltd while computing book profit under section 115JB of the Act amounting to ₹42,38,11,308/-. We noted that the AO made addition in the book profit of the assessee but the facts are that the provisions of Sec. 115JB of the Act requires that net profit should be prepared in accordance with Part II and III of Schedule VI to Companies Act. In the instant case, because of specific accounting treatment followed by the assessee pursuant to High Court order, the financial statements are not showing true and fair view and are contrary to Accounting Standards, provisions of Companies Act and Schedule VI thereto. In the instant case, what has been done pursuant to High Court scheme is not affect the accounting to be made as per companies Act while arriving at the true profit as per Part II of Schedule VI and hence, the assessee is entitled to make necessary adjustment in order to incorporate the impact of the said observation to the Profit as shown in the profit & Loss account to arrive at correct Book Profit under section 115JB of the Act. Hence, the CIT(A) has rightly deleted the addition made by the AO. This ground of Revenue’s appeal is dismissed.

18 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 ₹1,1,98,917/-. For this Revenue has raised the following ground: - “3. Whether on the facts and in the circumstances and in law, the Ld. CIT(A) was justified in allowing reimbursement of expenses to Blue Star Limited amounting to ₹1,15,98,917/-, without considering the facts that assessee has failed to produce any documentary proof for allowing the expenses?” 15. The AO disallowed the claim of reimbursement expenses by stating that the assessee has not filed the details including bills and vouchers by observing as under: - “6. …………. Assessee vide its letter dt.04/03/2016, submitted only a chart of date wise vouchers of expenses amounting to ₹1,15,98,917/-. However, no documentary evidences e.g. copy of agreement for sharing of expenses, how it is determined that these expenses incurred are related to the assessee and how these expenses incurred and attributable to the business of the assessee etc. are given by the assessee.

19 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 Therefore, it is concluded that assessee does not have any documents to prove its claim. Accordingly, reimbursement of expenses of ₹1,15,98,917/- is disallowed and added to the total income of the assessee.”

20 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 924 of 2008]. The relevant portion is as under:

"In so far as Questions 5. 1 to 5.3 are concerned, in the same set of facts and on the same issue., considering the acts on record, the learned ITAT held that there was no business and nothing has been brought out on record on behalf of the revenue to show that the assessee has raised the bogus claim of reimbursement of expenditures. This is purely a finding off act and therefore, question of law as framed would not arise. 6.6 Respectfully following the jurisdictional ITAT, Mumbai and jurisdictional Mumbai High Court decision, I am of the considered opinion that disallowances made by the AO is not justifiable and therefore I direct the AO to delete the above disallowance. This ground of appeal is allowed.” Aggrieved, now Revenue is in appeal before Tribunal.

21 | P a g e Blue Star Engineering of Electronics Ltd. ITA Nos.5242/Mum/2017 & 6412/Mum/2016 17. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has filed details of reimbursement of expenses and this issue is covered by the decision of Hon’ble Bombay High Court in the case of Vazirani Lani Developers Pvt. Ltd. in ITA No. 924 of 2008. Hence, we find no infirmity in the order of CIT(A) and the same is confirmed. This issue of Revenue’s appeal is dismissed. 18. In the result, both the appeals of the Revenue are dismissed. Order pronounced in the open court on 31. 12.2019. Sd/- Sd/- (मनोज कुमार अग्रवाल / MANOJ KUMAR AGGARWAL) (महावीर ससिंह /MAHAVIR SINGH) (लेखा सदस्य / ACCOUNTANT MEMBER) (न्याययक सदस्य/ JUDICIAL MEMBER) मुिंबई, ददनािंक/ Mumbai, Dated 31.12.2019. स दीप सरकार, व.यनजी सधिव / Sudip Sarkar, Sr.PS आदेश की प्रयिसलपप अग्रेपिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A) 4. आयकर आयुक्त / CIT ववभागीय प्रयतयनधर्, आयकर अपीलीय अधर्करण, मुिंबई / DR, ITAT, Mumbai 5. 6. गार्ा फाईल / Guard file. आदेशान सार/ BY ORDER, सत्यावपत प्रयत //True Copy// उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीलीय अधिकरण, मुिंबई / ITAT, Mumbai