DCIT, NEW DELHI vs. M/S. METRO TYRES LTD., NEW DELHI

That the Learned CIT(A) has erred in sustaining the disallowance of Rs. 39,600/- being the deduction allowable under section 24(a) of the Act on the contention that the income from rent of Rs. 1,32,000/- & 10 Others 4 Metro Tyres Ltd. received by letting out of property at Ludhiana has been treated as business income by the appellant himself in the earlier years and therefore, for consistency sake the amount of Rs 1,32,000/- is to be treated as business income. Every assessment year being an independent assessment year, the income from rent should have been held to be taxable under the head income from house property.”

Both the parties take us to the CIT(A)’s lower appellate discussion affirming the Assessing Officer’s action disallowing the assessee’s depreciation claim on non-compete fee, amounting to Rs.1,00,00,000/- u/s 32(1)(ii) of the Act as under:

It is in this factual backdrop that the instant issue of the assessee’s claim raised qua its non-compete fees arises for our apt adjudication. It is evident to us during the course of hearing that this is not the first year of the assessee having claimed the impugned depreciation on non-compete fees as our attention is invited to the relevant non-compete agreement dated 24.10.2005 followed by the assessment records for the corresponding A.Y. 2006-07 comprising of the Assessing Officer’s notice dated 10.09.2008 asking for the relevant non- compete fees details (pages 103 to 104 of the paper book), the taxpayer reply to this effect dated 24.09.2008 (pages 105 to 106) followed by the Assessing Officer’s section 143(3) assessment dated 30.12.2008 not making any such disallowance in the said preceding assessment year.

Mr. Kapoor vehemently submits in light of these facts that once the assessee’s impugned depreciation claim stood accepted in the immediate preceding assessment year, the learned lower authorities could not have ignored the settled legal proposition that the corresponding “block of assets” u/s 2(1) r.w.s 32(1)(ii) of the Act is not to be disturbed in the subsequent assessment years as per CIT Vs. Oswal Agro Mills & 10 Others 7 Metro Tyres Ltd. Ltd. in ITA 161/2006 & others connected cases, decided on 24.12.2010 as under:

We have considered these submissions of the learned counsel for the parties and are of the opinion that the arguments of the learned counsel for the assessee have to prevail. Mr. Aggarwal, learned Senior counsel for the assessee is right in his submission that the position concerning the manner in which the depreciation is to be allowed, has gone a sea change after the amendment of Section 32 by the Taxation Laws (Amendment) Act, 1986. Section 32(1) of the Act allows the depreciation on the written down value of the assets.

Section 2 (11) of the Act defines the term „block of assets‟ as under: “2(11) "Block of assets" means a group of assets falling within a class of assets comprising - (a) Tangible assets, being buildings, machinery, plant or furniture; (b) Intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed;”

Along with the aforesaid amendment, definition of written down value as contained in Section 43(6) has also been amended and the amended provisions read as under:

Thus, for the assessment year 1998-99, the W.D.V. of any block of assets shall be the aggregate of the W.D.V. of all the assets falling within that block of assets at the beginning of the previous year. From this, the adjustment has to be made for the increase or reduction in the block of assets during the year under consideration. The deduction from the block of assets has to be made in respect of any asset, sold discarded or demolished or destroyed during the previous year.

As per amended Section 32, deduction is to be allowed – “In the case of any block of assets, such percentage on the written down value thereof as may be prescribed”. Thus, the depreciation is allowed on block of assets, and the Revenue cannot segregate a particular asset therefrom on the ground that it was not put to use.

With the aforesaid amendment, the depreciation is now to be allowed on the written down value of the „block of assets‟ at such percentage as may be prescribed. With this amendment, individual assets have lost their identity and concept of „block of assets‟ has been introduced, which is relevant for calculating the deprecation. It would be of benefit to take note of the Circular issued by the Revenue itself explaining the purpose behind the amended provision. The same is contained in CBDT Circular No.469 dated 23.09.1986, wherein the rationale behind the aforesaid amendment is described as under: “6.3 As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the recordkeeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture."

It becomes manifest from the reading of the aforesaid Circular that the Legislature felt that keeping the details with regard to each and every depreciable assets was time consuming both for the assessee and the Assessing Officer. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of asset falling within the same class of assets. 32. Another significant and contemporaneous development, which needs to be noticed is that the Legislature has also deleted the provision for allowing terminal depreciation in respect of each asset, which & 10 Others 10 Metro Tyres Ltd. was previously allowable under section 32(1)(iii) and also taxing of balancing charge under section 41(2) in the year of sale. Instead of these two provisions, now whatever is the saleproceed of sale of any depreciable asset, it has to be reduced from the block of assets. This amendment was made because now the assessees are not required to maintain particulars of each asset separately and in the absence of such particular, it cannot be ascertained whether on sale of any asset, there was any profit liable to be taxed under section 41(2) or terminal loss allowable under section 32(1)(iii). This amendment also strengthen the claim that now only detail for "block of assets" has to be maintained and not separately for each asset.

Having regard to this legislative intent contained in the aforesaid amendment, it is difficult to accept the submission of the learned counsel for the Revenue that for allowing the depreciation, user of each and every asset is essential even when a particular asset forms part of „block of assets‟. Acceptance of this contention would mean that the assessee is to be directed to maintain the details of each asset separately and that would frustrate the very purpose for which the amendment was brought about. It is also essential to point out that the Revenue is not put to any loss by adopting such method and allowing depreciation on a particular asset, forming part of the „block of assets‟ even when that particular asset is not used in the relevant assessment year. Whenever such an asset is sold, it would result in short term capital gain, which would be exigible to tax and for this reason, we say that there is no loss to Revenue either.

The upshot of the aforesaid discussion is that though we are not entirely agreeing with the reasoning of the Tribunal contained in the impugned judgment, we are upholding the conclusion of the Tribunal based on the „block of assets‟ as discussed above. The consequence would be to dismiss these appeals. However, there will be no order as to costs.”

Faced with this situation, learned CIT-DR quotes hon’ble jurisdictional high court’s decision in Sharp Business System Vs. CIT (2012) 211 taxmann.com 576 (Del) holding that such a depreciation claim is not admissible since a non-compete clause does not form an intangible asset. Ms. Chaudhary vehemently contends therefore, that once the issues stand & 10 Others 11 Metro Tyres Ltd. settled in the preceding terms, we ought to confirm the learned lower authorities action rejecting the assessee’s depreciation claim.

We find no merit in the Revenue’s submissions as their lordships subsequent decision in PCIT Vs. Pepsico India Holding Pvt. Ltd. order in ITA 166/2023 dated 16.04.2024; pronounced after “Sharp Business System” has reiterated the fact that the impugned disallowance could not be made once corresponding depreciation stood accepted in the preceding assessment years as under:

That only leaves us to deal with the question of depreciation on non-compete fee. We note that the issue of deprecation on non-compete fee is an issue which is no longer res integra and stands answered by our Court in Sharp Business System v. Income Tax-III, [2012 SCC OnLine Del 5639] in favour of the appellant.

However, insofar the present case is concerned, the ITAT has taken into consideration the following facts as would be evident from paragraph no.26, which is reproduced as under: “26. We have gone through the details of the non- compete fees incorporated at page No. 70 of the paper book which clearly reveals that for the earlier years, namely, 2005-06 to 2007-08 the Revenue accepted the depreciation claimed at Rs. 63,54,176/-, Rs. 47,65,632/-, and Rs.35,74,224/-, but in respect of the assessment year 2008-09 the depreciation on the capitalized non-compete fee claimed that Rs.26,80,668/-was disallowed. Reasoning given by the Assessing Officer to disallow this claim is that the issue hinges around the interpretation of the phrase "business or commercial rights of similar nature" used in clause (ii) of section 32, and a careful reference to the language of the provisions in section 32 makes it clear that all the specific awards that a preceding general words "business or commercial rights of similar nature" are related to a class of rights which are intellectual property rights whereas the alleged payment is for non-compete fee. Further, according to the learned Assessing Officer the right to non-compete acquired by the assessee is only a right in personam and therefore the assessee is not entitled to claim & 10 Others 12 Metro Tyres Ltd. depreciation on the non-compete fee. Learned Assessing Officer does not refer to any change of circumstances from the earlier years so as to deviate from the view that was taken for earlier years. We therefore do not find anything illegality or irregularity in the Ld. CIT(A) following the view taken for the earlier years under identical circumstances. Ground No. 6 is accordingly devoid of merits and is dismissed.”

The ITAT has essentially followed the principle of consistency insofar as the case of the respondent – assessee is concerned.

We consequently find no justification to interfere with or disturb the ultimate conclusions rendered by the ITAT, notwithstanding it having failed to notice or consider the judgment rendered in Sharp Business System.

We find sufficient merit in the path that we propose to take since although the issue which arises inter parties and for the year in question would be rendered a quietus consequent to the disposal of the present appeal, the question of law already stands settled by Sharp Business System and would govern the issue if it arise in any subsequent adjudication.

The appeal consequently fails and shall stand dismissed.”

It is thus clear that their lordship’s above latter decision has settled the issue in assessee’s favour that even inspite of the case law “Sharp Business System”, once the assessee’s corresponding depreciation stood duly accepted in the preceding assessment year, it’s relevant “block of assets” could not have been interfered with by the learned departmental authorities. We accordingly find merit in the assessee’s instant first and foremost substantive ground and accept its impugned depreciation claim on non-compete fees. The assessee’s succeeds in its instant first and foremost substantive ground in the “lead” appeal (supra) and its latter twin cases and 4734/Del/2017 for A.Y. 2013-14 and 2014- & 10 Others 13 Metro Tyres Ltd. 15, respectively, raising this sole substantive issue succeed in very terms.

We now advert to the assessee’s second substantive ground that both the learned lower authorities have erred in law and on fact in rejecting its rental income claim of Rs.1,32,000/-; after claiming section 24(1) deduction, for the sole reason that the corresponding house property was earlier used for business purposes and therefore, the rental income ought to be treated as business income only.

It is evident in this factual backdrop that the instant issue has arisen for the first time in the impugned assessment year once the assessee has started letting out the corresponding house property. And this clinching factual aspect has nowhere been rebutted by the learned departmental authorities. We thus find no merit in the Revenue’s vehement contentions in forcibly imposing business income assessment on the assessee and direct the learned Assessing Officer to frame his consequential computation after treating the income herein of Rs.1,32,000/- under the “head” house property followed by his consequential computation. Ordered accordingly. This assessee’s instant lead appeal is allowed in above terms.

The assessee’s next twin appeals & 5767/Del/2013 A.Ys. 2008-09 and 2009-10 also raises the identical first and foremost issue of depreciation on non- compete fees which is accepted in the preceding terms. So is the outcome of its second identical substantive ground claiming assessment of its income from very house property than business income (supra), is also accepted in very terms. Ordered accordingly.

This leaves us with the assessee’s third and last issue of section 14A r.w. Rule 8D disallowance; in assessment years 2008-09 and 2009-10’s cases wherein learned counsel argues that both the lower authorities had nowhere accorded any satisfaction qua the assessee’s books of account as stipulated u/s 14A(ii) of the Act. Faced with this situation, learned counsel placed strong reliance on (2017) 399 ITR 576 (Del) HT Media Ltd. Vs. PCIT.

Learned CIT-DR draws strong support from both lower authorities respective findings making section 14A r.w. Rule 8D disallowance in assessee’s hands. The fact however remains the foregoing statutory satisfaction u/s 14A(2) of the Act is nowhere emanating from the instant case file. That being the case, we place heavy reliance on hon’ble jurisdictional high court foregoing decision to delete the impugned disallowance in very terms.

The assessee’s identical third substantive ground in assessment year 2008-09 and 2009-10’s appeals & 5767/Del/2013 is accepted. These twin cases stand allowed in very terms.

This leaves us with the remaining appeal between the parties i.e. assessee’s case for A.Y. 2009-10, assessee’s and Revenue’s cross appeals ITA Nos. 5041 & 5344/Del/2015 for A.Y. 2010-11, as many cases ITA No. 368 & 418/Del/2016 for A.Y. 2011-12 and taxpayer’s appeal ITA No. 379/Del/2016 for A.Y. 2012-13, involving section 143(3) r.w.s. 153A proceedings arising from the department’s search action dated 14.07.2012, conducted in M/s Metro Ortem group of cases.

It is at this stage that the learned counsel invites our attention to the assessee’s identical petitions in all these four assessment years seeking to raises an additional ground that the learned Assessing Officer had not framed his assessment after obtaining a valid approval(s) u/s 153D of the Act.

Learned CIT-DR vehemently objects to the assessee’s instant petitions that such a hyper-technical ground could not be allowed to be raised at this belated stage. We find no merit in the Revenue’s instant technical objection as per National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 that the tribunal is indeed empowered to entertain such an additional ground going to root of the matter provided all the relevant facts form part of the records.

We keep in mind this fine distinction and note very a perusal of the corresponding section 153D records that the assessee’s Assessing Officer had sought for the prescribed authority’s approval on 16.12.2019 which stood granted on 28.03.2014 in group of 56 connected cases. Learned CIT-DR would hardly dispute the clinching fact that this combined approval appears to be a non-speaking one not indicating any due application of mind by the competent authority. We thus quote ACIT Vs. Sirzuddin Company (2023) 454 ITR 312 (Odisa) as upheld in SLP Civial No. 44989/2023 dated 28.11.2023, PCIT Vs. Shiv Kumar Nyyar (2024) 163 taxmann.com 9 (Del), PCIT Vs. Sapna Gupta (2023) 147 Taxmann.com 288(All) that such a mechanical approval u/s 153D of the Act vitiates the assessment in entirety. We accordingly conclude that the assessee’s instant additional ground (supra) going to root of the matter deserves to be accepted. Ordered accordingly. All these four assessments in as many corresponding A.Ys. 2009-

All other pleadings on merits in the instant latter six appeals involving section 153A r.w.s. 143(3) proceedings (supra) stand rendered academic.

To sum up, the assessee’s instant nine appeals 2266 & 5767/Del/2013, ITA Nos. 5039 & 5041/Del/2015, ITA Nos. 378, 379 & 5966/Del/2016 and ITA No. 4734/Del/2017 are allowed and the Revenue’s twin cross appeals ITA No. 5354/Del/2015 &