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Income Tax Appellate Tribunal, “F” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Ravish Sood(JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the Revenue is directed against the order dated 07.07.2016 passed by the learned CIT(A)-54, Mumbai and it relates to A.Y. 2011-12.
The Revenue has filed this appeal challenging the decision rendered by the learned CIT(A) on following issues :- a) restricting disallowance relating to bogus purchases to 12.5% of the value of bogus purchases.
b) restricting disallowance made out of expenditure incurred by way of cash to 2% as against 5% disallowed by the Assessing Officer. c) deleting the disallowance of depreciation claimed on goodwill and brand value.
The facts relating to the case are that the assessee was earlier known as M/s. Mudra Lifestyle Limited. It is engaged in the business of manufacture and sale of fabrics in domestic and export market. The AO completed the assessment by making various additions. The assessee got partial relief in the 2 M/s. E-Land Apparel Pvt. Ltd appeal filed by it before Ld CIT(A). The revenue is aggrieved by the decision rendered by Ld CIT(A) on the above said three issues.
The first issue relates to disallowance relating to bogus purchases. The Revenue received information from the Sales Tax Department of Government of Maharashtra that certain parties are indulging in giving only bogus bills without actually supplying the material. It was noticed that the assessee has purchased material from such parties for an amount aggregating to ` 650.32 lakhs. Hence, the Assessing Officer proposed to disallow the above said purchase treating them as bogus in nature. The assessee furnished details of invoice, ledger account copy and details of payments but it could not produce the suppliers before the Assessing Officer. Hence, the Assessing Officer disallowed entire amount of purchase of ` 650.32 lakhs.
Before the learned CIT(A), the assessee submitted that the above said purchase consideration was not debited to the profit and loss account, but they have been capitalized in the books of account as under:- Factory building ` 3,16,69,882 Weaving machinery ` 1,07,45,540 Capital work in progress ` 2,26,16,680 ` 6,50,32,102 =========== It was further contended that the Assessing Officer made the addition purely relying on the statement given by the suppliers before the Sales Tax authorities. It was also contended that the assessee has proved the genuineness of transactions by furnishing all the relevant documents. In the alternative, it was submitted that the addition, if any, should be restricted to only profit component involved in the alleged bogus purchases.
The learned CIT(A) was convinced with the explanations of the assessee and accordingly directed the Assessing Officer to restrict the disallowance to 12.5% of ` 650.32 lakhs, which worked out to ` 81.29 lakhs. Since the assessee has claimed that the above said purchases have been capitalized, the learned CIT(A) directed the Assessing Officer to examine the same and reduce
3 M/s. E-Land Apparel Pvt. Ltd the amount from the capital value of the respective assets and accordingly re- compute the depreciation also. Aggrieved, the Revenue has filed this appeal.
At the time of hearing, the learned AR submitted that an identical addition relating to bogus purchases was made in assessee’s hand in A.Y. 2010-11 and the Ld CIT(A) decided the issue in the similar lines discussed above. When the matter reached the Tribunal, the ITAT, vide its order dated 30.8.2017 passed in has upheld decision rendered by the learned CIT(A). The assessee also furnished the copy of the order of the Tribunal.
We heard learned Departmental Representative and perused the record. We noticed that the Coordinate Bench of the Tribunal has upheld the identical view taken by the learned CIT(A) on an identical issue in A.Y. 2010-11. For the sake of convenience we extract operative portion of the order passed by the Tribunal on identical issue: 6. We have heard the Id. Departmental Representative, perused the orders of the lower authorities and the material available on record. We have given a thoughtful consideration to the facts of the case and after perusing the observations recorded by the CIT(A) while restricting the disallowance in respect of (i). repair and maintenance debited by the assessee in its 'Profit and loss account' to 12.5% of the amount under consideration; (ii). scaling down of the purchase consideration of the plant & and machinery by 12.5%, and thus restricting the consequential disallowance of depreciation to Rs.2,320/- (i.e. 12.5% of Rs.18.563/-); and (iii) observing that as no depreciation was claimed by the assessee in respect of the capitalized W.I.P of Rs. 5,59,24,816/-, therefore, no disallowance during the year under consideration in respect of the same would be called for in the hands of the assessee, are of the considered view that no infirmity emerges from the said observations of the CIT(A) and find ourselves to be in agreement with the aforesaid view arrived at by him. We further find that the CIT(A) duly appreciating that now when the purchase consideration of plant and machinery and Capital W.I.P is to be scaled down/reduced by 12.5%, therefore, he had rightly directed the A.O to verify that only the balance value of the same was carried forward to the succeeding years. We are of the considered view that the CIT(A) as a word of caution had rightly directed that on account of reduction of W.D.V of the value of Plant & machinery and Capital W.I.P, the A.O may take necessary* steps and withdraw the excess claim of depreciation in the backdrop of the modified /reduced W.D.V of Plant & machinery and 4 M/s. E-Land Apparel Pvt. Ltd
capitalized W.I.P, as claimed by the assessee. That as regards the estimation by the CIT{A) of the profit/ margin embedded in the bogus purchases carried out by the assessee from the aforementioned parties at 12.5%, we are of the considered view that now when it remains as a matter of fact that though the assessee had made purchases of the goods under consideration, though not from the aforementioned parties, but from the open/grey market, then as observed by us hereinabove, the fact that the assessee must have been benefited from procuring such goods at a lower rate cannot be ruled out. Thus in the backdrop of the aforesaid factual position the quantification of the profit/margin involved in procuring of the goods under consideration from the open/grey market, in the absence of any material, has to be left to a fair estimation on the part of the A.O. We find that the Hon'ble High Court of Gujarat in the case of CIT-I Vs. Simit P. Sheth (ITA No. 553 of 2O13, dated 16.01.2013) has held that the profit/ margin from making of bogus purchases can fairly be taken at 12.5% of the value of such bogus purchases. We thus in the backdrop of the aforesaid view arrived at by the Hon'ble High Court, which thereafter had consistently been followed by different coordinate benches of the Tribunal for quantifying the element of benefit involved in making of bogus purchases by an assessee, are thus of the considered view that the CIT(A) had fairly estimated the profit /margin involved in the procuring of the goods from the open/grey market at 12.5%. We thus find no infirmity as regards the estimated rate of profit/margin of 12.5% adopted by the CIT(A), and thus are not persuaded to dislodge the said finding so arrived at by him. We are of the considered view that as the CIT(A) had passed a very well reasoned order, therefore, there is no reason for us to take a different view and dislodge the order so passed by him. We thus in the backdrop of our aforesaid observations uphold the order of the C1T(A) and dismiss the appeal of the revenue.
Since the Ld CIT(A) has taken the decision in line with the decision taken by him in the preceding year, which has since been upheld by the co-ordinate bench of Tribunal, we do not find any infirmity in the order passed by the learned CIT(A) on this issue.
The next issue urged by the revenue relates to adhoc disallowance made out of expenses.
During the course of assessment proceedings, the Assessing Officer asked the assessee to submit the details of expenses incurred in cash and also asked the assessee to furnish the proof to establish the genuineness. Since the assessee did not furnish the details as called for the by Assessing Officer, he
5 M/s. E-Land Apparel Pvt. Ltd disallowed 5% of aggregate amount of expenditure. The learned CIT(A) restricted the same to 2% and hence the Revenue is aggrieved.
We heard the parties on this issue. The Learned AR submitted that an identical disallowance was made by the Assessing Officer in A.Y. 2008-09 to 2010-11. When the matter reached the Tribunal, the ITAT, vide its order dated 22.12.2017 passed in and others, restricted the addition to the extent of 3% of the cash component of the expenditure. The Learned AR submitted that the Tribunal appreciated the fact that most of the expenditure have been incurred by way of cheque payments and hence restricted the addition to 3% of the cash component of the expenditure. The Ld A.R submitted that the assessee had also contested the disallowance sustained by the learned CIT(A) in those years by filing appeals. However, during the year under consideration, the assessee has accepted the order passed by the learned CIT(A). Accordingly, he submitted that the assessee does not expect any further relief and accordingly submitted that disallowance of 2% of the expenses sustained by the learned CIT(A) would be reasonable one.
We noticed that there is merit in the submissions of learned AR. In A.Y. 2008-09 to 2010-11, both the assessee and the Revenue had filed appeals. As in the year under consideration, the Assessing Officer had made adhoc disallowance of 5% of entire amount of expenditure in those years also, even though he proposed to make disallowance from out of expenses incurred by way of cash. The Ld CIT(A) restricted the disallowance to 2%. Since both the parties had filed the appeals challenging the decision of learned CIT(A), the Tribunal could interfere with the decision of Ld CIT(A) and could sustain addition to the extent of 3% of the cash component of the expenditure. However, during the year under consideration, the assessee has accepted the order passed by the learned CIT(A) on this issue. We have noticed that the Ld CIT(A) has sustained addition to the extent of 2% of the entire amount of expenditure and we are of the view that the disallowance so sustained would
6 M/s. E-Land Apparel Pvt. Ltd meet the objective sought to be achieved by the Assessing Officer. Accordingly, we uphold the order passed by the learned CIT(A) on this issue.
13. The next issue relates to disallowance of depreciation claimed on goodwill and brand value. Identical issue has come up before the Tribunal in A.Y. 2008-09 to 2010-11 (referred supra) and the Tribunal has allowed the claim of the assessee. For the sake of convenience, we extract below the relevant discussion made by the Tribunal:- 12. Next issue relates to disallowance of depreciation claimed on goodwill and brand value. The assessee claimed depreciation on the amount of goodwill and brand value by treating them as intangible assets. The Assessing Officer disallowed the claims by holding that the assessee did not acquire these assets by making payment. In AY 2008- 09, the learned CIT(A) allowed the depreciation on the brand value and confirmed the disallowance of depreciation claimed on goodwill. In AY 2009-10 and 2010-11, the Le CIT(A), however, allowed the claim of the assessee on both the items. The assessee has challenged the decision of Ld CIT(A) in respect of Goodwill in Ground nos.6 in AY 2008-09. The revenue has challenged the decision of Ld CIT(A) rendered on both Goodwill and brand value in AY 2008-09. However, the revenue has challenged the relief granted on brand value only in AY 2009-10 and 2010-11, i.e., it did not object to the relief granted on goodwill in these two years.
The facts relating to these issues are discussed in brief. The Learned AR submitted that the assessee acquired three group companies during the year relevant to the A.Y. 2006-07 including the brand name. The difference between the assets and liabilities was treated as goodwill as per the accounting principles. Accordingly, the assessee claimed depreciation on the amount of brand value as well as good will by treating them as intangible assets eligible for depreciation. However, the AO rejected both the claims with the observations that the assessee was already enjoying the brand name of “Mudra” and further it did not pay any amount specifically for “good will”. The Ld CIT(A) allowed depreciation on brand name, but confirmed the disallowance of depreciation on goodwill.
The Ld A.R submitted that Hon'ble Supreme Court has held in the case of Smifs Securities Ltd., (348 ITR 302) that depreciation is allowable on goodwill amount. He further submitted that Hon'ble Supreme Court has observed in paragraph 12 of his order that the difference between ‘cost of assets’ and the ‘amount paid to acquire the same’ would constitute goodwill. Accordingly, learned AR submitted that the difference between the net asset acquired by the assessee and 7 M/s. E-Land Apparel Pvt. Ltd
payment made for it was rightly treated by the assessee as goodwill. Accordingly he submitted that the Ld CIT(A) was not right in law in confirming the disallowance of depreciation on goodwill. He submitted that the brand name “mudra” was owned by some other company and the assessee has acquired the same in the process of merger. Hence the Ld CIT(A) was justified in allowing depreciation on brand name.
15. The Learned AR further submitted that the learned CIT(A) has followed the decision rendered by the Coordinate Bench in the case of Toyo Engineering India Ltd. (ITA No.1040/Mum/2010 and 3834/Mum/2011 dated 11.7.2012) in order to decide this issue relating to depreciation on goodwill against the assessee. The Ld A.R submitted that the Tribunal had disallowed the claim of depreciation on goodwill in the very same assessee’s case in another year and hence the assessee carried the matter in appeal before Hon'ble Bombay High Court. The Hon'ble High Court, vide its order dated 30.10.2012 passed in of 2012, restored the matter back to the file of the Tribunal for examining the issue afresh in the light of the decision rendered by Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra). Thereafter the Coordinate Bench has passed the order in ITA No. 3279/Mum/2008 dated 30.10.2014 and has decided the issue in favour of the assessee. He submitted that the Coordinate Bench, in para 7 of the order, has specifically observed that the difference, if any, between the book value of assets and liabilities should be transferred to the account of goodwill of the assessee. Further the Coordinate Bench of the held that the assessee is entitled for depreciation on the amount of goodwill.
On the contrary, the learned Departmental Representative placed strong reliance on the order passed by the Assessing Officer on both the issues in all the three years. The Learned Departmental Representative further submitted that the learned CIT(A) has committed an error in allowing depreciation on the brand value in all the three years.
We heard the rival contentions and perused the record. We shall first take up the issue relating to depreciation on brand value. We noticed that the learned CIT(A) has followed the decision of the Coordinate Bench rendered in the case of KEC International Ltd. Vs. Addl. CIT (2010) 41 SOT 43 to come to the conclusion that depreciation is allowable on brand value. The Ld A.R submitted that the brand name was owned by some other company and the assessee has acquired the same only during the course of merger process. Since the assessee has acquired the brand name, the same constitutes intangible assets as held by the co-ordinate bench in the case of KEC International (supra) and the depreciation is allowable thereon. Accordingly we confirm the order passed by Ld CIT(A) in all the three years under consideration.
8 M/s. E-Land Apparel Pvt. Ltd
The next issue relates to the depreciation claimed on goodwill. We have earlier noticed that the Ld CIT(A) has confirmed disallowance of claim only in AY 2008-09 and allowed the claim made in AY 2009-10 and 2010-11. The revenue has accepted the decision of Ld CIT(A) rendered in AY 2009-10 and 2010-11 on goodwill issue. We noticed that the learned CIT(A) has confirmed the disallowance of depreciation claimed on goodwill by following the decision rendered by the Coordinate Bench in the case of Toyo Engineering India Ltd. (supra). The Learned AR has demonstrated that the matter in the case of Toyo Engineering India Ltd. (supra) was taken to Hon'ble Bombay High Court and Hon'ble High Court has restored the matter back to the file of the Tribunal. In the restored proceedings, the Coordinate Bench has specifically held that the difference between the book value of assets and liabilities should be transferred to goodwill account of the assessee and further the assessee is entitled to claim depreciation on the goodwill. Thus, we noticed that various reasoning given by the tax authorities in support of the disallowance on depreciation on goodwill fail. Accordingly, we direct the Assessing Officer to allow depreciation claimed by the assessee both on goodwill as well as brand value in all the three years. The orders passed by Ld CIT(A) on this issue, wherever contradictory to our decision, would stand modified accordingly.
14. Since the decision rendered by the learned CIT(A) is in accordance with the decision taken by the Tribunal in earlier years, we do not find any reason to interfere with his order on this issue.
In the result, appeal filed by the Revenue is dismissed. Order has been pronounced in the Court on 17.1.2018.