KAMADGRI FASHION LTD,MUMBAI vs. ITO WD 4(2)(1), MUMBAI

Rent Paid 68,890/- 2. Provision for incentive 97,37,699/- 3. Excess depreciation claimed 42,45,274/- TOTAL 1,40,51,863/- 2.2 During assessment proceedings, it was noted that the assessee paid a rent of Rs.3,68,560/- to an entity namely ALD Automotive Private Limited but did not deduct any TDS thereupon on the strength of ‘No Deduction certificate’ issued by ACIT-TDS1(1) dated 11/06/2009. The Ld. AO disallowed an amount of Rs.68,890/- being rent for the month of Kamadgiri Fashion Limited Assessment Year 2010-11 April & May, 2009 on the premises that the certificate was dated 11/06/2009 and could be applied only from June, 2009. 2.3 From perusal of Profit & Loss Account, it was noted that the assessee debited incentive expenses of Rs.99,69,850/- out of which an amount of Rs.99,39,699/- was shown as provisions. The Ld. AO noted that the said incentive was credited to the respective parties in the subsequent years and therefore allowable in subsequent years only and not in the impugned AY. 2.4 Further, Ld. AO noted that the assessee transferred Rs.424.53 Lacs from Amalgamation Reserve to General Reserve in the previous year relevant to AY 2009-10 wherein the company M/s Stripes Apparels Pvt. Ltd. was amalgamated with the assessee company and the same resulted into increase in general reserve to Rs.623.06 Lacs. The Ld. AO opined that the assessee purchased assets at higher cost but make the payment thereof at lower rate and therefore, amalgamation reserve was required to be reduced from the cost of the asset acquired by the assessee from the amalgamating company and proportionate deprecation be reduced accordingly. Finally, the Ld. AO reduced the depreciation against amalgamation reserve of Rs.424.53 Lacs at estimated rate of 10% which led to depreciation disallowance to the extent of Rs.42.45 Lacs.

Aggrieved, the assessee contested the same without any success before Ld.CIT(A) vide impugned order dated 14/01/2015 where the additions against incentives were confirmed on the premises that the expenses did not crystallized during impugned AY and the same, being Kamadgiri Fashion Limited Assessment Year 2010-11 contingent in nature, were not allowable u/s 37(1). The stand of Ld. AO was confirmed qua other additions also. Aggrieved, the assessee is in further appeal before us.

The Ld. Counsel for Assessee [AR] contested the addition against rent on the premises that the assessee did not deduct TDS against rental payment on the strength of ‘no deduction certificate’ issued u/s 197 in payee’s favor by the concerned Assessing Officer (TDS). Our attention is drawn to the fact that although the certificate is dated 11/06/2009, however, the same applies to whole financial year as evident from the annexure attached to the said certificate. In the alternative, it was contended that the impugned amount was much below threshold limit as provided u/s 194-I and therefore, even otherwise no tax deduction at source was required against the same. Qua addition against provision for incentives, Ld. AR drew our attention to the detailed documents placed at Page Nos. 52 to 101 of the paper book and contended that incentive was payable to the customers of the assessee against sales target achieved by them during impugned AY and the same had crystallized during impugned AY and allowable to assessee following mercantile system of accounting. The estimated addition against depreciation has been assailed on the ground that the assets were taken over by the assessee at book value only and full depreciation against the same was allowable to the assessee in terms of statutory provisions and lower authorities erred in understanding the issue in proper perspective.

We have carefully heard the rival contentions and perused relevant material on record. So far as the disallowance of rental expenses is concerned, we are inclined to delete the same for the simple reason that the impugned amount of Rs.68,890/- was well below the threshold limit of Rs.1,20,000/- as prescribed u/s 194-I during impugned AY so as to trigger the stated TDS provisions. Moreover, the annexure to certificate u/s 197 issued by concerned TDS officer quantifies the ‘Estimated Total Billing for F.Y.2009-10’ u/s 194-I’ which lead us to conclude that the same was applicable for the whole financial year. Resultantly, this addition stands deleted and this ground of assessee’s appeal succeeds.

The main dispute regarding addition against incentive expenses is crystallization. It is beyond doubt that under mercantile system of accounting, expenses pertaining to impugned AY were allowable to the assessee in impugned AY only provided that the same has been quantified and crystallized. The only basis on which the same has been disallowed by Ld. AO is that the same has been credited to the accounts of the respective parties in succeeding assessment years. However, in our opinion, if the liability had already been quantified and crystallized and provision thereof was made in the books of accounts, the same was allowable to the assessee irrespective of actual credit to the respective parties since the assessee, following mercantile system of accounting, was eligible to claim the same. The Ld. AR has placed elaborate Kamadgiri Fashion Limited Assessment Year 2010-11 documents in the paper book to demonstrate that the liability had actually crystallized during impugned AY. Therefore, without much deliberation, we restore the matter back to the file of Ld. AO to re- appreciate the documentary evidences submitted by the assessee and decide as per law. The assessee, in turn, is directed to demonstrate the crystallization thereof in the impugned AY. The Ld. AO is also directed to verify that deduction for these expenses is not claimed by the assessee in subsequent years. Resultantly, this ground of assessee’s appeal stands allowed for statistical purposes.

The last issue pertains to disallowance of depreciation for Rs.42.45 Lacs which is estimated @10% of amalgamation reserve accruing to the assessee. The facts giving rise to amalgamation reserve, as evident from Annual Report of the assessee company, are that pursuant to a scheme of amalgamation u/s 391 to 394 of the Companies Act, 1956, as approved by High Court of Bombay, one undertaking of an entity namely Stripes Apparels Ltd. (Transferor Company) was amalgamated into the assessee company which became effective from 29/06/2009. The entire business and whole of undertaking of the transferor company, on going concern basis, stood transferred to Assessee Company with effect from 01/04/2008. Pursuant to exchange ratio as approved under the scheme, the assessee allotted shares valuing at Rs.173.98 Lacs i.e. 17,39,866/- equity shares of Rs. 10/- each to the shareholders of the transferor company as against net assets of Rs.598.51 Lacs taken over by the assessee company. The differential of the two i.e. Rs.424.52 Lacs gave rise to the amalgamation reserve in the books of assessee company. All Kamadgiri Fashion Limited Assessment Year 2010-11 the assets and liabilities were taken over by the assessee at their book values as appearing in the books of transferor company, except minor adjustments so as to ensure uniformity in accounting policy and presentation of financial statements. The assessee has accounted the transaction on Pooling of Interest Method as envisaged in Accounting Standard-14 issued by ICAI. This method is followed in case of amalgamation in the nature of merger and according to this method, no adjustment is intended to be made in the book value of assets and liabilities taken over except to ensure uniformity of accounting policy. The Ld. AO has disallowed depreciation against the said amalgamation reserve at estimated rate of 10% and the same is the subject matter of this appeal.

On the basis of above, we note that lower authorities has erred in concluding that the amalgamation reserve represent lower payment made by the assessee to acquire depreciable assets of higher value whereas we have noted that the same represent difference of net assets taken over by the assessee and share capital issued to transferor company upon amalgamation. Further, all the assets & liabilities have been taken over at the book values only as evident from the Annual Report of the Company and moreover, this fact is never been controverted by the revenue.

Prima facie, the transaction is in the nature of demerger as defined in Section 2(19AA), the written down value of which is governed by Explanation 2A and 2B to Section 43(6). Since, the assessee is resulting Kamadgiri Fashion Limited Assessment Year 2010-11 company, Explanation 2B is applicable and the same is reproduced below:- Explanation 2B.—Where in a previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets in the case of the resulting company shall be the written down value of the transferred assets of the demerged company immediately before the demerger.

In nutshell, the assessee’s appeal stands partly allowed. Order pronounced in the open court on 04th October, 2017.