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Income Tax Appellate Tribunal, D BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 1961/MUM/2019 (Assessment Year: 2014-15) Quess Corp Limited (successor to Aravon Services Pvt. Ltd.), 3/3/2, Bellandur Gate, Sarjapur Main Road, Bangalore - 560102 [PAN: AAGCA4383F] …………… Appellant Deputy Commissioner of Vs Income Tax – 9(1)(2), Mumbai, Room No. 802, 8th Floor, Pratishtha Bhavan, Old CGO Annexe, Respondent M K Road, Mumbai - 400020 ……………. Appearance For the Appellant/Assessee : Shri Aditya Ramchandran For the Respondent/Department : Smt. Mahita Nair Date Conclusion of hearing : 02.01.2024 Pronouncement of order : 05.01.2024
O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Assessee has challenged the order, dated 29/01/2019, passed by the Ld. Commissioner of Income Tax (Appeals) – 16, Mumbai [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2014-15, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 28/12/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) 2. The Appellant has raised following grounds of appeal:
“1.1 The Commissioner of Income Tax (Appeals) - (CIT (A)) erred in upholding the disallowance of depreciation on Goodwill amounting to Rs. 2,47,92,333/- made by the Deputy Commissioner of Income Tax 9(1)(2), Mumbai (hereinafter known as Assessing Officer (AO) on account of impairment of asset as per Accounting Standard and not actually sold or disposed off.
1.2 The CIT (A) ought to have allowed depreciation on Goodwill amounting to Rs. 2,47,92,333/- as the same is allowable U/s 32(1) when the intangible assets were acquired and paid in past years. Honourable ITAT Mumbai 'A' Bench has allowed depreciation on Goodwill in the assessee's own case for assessment year 2009-10 in principle and goodwill is not sold/realized by the Petitioner and continue to enjoy the Goodwill during the year .
2.1 The CIT(A) erred in upholding the disallowance of part of director’s remuneration amounting to Rs. 7,03,286/- made by the AO without understanding the reconciliation submitted to him.
2.2 The CIT(A) should have allowed full Director Remuneration debited to P&L Account and not to disallow part of director's remuneration amounting to Rs. 7,03,286/- as the same is in the nature of business expenses and in not in the nature of personal or Capital Expenditure. CIT (A) should not have disallowed Rs. 7,03,286/- inspite of presenting the reconciliation of the difference in the amount of remuneration paid to the Director and the amount of taxable salary under Income Tax Act. Some of the expense was incurred by the Company but the said amount was not liable to tax in the hands of the Director due to various rules of Income Tax Act 1961.
2.3. The AO erred in disallowing Rs. 7,03,286/- as a part of remuneration paid to Director which was mainly because of Rent free accommodation apart from other various exempt perquisites like PF contribution, PF administrative expenses, LTA e.t.c given to the Director. The expense claimed by the Petitioner Company being Rs. 2,10,87,253/- may not necessarily match with Director's taxable Remuneration of Rs. 2,03,86,467/- as per 2
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) Return of Income filed by the Director, as allowability of expense to the company is different from the taxability of salary income in the hands of Director and are governed under different sections of the Act. Reconciliation of the amount paid by the Petitioner and the amount shown in the return of the Director is given below which was presented before AO and CIT(A) but both failed to understand the reconciliation statement.
Particulars Amount Amount Amount paid by the 21,087,253 Petitioner to Director ADD: Malaysian Tax Paid 877,482 Car Perquisites 39,600 Total 22,004,335 LESS: Exempt Perquisites Rent Free Accommodation 786,446 Medical Allowance 943 LTA 107,324 Employer’s Contribution to 660,267 PF PF Admin Charges 62,888 1,617,868 Income as per Return file 20,386,467 by the Director “ 3. The relevant facts in brief are that the Assessing Officer completed the assessment for the Assessment Year 2014-15 vide order, dated 28/12/2016, passed under Section 143(3) of the Act after making inter alia, the following additions/disallowances:
(a) Disallowance of depreciation of INR 2,47,92,333/- claimed on goodwill amount claimed by the Appellant (b) Disallowance of INR 7,03,286/- under Section 40A(2)(b) of the Act in respect of remuneration paid to the Directors 4. Being aggrieved, the Appellant carried the issue in appeal before CIT(A). However, the CIT(A) declined to grant any relief while disposing of appeal vide order, dated 29/01/2019.
Being aggrieved, the Appellant is now in appeal before us on the
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) grounds reproduced in paragraph 2 above.
Ground No. 1.1 to 1.2 6. Ground No. 1.1 to 1.2 raised by the Appellant are directed against the order of the CIT(A) upholding the disallowance for depreciation of INR 2,47,92,333/- on goodwill claimed by the Appellant, whereas Ground No. 2.1 to 2.3 pertain to disallowance of INR 7,03,286/- made by the Assessing Officer under Section 40A(2)(b) of the Act and sustained by the CIT(A).
The relevant facts for adjudication of Ground No. 1.1 to 1.2 are that in the computation of income for the Assessment Year 2014-15 the Appellant had claimed deduction of INR 2,47,92,333/- being depreciation on Goodwill. The Assessing Officer noted that for Assessment Year 2012-13 and Assessment Year 2013-14 Appellant’s claim for depreciation was disallowed by the Assessing Officer on the ground that on account of impairment loss the goodwill was written off by the Appellant from the books of account prepared as per the provisions of the Companies Act. Further, even as per the provisions of the Act, depreciation was to be computed on the written down value of the asset. Since the written down value was reduced to zero and the block of asset ceased to exist on the last day of the relevant previous year, no depreciation was allowable as per the provisions of the Act. Since identical claim for depreciation for goodwill was made by the Appellant for the Assessment Year 2014-15, the Appellant was asked to show cause as to why depreciation on goodwill should not be disallowed based on the assessment order for the Assessment Year 2012-13 and 2013-14. In response, the Appellant filed submissions. However, the Assessing Officer was not convinced and disallowed depreciation of INR 2,47,92,333/- claimed by the Appellant.
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) 8. In appeal on this issue, the CIT(A) confirmed the disallowance following the order passed by the Commission of Income Tax (Appeals) – 16 in appeal for the Assessment Year 2012-13.
Being aggrieved, the Appellant carried the issue in appeal before us.
During the course of hearing both the sides agreed that the Tribunal had, vide order dated 28/08/2019, passed in appeal preferred by the Appellant for the Assessment Year 2012-13 [ITA No. 2546/Mum/2018] decided identical issue against the Appellant and in favour of the Revenue holding that the Appellant was not entitled to depreciation on goodwill. The relevant extract of the aforesaid decision of the Tribunal reads as under: “4. The Ld. AR for the assessee submitted that the Ld.CIT(A) was erred in upholding the disallowances of deprecation on goodwill amounting to Rs. 3,03,70,514/- without appreciating the fact that depreciation on goodwill is allowable u/s 32(1) as an intangible asset of any other business or commercial rights of similar nature. The Ld. AR, further submitted that although, the assessee has written of goodwill in books of accounts by impairment of asset, as per the accounting standard issued by the ICAI, but the written down value of such goodwill is continued to be remain in the books of accounts and also, as long as, the block of asset is continued in the books of accounts, the assessee is entitled to claim depreciation on WDV of such block of assets. 5. The Ld. DR, on the other hand, strongly supported order of the Ld.CIT(A). 6. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. There is no doubt with regard to the allowability of depreciation on goodwill being, any other business or commercial rights of similar nature u/s. 32(1) of the I.T.Act, 1961. The Hon’ble Supreme Court in the case of CIT vs Smifs Securities Limited (2012) 348 ITR 302 (SC) held that goodwill is an asset under the expression used in Explanation 3(b)(ii) to section 32(1) and therefore, deprecation is allowable on such an asset as any other business or commercial rights of similar nature. The question
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) before the AO was whether, deprecation on goodwill claimed by the assessee is allowable or not, when such goodwill is ceased to exist in the books of accounts, during the relevant financial year. The provision of section 32 of the I.T. Act, 1961 provides for grant of deprecation. Section 2(11) defines, the term of block of assets, which includes intangible assets being know-how, patent, copy rights, trade marks, licences, franchise or any other business or commercial right similar nature. In order to claim depreciation, the assessee should fulfill three conditions, as per which, the assessee should be owner of the asset, the asset should be used for the purpose of business and the block of assets should exist to claim deprecation. In this case, the assesse has impaired, the value of goodwill recorded in the books of accounts and the excess value as determined, in accordance with accounting standard issue by the ICAI has been written off in AY 2011-12. Further, it was noticed from the assessment order that the assessee has shown “Nil’ value for goodwill as on 31/03/2012 in its books of accounts. Thus, as per books of accounts, the goodwill ceased to exist. Accordingly, the assessee has not claimed any deprecation in the books of account on value of goodwill. Further, deprecation is calculated on written down value of the block of assets. If, the written down value of asset is reduced to zero or, the block of asset is empty or ceased to exist on the last date of the previous year, then no depreciation is allowable, even though the written down value of the asset is not reduced to zero. In this case, there is no doubt whatsoever with regard to existance of assets in the books of accounts for the relevant financial year. As claimed by the assessee itself, it has fully written off goodwill in the books of accounts and the asset ceased to exist in the books of accounts on the last date of the previous year. Therefore, we are of the considered view that once, a particular asset is ceased to exist in the books of account and also, the assessee is not getting any enduring benefit from such assets, then the question of depreciation on such non existing asset does not arise. Further, the Ld. AR for the assessee relied upon by the judgment of the ITAT, in assessee’s own case for AY 2009- 10 to argue that the Tribunal has allowed depreciation on goodwill. We find that the Tribunal has allowed deprecation on goodwill by following the decision of Hon’ble Supreme Court in the case of Smifs Securities Limited vs CIT (supra), on the ground that goodwill is an asset under the expression used in explanation 3(b) to section 32(1) and therefore, deprecation is allowable on such asset as intangible assets being any other business or commercial rights of similar nature. As we have already stated earlier, there is no dispute with regard to allowability of deprecation on goodwill, but when you compare the facts of the current year, the question of allowability of deprecation has to be examined, in
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) the light of provision of section 32(1), where it mandates the block of assets should exists to claim depreciation. Since, goodwill is not treated as an asset in its books of accounts and also, the assessee is not getting any enduring benefit out of such goodwill, the question of allowing depreciation on such non existing asset does not arise. The Ld.AO as well the Ld.CIT(A), after considering relevant facts has rightly disallowed depreciation claimed on non-existing asset being goodwill. We do not find any error in the order of the Ld.CIT(A). Hence we are inclined to uphold order of the Ld.CIT(A) and dismissed appeal filed by the assessee.” (Emphasis Supplied) 11. In view of the above decision of the Tribunal in the case of the Appellant for the Assessment Year 2012-13, we decline to interfere with the order passed by the CIT(A) as the same in line with the aforesaid decision of the Tribunal disallowing depreciation on the same asset/goodwill. Therefore, Ground No. 1.1 to 1.2 raised by the Appellant are dismissed.
Ground No. 2.1 to 2.3 12. During the assessment proceedings, the Assessing Officer observed that the managerial remuneration of INR 2,10,87,253/- was paid to the Director/President of the Appellant-Company. Vide notice, dated 04/08/2016, issued under Section 142(1) of the Act, the Appellant was directed to provide proof that the amounts paid to the person specified under Section 40A(2)(b) of the Act was not excessive or unreasonable. The Appellant was also asked to justify the mismatched between the amount paid to the Director/President and claimed as deduction by the Appellant as the amount offered to tax by such Director/President in its own return of income. In response, vide letter dated 23/09/2016, the Appellant sought time to furnish details but failed to provide the same. Thereafter, summons under Section 133(1) of the Act were issued to the aforesaid Director/President. In response, vide letter dated 19/10/2016, the Director/President filed return of income for the Assessment Year 2014-15 showing that 7
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) income of INR 2,03,83,967/- was offered to tax whereas the Appellant had claimed that payment of remuneration of INR 2,10,57,253/- was paid to the Director/President. The Assessing Officer noted that there was difference of INR 7,03,286/- in the aforesaid amounts and invoking provisions of Section 40A(2)(b) of the Act, made disallowance by treating the differential amount of INR 7,03,286/- as excessive/unreasonable.
In appeal preferred by the Appellant on this issue, the CIT(A) decline to grant any relief holding that the Appellant had failed to provide reconciliation statement.
Being aggrieved, the Appellant is now in appeal before us.
The contention advanced on behalf of the Appellant is that the Appellant had submitted reconciliation statement before the Assessing Officer as well as the CIT(A). However, both, the Assessing Officer and the CIT(A) failed to appreciate and consider the same. Placing reliance upon Ground No. 2.3 raised in the present appeal, the Appellant submitted that proper reconciliation was furnished by the Appellant, therefore, the finding returned by the CIT(A) that no reconciliation statement was furnished is factually incorrect. It was further submitted that the provisions of Section 40A(2)(b) of the Act would not be attracted in the facts of the present case and that the Assessing Officer had erred in invoking/applying the same.
Per contra, the Ld. Departmental Representative placed reliance upon the order passed by the Assessing Officer and the CIT(A) on this issue and submitted that the Appellant had failed to explain the difference between the amount paid by the Appellant to the Director and the income offered to tax by the Director. Thus, the Appellant had claimed excessive payment in respect of which deduction could not have been 8
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) allowed to the Appellant. Therefore, the Assessing Officer/CIT(A) were justified in making disallowance of the amount paid by the Appellant exceeding the amount showing as income in the return of income filed by the Director.
We have heard the rival submissions and perused the material on record. We note that in Ground No. 2.3 the Appellant has provided the reasons for mismatch and provided reconciliation between the payment made by the Appellant to the Director and the income disclosed by the Director of the Appellant-Company in the return of income. Therefore, the findings returned by the Assessing Officer/CIT(A) are factually incorrect to the extent it has been stated that the Appellant had failed to provide reconciliation. Further, in our view, the Assessing Officer had failed to appreciate that for application of provisions of Section 40A(2)(b) of the Act the Assessing Officer was required to show that the payment to the Director/President were excessive or unreasonable having regarding to the fair market value of the services provided by the such Director/President. Neither the Assessing Officer nor the CIT(A) has benchmarked the transaction and/or made reference to the any fair market value while making/confirming the disallowance of remuneration paid to the Director/President under Section 40A(2)(b) of the Act. Even if, for the sake of arguments, it is presumed that the Appellant had failed to provide the reconciliation statement, the difference between the amount paid to the Director/President by the Appellant and the amount disclosed in the return of income by such Director/President cannot be termed as being excessive or unreasonable without having regard to the fair market value. In view of the aforesaid, we hold that the addition of INR 7,03,286/- made by the Assessing Officer by invoking the provisions of Section 40A(2)(b) of the Act cannot be sustained. Accordingly, order passed by the CIT(A) on this issue is set 9
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) aside and the addition of INR 7,03,286 made by the Assessing Officer under Section 40A(2)(b) of the Act is deleted. Ground No. 2.1 to 2.3 raised by the Appellant are allowed.
In result, the present appeal preferred by the Assessee is partly allowed.
Order pronounced on 05.01.2024.
Sd/- Sd/- (Prashant Maharishi) (Rahul Chaudhary) Accountant Member Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 05.01.2024 Alindra, PS
ITA No. 1961/Mum/2019 (Assessment Year: 2014-15) आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध, आयकर अपीलीय अदधकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.
आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai