SRF LIMITED,DELHI vs. ACIT, CIRCLE- 1, LTU, NEW DELHI

The present appeal filed by the assessee is directed against the order passed by Ld.CIT(A)-22, New Delhi dated 31.05.2019 for the assessment year 2015-16.

The assessee has raised following grounds of appeal:-

Facts giving rise to the present appeal are that the assessee company was engaged in the business of manufacturing of nylon tyre cord fabrics, packaging film, chemicals, engineering plastics and refrigerant gases. The original return of income declaring total income of INR 94,05,32,950/- was filed after claiming deduction under Chapter VI-A of INR 1,98,87,500/- and book profit of INR 3,81,66,29,461/- on 30.11.2015. Thereafter, the return of income was revised and declared total income of INR 105,07,73,790/-. The case was selected for scrutiny assessment and a notice u/s 143(2) of the Income Tax Act, 1961 (“the Act”) was issued and served upon the assessee. In response to the statutory notices, Ld. Authorized Representative (“AR”) of the assessee attended the proceedings and furnished the requisite details as called by the Assessing Authority. The Assessing Officer (“AO”) while framing the assessment u/s 143(3) of the Act dated 27.12.2017, made various additions on account of disallowance u/s 14A of the Act amounting to INR 23,00,192/- excess claim made in return of income in respect of Research and Development expenditure u/s 35(2AB) of the Act amounting to INR 6,17,97,008/- and disallowance of depreciation Goodwill amounting to INR 19,15,183/-. Thus, he computed total taxable income at INR 1,11,67,86,173/-. The AO recorded that since the tax payable on income assessed under MAT Act is higher than tax payable under normal provision of the Act, the assessee is liable to pay MAT under section 115JB of the Act.

Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who after considering the submissions, partly allowed the appeal of the assessee. Thereby, the Ld.CIT(A) deleted the addition which was made by invoking the provision of section 14A of the Act. However, the rest of the additions were sustained.

Aggrieved against the order of Ld.CIT(A), the assessee has preferred the present appeal before this Tribunal against the sustaining of addition made by disallowing deduction u/s 35(2AB) of the Act amounting to INR 6,17,97,008/- and disallowance of depreciation in respect of goodwill of INR 19,15,183/-.

Ld. Counsel for the assessee vehemently argued that the issues are squarely covered in favour of the assessee qua the deduction u/s 35(2AB) of the Act amounting to INR 6,17,97,008/-. He contended that the contention of the AO is that the approval by DSIR is pre-condition for allowability of claim. However, statute does not prescribe it as a pre-condition, only requirement, is that in house R&D activities should be approved by DSIR. He contended that provision of section 35(2AB) of the Act, no where requires that receipt of Form No.3CL is pre-condition for claiming deduction under said section and also no further requirement that weighted deduction would be allowed only to extent of expenditure approved by DSIR. Such requirement of approval of expenditure of revenue & capital expenditure is being laid down under Rule 6(7AB) of the Income Tax Rules, 1962 (“the Rules”) which cannot override provision of the Act. Such requirement of approval of expenditure by DSIR may be for tracking and reporting purpose but law has not intended that claim of deduction should be allowed on the basis of approval by DSIR. He further contended that law has been now amended the condition or requirement of obtaining approval from DSIR is inserted w.e.f 01.07.2016 by amendment made in Rule 6(7A)(b) of Rules. However, such provision cannot override the main Act. In support of this proposition, Ld. Counsel for the assessee relied upon various case laws:-

On the other hand, Ld. CIT DR for the Revenue opposed these submissions and supported the orders of the authorities below.

We have heard Ld. Authorized Representatives of the parties and perused the material available on record. We find that the claim of the assessee was rejected by the AO on the basis that section 35(2AB) of the Act explicitly provides that such expenditure on Research & Development should be approved by the prescribed Authority. In this case, prescribed authorities, Secretary, DSIR which is pre-condition to be fulfilled by the assessee before allowing weighted deduction. Ld.CIT(A) confirmed the finding of Assessing Authority by observing as under:-

The case of the assessee is that the lower authorities have failed to appreciate the fact that law does not require approval by DSIR. It is contended on behalf of the assessee that as per the AO, approval by DSIR is a pre- condition for allowability of claim. However, statute does not prescribed it as a pre-condition, only requirement is that in house R & D activities should be Page | 8 approved by DSIR. Also provisions of section 35(2AB) of the Act, no where requires that receipt of Form No.3CL, is pre-condition for claiming deduction under the aforesaid provision and also no further requirement that the weighted deduction would be allowed on the expenditure approved by DSIR. It was further stated the condition of requirement of obtaining approval from DSIR had been inserted w.e.f. 01.07.2016 vide amendment made in Rule 6(7A)(b) of Rules. However, the provision of the Act do not speak about such requirement. Therefore, the Rules cannot over-ride the main provision of the Act. Reliance in this regard is placed by the assessee on various case laws. Now the question is that whether the Authorities below were justified in declining the claim of the assessee on the basis that such claim was excessive of the expenditure approved by DSIR.

The AO opined that section 35(2AB) of the Act explicitly provide that such expenditure on R&D facility should be approved by the prescribed authority. In this case, Secretary, DSIR which is a pre-condition to be fulfilled by the assessee before being allowed weighted deduction. For the sake of clarity, section 35(2AB) of the Act is reproduced as under:-

As per this section, deduction is allowable if the assessee satisfied condition as stated in the aforementioned provision. The expenditure which is allowable on scientific research qua in-house, R&D facility is approved by the prescribed authority. If the assessee fulfils the conditions as laid in section 35(2AB) of the Act, in that event, deduction of one and half times of such expenditure would be allowable. Page | 10

However, it is brought to our notice that the related issue to the disallowance of impugned expenditure is otherwise, under challenge before the Hon’ble High Court of Delhi in W.P(Civil) No.1772 of 2018 which is pending adjudication and now fixed for hearing on 06.02.2024. The subject matter pending before Hon’ble High Court is also regarding exclusion of R&D Centre at Gurgaon. It is observed that substantial disallowance is related to Gurgaon Centre. Since the related issue of approval by DSIR, is pending adjudication before the Hon’ble High Court, therefore, for maintaining judicial discipline, we are not expressing our view on the merit of issue, same is kept opened. The AO is hereby directed to re-compute the disallowance after the decision of Hon’ble High Court. Hence, this issue is restored to the AO. Accordingly, Ground No.3 raised by the assessee is allowed for statistical purposes.

Ground Nos. 1 & 2 raised by the assessee are general in nature, need no separate adjudication, hence dismissed.

Ground No.7 raised by the assessee is not pressed.

Ground No.9 raised by the assessee is against the charging of interest u/s 234C & 234D of the Act, is consequential in nature, needs no separate adjudication, hence dismissed.

Ground Nos.4 & 6 raised by the assessee are inter-connected and raised against disallowance of depreciation on goodwill of INR 19,15,183/- under normal provisions.

At the outset, Ld. Counsel for the assessee submitted that the issue is squarely covered by the decision of Co-ordinate Bench of the Tribunal in assessee’s own case. Ld. Counsel for the assessee contended that the assessee company recognized goodwill of INR 3,68,94,006/- on account of purchase of three (03) businesses in 2008 for consideration of INR 150,31,26,228/- as slump sale from SRF Polymers Ltd. and paid in excess of value of assets acquired of INR 146,62,32,222/- with respect of three (03) businesses. The assessee has claimed Goodwill of INR 19,15,183/- for the period under appeal. The assessee duly submitted the requisite facts and evidences during the course of assessment proceedings. The AO disallowed the claim of depreciation of goodwill on the ground that it is balancing figure and not goodwill which the assessee paid in excess of its valuation to its group company. The assessee had not furnished any reasons as to why valuation of assets & liabilities were not made before purchase. Further, goodwill was not there in given schedule of assets & liabilities in agreement for transfer of business dated 01.01.2009. Such excess amount may be treated as a book entry. Ld.CIT(A) confirmed this finding. Ld. Counsel for the assessee submitted that the identical issue came before the Co-ordinate Bench of this Tribunal in earlier years and the issue is squarely covered in favour of the assessee for the decision rendered in assessee’s own case for Assessment Years 2009-10, 2014-15 & 2012-13. He submitted that even otherwise also documentary evidences with regard to claim of depreciation of goodwill was duly furnished vide submission dated 06.11.2017 and 20.09.2016 which is duly taken note by the AO. The observation of the AO is that goodwill is not given in asset and liability in agreement of transfer of business dated 01.01.2009 is misplaced as goodwill cannot be part of agreement. He placed reliance on the judgement of Hon’ble Supreme Court in the case of CIT, Kolkata vs Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) in which the Hon’ble Apex Court held that “goodwill amounts to intangible assets which are eligible for depreciation”. Therefore, he contended that the issue is squarely covered in favour of the assessee.

On the other hand, Ld.CIT DR supported the orders of the authorities below. However, he fairly conceded the fact that identical ground has been decided by the Tribunal in favour of the assessee.

We have heard Ld. Authorized Representatives of the parties and perused the material available on record. We find that identical ground was raised by the assessee. We also find that Tribunal in assessee’s own case in for Assessment Year 2009-10 vide order dated 23.02.2023 has decided the issue in favour of the assessee by observing as under:-

When the matter was carried before the DRP, DRP noted that in assessee’s own case in earlier year, DRP vide order Page | 14 dated 13.07.2018 had upheld the action of AO with respect of disallowance. DRP therefore, following the order of its predecessor, upheld the action of AO. Pursuant to the action of DRP, AO in the final assessment order disallowed the claim of depreciation. Aggrieved by the order of AO, assessee is now before us.

Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that the issue of depreciation on goodwill is covered in favour of the assessee by the decision of Hon’ble Apex Court in the case of CIT vs. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) wherein the Hon’ble Apex Court has held that goodwill amounts to intangible assets which are eligible for depreciation. He further submitted that identical issue arose in assessee’s own case in A.Y. 2012-13 wherein the Hon’ble Tribunal has held the goodwill to be intangible assets and eligible for depreciation. He pointed to the copy of the relevant portion of the order which is at Page 117 of the Paper Book. He submitted that the Hon’ble Tribunal had allowed the claim of depreciation on goodwill but since it was an additional claim made before the Tribunal, the matter was set aside to AO for examination. In the year under consideration, he submitted that it is not a case wherein an additional claim has been made and therefore following the decision of Hon’ble Apex Court in the case of Smifs Securities Ltd. (supra), the claim of the assessee be allowed.

Learned DR on the other hand took us to the findings of the AO and DRP and pointing to their findings submitted that the AO was fully justified in denying the claim of depreciation.

We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the claim of depreciation on goodwill. We find that issue of depreciation on goodwill also arose in Page | 15 assessee’s own case in A.Y. 2012-13 and the Co-ordinate Bench of Tribunal in order dated 24.04.2020 by relying on the decision of Hon’ble Apex Court in the case of Smifs Securities Ltd. (supra), held that assessee is eligible to claim depreciation on goodwill. However in that order since the claim of depreciation was made as an additional claim before the Tribunal, the matter was remitted to the AO for examination. In the year under consideration, we are of the view that since the claim was already made in the return of income and was denied by AO and DRP, we are of the view that ratio of the decision rendered by Hon’ble Apex Court in the case of Smifs Securities is squarely applicable to the facts of the case. We are therefore direct the AO to grant the depreciation of such goodwill. Thus the ground of assessee is allowed.”

Before us, Learned DR has inter alia contended that since the issue of goodwill is arising in the year under consideration for the first time, the issue may be remitted back to AO for verification and adjudication. We do not find merit in the aforesaid contention of the Learned DR in view of the fact that the issue of depreciation also arose before the tribunal in assessee’s own case in A.Y. 2012-13 (ITA No.5784/Del/2016 order dated 24.02.2020) wherein the coordinate Bench of Tribunal by relying on the decision of Hon’ble Apex Court in the case of SMIFS Securities (2012) 24 taxmann.com 222 (SC) had held that assessee is eligible for depreciation on goodwill but however since the issue was an additional claim, the matter was restored to AO. We further find that the Co- ordinate Bench of tribunal while deciding the appeal of the assessee for A.Y. 2014-15 (ITA No.6620/Del/2018 order dated 13.12.2021) had held the assessee to be eligible for depreciation. Before us, no material has been placed by the Revenue to point out any judicial precedence to support his Page | 16 contention that when depreciation arising out of the same transaction has been allowed in other years, whether it can be denied in other years. Before us, Revenue has also not pointed to any distinguishing feature in the facts of the case in the year under consideration and that of the earlier years. Revenue has also not placed any material on record to demonstrate that the order of Tribunal in assessee’s own case for A.Y. 2012-13 has been stayed/set aside/overruled by higher judicial forum. In view of the aforesaid facts, we are of the view that Assessee is eligible to claim depreciation on goodwill. We accordingly direct the AO to allow the claim of depreciation. Thus the ground of assessee is allowed.”

The Revenue has not brought any contrary decision to our notice. We therefore, taking the consistent view, hereby direct the AO to delete the impugned addition and allow the depreciation on goodwill as claimed by the assessee. Therefore, Ground Nos. 4 & 6 raised by the assessee are allowed.

Ground Nos. 5 to 5.2 raised by the assessee are in respect of non- allowance of claim of additional depreciation @ 10% amounting to INR 29,51,16,062/- made during assessment proceedings.

Ld. Counsel for the assessee submitted that the assessee had made this claim with respect to additional depreciation of INR 29,51,16,052/- during the assessment proceedings. The AO did not discuss this claim and Ld.CIT(A) also did not entertain the claim. Reliance is placed upon the judgement of Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs CIT [200] 157 taxman-1 (SC). He submitted that the issue is fully covered by the orders of the Tribunal in assessee’s own case in different years and remitted the issue back to the file of AO. It is pointed out by the Ld. Counsel for the assessee that the AO passed order giving appeal effect for providing balance additional depreciation in assessee’s own case for AY 2014-15 and AO also quantified amount of additional depreciation for the year under appeal.

On the other hand, Ld. CIT Dr relied on the orders of lower authorities.

We have heard the rival submissions and perused the material available on record. Under the identical facts, the Tribunal was pleased to remit the matter back to the AO in the assessee’s own case for AY 2014-15 by observing as under:-

In the result, appeal of the assessee is partly allowed for statistical purposes.