CHENNAI, APRIL 12, 2013: THE issue before the Bench is - Whether intangible assets acquired under slump sale are entitled for depreciation. And the verdict goes in favour of the assessee.

Facts of the case

A) Assessee, formerly known as Areva T & D Systems India Ltd merged with Areva T & D India Limited, had filed its ROI disclosing loss of Rs.97,06,238/-. Later on, it had revised its ROI and declared loss as Rs.1,05,41,362/-. As per assessee, the revision of ‘return’ was attributed to merger of the earlier company with the present assessee with effect from 01.01.2006 as approved by the Delhi HC order. The FY in question was also restricted to April, 2005 to December, 2005. On 31.03.2008, assessee’s return was processed u/s 143(1), during which AO noticed that the assessee had raised a claim of depreciation of Rs.3,11,01,728/- @ 25% on ‘goodwill’. As per assessee, the said payment had been made as excess of net value of the seller entity and accounted it as ‘goodwill’. However, AO had declined the same on the basis of the assessment order pertaining to the preceding AY 2005-06, wherein, it was held that the goodwill in question was not included in the list of assets subject matter of the agreement. The AO had also held in the assessment order that the assessee had failed to prove that the goodwill was related to its business or commercial right in the nature of know-how, patent, copy right, trade mark, etc. On appeal, CIT(A) had also confirmed the disallowance made by the AO. Before Tribunal, AR had submitted that the issue in hand was no more res integra, as the Delhi HC had accepted the relief sought by the assessee in the preceding AY which was disallowed upto the ‘Tribunal’. In support of the contentions, AR had produced on record copy of the judgment dated 30.03.2012 in ITA No. 315/2010 titled as Areva T & D India Ltd. v. DCIT (2012-TIOL-234-HC-DEL-IT) and prayed for acceptance of the appeal. On the other hand, DR had strongly support CIT(A)’s order and prayed for confirmation of the same.

B) Assessee; formerly known as Areva T & D Instrument Transformers India Private Limited was now known as Areva T & D India Limited, because of a merger approved by the Delhi HC. It had filed its ROI declaring income of Rs.5,73,39,048/- followed by a ‘revised return’ owing to the above merger. This time, the income declared was Rs 52,46,325/-. The same was processed u/s 143(1). As it was revealed from the assessment order, in ‘scrutiny’ proceedings, the AO noticed that an amount of Rs.19,38,000/- had been claimed in the shape of provision for liquidated damages pertaining to warranty. In support thereof, the assessee pleaded that since most of its sale contracts provided warranty ranging from 18 months to 24 months on the basis of scientific working; it was entitled for the relief. In the assessment order, the AO declined to accept assessee’s explanation and held that in the past, the amount used to be added back, which proved that it was only an approximation instead of an ascertained liability. On this principle, he placed reliance on the assessment finalized for the AY 2005-06 and granted relief in part to the assessee to the extent of Rs.46,000/- relating to amount utilized out of earlier years provision and made addition of balance amount of Rs.18,92,000/- in assessee’s total taxable income. Similarly, the assessee had also claimed a sum of Rs.75,34,297/-. On the basis of assessment order for the AY 2005- 06, the AO termed the expenses claimed as excessive and unreasonable. Accordingly, he restricted the claim to Rs.37,67,149/- @ 50% of the claim made and added rest of the amount in assessee’s total income. On appeal, CIT(A) had upheld AO’s finding qua warranty provision and observed that AR had relied on the recent decision of the SC in the case of Rotorks Controls India (P) Ltd. (2009-TIOL-64-SC-IT) where the SC has held that if provision for warranty was a part of sales contract and was maintained scientifically and based on past data of sales and year-wise warranties claimed by the customers in a systematic manner than provision for warranty will be allowed as ascertained liability. The assessee was a part of multinational company of France origin and having a team of good HRD engineers in managing the production, sales of transmission equipments of electrical engineering, consisting of high voltage power transmission equipments. Therefore, the provision for warranty claimed by the assessee in its revised return was allowed after the decision of the SC in the above cited case of M/s Rotorks Controls India (P) Ltd. The AR also claimed the provision for liquidated damages in the similar manner as provision for warranty on the ground that liquidated damages are calculated scientifically on the above basis. As per the contractual terms, if the execution of an order gets delayed, the customer is entitled to claim liquidated damages. Whereas, on the ISSCO and country net work expenses, the CIT(A)’s held that the AO had said that the expenditure was excessive and unreasonable especially when it was paid to sister concern. The AO should have enquired the full facts about to whom the amount has been paid and why it should be allowed in normal course when it was capital expenditure. The expenditure incurred by the assessee for installing hardware and servers and related equipments in the name of networking was nothing but purchase of plant & machinery which can be treated as capital expenditure of the company. Therefore, the assessee was entitled to depreciation on such installation of hardware in its business premises in all cities where its business offices are operating.

Having heard the matter, Tribunal held that,

A) ++ undisputedly even as per Revenue, the same very issue of depreciation on goodwill in question had arisen in the preceding AY, wherein the assessee’s similar claim was declined upto the ‘Tribunal’. Thereafter, in assessee’s appeal, the Delhi HC has accepted its plea and observed that in the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature" specified in Section 32(1)(ii), it is seen that such rights need not answer the description of "knowhow, patents, trademarks, licenses or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the SC in Techno Shares and Stocks Ltd. wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of the items falling in Section 32(1)(ii);

++ in view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in Section 32(1)(ii) and were accordingly eligible for depreciation under that Section. In view of the above, it ·is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation u/s 32(1)(ii). In the circumstances, the substantial question of law is decided in the affirmative and this appeal is allowed in favour of the assessee and against the Revenue and the impugned order is set aside. Taking cue from the same and more so, in the absence of any distinguishing features pointed out by the Revenue, we are of the view that the assessee’s claim of depreciation raised in the assessment, which was declined by the AO as well as CIT(A), deserves to be accepted. Therefore, we allow assessee’s appeal and delete the disallowance in question.

B) ++ we have given our thoughtful consideration to the rival contentions raised by the parties and also gone through the orders of lower authorities. Coming to disallowance of warranty provision above said, we find that reasoning adopted by the AO as well as CIT(A) is that the assessee has only followed approximation method instead of taking into consideration the liquidated damages as claimed by the concerned parties. In appeal, the CIT(A) also holds that only liquidated damages and actual expenses incurred by the assessee are allowable. On a query being put up in the course of hearing, the AR informs that there is no record maintained by the assessee relating to the purchasers who have raised their respective claims in furtherance to the warranty provision in question. This leaves us with an inference that the assessee is not following any scientific computation method in order to support the claim of warranty provision. Accordingly, we hold that in the absence of any record maintained on the claim raised by the assessee, the CIT(A) has rightly held that the liability in question is an unascertained one and not allowable. Consequently, qua this ground of the assessee, we confirm the findings of the CIT(A);

++ so far as the next plea of the assessee regarding ISSCO and country network expenditure is concerned, we notice from the CIT(A)’s order that on the one hand he is directing the Assessing Officer to verify and allow the expenditure and on the other hand, he had disallowed the entire expenditure of Rs.75,34,297/- claimed by the assessee unmindful of the fact that the Assessing Officer himself had accepted the same @ 50%. Therefore, in our opinion, the findings of the CIT(A) in this regard are mutually contradictory. Hence, we delete the operative para of the CIT(A) order “Therefore, I disallow the whole expenditure claimed by the assessee of Rs.75,34,297/ as capital expenditure” and direct the AO to pass a fresh order after due verification of the claim raised by the assessee in accordance with law by affording adequate opportunity of hearing. Accordingly, this ground is partly accepted for statistical purpose. As sequel to our above discussions, I.T.A. No. 4330/Del/2009 is allowed, whereas, I.T.A. No. 1213/Del/2010 is partly allowed for statistical purposes.

(See 2013-TIOL-235-ITAT-MAD)