The Commissioner Of Income Tax vs M/S.Areva T & D India Ltd on 27 November, 2017

[Cites 15, Cited by 0]

Madras High Court

The Commissioner Of Income Tax vs M/S.Areva T & D India Ltd on 27 November, 2017

https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 T.S.SIVAGNANAM,J This appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 ('the Act' for brevity) is directed against the order dated 27.11.2017 made in I.T.A.No.561/Mds/2011 on the file of the Income Tax Appellate Tribunal, Chennai 'B' Bench ('the Tribunal' for brevity) for the assessment year 2006-07.

2. The above tax case appeal is entertained to decide the following substantial questions of law :

“i. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that depreciation is allowable in respect of property acquired in exchange of relinquishment of tenancy right in another property even though no cost was involved in acquiring the ownership of new property and therefore its written down value is to be taken as NIL ?

ii. Whether the Tribunal was right in holding that non compete fee is an asset in the nature of patents, copyrights, trade mark, licence, franchises or any other business or commercial right of similar nature and therefore is eligible to claim depreciation under Section 32 of the Income Tax Act ?

2/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 iii. Whether the Tribunal was right in holding that the excess of net book value of the entity taken over by the assessee over and above the consideration paid for acquiring three companies would not fall within the ambit of provision of Section 28(iv) of the Income Tax Act and therefore, not taxable ?

And iv. Whether the Tribunal ought to have applied the decision of the Madras High Court in the case of Aries Advertising Co. Ltd., reported in 255 ITR page 510 wherein it was held that any amount transferrred by the assessee to the general reserve alone was to be treated as profit of the assessee as per Section 28(iv) ?”

3. We have elaborately heard Mrs.R.Hemalatha, learned Senior Standing Counsel for the appellant/Revenue and Mr.Tushar Jarwal, learned counsel assisted by Ms.Aswini Sankar, learned counsel accepting notice for the respondent/assessee.

4. The assessee is engaged in the business of manufacturing of heavy electrical equipment. They filed their return of income for the assessment year under consideration namely 2006-07 on 29.11.2006 declaring income of Rs.100,84,51,266/-. Thereafter, they filed revised 3/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 return on 31.3.2008 declaring a total income of Rs.100,35,99,280/-. The return was processed under Section 143(1) of the Act. Subsequently, the case was selected for scrutiny and a notice dated 05.10.2007 under Section 142(1) of the Act was issued. During the discussions held with the assessee, the Assessing Officer noted that they claimed depreciation on an amount of Rs.42,013/- during the year on a property situated in Lucknow. On perusal of the records, it was found that the assessee had not paid any consideration for acquiring the property and that the same was obtained in lieu of surrendering the tenancy right over the other property located in the same town. For such a reason, the claim for depreciation on the value of the property was denied.

5. The next issue related to disallowance of depreciation claimed under Section 32(1) of the Act in respect of 'non compete fee'. The assessee contended that the depreciation on 'non compete fee' related to one M/s.Areva T & D Instrument Transformer India Private Limited amounting to Rs.52,43,007/- and that they claimed the same as deduction. The Assessing Officer rejected the claim on the ground that 'non compete fee' could not be classified as any of the businesses or commercial right as spelt out in Appendix I of the Income Tax Rules, 4/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 1962 and therefore, not allowable.

6. The other issue was with regard to amalgamation of three companies with the assessee company and on amalgamation, the assets stood transferred to the assessee company with effect from 01.1.2006. The net excess value of the assets over the liability of the amalgamating company amounted to Rs.54,26,56,000/- and had been adjusted against the general reserve of the assessee company. The assessee was called upon to explain as to why the said excess asset, which was taken over as liability during the current year, should not be taxed under Section 28(iv) of the Act. The explanation offered by the assessee was not accepted and the Assessing Officer held that the said amount had to be charged to income tax under the head 'profit and gain of business' under Section 28(iv) of the Act.

7. Aggrieved by the above findings, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai [for short, the CIT(A)]. By order dated 31.1.2011, the appeal was partly allowed and the assessee got relief in respect of depreciation on the property at Lucknow and depreciation on non compete fee and in respect the amount credited to reserve and surplus. As against that, the Revenue filed an appeal before the 5/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 Tribunal and it was dismissed by the impugned order.

8. The first question of law is as to whether the depreciation is allowable in respect of the property acquired in exchange of relinquishment of tenancy right in another property.

9. This issue was considered by the Hon'ble Division Bench of this Court in the assessee's own case in the decision reported in (2012) 26 Taxmann.com 266, the relevant portions of which read thus:

“6. We have perused the order passed by this Court dated 30.03.2012 in the Tax Cases filed by the Revenue in T.C.(A) Nos. 1390 of 2005, 2436 of 2006 and 250 to 252 of 2008 Alsthom Ltd. case ( supra) wherein, this Court pointed out that since there was a payment of consideration in exchange of the property, it could not be held that the assessee would be entitled to the depreciation of the property obtained. Thus this Court reversed the order of the Tribunal.

7. As far as the present case is concerned, we must point out to the agreement with the landlord, which showed the payment of consideration for the surrender of tenancy rights. The Revenue does not 6/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 dispute the existence of such an agreement. It is also not disputed by the Revenue that the purchase of the premises by the assessee was from M/s. Harsaran Singh Constructions Pvt.

Ltd., which had nothing to do with the landlord. Given the fact that tenancy right is a capital asset, as held by the Apex Court in the decision reported in CIT v. D.P. Sandu Bros.

Chembur (P.) Ltd. [2005] 273 ITR 1 / 142

                                         Taxman      713     (SC)    that    the   surrender      of
                                         tenancy    rights    amounted        to   transfer     and

hence, being a capital receipt, on the facts thus placed before this Court that the amount paid on account of surrender of tenancy rights being given by the assessee to the builder, there is no exchange of one property for the other. Hence, we have no hesitation in accepting the plea of the assessee, thereby rejecting the Revenue's contention raised in all these Tax Cases. Consequently, we hold that the assessee is entitled to depreciation.”

10. In the light of the said decision of the Hon'ble Division Bench of this Court in the assessee's own case reported in (2012) 26 Taxmann.com 266, substantial question of law No.1 is answered against the Revenue.

7/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021

11. The second question is as to whether the non compete fee is an asset in the nature of patents, copyrights, trademark, licence, franchises or any other business or commercial right of similar nature and as to whether the assessee is eligible to claim depreciation under Section 32 of the Act.

12. The Tribunal took note of the decision of the High Court of Delhi in the assessee's own case for the assessment year 2005-06 in ITA.No.315 of 2010 dated 30.3.2012 and allowed the appeal filed by the assessee thereby reversing the findings of the CIT(A).

13. Mrs.R.Hemalatha, learned Senior Standing Counsel appearing for the appellant/Revenue has placed reliance on the decision of the Delhi High Court in the case of Sharp Business System Vs. CIT-III [reported in (2012) 27 Taxmann.com 50] in support of her contention that the amount paid as non compete fee did not qualify for depreciation under Section 32(1)(ii) of the Act.

14. In the decision in the case of Asianet Communications Ltd. Vs. CIT, Chennai [reported in (2018) 257 Taxman 473], a Division Bench of this Court, to which, one of us (TSSJ) was a party, had considered the same issue as to, where the non compete fee paid by the assessee was for the purpose of its business and it did 8/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 not entail an enduring benefit to the assessee in its business, whether the payment of such fee was to be allowed as revenue expenditure. In this decision, the Court took note of the decision of the Delhi High Court in the case of Sharp Business System and it has been held as follows :

“36. So far as the decision in Sharp Business System (supra) is concerned, as pointed out earlier, in paragraph 5 of the judgment, it has referred to the decision of this Court in G.D.Naidu. The discussion is in paragraph 9 and the conclusion is in paragraph 10.

37. In paragraph 9 of the judgment, the Court has not discussed the decision of G.D.Naidu, though it has referred to it in paragraph 5 of the judgment. This is pointed out because, the Court has discussed the decision in Blaze & Central (P.) Ltd. (supra), which was distinguished in G.D.Naidu. We find that in paragraph 9 of the judgment, the Court after referring to Empire Jute Co. Ltd. (supra) and Alembic Chemical Works Co. Ltd. (supra), has pointed out that the single test, that is, whether the payment results in an enduring benefit cannot be conclusive in a decision as to 9/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 whether an expenditure qualifies as one falling or in the capital field and that the decisions have emphasized the need to shift from a narrower field to a broader one, to ascertain the real nature of the advantage, which the taxpayer would derive.

38. Thus, the test to be applied following Empire Jute Co. Ltd. (supra) is to see as to whether it added to the capital of the assessee, whether a new asset was created and whether there was an addition or expansion of the profit making apparatus of the assessee and whether the assessee acquired source of profit or income when such investment was made. However, the Court in our respectful view, applied the test, which does not flow from the test laid down in Empire Jute Co. Ltd. (supra) by observing that the test is one of ascertaining whether from commercial angle and the advantage results in a capital field or it is the expenditure falls legitimately within the revenue field.

Ultimately, the Court held that the arrangement for a period of 7 years is an enduring benefit. This in our respectful view, does not fulfil the test laid down by Empire Jute Co. Ltd. (supra) and in fact, the Court 10/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 itself had pointed out that is not the conclusive test to determine whether expenditure is in capital field or revenue. Thus, for the above reasons, we are not in respectful agreement with the reasoning given by the Hon'ble Division Bench in Sharp Business System (supra).

39. It would be relevant to note that, in the case of Sharp Business System (supra), the Joint-venture company was incorporated in the assessment year 2001-02 and in the first year of business, with a view to warding off competition, it entered into agreement by paying a non-compete fee of Rs.73 Crores to L & T Ltd., of setting-up or undertaking or assisting in the setting-up or undertaking any business in India, of selling, marketing and trade of electronic office products for seven years and this amount was treated as deferred revenue expenditure in the assessees books of accounts and written-off over corresponding period of seven years.

40. There is a marked difference in the factual position in Sharp Business System (supra) and the factual position in the case on hand where the assessee's business continues to remain the same, and this is also one more 11/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 reason to hold that the decision in Sharp Business System (supra) is not applicable to the facts of the case apart from the reservation expressed by us above.”

15. In the decision of this Court in the case of Asianet Communications Ltd., the Court distinguished the decision of the Delhi High Court in the case of Sharp Business System. We would hasten to add that the facts in the case of Sharp Business System were couched differently in the sense that a sum of Rs.73 Crores was paid to M/s.L & T Ltd., as consideration for the latter in setting-up or undertaking or assisting in the setting-up or undertaking any business in India, of selling, marketing and trade of electronic office products for seven years. The facts of the case of the assessee before us are entirely different. This aspect had been noted by the Tribunal in paragraph 11 of the impugned order. The Tribunal also took note of the fact that in the assessee's own case, the High Court of Delhi decided the issue in favour of the assessee.

16. Before us, a chart has been filed showing the issue relating to depreciation on non compete fee. From the chart, we find that for the assessment year 2001-02, the Assessing Officer himself allowed it, which was confirmed by the CIT(A) and the decision of the CIT(A) was 12/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 accepted by the Department. For the assessment year 2002-03, no scrutiny assessment had been carried out. For the assessment year 2003-04, the CIT(A) allowed it and the Assessing Officer gave effect to the order passed by the CIT(A). For the assessment year 2004-05, no scrutiny assessment was carried out and for the assessment year 2005-06, the claim was allowed by the CIT(A) and it was given effect to by the Assessing Officer. Thus, the Assessing Officer was bound to be consistent with the earlier decisions.

17. Therefore, we find that the Tribunal rightly granted relief to the assessee. Accordingly, substantial question of law No.2 is answered against the Revenue.

18. Substantial question of law Nos.3 and 4 are connected as the question is as to whether the net book value of the entity taken over by the assessee over and above the consideration paid for acquiring three companies would not fall within the ambit of the provisions of Section 28(iv) of the Act.

19. The Tribunal found that the amalgamation of the three companies with the assessee company was not the business of the assessee and consequently, it could not be stated that the provisions of Section 28(iv) of the Act would apply to the excess of the net book 13/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 value of the entities over the consideration paid in any way nor was it income liable to tax under the head 'profit and gains' of business in the hands of the assessee company. On the above terms, relief was granted to the assessee.

20. This issue is no longer res integra and has been decided by the Hon'ble Supreme Court in the case of Commissioner Vs. Mahindra & Mahindra Ltd. [reported in (2018) 404 ITR 1] wherein it was held that for applicability of Section 28(iv) of the Act, the income must arise from the business or profession and the benefit, which is received has to be in some other form other than in the shape of money.

21. An identical issue was considered by the Hon'ble Division Bench of this Court in the case of CIT Vs. Stads Ltd. [reported in (2015) 373 ITR 313] wherein it was held that the provisions of Section 28(iv) of the Act make it clear that the amount reflected in the balance sheet of the assessee under the head 'reserves and surplus' could not be treated as a benefit or perquisite arising from business or exercise of profession, that the difference amount post amalgamation was the amalgamation reserve and it could not be said that it was out of normal transaction of the business and that the present transaction, 14/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 being capital in nature, which arose on account of amalgamation of four companies, could not be treated as falling under Section 28(iv) of the Income Tax Act.

22. Thus, the Tribunal rightly granted relief to the assessee. We also find that the CIT(A) appreciated the facts in a proper perspective and granted relief to the assessee and in doing so, followed the decision of the High Court of Gujarat in the case of CIT Vs. Spunpipe & Construction Co. [reported in (1965) 55 ITR 68].

23. Mrs.R.Hemalatha, learned Senior Standing Counsel appearing for the appellant/Revenue has placed reliance on the decision of this Court in the case of CIT Vs. Aries Advertising (P.) Ltd. [reported in 125 Taxman 969].

24. We find that this decision is entirely different on facts wherein the assessee company transferred various credits and deposits of the erstwhile company remaining unclaimed, taken over by the assessee to its general reserve. The Assessing Officer treated the transferred amount as income in the hands of the assessee, which was reversed by the CIT(A) concerned, which order was upheld by the Tribunal. The order passed by the Tribunal was reversed by this Court holding that the amounts, which were transferred to the assessee 15/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 company represented various credits and deposits during the trading with the erstwhile company and the amount remained for a long time for recovery and remained unclaimed. The amounts were then transferred by the assessee-company to the general reserve treating it to be as profits and therefore, on facts, the decision of the Hon'ble Supreme Court in the case of CIT Vs. T.V.Sundaram Iyengar & Sons Ltd. [reported in (1996) 222 ITR 344] would apply on all fours. Therefore, it was contended that the amount of credit balances written off and transferred to the general reserve account had to be treated as income of the assessee chargeable to income-tax. We find this decision to be wholly inapplicable to the facts and circumstances of the case on hand. For all the above reasons, we find that the Tribunal was right in granting relief to the assessee under the said head. Accordingly, substantial question of law Nos.3 and 4 are answered against the Revenue.

25. In the result, the above tax case appeal fails and is dismissed. The substantial questions of law are answered against the Revenue. No costs.

(T.S.S.J.) (R.N.M.J.) 25.3.2021 16/17 https://www.mhc.tn.gov.in/judis/ TCA.No.194 of 2021 T.S.SIVAGNANAM,J AND R.N.MANJULA,J RS To The Income Tax Appellate Tribunal, 'B' Bench, Chennai. TCA.No.194 of 2021

25.3.2021 17/17 https://www.mhc.tn.gov.in/judis/

Unlock Advanced Research with PRISMAI

Madras High Court