Case Law Details
ORDER
Per J. Sudhakar Reddy, A.M.
These are cross appeals and are directed against the order of the CIT (Appeals)-VIII, Mumbai dated 05-06-2009 for the assessment year 2006- 07.
2. The sole issue that arises in the assessee’s appeal, is the allow ability of depreciation on `Brand’ received by the assessee under the Scheme of Arrangement u/s 391 to 394 of the Companies Act, 1956. In the Revenue appeal, the first ground relates to depreciation allowed by the CIT(Appeals) on certain assets and second ground is on the issue of deletion of addition made under the proviso of section 40(a) and section 43B, by the CIT (Appeals).
3. Facts in brief:
The assessee is a company engaged in the business of designing, fabrication, galvanising and testing of power transmission line towers, erection of complete transmission lines, supply and erection of substation structures and overhead equipment for railway electrification.
The assessee company filed its return of income on 30-11-2006 declaring a total income at a sum of Rs. 9,39,13,086/-.
2. The AO at para 3.2, 3.3 and 3.4 brought out the facts of the composite schemes of arrangement which are extracted for ready reference :
“3.2 A composite Scheme of Arrangement (hereafter known as `the scheme’ between the assessee company, KEV Infrastructure Ltd (Formerly KEC International Ltd.), Bespoke Finvest Ltd., KEC Holdings Ltd. and the respective shareholders under Section 391 to 394 of the Companies Act, 1956 was sanctioned by the Honourable High Court of Judicature at Mumbai on 27.09.2005. the composite scheme for the sale of investment by the KEC Infrastructure Ltd. to KEC Holdings Ltd and the sale of the Power Transmission business of KEC infrastructure Ltd. to the assessee i.e. KEC international Ltd., the merger of the Bespoke finvest Ltd with KEC holdings Ltd was presented to the High Court of Mumbai on 28.06.2005 and the Scheme was approved by the High Court on 27.09.2005 from the closure of the business hours on 31.03.2005 or w.e.f. 01.04.2005. The approved scheme was received by the Company and became operational on 26.12.2005.
3.3 Pursuant to the scheme, the whole of the undertaking and properties including all the movable and immovable assets and al debts, liabilities, contingent liabilities, duties and obligations of every kind of the “Power Transmission Business” of KEC Infrastructure Ltd was acquired by assessee for a total consideration of Rs. 143.00 Cr. At the time of acquisition, the net worth of the undertaking was quantified at a negative sum of Rs. 157.19 Cr. By the auditors of the KEC Infrastructure Ltd u/s 50B(3) of the Income Tax Act (the Act). In terms of the scheme, the assessee company has paid the sale consideration of Rs. 143 Cr. By way of equity and preference shares. The assessee company issued 3,76,35,858 equity shares of Rs. 10 Each fully paid up at a total premium of Rs. 92.36 Cr. Further, the assessee company has issued 12,99,966 Preference shares of Rs. 100 each towards the sale consideration of the Power Transmission business.
3.4 At the time of transfer of the Power Transmission Business, the book values of assets acquired from KEV Infrastructure Ltd was a sum of Rs. 35,43,13,504/-. After transfer of the undertaking the assessee company has revalued the same assets which were acquired from the KEC Infrastructure Ltd for a sum of Rs. 339.82 Cr. The details of book value of assets acquired from KEC Infrastructure Ltd and the revalued sums of the same assets are as under :
The AO disallowed the depreciation on the assets purchased by the assessee company in a slump sale. The reasons given by the AO are brought out by the CIT (Appeals) at pages 4 and 5 of his order which are extracted below for ready reference :
i) The AO has observed that the scheme approved by the Honourable High Court u/s 391 to 394 of the Companies Act fulfils all the conditions stipulated u/ s.2(19AA) of the Act. Hence, he has treated it as a `demerger’ of PTB from KEC Infrastructure Ltd. The AO has also reproduced the provisions of section 2(19AA) of the I.T. Act at page Nos. 10 to 12 of the assessment order.
ii) The AO has discussed the scope of section 2(19AA) as explained in Circular No. 779 dated 14.09.1999 of CBDT and reproduced the relevant portion at page Nos. 12 & 13 of the assessment order.
iii) The AO has held that the appellant company in the scheme has acquired PTB and fulfilled all the conditions stipulated u/s.2(19AA) of the I.T. Act. Further, he has held that section 43(6) of the Act defines the term `written down value’. He has also relied on the Explanation 2A and Explanation 2B to section 43(6) by holding that these are relevant for the appellant’s case.
iv) The AO has also observed that in the books of KEC Infrastructure Ltd., the intangible assets such as `brand’ and `goodwill’ were not there. The assessee company has valued the `brand’ at a sum of Rs. 240 crores and `goodwill’ at Rs.3.63 crores. The AO has also held that under the Explanation 2B to section 43(6), the depreciation requires to be allowed on the WDV on the transferred assets of the demerged company.
v) The AO has concluded that the appellant company cannot increase the actual cost of block of assets in the demerger. The word `actual cost’ is defined in Section 43(1) of the I.T. Act.
vi) The AO has further held that s per Explanation 7A to Section 43(1), the actual cost to the assessee shall be taken to be same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business. Thus, he has concluded that the assessee is not eligible for the depreciation on the enhanced value in its books of accounts and it is allowable only on the WDV.
vii) Finally, the AO has held that the purpose of enhancement of the actual cost to the assessee is for the purpose of reduction of tax liability by claiming high depreciation.
3. The AO further made a disallowance of a deduction of Rs.6,94,02,867/- u/s 40(a). The assessee claimed that certain disallowances were made for expenditure in the earlier years in the case of KEC Infrastructure Ltd. and as the payments of these disallowed expenditure were made during the year, the assessee claims that the same should be allowed in its hands. In the computation of income the assessee had claimed deduction u/s 43B on the same ground. The AO observed that the disallowance of expenditure either u/ 40(a) or u/s 43B related to an other company the KEC Infrastructure Ltd. and that the assessee company is formed only in this year and hence there is no question of expenditure in the earlier year which could have been disallowed. Thus he did not allow this claim. Aggrieved, the assessee carried the matter in appeal. The first appellate authority on the issue of disallowance of depreciation for the detailed reasons given, concluded at para 1.15 at page 9 as follows :
“1.15 Keeping in view these facts and circumstances, it is held that the action of the AO is not justified by holding that the company has fulfilled the condition laid down u/s.2(19AA) of the I.T. Act. However, as discussed above, the company is not fulfilling the conditions laid down at clause (iii), (iv) & (v) to section 2(19AA), therefore, it cannot be held as a case of demerger. Therefore, the value adopted by the company on the basis of revaluation of the assets is to be considered for depreciation purpose. Thus, the order of the AO is modified to this extent that the value of assets may be taken as per the valuer’s report on tangible assets. “
This finding of the first appellate authority that this is not a case of demerger, is not challenged by the Revenue.
4. On the second aspect regarding the claim of depreciation, the first appellate authority at para 1.18 held as follows :
“1.18 Keeping in view the facts and circumstances and the legal position of the case that brand account and goodwill account are not reflected in the books of accounts of the transferor company and secondly, the provisions of section 32(1)(ii) has not allowed depreciation on brand account and goodwill and thirdly, the Hon’ble Tribunal in the above said case has held that the depreciation is not allowable on goodwill and other intangible assets which are not covered in Section 32(1)(ii) of the I.T. Act, therefore, the claim of disallowance made by the AO on the claim of depreciation on intangible assets is upheld. Finally, the AO is directed to recompute the depreciation accordingly. Thus, the ground is partly allowed.
5. On the issue of disallowance of expenditure, the first appellate authority applied the decision of the jurisdictional Tribunal in the case of M/s Anil Engineering Corporation vs. ITO 50 ITD 99 and held that the transferee of the business would be eligible to claim deduction in respect of the liability taken over from the transferor for which the payment was made by the transferees subsequently. Aggrieved on the issue of disallowance of depreciation on Brand, the assessee filed an appeal on the following ground :
“On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals)-VII upheld the action of the Additional Commissioner of Income Tax, Range 8(2), Mumbai in disallowing depreciation claimed by the Appellant on Brand received by it under a Scheme of Arrangement under section 391 to 394 of the Companies Act, 1956.”
6. The Revenue also filed an appeal on the following two grounds:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing Rs.87.76 crores as deprecation to the assessee whereas the same was restricted to R.16.98 (15.98) crores by the A.O. without appreciating the facts of the case.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition made by the A.O. under the proviso to Section 40(a) and 43B as the same were not the liability incurred by the assessee without appreciating the facts of the case.
Shri S.E. Dastur, learned Senior Advocate, appearing on behalf of the assessee, along with Shri N.D. Sheth, took this Bench through the facts of the case and submitted that the only issue, that is before the Tribunal in this appeal, is whether the first appellate authority was right in holding that the provisions of section 32(1)(ii) does not allow depreciation on “Brand” account and “goodwill” account by relying on the decision of Mumbai Bench of the ITAT in the case of R.G. Keswani vs. ACIT in ITA No. 1463/Mum/2005 dated 19-02-2008. He submitted that the assessee company had taken over, as a `slump sale’, the power business of the related concern, under the composite scheme u/s 391 to 394 of the Companies Act and that this composite scheme was sanctioned by the Hon’ble Bombay High Court. He submitted that the purchase consideration was about Rs.143 crores plus the taking over of all the liabilities. He submitted that the AO disallowed the claim of depreciation on two grounds, the first being that this is not a case of slump sale but only a case of demerger and hence the written down value of the transferor company has to be taken and the second ground is that “Brand” is not covered within the ambit of section 32(1)(ii) of the Act. He pointed out that the first appellate authority reversed the decision of the AO with respect to the first ground i.e. whether the take over in question, is a slump sale or a demerger. The first appellate authority was of the view that this is a slump sale and not a case of demerge and that the assessee company has not fulfilled the conditions laid down u/s 2(19AA) of the Act. On the second reason, he submitted that the first appellate authority has not accepted the contention of the assessee and the assessee is in appeal on this issue.
8. Mr. Dastur submitted that “Brand” is nothing but a “rade mark” and that it is covered by the word “Trade Mark”. Without prejudice to the above submission, he submitted that “Brand” can be considered as “any other business or commercial rights of similar nature”. He pointed out that the owner of the “Brand” can prevent the use of the “Brand” by another party, by way of a legal action, just as in the case of copy right, trade mark or knowhow. He took this bench to page 12
of the assessee’s paper book, which consists of the composite scheme of arrangement and specifically para 13.1, 13.4, 14, 14.2, 15.3, 15.4, to drive home his argument that, this is a composite scheme, that the assets will be debited in the transferees’ book, liabilities will be credited, share capital will be credited and the difference will be goodwill or capital reserve and that the assessee shall get the assets valued and reflect the same in its books. He also pointed out that the movable assets are transferred by handing over of the same, interse the parties by delivery. Hence there is no order of the Court on movable assets. He pointed out that the Court stated that “Brand” shall be reflected in the books as per valuation. He pointed out that the valuation is done by N.M. Raiji & Co. under three methods and the value assessed by them was reflected by the assessee company. He took this Bench through the valuation report which is at page 39 of the paper book.
9. Mr. Dastur pointed out that “Brand” is, a particular manner or way in which the enterprise has a logo. He submitted that the CIT(Appeals) erroneously relied on the judgment of the Tribunal in the case of R.G. Keswani (supra), which is relating to goodwill and further added that the observations in this decision are in favour of the assessee.
10. Mr. Dastur submitted that the Brand related to trade mark. He furnished the copy of the Trade Marks Act, 1999 and pointed out to the definition at section 2(zb) and section 2(m) and submitted that “Mark” includes “Brand” and that the Trade Mark Act put both “Mark” and “Brand” in the same category. He referred to the dictionary meaning of the term “Brand” in P. Ramanatha Aiyar Dictionary and the judicial dictionary of K.J. Aiyar. He relied on the decision of Hon’ble Bombay High Court in the case of CIT vs. Techno Shares and Stocks Ltd. (2009) 184 Taxman 103 (Bom.) and submitted that the Hon’ble Bombay High Court has understood the term “Brand” as an intellectual property right and has equated “Brand” with “Trade Mark”. Thus he submitted that the issue is in fact covered in favour of the assessee by the decision of the jurisdictional High Court. He took this Bench through the Finance Bill which introduced section 32(1)(ii), as well as when section 55(2)(a) was introduced and submitted that goodwill was treated differently from the “Brand name” and the intention of the legislature was to equate the “Trade Mark” with a “Brand name”. Thus he submitted that the Brand falls within the ambit of section 32(1)(ii) of the Act and the assessee should be granted depreciation.
11. The learned Sr. DR, Mr. S.S. Rana, submitted that the AO considered the transfer as a demerger but the learned CIT(Appeals) has not approved this finding of the AO and had accepted the contention of the assessee that this is a case of slump sale. He submitted that the Revenue has not filed an appeal against this finding of the first appellate authority and hence the issue whether the transfer is a slump sale or a demerger is not before the Bench. Thus he agreed that the issue before the Tribunal is whether the “Brand” falls within the ambit of section 32(1)(ii) of the Act. Mr. Rana relied both on the reasons given by the AO as well as the CIT(Appeals) and vehemently contended that “Brand” is nothing but “Goodwill”. He submitted that in the case of Chitra Publicity Co. P. Ltd. vs. ACIT 127 TTJ (Ahd.) (T.M.), the Tribunal has loosely used “Brand” in conjunction with “Goodwill”. He relied on the decision of R.G. Keswani (supra) and submitted that the valuation in question is in fact a valuation of “Goodwill” and by applying the ratio of this decision of the Tribunal, the assessee is not entitled to any depreciation. He relied on a number decisions in support of his contention that no depreciation can be granted on “Goodwill”. He pointed out that the assessee in fact has transferred goodwill at a separate value and alternatively no depreciation should be allowed on the “Goodwill”. 12. Mr. Dastur, in reply, submitted that in the case of Chitra Publicity Co. P. Ltd., the only issue that was before the Bench is whether the valuation report can be ignored, if not properly dislodged by the Revenue. He submitted that this case law is good only for the proposition that when arms length price is determined in the valuation report, it must be regarded as actual cost. He submitted that nowhere in this decision it is stated that “Goodwill” is same as “Trade Mark” or “Brand”.
13. Rival contentions heard. On a careful contentions of the facts and circumstances of the case and on a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.
14. Both the parties agreed that the issue whether the transfer in question is a slump sale or a demerger is not before the Tribunal. Thus the undisputed facts in this case are (a) this is a case of slump sale and (b) the valuation is done by an approved recognized valuer and the same is an arms length and has not been disputed or dislodged by the Revenue. On this factual matrix, as pointed out by both the parties, the only issue is whether the term “Brand” falls within the ambit of section 32(1)(ii) of the Act. Section 32(1)(ii) reads as follows : “32. (1) [In respect of depreciation of— (i) – – – – – – – – (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,”
15. Under the Trade Marks Act, 1999 (47 of 1999), Section 2(zb) reads as follows : ” “trade mark” means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colours; and- (i) in relation to Chapter XII (other than section 107), a registered trade mark or a mark used in relation to goods or services for the purpose of indicating or so as to indicate a connection in the course of trade between the goods or services, as the case may be, and some person having the right as proprietor to use the mark; and 12 (ii) in relation to other provisions of this Act, a mark used or proposed to be used in relation to goods or services for the purpose of indicting or so to indicate a connection in the course of trade between the goods or services, as the case may be, and some person having the right, either as proprietor or by way of permitted user, to use the mark whether with or without any indication of the identity of that person, and includes a certification trade mark or collective mark; Section 2(m) reads as follows : ” “mark” includes a device, brand, heading, label, ticket, name, signature, or any combination thereof.”(Underlining ours)
16. As trademark includes a mark and mark includes a brand, we have to necessarily conclude that trademark includes “Brand”. 16.1 In K.J. Aiyar’s judicial dictionary, “Brand” is defined as follows : “BRAND. A distinguishing name, design or trade-mark, used, for putting on goods or on cases in which they are enclosed to define and distinguish ownership, class or quantity [Pears]. In Ramanatha Aiyar’s Law Lexicon Volume 12005, defines “Brand” as follows : “Brand. To burn or impress or make a mark upon with a hot iron. A distinguishing name. design, or trade mark used for putting on goods or packages. It generally defines ownership, class, or quality of the goods. To put a name (the brand name) on something or to design and package a product so that it is easily recognizable by a consumer. A brand name can be protected by law against misuse by competitors hoping to benefit from the reputation associated with a particular branded product (Banking). BRAND, in Patents Act, 1883 (46 and 47 Vict., c. 57), S. 64, means “a device applied to an article by burning, and not a device woven or incorporated into the substance of the article.” [Pirie v. Goodall, (1892), I Ch 35]. Incorporation of a mark (by a water13 mark) would suffice to constitute a trade mark brand (Pirie v. Goodall, 1892, 1 Ch. 35); but mere words in common use would not amount to a Trade mark brand.
17. The Hon’ble Bombay High Court in the case of Techno Shares and Stocks Ltd. (supra) was considering a case whether, depreciation was allowable on a Bombay Stock Exchange Card u/s 32(1)(ii) of the Act. It held that BSE Card is only personal privilege granted to a Member to trade in shares on the floor of the Stock Exchange and such a privilege cannot be equated with the expression “licence” or an expression “any other business or commercial right of similar nature” enumerated in section 32(1)(ii) of the Act. While holding so, the Hon’ble High Court at para 23 held as follows : ” The expression `Franchises’ is neither defined in the Act nor there is any specific legislation in India relating to franchises. As per Black’s Law Dictionary, 8th Edition, the expression franchise denotes :- “1.****** `When referring to Government grants (other than patents, trademarks, and copyrights), the term `franchise’ is often used to connote more substantial rights, whereas the term `license’ connotes lesser rights. Thus, the rights necessary for public utility companies to carry on their operations are generally designated as franchise rights. On the other hand, the rights to construct or to repair, the rights to practice certain professions and the rights to use or to operate automobiles are generally referred to as licenses….’ 3. The sole right granted by the owner of a trademark or tradename to engage in business or to sell a good or service in a certain area. 4. The business or territory controlled by the person or entry that has been granted such a right. 14 Commercial franchise.- A franchise using local capital and management by contracting with third parties to operate a facility identified as offering a particular brand of goods or ser vices. Sports franchise.- (1)_ a franchise granted by a professional sports league to field a team in that league. (2) The team itself. Trial franchise. – A franchise having an initial term of lismited duration, such as one year. Franchise, vb. To grant (to another) the sole right of engaging in a certain business or in a business using a particular trademark in a certain area.” Thus, franchising is a kind of business where franchisor grants a licence to the franchisee to use franchisor’s intellectual property rights such as know-how, patents, trademarks, brand name, etc. to market the franchisor’s products or services for consideration. ” At para 34, it held as follows : ” – – – – – – – – – – – – – Whereas, the intangible assets enumerated in section 32(1)(ii) of the Act form a class of intellectual property and since the common thread flowing in almost all the said expressions is the intellectual property rights, the expression `licences’ would take colour from other expressions which are all referable to intellectual property rights. Thus, the decision of the Apex Court in the case of Scientific Engg. House (P) Ltd. (supra) does not support the case of the assessees.”
18. From the above it is clear that the jurisdictional High Court has held that brand name is an intellectual property right similar to knowhow, patents and trademarks etc..
19. While introducing the Finance Act, 2001, the explanatory notes on provision relating to direct taxes para 42 reads as follows : 15 ” 42. Providing for cost of acquisition of certain intangible capital assets under section 55 42.1 Under the existing provisions of sub-section (2) of section 55 of the Income-tax Act, the cost of acquisition of an intangible capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, is the purchase price in case the asset is purchased by the assessee from a previous owner, and nil in any other case. It was pointed out that certain similar self-generated intangible assets like brand name or a trade mark may not be considered to form part of the goodwill of a business, and consequently it may not be possible to compute capital gains arising from the transfer of such assets. 42.2 The Act has therefore amended clause (a) of sub-section (2) to provide than the cost of acquisition in relation to trade mark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.”
20. From the above it can be seen that trade mark or brand name has been used in conjunction and as an alternative to each other. Thus it can be concluded that even the legislature has intended that brand name or trade mark are similar intellectual properties.
21. In view of the above, we are of the considered opinion that we have to invariably agree with the argument of Shri S.E. Dastur that the term “Brand” falls within the ambit of section 32(1)(ii) of the I.T. Act and that the assessee is eligible for depreciation on the same.
22. Coming to the decision in the case of Chitra Publicity Co. P. Ltd. (supra) relied upon by the learned DR, the only proposition is that the valuation report cannot be ignored if not properly dislodged by the Revenue. It held that the AO did not consider the report of the registered valuer which were placed before him, in support of the value of the 16 hoardings and goodwill. It was also held that the AO has not pointed out the defects in the value of hoardings shown by the assessee. It held that no fault has been found with the valuation report and, therefore, the same cannot be rejected. There is no proposition that trademark or trade name can be equated with goodwill.
23. Coming to the decision of the Tribunal in the case of R.G. Keswani vs. ACIT in ITA No. 1463/Mum/2005 dated 19-02-2008, relied upon both by the CIT(Appeals) as well as by the learned DR, it is held that “any other business or commercial right of similar nature” is provided as a residual category, is found in the company of expression like, know-how, patents, copy rights, trade marks, licences, franchises, and, therefore, in view of the principle of ejusdem generis, the above expression has to be read in the company of the preceding works. It held that in such circumstances, the expression “any other business or commercial right of similar nature” also must be in the same genesis or category with specific and elucidated identity of commercial or business nature.
24. Nowhere in this judgment it is given that Brand does not fall in any of the category specified in section 32(1)(ii) of the Act. This case law is only limited to the issue whether the assessee is entitled to depreciation on goodwill. It has no application in the present case, except to the extent that the assessee shall not be entitled to depreciation on the goodwill transfer.
25. Thus, we direct the AO to allow depreciation to the assessee on the Brand received by it under the Scheme of Amalgamation. As far as goodwill is concerned, the assessee shall not be entitled to depreciation. 17
26. In the result, the appeal of the assessee is allowed in part.
27. ITA No. 4966/Mum/2009. This brings us to the Revenue’s appeal which is on two issues, the first being the direction of the CIT(Appeals) to allow depreciation at R.87.76 crores as against depreciation of Rs.15.98 crores allowed by the AO and the second being deletion of disallowances made under the proviso to section 40(a) and section 43B by the CIT(Appeals).
28. After hearing rival contentions, we hold as follows.
29. On the first ground, the Revenue has not disputed the findings of the first appellate authority that the transfer in question is a case of slump sale and not a case of demerger. The valuation has also not been disputed. Under these circumstances, for the reasons noted in the assessee’s appeal, we have to necessarily uphold the order of the first appellate authority and dismiss ground No. 1 of the Revenue.
30. Coming to ground No. 2, the facts are brought out at para 2.5 and 2.6 of the CIT(Appeals)’ order at page 12 which are extracted below for ready reference : “2.5 The AO has noticed that in the computation of income, the appellant company has claimed deduction of Rs.6,94,02,867/- u/s 40(a) which was disallowed in earlier years and offered in the case of KEC Infrastructure Ltd. in F.Y. 2004-05. The claim of deduction was made by stating that the payments made out of disallowance of earlier years. The AO has disallowed the claim of the appellant company by holding that the disallowance in earlier years was related to another company M/s KEC Infrastructure Ltd. The assessee company was formed in the year under consideration, therefore, no question of expenditure incurred in earlier years can be considered. Hence, he has disallowed the deduction of Rs.6,94,02,867/- u/s.40(a) of the I.T. Act. 18 2.6 Similarly, the appellant company has claimed deduction of R.7,04,869/- and Rs.3,10,79,751/- u/s.43B which was stated to be claimed on actual payments. The AO has taken the same stand that this expenditure was relating to another company M/s.KEC Infrastructure, therefore, it is not allowed in the case of the appellant. Hence, he has disallowed the deduction of Rs.3,10,79,751/- u/s. 43B of the Act.”
31. The assessee submitted that there is no dispute on the fact that the assessee had deducted and paid the tax in respect of liability pertaining to the expenses so disallowed in the hands of the transferor company and discharged the liability so assumed pursuant to the acquisition in question. He further submitted that the amounts disallowed u/s 43B in the hands of the transferor company, have been paid by the assessee company and the only issue is whether the assessee is entitled to deduction under the facts and circumstances of the case. It relied on the decision of Hon’ble Supreme Court in the case of CIT vs. T. Veerabhadra Rao 155 ITR 152 (SC) and the decision of the Mumbai Bench of the Tribunal in the case of Anil Engineering Corporation vs. ITO 50 ITD 99. The learned CIT(Appeals) at para 2.8 held as follows : “2.8 I have gone through the submissions of the appellant and the order of the AO. It is noticed that the expenditure disallowed u/s. 40(b) and 43B of the I.T. Act was relating to the transferor company. The appellant company pursuant to the scheme of arrangement acquired the Power transmission business of KEC Infrastructure Ltd. on a going concern basis. Since the PTB division was acquired by the appellant company as a going concern along with all assets and liabilities, therefore, the appellant has paid the tax in respect of the liability pertaining to expenses so disallowed in the hands of the transferor company u/s. 40(a) and 43B of the I.T. Act. The AO has disallowed the claim of the appellant company on the plea that the company was started in the year under consideration and the question of allowing the expenditure incurred in the earlier years does not arise. Since the expenditure disallowed u/s. 40(a) and 43B of the I.T. Act is to be 19 allowed on actual payment basis, therefore, it has to be allowed either in the case of the transferor company or the transferee company. In this regard, the Hon’ble Mumbai Tribunal has decided the issue in the case of M/s Anil Engineering Corporation vs. ITO 50 ITD 99 where it is held that the transferee of the business would be eligible to claim the deduction in respect of the liability taken over from the transferor for which the payment was made by the transferee subsequently. The facts of this case are squarely covered by this decision of the Hon’ble Tribunal. Therefore, the AO is directed to allow the expenditure claimed by the appellant company u/s. 40(a) and 43B of the I.T. Act. It is mentioned here that alternately , the transferred company M/s.Summit Securities Ltd. (formerly known as KEC Infrastructure Ltd.) has also claimed this expenditure being the transferor company. I have decided the appeal of the transferor company and dismissed the appeal of the appellant there. Therefore, this ground of appeal is allowed in appellant’s case.”
32. The Hon’ble Supreme Court in the case of T.Veerbhadra Rao K. Koteswara Rao & Co. (supra) held as follows : “If a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, the same right should be recognized in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded as belonging to the new owner. It is not imperative that the assessee referred to in sub-cl. (a) must necessarily mean the identical assessee referred to in sub-cl. (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub- cI. (b). The successor assessee, in effect, steps into the shoes of his predecessor. Unless the language of the statute plainly and clearly compels a construction to the contrary, the normal rule of the law should be given its proper play. 20 The assessee had spent a sum of Rs.6,880 as legal expenses in connection with an appeal filed in the Supreme Court arising out of a suit which was filed by the predecessor to recover an amount due from the Central Government and continued by the assessee on taking over the assets and liabilities of the predecessor. Held, that the assessee was entitled to the deduction of the sum of Rs. 6,880 spent by it towards legal expenses. Decision of the Andhra Pradesh High Court in CIT vs. T. Veerabhadra Rao, K. Koteswara Rao & Co. (1976)102 ITR 604 (AP) affirmed.”
33. In the case of Anil Engineering, the Tribunal followed the judgment of Hon’ble Supreme Court referred above and held that the transferee of the business should be eligible to claim the deduction in respect of the liability taken over from the transferor for which the payment was made by the transferee subsequently.
34. As the findings of the first appellate authority are in line with the proposition laid down by the Hon’ble Supreme Court in the case of T. Veerbhadra Rao K. Koteswara Rao & Co. (supra), we uphold the same and dismiss ground No. 2 of the Revenue.
35. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed in part. Order pronounced on this 4th day of June, 2010.
