[CIT v. Smifs Securities Ltd. (Civil Appeal No.5961 of 2012 dated 22-8-2012)]
Entries in books of accounts – the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure.
The following three questions of laws were raised before the Supreme Court:
1. Whether Stock Exchange Membership Cards are assets eligible for depreciation u/s. 32 of the Income Tax Act, 1961? Whether, on the facts and in the circumstances of the case, deletion of Rs.53,84,766/- has been made correctly?
2. Whether goodwill is an asset within the meaning of section 32 of the Income Tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said section?
3. The third question raised was regarding cancellation of disallowance of an amount of Rs.83,02,976/- as a bad debt.
The Supreme Court held that the first question was covered by the decision in the case of Techno Shares and Stocks Ltd. [(2010) 327 ITR 323 (SC) ], in favour of the assessee. With regard to the second question, the Supreme Court noted that the facts were as under: In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd. with Smifs Securities Ltd. (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd, were transferred to and vest in the company. In the process, goodwill had arisen in the books of the company.
The excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.
The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income Tax Act, 1961 [‘Act’ for short]. The Supreme Court after adverting to the provisions of Explanation 3 to section 32(1) of the Act held that ‘Goodwill’ was an intangible asset under Explanation 3(b) to section 32(1) of the Act. The Supreme Court observed that in the present case, the Assessing Officer, as a matter of fact, had come to the conclusion that no amount was actually paid on account of goodwill. This was a factual finding.
The Commissioner of Income Tax (Appeals) had come to the conclusion that the authorized representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding had also been upheld by Income Tax Appellate Tribunal. According to the Supreme Court, there was no reason to interfere with the factual finding. The Supreme Court further observed that against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset u/s. 32 of the Act. In the circumstances, before the High Court, the Revenue had not filed an appeal on the finding of fact referred to hereinabove. So far as the third question is concerned, the Supreme Court noted that the argument on behalf of the revenue was that, since the Tax Audit Report indicated that the amounts have been incurred on capital account, the assessee was not entitled to deduction of bad debt.
The Supreme Court observed that both the CIT(A) as well as the ITAT had concluded that the assessee had satisfied the provisions of section 36(1)(vii) of the Act. They held that bad debt claimed by the assessee was incurred in the normal course of business and, therefore, the assessee was entitled to deduction u/s. 36(1)(vii). The Supreme Court held that it is well settled now by a catena of decisions that the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure.
The Supreme Court held that in the present case, the concerned finding of facts recorded by the authorities below indicated that the assessee was entitled to deduction in the course of business u/s. 36(1)(vii) of the Act.
