I-T - Whether a sum can be added to income of assessee u/s 40A(2) although same has not been claimed as expenditure - NO: Delhi HC

THE issues before the Bench are - Whether a sum can be added to the income of the assessee u/s 40A(2), although the same has not been claimed as expenditure; Whether depreciation can be disallowed on the intangible assets, although the same has been allowed on the tangible assets and whether an amount which has been paid as a part of the sale price in a slump sale transaction can be added back to income of the assessee, merely on the pretext that the transaction was alleged to be sham in nature. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a joint venture of Saipem SPA (Italy) and one Mr Binoy Jacob. Both the joint venture partners have a 50% share in the assessee company. The assessee had acquired the running business of design and consultancy in the oil and gas sector from Triune Projects Private Limited by way of a slump sale and the total amount paid therefore was approximately Rs.45.68 crores divided into two categories of tangible an intangible assets.

The assessee had made a claim of depreciation at the rate of 25% on the intangible assets and 15% with regard to the tangibles. The AO disallowed the depreciation claimed of Rs.10,14,68,882 in respect of the intangibles, but disallowed the depreciation claimed with regard to the tangible assets. The income tax liability was computed at Rs 4,34,47,670 which was adjusted against the refund of Rs.1,62,40,170. After this substantial adjustment, an amount of Rs.1,10,848 was shown to be refundable. On appeal before the CIT(A), the disallowance was maintained and rather a sum of approximately Rs 30.44 crores was added to the income u/s 40A(2). This sum was the difference between the amount allocated for intangibles less the amount disallowed by way of depreciation. The CIT(A) had also made a disallowance of Rs.16,86,487 with regard to the depreciation claimed by the assessee as against the tangible assets.

Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal instead of staying the recovery of demand, converted the same into installments. Still aggrieved with this order, the assessee filed a writ petition before the Tribunal.

The counsel for the assessee submitted that this sum could not, in any event, be added back to the income of the assessee u/s 40A(2), as this was never claimed as an expenditure. Regarding the disallowance, he submitted that this stand of the CIT(A) was inconsistent with the view taken by him that the transaction was a sham transaction. If on the one hand, he disallowed depreciation on intangibles, he could not have, on the other, allowed depreciation on tangibles.

Having heard the parties, the High Court held that,

++ prima facie, we agree with the submission made by the counsel for the petitioner. This amount had not been claimed by way of expenditure by the petitioner. It was an amount which was embedded in the price paid in the slump sale. Even if we construe the said sale to be a sham or not to be slump sale at all, this amount of Rs.30.44 crores (approximately) could not be added to the income of the assessee under Section 40A(2) of the said Act or any other provision. Of course, disallowance for depreciation could be made if the law permitted. That disallowance had already been made by the Assessing Officer and, therefore, there was no occasion for any further disallowance insofar as the depreciation amount was concerned;

++ in these circumstances, we feel that the petitioner has an excellent prima facie case and the Tribunal ought to have granted stay of the demand raised by the revenue. We set aside the impugned order passed by the Tribunal to the extent of balance payments other than the payment of Rs.50 lacs already made by the petitioner. The rest of the demand is stayed till the Tribunal disposes of the appeal. The writ petition stands disposed of. Any observations made in this order are only prima facie observations and will not be taken into account by the Tribunal while considering and deciding the appeal. We expect that the Tribunal shall decide the appeal expeditiously. The parties have assured that they shall not take any adjournments