TMI Blog2012 (4) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... esulted in carrying on the transmission and distribution business by the assessee, without any interruption. Therefore, 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. 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) – Decided in favor of assessee. - ITA No.315/2010, ITA No.1151/2010, ITA No.1152/2010 - - - Dated:- 30-3-2012 - MR. JUSTICE SIDDHARTH MRIDUL, SIDDHARTH MRIDUL, JJ. For Appellant: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. For Respondent: Mr. N.P. Sahni, Sr. Standing Counsel. 1. The three appeals under Section 260A of the Income Tax Act, 1961(hereinafter referred to as the Act‟) raise a common issue of law and are being disposed of by this common order. 2. ITA No.315/2010 was admitted vide order dated 27th January, 2011 with the following substantial question of law:- Whether on the facts and in the circumstances of the case, the Tribunal erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2007. The AO disallowed the claim of the assessee Company on two grounds, namely, (a) depreciation under Section 32(2)(ii) is not available on goodwill; (b) the assessee Company was unable to demonstrate that the amount of Rs.16,58,76,000/- shown as goodwill in the books of accounts was in fact a payment made towards acquiring of certain business and commercial rights and therefore eligible for depreciation in tax as per Section 32(1)(ii) of the Act. (viii) After the order of assessment was framed the assessee Company invoked the jurisdiction of Commissioner of Income Tax (Appeals) [CIT(A)] challenging the validity of the assessment order with regard to depreciation. (xi) The assessee Company filed its appeal contending, inter alia, that the sum of Rs.16,58,76,000/- was in actuality an amount paid by the assessee Company for acquiring intangible assets including valuable knowhow, employees, work orders, business information, business contracts etc., as specified in the slump sale agreement dated 30th June, 2004 which were compendiously termed as goodwill and therefore entitled to depreciation under Section 32(1)(ii) of the Act. (x) The CIT(A) repelled the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was required to clarify the nature of such expenditure and to file its justification for the sum claimed. (c) the AO further noticed that the assessee Company claimed depreciation to the tune of Rs.14,17,500/- under Section 32(1)(ii) of the Act. (v) The AO while completing the assessment under Section 143(3) of the Act disallowed the depreciation, inter alia, on the ground that the depreciation under Section 32(2)(ii) is not applicable to goodwill as the legislature had specifically excluded goodwill as capital assets eligible for benefit of the provisions of Section 32. (vi) The assessee Company invoked the jurisdiction of the CIT(A) challenging the validity of the assessment order. The CIT(A) allowed the appeal of the assessee in view of the appellate order passed for the assessment year 2005-06 in respect of the same assessee. (vii) The Revenue carried the matter in appeal before the ITAT. The ITAT dismissing the appeal of the Revenue held that the assessee has not claimed depreciation on goodwill. It acquired commercial rights to sell products under the trade name and paid consideration in dispute for acquiring marketing and territorial rights to sell through deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Coco Cola Beverages (P) Ltd., 331 ITR 192 in this behalf. 7. Per contra, on behalf of the Revenue it was urged that the business or commercial rights acquired by the assessee did not fall within the definition of intangible assets and that none of the business or commercial rights purportedly acquired by the assessee fell within the definition of intangible assets as given in Explanation 3(b) to Section 32(1) of the Act so as to make them eligible for depreciation under Section 32 of the Act. 8. Before proceeding further it would be relevant to consider the relevant provisions of Section 32 of the Act: Section 32 - Depreciation (i) buildings, machinery, plant or furniture, being tangible assets; (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, owned, wholly or partly, by the Assessee and used for the purposes of the business or profession, the following deductions shall be allowed] [(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991:] [Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in [clause (xiii), Clause (xiiib) and Clause (xiv)] of Section 47 or Section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a licence or business or commercial right of a similar nature . In that case the AO and the CIT(A) held that the assessee could not claim depreciation on the stock exchange membership card; but the Appellate Tribunal held that it was an intangible asset and the assessee was entitled to depreciation thereon under Section 32(1)(ii). The High Court, on appeal held that the BSE membership card was only a personal privilege granted to a member to trade in shares on the floor of the stock exchange and that such a privilege was not a licence or any other business or commercial right of a similar nature under Section 32(1)(ii). The Supreme Court reversing the decision of the High Court held that the right of membership of BSE was a business or commercial right . The Supreme Court held as follows:- 19. The next question is - whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of Section 32(1)(ii). Our answer is in the affirmative for the reason that the Rules and the Bye-laws analysed hereinabove indicate that the right of membership (including the right of nomination) vests in the Exchange only when a member commit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responding to or resembling to in many aspects. In this regard, it would not be out of place to refer to the decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) wherein the concept of goodwill has been understood in the following terms: Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill was nothing more than "the probability that the old customers would resort to the old places" was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage "that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business". In Trego v. Hunt [1896] AC 7 (HL) Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business. 22. Regard being had to the concept of "goodwill" and the statutory scheme, the claim of the Assessee and the delineation thereon by the tribunal are to be scanned and appreciated. The claim of the Assessee-Respondent, as is discernible, is that the assessing officer had treated the transactions keeping in view the concept of business or commercial rights of similar nature and put it in the compartment of intangible assets. To effectively understand what would constitute an intangible asset, certain aspects, like the nature of goodwill involved, how the goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset it represents, namely, trademark, right, patent, etc. and further whether it would come within the clause, namely, "any other business or com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as they represent a particular benefit or advantage or reputation built over a certain span of time and the customers associate with such assets. Goodwill, when appositely understood, does convey a positive reputation built by a person / company / business concern over a period of time. Regard being had to the wider expansion of the definition after the amendment of Section 32 by the Finance Act (2) 1998 and the auditor's report and the explanation offered before the assessing officer, we are of the considered opinion that the tribunal is justified in holding that if two views were possible and when the assessing officer had accepted one view which is a plausible one, it was not appropriate on the part of the Commissioner to exercise his power under Section 263 solely on the ground that in the books of accounts it was mentioned as "goodwill" and nothing else. As has been held by the Apex Court in Malabar Industrial Co. Ltd. [2000] 243 ITR 83, Max India Ltd. [2007] 295 ITR 282 (SC) and CIT v. Vimgi Investment P. Ltd. [2007] 290 ITR 505 (Delhi) once a plausible view is taken, it is not open to the Commissioner to exercise the power under Section 263 of the Act. 11. It would also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , damage or injury; (e) all other claims against, or the rights to make a claim against, any third party in respect of loss of or damage or injury caused to, the Activity or any of the Activity Assets which occurred prior to the Completion Date to the extent that such loss, damage or injury has not been made good by and at the cost of the Activity Transferor; (f) all rights that the Activity Transferor may have under the agreement(s) under which the Activity Transferor acquired the Activity or any of the Activity Assets; Business Information means all information (whether or not confidential and in whatever form held, including computerised records) which in any way relates to all or any part of the Activity or any of the Activity Assets or any products manufactured and/or sold or services provided by the Activity; Business Records means all records of Business Information and other date (wherever situated) n and all books, files, registers, documents, literature, correspondence and other records of the Activity Transferor owned or used or intended for use in connection with the Activity at the Completion Date, in each case whether in writing or in electronic or any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and the Activity Assets with effect from the Effective Date to the intent that as from the date all profits/losses and receipts/payments, rights and advantages accruing to the Activity and for the Activity Assets shall belong to the Activity Transferee, and that as from the date it shall be responsible for discharging all of the Assumed Liabilities on the terms and conditions of this Agreement. 3. EXCLUDED ASSETS/EXCLUDED LIABILITIES 3.1 Excluded Assets The following items are excluded from the sale and purchase of the Activity and nothing in this Agreement shall operate to transfer:- 3.1.1 the trademark or any rights to use the name ALSTOM or any name confusingly similar thereto; and 3.1.2 cash in hand, cash in bank, bank deposits and cheques in hand. . 7. ASSUMPTION OF CONTRACTS AND BUSINESS CLAIMS 7.1 With effect from the Completion Date, the Activity Transferee shall become entitled to the Business Claims and to the benefits of the Activity Transferor under the Contracts and the Activity Transferee undertakes to the Activity Transferor to carry out and perform and to complete all the obligations and liabilities of the Activity Tranferor created by o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLOYEES 9.1 The contracts of employment of each Employee of the Activity who is listed in Exhibit 4.1 (each an Employee‟) will (subject to right, if any, of the concerned employee in accordance with mandatory applicable law) have effect as if originally made between the Activity Transferee and the Employee and the Activity Transferee shall assume all rights, power, duties and liabilities under or in connection with the contracts of employment of such Employee. The employment of each Employee by the Activity Transferee shall be treated as a continuous employment without any break of service and such transfer shall be on terms and conditions which are not less favourable then on which they have been engaged as on the day immediately preceding the Completion Date by the Activity Transferor. 9.2 The Activity Transferor shall perform and observe all its Obligations (including statutory obligations) under or in connection with the contracts of employement of the Employees up to the Completion date and the Activity Transferee shall perform and observe all such obligations of such Employees with effect from and after the Completion Date. 9.3 Immediately following Completion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.16,58,76,000/- over and above the book value of net tangible assets, was allocated by the transferee towards acquisition of bundle of business and commercial rights, clearly defined in the slump sale agreement, compendiously termed as goodwill in the books of accounts, which comprised, inter alia, the following:- (i) Business claims, (ii) Business information, (iii) Business records, (iv) Contracts, (v) Skilled employees, (vi) knowhow. It is also observed that the AO accepted the allocation of the slump consideration of Rs.44.7 Crores paid by the transferee, between tangible assets and intangible assets (described as goodwill) acquired as part of the running business. The AO, however, held that depreciation in terms of Section 32(1)(ii) of the Act was not, in law, available on goodwill. The CIT(A) and the ITAT approved the reasoning of the AO thereby holding disallowance of depreciation on the amount described as goodwill. It was thus argued on behalf of the assessee Company that Section 32(1)(ii) would mean rights similar in nature as the specified assets, viz., intangible, valuable and capable of being transferred and that such assets were eligible for depreciation. On beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 Supreme Court in Techno Shares and Stocks Ltd.(supra) 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) of the Act. 14. In view of the above discussion, we are of the view that the spe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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