TMI Blog2010 (12) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... re, to that of knowhow, patents, copy right, trade mark, license or franchise. Business or a commercial rights which move along with the establishment on its sale and not akin to the know how, patents, copy rights, trade marks, license, franchises are not entitled for depreciation - not entitled to depreciaiton Business or commercial rights - which confers upon the purchaser a right to carry on its trade in a particular manner are akin to the know how, patents, copy rights, trade marks, license, franchises, etc. - Entitled to depreciation. Excess payment over and baove the cost of tangible assets - There is no bifurcation of the total cost which can be allocated towards the commercial benefits and the commercial rights acquired by the assessees. Complete details of cost of acquisition of the commercial benefits and the commercial rights cannot be available on record. It is only a question of estimate. - total goodwill cost should be bifurcated in two equal parts; one is for commercial benefits and the other is for commercial rights and the amount incurred in acquiring the commercial right should be eligible for depreciation u/s 32 of the Act. Therefore, we direct the A.O. to div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was Rs. 9 crores and the company took over assets valued at Rs. 4,75,46,800/- as per the details in the annexure. It was further stated that balance amount represents the amounts paid as consideration towards transfer of distillery license which otherwise would not have been possible to acquire. The A.O. has examined the claim of the assessees. Being not convinced with it he disallowed the claim of depreciation on goodwill. 5. The assessee preferred an appeal before the CIT(A) with the submission that assessee had acquired a distillery unit by name Chagallu Distillery from M/s. Nizam Sugar Limited (NSL). The seller NSL is a government company in which substantial share holding to the extent of 98.88% is owned by the Government of Andhra Pradesh. The sale of distillery unit took place consequent to the decision of the Government of Andhra Pradesh under the privatization process in which the Chagallu Distillery has been included. As per the sale and purchase agreement, the purchase price of the distillery unit was termed as a single price of Rs. 9 crores as per its clause 2.3 besides separate payment of stocks. It was further stated that as per clause 1 specifying construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see did not find the favour from the CIT(A) and CIT(A) accordingly confirmed the disallowance on depreciation made by the A.O., after having observed that in the light of the statutory provisions contained in section 32(1)(II), the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to know how, patents, copy rights, trade marks, license, franchises. The relevant observation of the CIT(A) are extracted hereunder: I have considered the above facts of the case, the appellants submissions as well as A.O s contention. In this case, the appellant had acquired a distillery unit by name Chagallu Distillery from M/s. Nizam Sugars Ltd. (NSL). As per the sale and purchase agreement, the appellant had paid a consolidated price of Rs.9.00 crores for acquiring the unit. The excess of the amount paid over the value of the fixed assets acquired amounting to Rs. 4.75 crores has been termed as the payment towards goodwill as per the agreement. It is the appellant s contention that the term goodwill has been employed as conveying only the right to carry on the business of operation of distillery and the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 32(1)(ii) of the Income-tax Act. In such circumstances, there was nothing on record including in the agreement to show that the appellant had paid the amount for something other than goodwill. The Department s view is also supported by the Hon ble ITAT has held that goodwill does not fall in the category of intangible assets as prescribed under sec. 32(1)(ii) and therefore acquisition cost of goodwill is not entitled for depreciation. Therefore, the acquisition cost of goodwill is not an intangible asset entitled for depreciation. This ground of appeal is decided against the appellant. This ground of appeal stands as dismissed. 7. Aggrieved, the assessee has preferred an appeal and reiterated its contentions. The Ld. Counsel for the assessee Mr. G.V.N. Hari has contended that goodwill is a bundle of rights which move along with the establishment/industry/unit. The value of the good will depends upon the location of the establishment of the industry/unit and the nature of commercial benefits which are being transferred along with the establishment/industry/unit. Therefore, in a sale of going concern, the value of the goodwill is to be determined separately and since it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial rights. If the assessee acquires a commercial right which is akin to the know how, patents, copy rights, trade marks, license, franchises, being an intangible asset it may be eligible for depreciation u/s 32 of the Act. But the commercial benefits which are accrued on account of its location, reputation, the lack of competition and for other various reasons, the same are not eligible for depreciation u/s 32 of the IT. Act. In support of his contention that goodwill though it is an intangible asset, but it is not of similar nature of that know how, patents, copy rights, trade marks, license, franchises; therefore, not eligible for depreciation. He placed a reliance upon the following judgments: 1. Borkar Packaging (P) Ltd. v. ACIT 131 TTJ 99 2. Guruji Entertainment Network Ltd. v. ACIT 108 TTJ (Del) 180 3. CIT ANR v. Mangalore Ganesh Beedi Works 264 ITR 142 4. Bharatbhai J. Vyas v. ITO 97 ITD 248 (Ahd.) 5. R.G. Keswani v. ACIT 116 ITD 133 9. Having heard the rival submissions and from a careful perusal of record, we find that the sole controversy in these appeals revolves around an issue whether goodwill being an intangible asset is eligi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which may perhaps be gathered up and be revived again . 11. Their Lordship of this apex court in the case of S.C. Cambatta Co. finally concluded that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of business, the honesty of those who run it and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality and the goodwill may be lost. Their Lordship further observed that at the same time locality is not everything. The power to attract customers depends upon one or more of the other factors as well. In the case of Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba Boatwaua AIR 1970 SC 1147, their Lordship of the Apex court have examined the goodwill by holding that it is the benefit and advantage of the good name, reputation and connection of business. It is the attractive force which brings in customers. It is the magnetic quality of a particular trade of business which attracts customers to it as a matter of course. This quality springs from and is developed by various contribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us is whether the goodwill is business or commercial right of similar nature of know how, patents, copy rights, trade marks, license or franchises. 14. We have also examined the facts of the case of Ravindran and we find that assessee purchased a hospital with its land, building, equipments, staff, name, trade mark and goodwill as a going concern under 2 separate sale deeds. While immovables are covered by one sale deed, movables covering trade mark, goodwill, etc. are covered by another sale deed. In schedule B besides the name and get up, the parties have given the emblem or trade mark of hospital purchased by the assessees. Under the sale deed, the value of goodwill which includes the name of the hospital and its logo and trade mark was declared as Rs.2 crores. The depreciation u/s 32(l)(ii) of the Act was claimed on goodwill and while dealing with the issue, their Lordship have observed that the value of the goodwill covers the trade mark or logo and the name of the hospital. Without resorting to residuary entry, the assessee is entitled to claim depreciation on the name, trade mark, logo under the specific head provided u/s 32(l)(ii) which covers trade mark and franchi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of paying a very huge amount for goodwill is for maintenance of the continued reputation of the Hospital which was run in so much so, purchase of Hospital as a going concern with its name and trade mark is nothing but acquisition of goodwill earned by the Hospital and it cannot be termed anything other than a commercial or business right. In fact, if the previous owner of the Hospital wanted to retain the name, logo or trade mark of the Hospital even after sale of building and premises, he could have retained the same without transferring it to the appellant-assessee. By transferring the right to use the name of the Hospital itself, the previous owner has transferred the goodwill to the appellant-assessee and the benefit derived by the appellant-assessee is retention of continued trust of the patients who were patients of the previous owners. When the goodwill paid is for ensuring retention and continued business in the Hospital, it is certainly for acquiring a business and commercial rights and it is certainly comparable with trade mark, franchise, copy right etc., referred to in first part of sub-clause (ii) of section 32(1) and so much so, in our view, goodwill is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssigned in different names and therefore by using the word similar nature , the legislature has restricted the scope of intangible assets similar to the specified one. What it has paid for, in this case, simplicitor is an amount as a consideration for retirement of one partner, as goodwill, which amounts to giving compensation to a retiring partner and the term has been used as a goodwill. This does not signify acquisition of any know how, patents, copy rights, trade mark etc. or any business or commercial rights of similar nature. There may be an innumerable number of intangible assets, which may be transacted in business realities. There cannot be a dispute about terming such compensation as goodwill, but while deciding the allowability of depreciation, one has to take recourse of specific provisions. Therefore, the amount paid by the assessee to retiring partners towards goodwill was not eligible for depreciation u/s 32(l)(ii) as the payment did not result in any acquisition in know how, patents, copy rights, trade mark, etc. as prescribed in that section. 19. In the case of Guruji Entertainment Network Limited v. ACIT ( supra ), the Tribunal has also held that though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a substantial amount and is eligible for depreciation. The facts of this case are that assessee has acquired the foreign exchange broking business from M/s. Uday S. Kotak for a sum of Rs.5.90 crores out of which Rs. 1.88 crores was towards goodwill and Rs.3.83 crores was towards net current assets. The assessee claimed depreciation on goodwill and on forex business rights u/s 32(l)(ii) of the Act being intangible assets. It was also stated that assessee proposed to change the name of the company to Kotak Forex Brokerage Limited subject to receipt of necessary approvals from the ROC, Mumbai to ensure smooth transition of the business, the seller permits the purchaser to carry on the business style as Uday S. Kotak, until such time as the purchaser obtains the approval of the ROC for the change of its name to Kotak Forex Brokerage Limited. In the light of these facts, the Tribunal has held that the assessee is entitled for depreciation on goodwill being an intangible asset. 22. We have also examined the judgment of the apex court in the case of Techno Shares Stocks Limited ( supra ) recently rendered in which their Lordship have held that the right of membership with the exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial rights. Therefore those commercial benefits which move along with the establishment on its sale and not akin to the know how, patents, copy rights, trade marks, license, franchises are not entitled for depreciation. The legislature has used the word in a residuary clause is other business or commercial rights of similar nature . The commercial rights cannot be equated with the commercial benefits. Commercial rights confers certain right upon the purchaser to carry on its trade in a particular manner in order to earn more profit. Therefore, the commercial rights can be called to be equated with the know how, patents, copy rights, trade marks, license, franchises as all these items confers certain rights upon the owner to carry on its trade in a particular way. Therefore, we are of the considered view that the commercial benefits which moves along with the establishment on its sale are not akin to or do not belong to the same genesis of know how, patents, copy rights, trade marks, license, franchises because they do not confer any right upon the purchaser. These benefits are like the locality, particular type of customer, the person who owned it, etc. and these benefits thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill or the right to carry out distilling that form part of sale. It was stated on behalf of the assessee that purchase price of the complete establishment was consolidated price of Rs.9 crores and it includes the consideration for assets and business. It was also explained that the goodwill means the right to carry on business with a specific provisions from the use of the name Nizam Sugars Limited . There is no dispute that assessee has paid the excess amount against the cost of goodwill and the goodwill was defined in the sale and purchase agreement executed on 26th April, 2001 which is available at pg.Nos.3 to 38 according to which goodwill is all the goodwill, interest and connection of NSL (Nizam Sugars Limited) in and concerning the business together with the right to represent the purchaser as carrying on business as a going concern in succession to NSL but not including any right to use the name of Nizam Sugars Limited or any associated or related name . Therefore, by virtue of a goodwill, assessee has acquired all business/commercial benefits or rights to run the chagallu distillery but without using the name of Nizam Sugars Limited or any of its associates. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts sale. It is also brought to our notice that it is not easy to obtain a license to set up of sugar factory and distillery. It requires lot of efforts. That is why it has its own value and without licenses one cannot run distillery and sugar factory. Beside this license, other licenses or permission are required from various agencies to run a sugar factory smoothly and it has its own value. A lumpsum amount over and above the cost of the tangible assets is considered to be the cost of the goodwill, which includes business or commercial benefits and rights. There is no bifurcation of the total cost which can be allocated towards the commercial benefits and the commercial rights acquired by the assessees. Complete details of cost of acquisition of the commercial benefits and the commercial rights cannot be available on record. It is only a question of estimate. Since we have also taken a view that in such type of cases goodwill is a bundle of commercial benefits and commercial rights and commercial benefits are not eligible for depreciation whereas the commercial rights being akin to the know how, patent, copy right, trade mark, license or franchise are eligible for depreciation in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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