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2015 (7) TMI 609 - ITAT LUCKNOW

2015 (7) TMI 609 - ITAT LUCKNOW - TMI - Depreciation on goodwill account - CIT(A) allowed the claim - as per revenue the company has issued 74,26,950 equity shares of ₹ 10/- each to the shareholders of J.K. Synthetics Ltd. (hereinafter called in short as JKSL) free of cost by debiting to goodwill account and the company has created goodwill account and declared it in fixed assets as per schedule IV to the annual report of the company - Held that:- First of all the cost of shares allotted t .....

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LHI HIGH COURT) where in HC examined this issue in the light of legal provisions of the Act and various judgments of the Hon'ble Apex Court and finally concluded that 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) of the Act and were accordingly eligible for depreciation and also confirmed by the Hon'ble Apex Court. Therefore, we are of the considered opinion that the ld. CIT(A .....

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2010 - Dated:- 10-6-2015 - SHRI SUNIL KUMAR YADAV AND SHRI. A. K. GARODIA, JJ. For The Appellant : Dr. Anant Kumar Agrawal, CIT (DR) For The Respondent : Shri. Ajay Vohra, Sr. Advocate with Shri. Abhishek Agarwal, Advocate ORDER PER SUNIL KUMAR YADAV: These appeals are preferred by the Revenue against the respective orders of the ld. CIT(A) on common ground that the ld. CIT(A) has erred in law and on facts directing the Assessing Officer to allow depreciation on an amount of ₹ 7,42,69,500/ .....

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ssessee has approached the Hon'ble High court of Allahabad and vide judgment dated 9.9.2014, the Hon'ble High court of Allahabad has set aside the order of the Tribunal and restored the proceedings back to the Tribunal for a decision afresh on merit after hearing both the parties. Consequently these appeals were listed for hearing and arguments of both the parties were heard. 3. The facts in brief relating to the controversy involved in these appeals culled out from the orders of the low .....

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tion scheme was circulated which envisaged transfer of the cement undertakings of the sick company to the assessee on the payment of outstanding dues of the financial institutions and banks as consideration for the transfer. The scheme which was sanctioned by the AAIFR defined the expression demerger to main transfer of sale through section 18(6A) of Sick Industrial Companies Special Provisions Act, 1985. The cost of the scheme was shown in clause (C) to be of ₹ 510.39 crores including the .....

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all fixed assets and current liabilities. Clause H(e) of the scheme contemplated that the assessee would issue one paid up equity share of phase value of ₹ 10/- free of cost to all the existing shareholders of JKSL against ₹ 10/- equity shares of JKSL held by them. 4. The assessee in its original return of income claimed depreciation of ₹ 72,32,58,987/-. The assessee, however, filed a revised return enhancing the claim of depreciation to ₹ 73,26,86,528/-. Consequently, ad .....

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he quantum of addition to the amount of ₹ 72,32,58,987/-, as claimed in the original return. 5. In appeal, the ld. CIT(A) by his order dated 7.5.2010 reversed the order of the Assessing Officer on this aspect on the ground that issuance of shares was towards part payment of purchase consideration and hence was included in the cost of acquisition of cement undertaking. Therefore, the assessee could not be deprived of depreciation by mainly treating the issue of shares to the goodwill accoun .....

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he revised claim of the assessee for enhanced depreciation includes depreciation on the amount of goodwill which is not a fixed asset as per provisions of section 32 of the Act. Therefore, the enhanced claim of depreciation cannot be allowed. In support of his contention, the ld. D.R. has placed reliance upon the order of the Tribunal in the case of R.G. Keswani vs. ACIT, Mumbai, 116 ITD 133 (Mumbai) and DCIT vs. Toyo Engineering India Ltd., 18 ITR (T) 159 (Mumbai-Trib.). Reliance was also place .....

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in the means of finance it was shown against goodwill account, yet it was actually the cost of asset on which depreciation is to be allowed. Even if issuance of equity shares for a sum of ₹ 7.44 crores is to be considered against the value of goodwill, the depreciation is to be allowed in the light of series of judgments of the Hon'ble Apex Court and various High Courts and in support of this proposition of law, he has placed reliance upon the judgment of the Hon'ble Apex Court in .....

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see has further contended that since the findings of the ld. CIT(A) are in consonance with the judgments of the Hon'ble Apex Court and various High Courts, the same deserves to be confirmed and no interference is called therein. 9. Having carefully examined the orders of the lower authorities; documents filed and judgments referred to by the respective parties in the light of the rival submissions, we find that undisputedly the assesseecompany acquired the cement undertaking of JKSL, a going .....

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hown against goodwill in cement undertaking. It is also an undisputed fact that instead of making payments of ₹ 7.44 crores, which is part of the cost of the scheme, the assessee has issued equity shares of the assessee to the shareholders of JKSL. Therefore, issuance of shares is also cost of asset or at the most it will be called to be cost of goodwill. But for both the reasons the assessee is entitled for depreciation. The assessee has originally claimed depreciation at ₹ 72,32,58 .....

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ssessee is not entitled for depreciation. 10. Our attention was also invited to Explanation 3 below section 32(1) of the Act. While allowing the claim of the assessee, the ld. CIT(A) has held that issuance of shares for ₹ 7.44 crores was a part payment of purchase consideration towards cost of acquisition of cement undertaking, therefore, the cost of shares issued to the shareholder of JKSL is eligible for depreciation and the ld. CIT(A) has also held that even if it is considered to be th .....

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consideration towards cost of acquisition to the cement undertaking, then the assessee is eligible for depreciation of the said cost. The dispute was raised that it is not a part of payment of purchase consideration towards cost of acquisition of cement undertaking. It was rather called to be the cost of goodwill which was transferred to the assessee. In this regard, we have carefully perused the judgments referred to by the parties. 11. In the case of R.G. Keswani vs. ACIT (supra) and DCIT vs. .....

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ion had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. Therefore, the assessee is entitled for depreciation on the said goodwill. The relevant observations of the Hon'ble Apex Court are extracted hereunder in order to understand the legal proposition and controversy raised therein:- We quote hereinbelow Explanation 3 to section 32(1) of the Act: "Explanation 3.-For the purposes of this sub-section, the expres s .....

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s of similar nature. Areading the words "any other business or commercial rights of similar nature" in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3( .....

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and liabilities of M/s. YSN Shares and Securities P. Ltd. 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 has also been upheld by the Income-tax Appellate Tribunal ("the ITAT", for short). W .....

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n No. (b) also in favour of the assessee. 12. In the case of Areva T and D India Ltd. vs. DCIT (supra), the Hon'ble Delhi High Court has examined this issue in the light of legal provisions of the Act and various judgments of the Hon'ble Apex Court and finally concluded that 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) of the Act and were accordingly eligibl .....

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April 1, 2004. As a result thereof, the running business of transmission and distribution was acquired by the transferee lock, stock and barrel minus the trade mark of the transferor which was retained by the transferor, for lump sum consideration of ₹ 44.7 crores. It is further seen that the book value of the net tangible assets (assets minus liabilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as ₹ 28.11 crores. The said assets and l .....

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ess information, (iii) business records, (iv) contracts, (v) skilled employees, (vi) know-how. It is also observed that the Assessing Officer accepted the allocation of the slump consideration of ₹ 44.7 crores paid by the transferee, between tangible assets and intangible assets (described as goodwill) acquired as part of the running business. The Assessing Officer, however, held that depreciation in terms of section 32(1)(ii) of the Act was not, in law, available on goodwill. The Commissi .....

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ng the doctrine of noscitur sociis the expression "any other business or commercial rights of similar nature" used in Explanation 3(b) to section 32(1) has to take colour from the preceding words "know-how, patents, copyrights, trade marks, licences, franchises". It was urged that the Supreme Court had clearly held in Techno Shares and Stocks Ltd. [2010] 327 ITR 323 (SC) that "Our judgment should not be understood to mean that every business or commercial right would con .....

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n that such rights need not answer the description of "know-how, patents, trade marks, licences or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact .....

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the aforesaid six categories of assets, viz., know-how, patents, trade marks, copyrights, licences or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in the case of the assessee, intangible assets, viz., business cl .....

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e 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. [2010] 327 ITR 323 (SC) 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 .....

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it is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation under section 32(1)(ii) of the Act. In the circumstances, the substantial question of law is decided in the affirmative and this appeal is allowed in favour of the assessee and against the Revenue and the impugned order is set aside. 13. This judgment of the Hon'ble Delhi High Court was approved by the Hon'ble Apex Court as the SLP filed by the Departm .....

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