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2015 (10) TMI 1283 - SUPREME COURT

2015 (10) TMI 1283 - SUPREME COURT - [2015] 378 ITR 640 (SC) - Nature of expenditure - whether the expenses incurred by the Assessee were for protecting the business of the firm or were expenses incurred for personal reasons namely consequent to disputes or differences relating to the ownership of the going concern with the erstwhile partners of the Assessee - Tribunal noted that the legal expenses incurred were for defending the business of the going concern and for protecting its interests and .....

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n shown to us to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court. The Revenue did not seek the framing of any such question. See K Ravindranathan Nair Versus Commissioner of Income-Tax [2000 (11) TMI 3 - SUPREME Court]. Accordingly, we hold that the High Court was not justified in upsettin .....

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5AB - High Court denied any benefit to the Assessee under Section 35A and Section 35AB since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trademarks, copyrights and know-how - Held that:- As held, in our opinion rather speculatively by the High Court, that the valuation made by the Chartered Accountant of AOP-3 that is M.R. Ramachandra Variar that the goodwill was split into know-how, copyrights and trademarks only for the purp .....

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nt) as has been done by the Tribunal, the Assessee would be quite satisfied. Unfortunately, the alternative aspect of the Assessee's case was not looked into by the High Court.

Would intellectual property such as trademarks, copyrights and know-how come within the definition of 'plant' in the 'sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it'? - Held that:- In our opinion, this must be answered in the affirmative for the re .....

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cially necessary and essential as understood by those dealing with direct taxes.

Section 32 of the Act as it stood at the relevant time ‘In respect of depreciation of buildings, machinery, plant or furniture owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed –’ did not make any distinction between tangible and intangible assets for the purposes of deprecia .....

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of.- Decided in favour of assessee. - Civil Appeal Nos. 10547-10548 of 2011 - Dated:- 15-10-2015 - Madan B. Lokur And S. A. Bobde, JJ. JUDGMENT Madan B. Lokur, J. 1. These appeals are directed against a judgment and order dated 23rd December, 2010 passed by the Division Bench of the High Court of Karnataka at Bangalore in ITA Nos. 69-70 of 2001. 2. The three substantial questions of law considered by the High Court were as follows:- i) Whether ₹ 12,24,700/- claimed as revenue expenditure b .....

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nd know-how, in terms of Section 35A and 35AB of the Act? iii) Whether the Tribunal had erred in directing the Assessing Officer to capitalize the value of trademarks, copyright and technical know-how by treating the same as plant and machinery and grant depreciation therein? 3. In its conclusion, the High Court answered the first two questions in the negative and the third question in the affirmative in favour of the Revenue and against the Assessee. While doing so, the High Court set aside the .....

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5. The partnership firm was reconstituted from time to time and its last reconstitution and partnership deed contained Clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after its dissolution. Clause 16 of the partnership deed reads as follows:- "16. If the partnership is dissolved, the going concern carried on under the name of the Firm Mangalore Ganesh Beedi Works and all the trade marks used in course of the said business by the said firm a .....

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s of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners." 6. Due to differences between the partners of MGBW, the firm was dissolved on or about 6th December, 1987 when two partners of the firm applied for its winding up by filing Company Petition No. 1 of 1988 in the High Court. While entertaining the Company Petition the High Court appointed an Official Liquidator and eventually, after .....

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of its partner/s, who makes an offer of a highest price, the same not being less than the minimum (reserved) price of ₹ 30 crores (Rupees Thirty Crores) within 11-7-1991 accepting further liability to pay interest at 15% per annum towards the amount of the price payable to partner/s from 6-12-1987 till the date of deposit." 8. The High Court also prescribed certain other activities such as conducting the auction by the Official Liquidator etc. 9. Pursuant to the order passed by the Hi .....

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uidator to AOP-3 on or about 7th January, 1995. 10. MGBW (hereinafter referred to as the 'Assessee') filed its return for the period 18th November, 1994 to 31st March, 1995 and subsequently filed a revised return. Broadly, the Assessee claimed a deduction of ₹ 12,24,700/- as a revenue expenditure permissible under Section 37 of the Income-Tax Act, 1961 (hereinafter referred to as 'the 'Act') towards legal expenses incurred. The Assessee also claimed depreciation under S .....

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e Commissioner of Income-Tax (Appeals) who passed an order on 15th October, 1998. The appeal was allowed in part inasmuch as it was held that the Assessee was entitled to a deduction towards legal expenses. However, the claim of the Assessee regarding deduction or depreciation on the Intellectual Property Rights was rejected by the Commissioner of Income-Tax (Appeals). 12. As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the Assessee in respect of legal e .....

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tion No. 1 15. In respect of the first question the issue really is whether the expenses incurred by the Assessee were for protecting the business of the firm or were expenses incurred for personal reasons namely consequent to disputes or differences relating to the ownership of the going concern with the erstwhile partners of the Assessee. 16. The Tribunal examined the issue in substantial detail. It was held by the Tribunal that the concern was in fact a going concern and therefore, the legal .....

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n the High Court. The Tribunal noted that even the Assessing Officer did not treat the expenditure as being of a capital nature. 17. On a consideration of the issues placed before the Tribunal, including the decision of this Court in Dalmia Jain and Company Limited v. Commissioner of Income Tax [1971] 81 ITR 754 (SC) it was held that the expenses incurred by the Assessee were honest and reasonable and were incurred for the purposes of protecting the business of the firm as a going concern. In Da .....

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sion; expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from Court to Court and incurring expenditure is not a ground fo .....

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therefore personal in nature. 19. We are not at all impressed with the submission of learned counsel for the Revenue. There is a clear finding of fact by the Tribunal that the legal expenses incurred by the Assessee were for protecting its business and that the expenses were incurred after 18th November, 1994. There is no reason to reverse this finding of fact particularly since nothing has been shown to us to conclude that the finding of fact was perverse in any manner whatsoever. That apart, .....

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decision on fact of the Tribunal can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal on facts is perverse, in the sense that it is such as could not reasonably have been arrived at on the material placed before the Tribunal. In this case, there was no such question before the High Court. Unless and until a finding of act reached by the Tribunal is canvassed before the High Court in the manner set out above, the High Court is o .....

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on in favour of the Assessee and against the Revenue. Question Nos. 2 & 3 21. As a preface to answering these questions, we must accept and acknowledge that intellectual property rights have a value. There is a tacit acceptance of this in Bharat Beedi Works (P) Ltd. v. CIT (1993) 3 SCC 252, paragraph 13. wherein it has been observed that there is a value attached to a brand name. 22. Proceeding from this starting point, it must be noted that the fundamental basis on which these questions wer .....

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410.02. The total liabilities were valued at ₹ 26,55,77,389.02 thereby making the net assets worth ₹ 2,02,24,021.30. The Chartered Accountants specifically stated in the Report that the net assets excluded goodwill. The Report calculated goodwill on the super profit method by taking three times the profit for 5 years (30.06.1983 to 30.06.1987). This was then calculated at ₹ 26.10 crores. It is on this basis that the reserve price for the auction was fixed at ₹ 30 crores, .....

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iar. In his Report dated 12th September, 1994 the technical know-how was valued at ₹ 36 crores, copyright was valued at ₹ 21.6 crores and trademarks were valued at ₹ 14.4 crores making a total of ₹ 72 crores. These figures were arrived at by taking 5 times the average profits for the last 5 years (ended 31st March, 1994). It is not necessary to go into calculating the bifurcated value of the three intangible assets except to say that the trademarks were given a value sinc .....

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aroma of beedis differs from one manufacturer to another, depending on the secret formula for mixing and blending tobacco. The claim for depreciation/amortization by the Assessee is limited to this amount of ₹ 72 crores. 24. While passing orders on the bid given by the Assessee, the High Court tacitly accepted, in its order of 22nd December, 1994 that the trademarks and copyrights were the intangible assets of MGBW. The High Court held, Company Application No.436/1994 is allowed and the s .....

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on No.433/1994. The out-going group of partners presently in Management of the affairs of M/s Mangalore Ganesh Beedi Works, are hereby directed to deliver forthwith the possession of the entire business of the said dissolved partnership firm together with all trade marks, trade names, copy rights, Book of Accounts, documents relating to assets and liabilities, Bank Accounts etc., under the supervision of the Official Liquidator, who shall submit a report as to the completion of the process of de .....

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ufacturer over the last five decades. After taking into consideration the net assets and liabilities of MGBW, the Chartered Accountant arrived at the net value of the going concern at ₹ 90 crores. On this basis, AOP-3 gave its bid of ₹ 92 crores which was eventually accepted. 26. In the case of M. Ramnath Shenoy ITA No.258 (Bangalore/1997) decided on 10th July, 1997 relevant to Assessment Year 1995-96 (an erstwhile partner of MGBW) the Tribunal accepted (after a detailed discussion) .....

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held that the assets are self-generated and would not attract capital gains. The decision of the Tribunal has been accepted by the Revenue and we really see no reason why a different conclusion should be arrived at in so far as the Assessee is concerned. 27. The High Court denied any benefit to the Assessee under Section 35A and Section 35AB of the Act since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trademarks, copyrights a .....

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opyrights and trademarks only for the purposes of claiming a deduction under Section 35A and Section 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trademarks. 28. We leave open the question of the applicability of Section 35A and Section 35AB of the Act for an appropriate case. This is because learned counsel submitted that if the Assessee is given the benefit of Section 32 read with Section 43 .....

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in Section 43(3) of the Act is inclusive. plant includes ships, vehicles, books, scientific apparatus and surgical equipment used forthe purposes of the business or profession but does not include tea bushes or livestock; A similar definition occurring in Section 10(5) of the Income Tax Act, 1922 plant includes vehicles, books, scientific apparatus and surgical equipment purchased forthe purposes of the business, profession or vocation; was considered in Commissioner of Income Tax v. Taj Mahal H .....

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t;plant" by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to "plant" is wide. The word "includes" is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, those words and phrases must be construed as comprehending not only such things as they signify according to .....

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r opinion, this must be answered in the affirmative for the reason that there can be no doubt that for the purposes of a large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the Assessee. Therefore, it cannot be doubted that so far as the Assessee is concerned, the trademarks, copyrights and know-how acquired .....

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n tangible and intangible assets for the purposes of depreciation. The distinction came in by way of an amendment after the assessment year that we are concerned with. That being the position, the Assessee is entitled to the benefit of depreciation on plant (that is on trademarks, copyrights and know-how) in terms of Section 32 of the Act as it was at the relevant time. We are, therefore, in agreement with the view taken by the Tribunal in this regard that the Assessee would be entitled to the b .....

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