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2016 (2) TMI 187 - ITAT PUNE

2016 (2) TMI 187 - ITAT PUNE - TMI - Deduction u/s. 35D(2)(c)(iv) - CIT(a) allowed the claim - Held that:- It is a well settled law that the expenditure incurred on issue of fresh share and expansion of capital base is capital in nature. Thus, in view of the law laid down in the case of Brooke Bond India Ltd. Vs. Commissioner of Income Tax reported as [1997 (2) TMI 11 - SUPREME Court ] we are of the view that the Commissioner of Income Tax (Appeals) has erred in allowing deduction claimed by the .....

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claimed on goodwill u/s. 32(1)(ii) - Held that:- Following the decision rendered in the case of Commissioner of Income Tax Vs. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT ), the Hon'ble Bombay High Court in the case of Commissioner of Income Tax Vs. Birla Global Asset Finance Co. Ltd. (2012 (8) TMI 773 - BOMBAY HIGH COURT ) held that depreciation in respect of intangible assets constituting goodwill is allowable. - ITA No. 1317/PN/2010, ITA No. 7547/PN/2010 - Dated:- 1-1-2016 - SHRI .....

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of Nickel hydrogenated catalysts, Naptha reforming catalysts and Gas reforming catalysts. For the impugned assessment year, the assessee filed return of income on 28-11-2003 declaring loss of ₹ 10,11,17,770/-. Thereafter, the assessee filed revised return of income on 29-10-2004 declaring loss of ₹ 9,54,93,860/-. The case of the assessee was selected for scrutiny and accordingly notice u/s. 143(2) was issued to the assessee on 25-11-2004. During the course of assessment proceedings, .....

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f Hon'ble Supreme Court of India in the case of Punjab State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax reported as 225 ITR 792 (SC): 93 Taxman 5 (SC). Aggrieved by the assessment order dated 28-02-2005, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) rejected the appeal of the assessee on account of claim of depreciation on goodwill and non-compete fees and confirmed the addition on both t .....

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2010 (Appeal by the Revenue) 3. The Revenue in appeal has raised the solitary issue against allowing deduction of ₹ 6,03,900/- u/s. 35D(2)(c)(iv). The ground of appeal raised by the Revenue is as under: 1. On the facts and in the circumstances of the case and in law, the ld. CIT(A)-I, Thane has erred in allowing the deduction u/s. 35D(2)(c)(iv) of ₹ 6,03,900/- overlooking the fact that the assessee is a Pvt. Ltd. Co. and the expenditure has been incurred for issuing 4,19,90,000/- equ .....

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'ble Supreme Court of India in favour of the Revenue. The ld. DR placed reliance on the decision rendered in the case of Punjab State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax (supra). The ld. DR further submitted that a perusal of the provisions of section 35D(2)(c)(iv) would clearly show that such expenditure is not allowable. 5. On the other hand Shri P.J. Pardiwala and Basanti Patel appearing on behalf of the assessee vehemently supported the findings of Comm .....

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missioner of Income Tax (supra) while adjudicating this issue has held as under: 7. We do not consider it necessary to examine all the decisions in extensor because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of a ca .....

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and against the assessee. 7. The Hon'ble Supreme Court of India later on in the case of Brooke Bond India Ltd. Vs. Commissioner of Income Tax reported as 225 ITR 798 (SC) after considering catena of judgments has reiterated the law laid down in the case of Punjab State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax (supra). The Hon'ble Apex Court in the case of Brooke Bond India Ltd. Vs. Commissioner of Income Tax (supra) has held : 6. Dr. Pal has, however, submi .....

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efore the Appellate Assistant Commissioner as well as before the Tribunal. It is no doubt true that before the Appellate Assistant Commissioner as well as before the Tribunal it was submitted on behalf of the assessee that the increase in the capital was to meet the need for working funds for the assessee company. But the statement of case sent by the Tribunal does not indicate that a finding was recorded to the effect that the expansion of the capital was undertaken by the assessee in order to .....

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e of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Now, it is a well settled law that the expenditure incurred on issue of fresh share and expansion of capital base is capital in nature. Thus, in view of the law laid down by the Hon'ble A .....

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ssioner of Income Tax (Appeals) in disallowing depreciation claimed on payment of non-compete fees. In ground Nos. 4 to 6 the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in disallowing depreciation claimed on goodwill u/s. 32(1)(ii). 9. The ld. AR submitted that during the period relevant to the assessment year under appeal the assessee had purchased catalyst business from M/s. ICI India Ltd. As part of takeover, the assessee paid a sum of ₹ 10,73,30,000/- on .....

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ome Tax Vs. Ingersoll Rand International Ind. Ltd., 227 Taxman 176 (Kar); ii. Serum Institute of India Ltd. Vs. Addl. Commissioner of Income Tax, 135 ITD 69 (Pune); iii. M/s. Schott Glass India Pvt. Ltd. Vs. DCIT, ITA No. 1698/Mum/2003 for the assessment year 1998-99 decided on 07-09-2011; and iv. Assistant Commissioner of Income Tax Vs. Real Image Tech. (P.) Ltd., 120 TTJ (Chennai) 983. In respect of claim of depreciation on goodwill the assessee placed reliance on the decision of Hon'ble S .....

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ently defended the orders of authorities below in rejecting the depreciation claimed by the assessee on non-compete payment and goodwill. The ld. DR submitted that goodwill increase with the period of time in a growing business. It is only in the case where there is a sharp decline in the business, the value of goodwill may come down. In the case of assessee it is evident from the records that the assessee is having progressive business. Therefore, there is no question of goodwill getting deprec .....

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ataka High Court in the case of Commissioner of Income Tax Vs. Ingersoll Rand International Ind. Ltd. (supra). The decision of Hon'ble Delhi High Court in the case of CIT Vs. Hindustan Coca Cola Beverages P. Ltd. reported as 331 ITR 192 (Del) on which the Chennai Bench of Tribunal has placed reliance is on different set of facts. Therefore, the case laws on which the ld. DR has placed reliance will have no application. 12. We have heard the submissions made by the representatives of rival si .....

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ing that non-compete fee being in the nature of capital expenditure, depreciation is to be allowed on the non-compete fee as it constitutes a commercial or a business right under Sec. 32(1)(ii) of the Act? 13. The Hon'ble High Court after considering and discussing various judgments cited by the rival sides held as under: 7. Section 32 has been widened by the Finance Act No.2 (Act of 1998) whereby depreciation is allowed on intangible assets acquired on or after 1st April 1998. As per Sec.32 .....

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rights, trade marks, licences, franchises, but must be of similar nature as the specified assets. The fact that after 'the specified intangible assets', the words 'business or commercial rights of similar nature' have been additionally used, clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets, but also to other categories of intangible assets which were neither feasible nor possible to exhaustively en .....

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e unnecessary. 8. Therefore what is to be seen is, what are the nature of intangible assets which would constitute business or commercial rights to be eligible for depreciation. In this regard, it is necessary to notice that the intangible assets enumerated in Sec.32 of the Act effectively confer a right upon an assessee for carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business to the exclusion of another assessee. A non-compete right encompasse .....

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ed. The object of acquiring a know-how, patents, copyrights, trade marks, licences, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same ie., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restrict .....

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eing acquired. The right is acquired for carrying on the business and therefore it is a business right. The word 'commercial'' is defined in Black's Law Dictionary as related to or connected with trade and commerce in general', 'commerce' is defined as 'the exchange of goods, productions or property of any kind; the buying, selling and exchanging of articles'. A right by way of non-compete is acquired essentially for trade and commerce and therefore it will al .....

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he first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his-business without bothering about the competition. Generally, non-compete fee is paid for a definite period. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Therefore .....

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ights of similar nature' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently .....

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to 3 raised in the appeal of the assessee are allowed. 14. The next issue raised in the appeal of the assessee is with regard to disallowance of depreciation claimed on goodwill u/s. 32(1)(ii) of the Act. In the case of Commissioner of Income Tax Vs. Smifs Securities Ltd. (supra) one of the question before the Hon'ble Apex Court for adjudication was: Whether goodwill is an asset within the meaning of section 32 of the Income Tax Act, 1961, and whether depreciation on goodwill is allowable u .....

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) with retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company." It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consider .....

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dings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." Explanation 3 states that the expression asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words any other business or commercial rights of similar nature' in .....

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er of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [ CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the differe .....

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