TMI Blog2009 (8) TMI 1174X X X X Extracts X X X X X X X X Extracts X X X X ..... as revenue expenditure . 3. The assessee company had filed its return of income, admitting an income of ₹ 446.76 crores. The assessee had claimed ₹ 30.25 lakhs as depreciation on payment for goodwill . In the schedule showing depreciation on intangible assets, it was mentioned that the total amount paid to Philips (India), Mumbai was ₹ 1.38 crores and after reducing the depreciation claimed in the earlier year, WDV was ₹ 1.21 crores. On this WDA, depreciation of ₹ 30.25 lakhs was claimed. The assessment for the AY under dispute was concluded, determining the taxable income at ₹ 451.93 crores, thereby allowing the depreciation as claimed. 3.1. On examining the relevant records suo motu, the Ld.CIT (LTU) was of the view that the claim of depreciation made by the assessee company was illegal and excessive which was not considered by the AO. 4. The facts of the issue, the assessee s contentions and the reasoning of the CIT (LTU) in setting-aside the assessment order being erroneous and prejudicial to the interest of revenue u/s 263 of the Act are summarized as under: Facts of the case: (a) the assessee had acquired a business from Ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suppliers, customers and their preferences, behaviours and, thus, it was an intangible asset; (iv) the valuer in their report have attributed ₹ 1.38 crores being business information under the category of other identifiable intangibles (goodwill) . Hence, the business information (know-how) has been depreciated u/s 32 at the rate of 25%. (v) The word know-how has not been defined u/s 32. however, explanation u/s 35AB describes the word and the extract has been reproduced; (vi) If other identifiable intangibles acquired by the assessee is goodwill and no depreciation is allowable on goodwill, then the amount of expenditure which the assessee would have incurred in recruiting and training new set of experienced employees capable of achieving the sale/profit, if the assessee had not taken over the employees from the transferor, be granted as revenue expenditure. 4.2. After examining the various arguments put-forth by the assessee company, the conclusion of the CIT (LTU) was that the claim of depreciation was illegal and excessive which was not considered by the AO and, thus, the assessment order being erroneous and prejudicial to the interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other contracts. - The report didn t assign any specific value for business information or know-how for the reason that he had included in the above and chose to make last i.e., 4th category shown in para 4.5. as goodwill separately for ₹ 1.38 crores. Therefore, the claim of goodwill categorized by its valuer can no be business information thereby contradicting its valuer. - The assessee s argument that the amount paid to Phillips actually represents the value of the skill and know-how developed by the ten employees taken over by the assessee. The human resource, however, does not fall within the definition of intangible assets given Expln.3 in s.32. - Absorbing the employees does not amount to acquiring a right. The knowledge and skill of the employees cannot be treated as assessee s right or ownership. The assessee cannot claim that it owns the employees. The agreement through which they were absorbed does not stipulate any period for which they must work for the assessee. They are at liberty to quit the services at any given point of time; - Another argument was that the word know-how has not been defined u/s 32, but, the same has been ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee instantly and would help the assessee to carry on the business without any gestation period. The know-how developed by them during their service with the their earlier company was one of the important components of the assets bought over by the assessee; - the business information (know-how) brought in by these employees had helped the assessee to achieve sales of ₹ 31 million and ₹ 213 million in FYs 2002-03 (3 months) and 03- 04 respectively, resulting in increase in overall profits; - out of ₹ 40 crores consideration paid, ₹ 1.38 crores to other identifiable intangibles is ascribable to business information (know-how) brought in by these employees. They brought with them the know-how business skills, market knowledge, knowledge of suppliers, customers and their preferences, behaviour etc; which was also an intangible asset; - The CAs in their report have attributed ₹ 1.38 crores being the business information under the category of other identifiable intangibles ; (ii) The business information (know-how) acquired by the assessee as described above, has been depreciated u/s 32 at the rate of 25%; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, resulting in increase in overall profits during the AY under dispute. Thus, the assessee company subscribe that the know-how brought with by those employees was also an intangible asset which qualifies for depreciation. 6.2. Taking cue from the valuer s report [ paras: 4.2., 4.3, and 4.4 ], the Ld.CIT (LTU) was of the firm view that the assessee company had received all tangible and intangible assets which included business information all stored in tangible form. Drawing strength from the findings of the Hon ble Apex Court reported in (1981) 21 CTR (SC) 138; jurisdictional High Court reported in 264 ITR 142 and the Hon ble ITAT, Mumbai reported in 308 ITR (AT) 271, the Ld. CIT(LTU) concluded that the claim of depreciation made by the assessee was illegal and excessive which was not considered by the AO in the impugned order which, according to the CIT(LTU), being erroneous and prejudicial to the interest of the revenue, he invoked the provisions of s.263 of the Act to set-aside the AO s order. 6.3. The action of the CIT(LTU) has been strongly contested by the assessee company for the reasons narrated in the fore-going paragraphs. Let us now analyze the legal position o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. Further, merely because the assessee showed the said payment on account of goodwill in the books of account, no adverse inference could be drawn against the assessee. A perusal of the provisions of s.32(1)(ii) shows that the Legislature has specified certain intangible assets on which depreciation can be claimed, namely, know-how, patents, copyrights, trademarks, licences, franchises. These specific intangible assets are followed by the expression any other business of commercial rights of similar nature. In such a situation, the rule of Ejusdem Generis would apply. The scope of the rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. The general words take the colour from the specific words. The specific words in the above section reveal the similarity in the sense that all the intangible assets specified are tools of the trade, which facilitate the assessee carrying on the business. Therefore, the expression any other business or commercial rights of similar nature would include such rights which can be used as a tool to carry on the business. If ..... X X X X Extracts X X X X X X X X Extracts X X X X
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