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2016 (7) TMI 1013 - ITAT BANGALORE

2016 (7) TMI 1013 - ITAT BANGALORE - TMI - Entitled for depreciation on goodwill - carry forward losses - belated submission of ITR-V - Held that:- As decided in SMIFS Securities Ltd [2012 (8) TMI 713 - SUPREME COURT ] 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 simi .....

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he test of the law. Even otherwise, it is not the case of the AO that the appellant had not posted Form ITR-V within the prescribed time limit. The Hon’ble Bombay High Court in the case of Crawford Bayley & Co. v. UOI, [2011 (12) TMI 64 - BOMBAY HIGH COURT ] , held that the action of the AO declaring return of income invalid for non-receipt of ITR-V was invalid. Respectfully following this decision, we hold that the AO is not justified in treating the original return of income as invalid for bel .....

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ed against the different orders of CIT(Appeals)-I, Bangalore dated 27.3.2013 for the assessment years 2008-09 & 2009-10. Since common issues are involved in both these appeals, we proceed to dispose of the same vide this consolidated order. 2. The appellant raised the following grounds of appeal for the AY 2008-09:- Ground 1 1.1 The impugned order of the learned CIT(A) is erroneous and bad in law as the learned CIT(A) has wrongly disallowed the Appellant's claim for depreciation on goodw .....

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irrelevant and unlawful grounds, baseless presumptions. The valid claim for deduction of depreciation by the Appellant deserves to be allowed in toto. 2.2 The learned CIT(A) has failed to appreciate that the rights acquired are in the nature of Goodwill and further that as an intangible asset, the same is lawfully eligible for depreciation under Section 32(1)(ii) of the Act. 2.3 The learned CIT(A) erred in not appreciating that intangible assets acquired by Appellant in the nature of customer/ s .....

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the Company is a separate entity and has a distinct legal status from the shareholders in the Company. 2.5 The learned CIT(A) has erred in not appreciating that factors which may be relevant while adjudicating the deduction claim in an earlier assessment period, when Goodwill was acquired, vary from considerations for allowance of depreciation in subsequent year when Goodwill is part of the opening WDV and block of assets for current Assessment period. Consequently the learned CIT(A) proceeded t .....

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Income from Capital Gains' and wrongly upheld the order of the learned AO. 3.2 The learned CIT(A) erred in disregarding the valid return filed by the Appellant, within statutory time, by reference to inapplicable provisions and notifications while ignoring the relevant provisions, notifications and circulars. Without prejudice, the learned CIT(A) failed to appreciate that the return was filed within time and in any case reasonable time as applicable to the year under consideration. 3.3 The l .....

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e to one another. Further, the Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at the time of, hearing of the appeal. 3. Briefly the facts of the case are that the appellant is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and export of readymade garments. The return of income for the AY 2008-09 was filed on 29.9.2008 disclosing a loss of ₹ 6 .....

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on. The AO held as follows:- Therefore, it is not the case that depreciation has to be allowed at the rate prescribed under the Income tax Rules 1962 on all the assets whether tangible or intangible of the assessee while computing the business income of the assessee carrying on business profession etc., It is only in respect of such assets owned and used by the assessee in his business qualify for depreciation allowance. Similarly, it is only those assets which have reduction in its value by vir .....

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ing, it is taken that "goodwill" could be considered as a business or commercial rights similar to know how, patents, copyrights, trademark, licences, franchises in order to hold that it constitutes intangible asset in the light of the very undisputed fact that it is a "self generated asset" as held by the Supreme Court in the case of M/s B.C. Srinivas Setty vs. CIT (128 ITR 294(SC) ) which may or may not appear in balance sheet and it normally appreciates in its value throug .....

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uot; Goodwill"). In view of this, I disallow the deduction claim for depreciation allowance on goodwill of ₹ 2,76,85,547/- and add the said amount to the total income declared. 5. The AO also had not allowed the carry forward losses under the head capital gains of ₹ 1,22,41,530 and business loss of ₹ 2,58,76,063 by holding that the Form of verification of return of income in ITR-V was received beyond the stipulated time of 15 days from the date of electronically filing the .....

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nd Fabrics International', a sole proprietorship concern on slump sale basis and as a going concern in the F.Y: 2002-03. As a part of the business acquisition, a number of intangible assets including customer/supplier contracts, export quotas and assembled workforce (employee base) were acquired and the consideration for the same was settled by way of issuance of shares. The said intangible assets were classified as goodwill' for the purpose of disclosure in the financial statement. The .....

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usiness or commercial rights of similar nature. being intangible assets acquired on or after the 1st day of April, 1998, As per Explanation-3, the expression assets shall mean- (a) tangible assets, being buildings, 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. 5.2 It is the contention of the appellant the intangible assets of customer/supplier contracts, exp .....

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and eligible for depreciation. The appellant also relied on the decision of the Mumbai High Court in the case of Birla Global Asset Finance Co. Ltd. (TS-791-HC-2012(BOM) on the ground that brand equity was also eligible for depreciation as an intangible asset. It is already mentioned in the above paras the appellant acquired certain rights / assets which are distinguishable from goodwill , therefore, the above decisions are not applicable to the present facts of the case. The appellant had made .....

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sion of the Apex Court, the goodwill was acquired on account of a scheme of amalgamation from a different company and in that context, it was held the goodwill was eligible for depreciation. In the instant case the sole proprietorship was converted into a private limited company. It was further noticed that 99% of the shares of the appellant company were allotted to the erstwhile 'proprietor'. In this back ground it is for consideration as to whether it can be construed that the 'goo .....

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status. However, I am not able to accept the assessee's explanation because the ultimate beneficiary is one and the same. Therefore, the submissions of the appellant are not acceptable that the so called goodwill' is not eligible for depreciation. 5.4. It may be seen from the submissions of the appellant that the amount paid towards goodwill' was actually towards the customer / supplier contracts on export quotas and assembled workforce etc.,. It is the contention of the appellant th .....

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on the customer or supplier contracts or workforce. The appellant also did not give neither the valuation nor the basis of valuation of these so called rights. In the absence of the basic facts relating to these rights I am unable to accept that the said items are falling under the category of intangible asset u/s 32(1)(ii) of the Act. Therefore, the appellants claim for depreciation on these assets is rejected and the AO's action is upheld. 7. The CIT(Appeals) also upheld the denial of carr .....

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e of the powers conferred by sub-section (1B) of sections 139 and 139D the Income-tax Act, 1961 (43 of 1961) read with sub-rule (3) of rule 12 of the Income tax Rules, 1962. In view of this, the said notification is binding on all Income Authorities mentioned in Sec. 116 of the IT Act. In absence of any waiver of the said stipulated condition, delay in filing of ITR-V can not be accepted. Therefore, A.O's action is fully justified. The reliance on circular no. 3/2009 dated 21. 05. 2009 by th .....

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t. Ltd. It was stated before us that this goodwill was present in the hands of the sole proprietary concern at the time of acquisition of the same by the appellant company and in support of this submission, he filed before us the balance sheet of the erstwhile sole proprietary concern wherein goodwill of ₹ 35 crores was shown on the asset side of the balance sheet of the said company. 10. The ld. counsel for the appellant submitted that valuation of goodwill has not been disputed by the AO .....

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al before the Tribunal, reassessment proceedings were held to be invalid and consequently the claim for depreciation finally came to be allowed. 11. For the AYs 2006-07 & 2007-08, depreciation claim was sought to be withdrawn by exercising the revision proceedings u/s. 263 of the Act and the issue is pending disposal before the CIT(Appeals) now. 12. Thus, it was submitted that even without going into the other aspects of the issue, since the claim for depreciation came to be allowed for the .....

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IT, ITA No.1629/Mum/2009. He also relied on the decision of the Hon ble Supreme Court in the case of CIT v. Mahindra Mills, 243 ITR 56 (SC). He further submitted that w.e.f. 1.4.2002, the AO was duty bound to allow depreciation even without the claim from the appellant as per law. 13. On merits, the ld. counsel for the appellant submitted that the issue whether goodwill is eligible for depreciation is no longer res integra in the light of the decision of Hon ble Supreme Court in the case of CIT .....

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ITR-V. He further submitted that delay has occurred on account of transmission. The notification prescribing the time limit for receipt of Form ITR-V cannot override the provisions of the Act. He also submitted that the AO having acted upon the original return of income, he cannot turn back and say now that the original return of income is not valid as Form ITR-V was received belatedly. 15. On the other hand, the ld. Sr. DR submitted that the assessee was not entitled to depreciation on goodwill .....

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upheld in this regard. 16. As regards the other issue, the ld. Sr. DR submitted that non-receipt of Form ITR-V within the stipulated time does not constitute a valid return of income and therefore the assessee company is not entitled to carry forward of determined losses for future years. 17. We have heard the rival submissions and perused the material on record. We shall first deal with the grounds challenging the disallowance of depreciation on goodwill. 18. From a perusal of the assessment o .....

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le for depreciation. 19. On appeal, the CIT(Appeals) after considering the relevant material and the submissions made by the appellant, held that since no commercial rights have been acquired, no depreciation was admissible on the goodwill. 20. In the present case, it is an undisputed fact that the sole proprietary concern was acquired by the appellant as a going concern with all assets & liabilities. In the balance sheet of the sole proprietary concern, goodwill of ₹ 35 crores was sho .....

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of Triune Energy Services (P.) Ltd. v. DCIT, 65 taxman.com 288 (Delhi) held that the excess of the amount paid over net value of assets constitutes goodwill . In coming to this conclusion, the Hon ble Delhi High Court relied on Accounting Standards AS-10 issued by the ICAI. That apart, when the company was taken over as a going concern with all the assets & liabilities for a slump consideration, it is neither permissible nor possible to apportion the consideration paid against different asse .....

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194 Taxman 477 (Ker.) wherein it was held as follows:- 3. ………………………………………… Depreciation though is an allowance to take care of loss or erosion in value of the asset in the course of time on account of use, such consequence need not actually take place for the purpose of entitling assessee for the relief in terms of the statutory provision. In fact, it is common knowledge that on accou .....

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es for assessment of capital gains on sale of depreciable assets. Therefore, we do not think assessee s entitlement for depreciation on assets including intangible assets can be negative on the ground that no erosion in value takes place on account of use of the asset in business or profession. ……………………….. 22. This leaves us with the limited question of considering whether goodwill is eligible for depreciation by residual clause in s .....

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ction 32(1)(ii) which covers trademark and franchise. It is common knowledge that trademark and franchise covers name, logo etc., the value of which are included in the value of goodwill claimed for the purpose of depreciation by the assessee. Though it may be difficult to define goodwill, its meaning and scope are explained in several Court judgments. In the case of Khushal Khemgar Shah v.Mrs. Khorshed Banu Dadiba Boatwalla AIR 1970 SC 1147, the Supreme Court has explained goodwill as follows : .....

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with the customers together with the circumstances which make connections durable. It is the component of total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features." In B.C. Srinivasa Setty s case (supra), the Supreme Court held that in a progressing business goodwill tends to show progressive increase and in a failing business it may begin to wane. 24. The Hon ble High Cou .....

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etty [1981] 128 ITR 294/ 5 Taxman 1 (SC), the Supreme Court had explained th at:- "Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill was nothing more than 'the probability that the old customers would resort to the old places' was expanded by Wood V. C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage that has been acquired by the old firm in carryi .....

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et, because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in IRC v. Muller and Co.'s Margarine Limited [1901] AC 217 (HL) that although goodwill was easy to describe, it was nonetheless difficult to define. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the r .....

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into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business." 25. The issue whether depreciation is allowable on goodwill is no longer res integra as the Hon ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (supra) had resolved this issue and held that goodwill is an asset within .....

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[a] tangible assets, being buildings, 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 co .....

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was followed by the Hon ble Delhi High Court in the case of Triune Energy Services (P.) Ltd., Hon ble Gujarat High Court in the case of Principal CIT v. Swastik Industries, 68 taxman.com 329 (Gujarat), Hon ble Bombay High Court in the case of CIT v. Birla Global Asset Finance Co. Ltd., 41 taxmann.com 262 (Bombay) and the Hon ble Karnataka High Court in the case of CIT v. M/s. Manipal Universal Learning Pvt. Ltd., ITA No.61 of 2007 dated 1.4.2013. Respectfully following the decision of the Hon bl .....

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d mail from the department acknowledging e-filing of return of income. Subsequently, in accordance with the instructions of the Department, the appellant posted a copy of Form ITR-V duly signed. The Form was remitted by post. Based on this return, the AO has acted upon. The AO while rejecting the carry forward losses has relied upon the Notification issued by the Ministry of Finance wherein it is stated that date of transmission of data electronically shall be the date of furnishing of return, i .....

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fact, the AO acted upon the return of income filed by the appellant. It implies that the AO had condoned the delay in receipt of Form ITR-V, as the Notification dated 4.1.2012 empowers the Commissioner to condone the delay in receipt of Form ITRV. In fact, we are told at the Bar that the CBDT had issued general Notifications extending the date of receipt of ITR-V. Furthermore, the provisions of sub-section (9) of section 139 provides that where the AO considers that return of income furnished by .....

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