2007 (12) TMI 308 - AT - Income Tax

Depreciation on goodwill - Goodwill is intangible assets or not - expression any other business or commercial rights of similar nature - rule of ejusdem generis - Whether the assessee can be said to have acquired the commercial right in terms of section 32(1)( ii ) of the Act so as to claim the depreciation? - HELD THAT - There is no dispute to the legal proposition that the nomenclature given to the entries in the books of account is not relevant for ascertaining the real nature of the transaction as held by the Hon ble Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. v. CIT 1971 (8) TMI 10 - SUPREME COURT . Therefore, in my opinion, the nature of transaction should be ascertained on the basis of the agreement between the parties. In my opinion, no adverse inference can be drawn on this ground. In the commercial agreements when the rights under the contract are transferred then mutual understanding is usually arrived at between the parties in such a way that joint efforts are made to make the transaction and agreement effectively. No doubt, the assessee was required to obtain the confirmation of HLL but at the same time, Mr. Smith was required to assist the assessee in getting the contract transferred in assessee s name, (clause 2 of the agreement). It also appears from clause 4 which provides that Mr. Smith shall inform HLL that he is still involved in the assessee-company. All this arrangement was made in order to get the said contract transferred in the name of assessee so as to make the agreement effective. That does not mean that payment was not made for acquiring the rights under the contract. The substance of the agreement was to acquire all the rights in the contract. Accordingly, it is held that the payment done by the assessee for acquiring all the rights in the said contract as well as all the articles and paraphernalia belonging to Mr. Smith which were lying at the canteen. 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, in my opinion, 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 this test is applied, then the rights acquired by the assessee under the agreement would fall within the expression mentioned above, since catering business at HLL canteen could be carried on only with the help of such rights under the contract and consequently, the assessee would be entitled to depreciation. At this stage, it may be mentioned even for the sake of repetition that assessee had not only acquired the rights under the contract but also articles and paraphernalia lying in the canteen of HLL as stated in clause 5 of the agreement. Such articles being tangible assets would be eligible for depreciation under the clause ( i ) of section 32(1) and therefore value of the same will have to be ascertained by the Assessing Officer and the balance amount shall be allocated for the intangible asset for the purpose of granting depreciation under clause ( ii ) of section 32(1). Thus, the order of the learned CIT(A) is set aside and the Assessing Officer is directed to allow the depreciation in the light of this order. In the result, the appeal of the assessee stands allowed.

Issues Involved:
1. Disallowance of depreciation on goodwill amounting to Rs. 3,79,688.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Goodwill:

The core issue in this appeal concerns the disallowance of depreciation on goodwill amounting to Rs. 3,79,688. The assessee, a 100% subsidiary of M/s. Radhakrishna Hospitality Services Ltd. (RHSL), engaged in catering and allied services, had acquired a catering contract from Mr. Rui Smith, the proprietor of M/s. Skyline Caterers, for Rs. 27 lakhs. This amount was recorded as goodwill in the assessee's balance sheet, and depreciation at 25% was claimed, treating it as an intangible asset.

During assessment, the Assessing Officer (AO) questioned the depreciation on goodwill, arguing that goodwill is not explicitly listed under section 32 of the Income Tax Act, which includes intangible assets like know-how, patents, copyrights, and trademarks. The AO disallowed the depreciation, interpreting that goodwill does not fall within the scope of "similar nature" as specified in section 32(1)(ii).

On appeal, the CIT(A) upheld the AO's decision, stating that the payment was not for any intangible asset specified in section 32(1)(ii) and was primarily for a non-compete clause, thus constituting capital expenditure not eligible for depreciation.

Tribunal's Findings:

The Tribunal examined the agreement between the assessee and Mr. Rui Smith, noting that Rs. 25 lakhs was paid for acquiring the catering contract and Rs. 2 lakhs for the non-compete clause. The Tribunal disagreed with the CIT(A)'s conclusion that the entire payment was for the non-compete clause. It emphasized that the payment of Rs. 25 lakhs was specifically for acquiring the rights under the catering contract and not merely for goodwill or the non-compete clause.

The Tribunal highlighted that the nomenclature in the books of account is not determinative of the transaction's nature, as established by the Supreme Court in Kedamath Jute Mfg. Co. Ltd. v. CIT. The substance of the agreement revealed that the payment was for acquiring commercial rights under the contract, which are intangible assets akin to those specified in section 32(1)(ii).

The Tribunal further clarified that the rights acquired under the contract qualify as "business or commercial rights of similar nature" under section 32(1)(ii), as they are tools facilitating the assessee's business. Consequently, the assessee is entitled to depreciation on these commercial rights.

Additionally, the Tribunal noted that the assessee also acquired tangible assets (articles and paraphernalia) under the agreement, which are eligible for depreciation under section 32(1)(i). The AO was directed to ascertain the value of these tangible assets and allocate the balance amount for the intangible asset to grant appropriate depreciation.

Distinguishing Case Law:

The Tribunal distinguished the present case from Bharatbhai J. Vyas v. ITO, where depreciation on goodwill simplicitor was disallowed. In the current case, the payment represented commercial rights under an agreement, not mere goodwill, making the previous case inapplicable.

Conclusion:

The Tribunal set aside the CIT(A)'s order and directed the AO to allow depreciation in light of this judgment, thereby allowing the assessee's appeal.

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