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2013 (9) TMI 188 - AT - Income TaxDepreciation applicable u/s 32(1)(ii) - intangible assets as goodwill Business Purchase Agreement( BPA ) - Out of the total consideration of ₹ 62 crores, sum of ₹ 49.26 crores was apportioned towards brands, building, plant and machinery, furniture and fixtures, vehicles and current assets. The balance amount of ₹ 12.74 crores mainly representing the value attributable to the intangible assets comprising of licenses, permissions, health registrations, approvals, concessions, manufacturing know-how, specifications, marketing capabilities such as the distribution network comprising of wholesale stockists, information and documents in relation to products etc was recorded as goodwill in the books of account of the assessee. In respect of the said goodwill, depreciation was claimed under section 32(1)(ii) of the Act. Held that - Amended provisions of section 32 of the Act w.e.f. 1.4.1999, ambit of depreciation has been enlarged to cover both the tangible and intangible assets Reliance has been placed on the Hon ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT 2012 (4) TMI 79 - DELHI HIGH COURT , wherein it has been held that the nature of business or commercial rights cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises - The nature of business or commercial rights can be of the same genus in which all the aforesaid six assets fall - Intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible, assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business Thus, intangible assets enables the assessee to access the market and has an economic and money value is a license or akin to a license which is one of the items falling in Section 32(1)(ii) of the Act. In the present case, schedules to Business Purchase Agreement (BPA) comprising of the list of Stockist Agreements, Distribution Agreements, Lease Agreements and also Distribution and Marketing Agreements, alongwith List of Licenses and Permissions and List of various Products, the name license and also the manufacturing know-how etc., alongwith List of employees are assets, which are invaluable and instrumental in carrying on the business of Animal Health Care and Diagnostics Business divisions acquired by the assessee from M/s Ranbaxy Laboratories Ltd. as per BPA Relying upon the judgment in the case of Areva T and D India Ltd. Vs. DCIT, it is held in the present case that consideration of ₹ 12.74 crores paid by the assessee was for acquisition of the intangible assets is entitled for depreciation under section 32(1)(ii) of the Act Decided in favor of Assessee. Nature of compensation received towards cancellation of share purchase agreement - Capital receipt (non taxable) or revenue receipt - failure to fulfill the terms of agreement - The contention of the assessee in this regard was that the agreement entered into by the assessee was for acquisition of the company and not for trading in shares of the said company - The acquisition of the business of Zydus was the intention of the assessee in order to start a new profit earning venture i.e. new source of income. - Held that - In the facts of the present case, there was no loss of source of business income in the hands of the assessee as the assessee was only exploring the possibility of taking over the business of a concern in which it had no interest. The compensation received for failure of such decision being taken in the course of carrying on its normal line of business was rightly held to be taxable receipt in the hands of the assessee Decided against the Assessee.
Issues Involved:
1. Disallowance of depreciation claimed on intangible assets recorded as Goodwill. 2. Addition on account of compensation received towards cancellation of Share Purchase Agreement (SPA). Issue-wise Detailed Analysis: 1. Disallowance of Depreciation on Intangible Assets Recorded as Goodwill: The assessee filed appeals against the orders of the Commissioner of Income-tax (Appeals) [CIT(A)], Shimla, for the assessment years 2007-08 and 2008-09. The primary contention was the disallowance of depreciation claimed on intangible assets recorded as Goodwill. Facts and Arguments: - The assessee had entered into a Business Purchase Agreement (BPA) with Ranbaxy Laboratories Limited, acquiring its Animal Health Care and Diagnostics Business divisions for Rs. 62 crores. Out of this, Rs. 49.26 crores was allocated to tangible assets, and Rs. 12.74 crores was recorded as Goodwill. - The Assessing Officer (AO) disallowed the depreciation on Goodwill, citing that Goodwill was not an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961. - The CIT(A) upheld the AO's decision, stating that the term 'Goodwill' was not included in the specific categories of intangible assets enumerated in Section 32(1)(ii) and that the provisions were restrictive. Tribunal's Findings: - The Tribunal noted that the amended provisions of Section 32 w.e.f. 1.4.1999 allowed depreciation on both tangible and intangible assets, including know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. - The Tribunal relied on the Delhi High Court's judgment in Areva T and D India Ltd. Vs. DCIT, which applied the principle of ejusdem generis to interpret "business or commercial rights of similar nature" and held that intangible assets like business claims, business information, business records, contracts, employees, and know-how were eligible for depreciation. - The Tribunal also referred to the Supreme Court's decision in CIT Vs. SMIFS Securities Ltd., which held that Goodwill is an intangible asset under Explanation 3(b) to Section 32(1) and is eligible for depreciation. - The Tribunal concluded that the assessee was entitled to claim depreciation on the intangible assets recorded as Goodwill, directing the AO to allow the claim. 2. Addition on Account of Compensation Received Towards Cancellation of SPA: The assessee also contested the addition of Rs. 2.25 crores received as compensation for the termination of the SPA. Facts and Arguments: - The assessee had entered into an SPA with sellers to acquire shares of Sarabhai Zydus Animal Health Limited, depositing Rs. 24.81 crores as Earnest Money Deposit (EMD). - The SPA stipulated that if the sellers failed to obtain consent from Cadila (another shareholder) to give up their Right of First Refusal (ROFR), the SPA would terminate, and the sellers would return the EMD with interest and penalty. - The SPA was terminated as Cadila exercised its ROFR, and the sellers repaid the EMD with interest and penalty. Additionally, the assessee received Rs. 2.25 crores as compensation for the termination of the SPA, which it claimed as a capital receipt. - The AO and CIT(A) treated the compensation as a revenue receipt, arguing that the transaction was a business deal and the compensation was a windfall gain. Tribunal's Findings: - The Tribunal referred to the Supreme Court's judgment in CIT Vs. Saurashtra Cement Ltd., which held that compensation for the sterilization of a profit-earning source is a capital receipt. - The Tribunal also considered the Supreme Court's decision in Oberoi Hotel Pvt. Ltd. Vs. CIT, which held that compensation received for giving up a right to purchase or operate a property is a capital receipt if it results in the loss of a source of income. - However, the Tribunal distinguished the present case, noting that the assessee was exploring the possibility of acquiring a new business and the compensation received was for the failure of this venture. - The Tribunal upheld the CIT(A)'s decision, holding that the compensation was a revenue receipt as it was received in the course of the assessee's normal business activities and did not result in the loss of any existing source of income. Conclusion: - The Tribunal allowed the assessee's appeal regarding the claim of depreciation on Goodwill, directing the AO to allow the depreciation. - The Tribunal dismissed the assessee's appeal regarding the compensation received for the termination of the SPA, upholding the CIT(A)'s decision to treat it as a revenue receipt. Order Pronounced in the Open Court on 2.4.2013.
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