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2014 (9) TMI 280 - AT - Income TaxDepreciation in intangible assets disallowed u/s 32(1)(ii) - Whether consideration paid to acquire rights under the contract did not represent depreciable intangible asset, in terms of Section 32(1)(ii) of the Act Held that - The assessee has acquired maintenance contracts for 3578 elevators which is the main source of revenue for the assessee, and maintenance contracts for 1001 elevators which are under warranty period and which will start yielding revenue once the warranty period expires - the Assessee has acquired exclusive right to execute the maintenance contracts as it constitutes the very backbone of the business as per the Undertaking and Sale Agreement between the parties - the Assessee has obtained all Intellectual Property Rights in the form of know- how relating to the complete business of the Maintenance Division of ECE Ltd. - apart from IPR s, the Assessee has also received leases, licenses, offers and purchase orders etc. relating to the said Maintenance Division of ECE Ltd. Likewise, the Assessee has also obtained various rights, permits, authorizations etc. relating to the business of Maintenance Division of ECE Ltd. including the benefits accruing from existing and prospective service contracts with third parties in whose premises the products of the vendor have been installed. AMCs would not fall under any of the specified intangible assets such as know-how, patents, copyrights, trademarks, licenses and franchises listed under Section 32(1)(ii) of the Act - the present Agreement represent a bundle of rights in the form of commercial rights which eventually constitute the basic income earning apparatus of the Assessee the contention of the assessee is accepted that AMCs are commercial rights and the same should rightly be categorized as business or commercial rights for the purposes of Section 32(1)(ii) of the Act - AMCs should get covered within the expression business or commercial rights of similar nature specified u/s 32(1)(ii) of the Act and accordingly eligible for depreciation Decided in faovur of assessee. Admission of additional ground - Depreciation in goodwill u/s 32(1)(ii) Held that - Following the decision in Commissioner of Income Tax, Kolkata Versus Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - the assessee became aware of its rights to claim depreciation in terms of Sec. 32 on goodwill of business and moved an application for admission of additional grounds before us for the first time - the value ascribed to goodwill was always part of the accounts of the Assessee in terms of audited balance sheets of the Assessee for the year ending 31.03.2003 and the same were part of the purchase consideration as could be seen from Article 3.1 of the said Agreement admission of application for additional ground as non- allowance could result in denial of justice Decided in favour of assessee. Following the decision in Srinivasa Shetty 1981 (2) TMI 1 - SUPREME Court - because of its intangible nature it (goodwill) remains insubstantial in form and nebulous in character - Its value may fluctuate from one moment to another depending on the changes in the reputation of business - the cumulative amount as shown in the Undertaking and Sale Agreement is inclusive of goodwill though this is not specifically the subject matter of slump-sale in the Undertaking Sale Agreement - on the one end the amount of goodwill is not reflected in the Undertaking and Sale Agreement but a cumulative amount inclusive of the value of goodwill is mentioned while, on the other end the balance sheets of the assessee disclose ₹ 1,85,44,612/- as goodwill and ₹ 18,34,74,000/- as value for maintenance portfolio thus, excess consideration paid by the assessee over and above the value of net assets should be considered as goodwill of business, since goodwill is duly accounted for in the audited accounts of the assessee for period ending 31.03.2003 and the valuation made during slump-sale of business has factored the value of goodwill in the composite value of Maintenance portfolio - goodwill being in the nature of excess consideration should get covered within the expression business or commercial rights of similar nature as specified u/s 32(1)(ii) of the Act and accordingly be eligible for depreciation Decided in favour of assessee.
Issues Involved:
1. Validity of additional grounds raised by the assessee. 2. Allowability of depreciation on "Maintenance Portfolio" under Section 32(1)(ii) of the Income Tax Act. 3. Allowability of depreciation on "Goodwill" under Section 32(1)(ii) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Validity of Additional Grounds Raised by the Assessee: - The assessee raised an additional ground claiming depreciation on "Goodwill" under Section 32(1)(ii) of the Act for the first time before the Tribunal. - The Tribunal referred to several precedents, including the Supreme Court's decision in Jute Corporation of India Ltd. v. CIT, which established that an assessee is entitled to raise additional grounds not merely in terms of legal submissions but also additional claims not made in the return filed by it. - The Tribunal noted that the claim for depreciation on goodwill could not have been raised earlier due to the lack of clarity in the law, which was later crystallized by the Supreme Court ruling in the case of Smifs Securities Ltd. - The Tribunal allowed the additional ground, emphasizing that non-allowance could result in denial of justice. 2. Allowability of Depreciation on "Maintenance Portfolio" under Section 32(1)(ii): - The assessee acquired the "Elevator Division" of ECE Industries Ltd., including maintenance contracts, which were valued at Rs. 18,34,74,000. - The Tribunal examined whether these maintenance contracts, termed as "Maintenance Portfolio," qualify as "intangible assets" under Section 32(1)(ii). - The Tribunal observed that the maintenance contracts constituted the main source of revenue and were integral to the business, thus qualifying as "commercial/business rights." - The Tribunal applied the principle of ejusdem generis, concluding that the maintenance contracts fall within the expression "business or commercial rights of similar nature" and are eligible for depreciation. - The Tribunal disagreed with the CIT(A)'s view that the maintenance portfolio did not constitute depreciable intangible assets, emphasizing that the contracts represented a bundle of commercial rights essential for the business. 3. Allowability of Depreciation on "Goodwill" under Section 32(1)(ii): - The assessee allocated Rs. 1,85,44,612 towards "Goodwill" in its accounts, part of the consideration paid for acquiring the business from ECE Industries Ltd. - The Tribunal referred to the Supreme Court's ruling in the case of Smifs Securities Ltd., which held that goodwill is included within the expression "any other business or commercial rights of similar nature" under Section 32(1)(ii). - The Tribunal noted that the value of goodwill was reflected in the audited balance sheet and was part of the total consideration for the business acquisition. - The Tribunal concluded that the excess consideration paid over the value of net assets should be considered as goodwill and is eligible for depreciation under Section 32(1)(ii). Conclusion: - The Tribunal allowed the appeal, holding that both the "Maintenance Portfolio" and "Goodwill" qualify as intangible assets eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. - The order was pronounced in the open court on 29.08.2014.
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