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TMI Blog2011 (1) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 263 ignoring the fact that the goodwill generated in a business cannot be described as an `asset' so as to be entitled to depreciation under section 32 and, therefore the depreciation on goodwill was not admissible ?" 3. To appreciate the questions posed in proper perspective, it is necessitous to state the relevant facts. For the sake of convenience, the facts from I.T.A. No. 1391/2010 are exposited herein. The respondent-assessee is a limited company engaged in manufacturing and trading of non-alcoholic beverages. The assessee filed its return of income on December 2, 2003, declaring loss for the relevant assessment year under section 143(3) of the Act and the assessment was completed and loss was determined at Rs.2,82,90,29,838 and the Assessing Officer had allowed the depreciation on goodwill as claimed in the return. 4. After the order of assessment was framed, the Commissioner of Income-tax-IV, New Delhi (in short "Commissioner") invoked the jurisdiction under section 263 of the Act as he noticed that the depreciation on goodwill which was accepted by the Assessing Officer was not an asset so as to entitle the assessee the benefit of depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for fresh adjudication. 6. Being dissatisfied with the aforesaid order, the assessee preferred appeals before the Tribunal which deliberated upon the contentions raised by the assessee as well as the Revenue and referred to the audit report which showed the computation of depreciation on goodwill and the answers to the queries made by the Assessing Officer. Thereafter, the Tribunal addressed itself to what was termed as goodwill in the books of account and noticed that the same was in the compartment of the definition "any other business or commercial rights of similar nature (i.e. know-how, patent, copyrights, trademarks, licences, franchises)". The Tribunal further took note of the fact that the Commissioner had recorded a finding that such a claim is patently inadmissible and the said finding is solely based on the entry in the books of account. It referred to its earlier decision in Skyline Caterers Pvt. Ltd. v. ITO [2008] 306 ITR (AT) 369 ; [2008] 116 ITD 348, wherein it has been held by the Tribunal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as far as situation before us is concerned, we have noted that the Assessing Officer had detailed explanation of the claim of depreciation on goodwill before him, and that the same claim was allowed in earlier years. There was no change in the facts of the case nor there was slightest change in the legal position in this year vis-a-vis the earlier years in which the claim was allowed. As regards the Assessing Officer not commenting upon the legality of the claim, we have noted that the Assessing Officer examined the submissions of the same and did comment upon the same when, and to the extent, he did not agree with the submissions i.e. on the question of allowing depreciation on leasehold rights. The fact that there are no elaborate discussions about a claim of deduction cannot, in the light of the decision of a co-ordinate Bench in the case of Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173, cannot be a good ground for assuming jurisdiction under section 263. In these circumstances, in our considered view, from the fact that the Assessing Officer has not discussed the claim of depreciation on goodwill in the assessment order even though the same claim was allowed in the earlier ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase `prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S. P. Jain [1957] 31 ITR 872, the High Court of the Karnataka in CIT v. T.Narayana Pai [1975] 98 ITR 422, the High Court of Bombay in CIT v. Gabriel India Ltd. [1993] 203 ITR 108 and the High Court of Gujarat in CIT v. Smt. Minalben S. Parikh [1995] 215 ITR 81 treated loss of tax as prejudicial to the interests of the Revenue. After so stating, their Lordships proceeded to hold as under (page 88) : The phrase `prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word `erroneous' in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word `erroneous' in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct." [emphasis added] 14. In CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom), after referring to Black's Law Dictionary for what an "erroneous judgment" means, the Division Bench has opined that the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such an action is against the well accepted policy of law that there must be a point of finality in all legal proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the inquiry was not proper, we are unable to uphold the action taken by him under section 263 of the Act." (emphasis supplied) 16. In CIT v. Max India Ltd. [2007] 295 ITR 282, the apex court has ruled thus (pages 283-84) : "At this sage we may clarify that under paragraph 10 of the judgment in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 this court has taken the view that the phrase `prejudicial to the interests of the Revenue' under section 263 has to be read in conjunction with the expression `erroneous' order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue ; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. According to the learned Additional Solicitor General, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights etc. owned by the seller. In the valuation report these contracts, rights etc. have not been assigned any value. Therefore, the difference between the total consideration and the value of the tangible assets has been accounted for as goodwill. Goodwill in the assessee's case is in substance similar to the tangible assets. It includes industrial information relating to the acquired business like data base of the territory relating to consumer preferences of different flavours, season curves, distribution network, population related statistics etc. These information assist in the manufacture of the product of the assessee in the sense that based on this only the assessee plans its manufacturing schedules. Hence, it is in effect know-how. Further, the payment on account of goodwill is similar to assets like patents, copyrights, trademarks; licences referred to in the definition of the block of assets in the sense that the function of all these assets is to restrict their misuse and to earn maximum profits in the business. The function of goodwill acquired by the assessee also is the same in view of the fact that it maximizes the profits of the company. Since, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself whether or not a claim of depreciation on goodwill in the books of account is final or it is otherwise admissible. In that backdrop, the Tribunal referred to the concept of any other business or commercial rights of similar nature, i.e., know-how, patent, copyrights, trademarks, licences, franchises and referred to its decision rendered in Skyline Caterers Pvt. Ltd. [2008] 306 ITR (AT) 369 (Mumbai) ; [2008] 116 ITD 348 wherein it had held that nomenclature given to the entries in the books of account is not relevant for ascertaining the real nature of the transaction. To arrive at the said conclusion in the earlier case, the Tribunal had placed reliance on the decision rendered in Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 (SC). After so stating, the Tribunal opined that it was difficult to accept the view of the Commissioner that once an amount is described as goodwill in the books of account, depreciation thereon as an intangible asset cannot be admissible on the same. 20. In this regard, we may refer with profit to the relevant part of section 32 of the Act which reads as follows : "32. Depreciation.-(1) In respect of depreciation of- (i) buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al vehicle' means `heavy goods vehicle', `heavy passenger motor vehicle', `light motor vehicle', `medium goods vehicle' and `medium passenger motor vehicle' but does not include `maxi-cab', `motor-cab', `tractor' and `road-roller' ; (b) the expressions `heavy goods vehicle', `heavy passenger motor vehicle', `light motor vehicle', `medium goods vehicle', `medium passenger motor vehicle', `maxi-cab', `motor-cab', `tractor' and `roadroller' shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988) : Provided also that in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent. of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991 : Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eto) ; Explanation 5.-For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income ;" 21. It is worth noting, the scope of section 32 has been widened by the Finance (No. 2) Act, 1998 whereby depreciation is now allowed on intangible assets acquired on or after 1st April, 1998. As per section 32(1)(ii), depreciation is allowable in respect of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature being intangible assets. Scanning the anatomy of the section, it can safely be stated that the provision allows depreciation on both tangible and intangible assets and clause (ii), as has been indicated hereinbefore, enumerates the intangible assets on which depreciation is allow-able. The assets which are included in the definition of "intangible assets" includes, along with other things, any other business or commercial rights of similar nature. The term "similar" has been dealt with by the apex court in Nat Steel Equipment Pvt. Ltd. v. CCE [1988] 69 STC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt [1896] AC 7 (HL) as the "sap and life" of the business. Architecturally, it has been described as the "cement" binding together the business and its assets as a whole and a going and developing concern.' A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, 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 reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compartment of taking a plausible view inasmuch as basically intangible assets are identifiable non-monetary assets that cannot be seen or touched or physical measures which are created through time and/or effort and that are identifiable as a separate asset. They can be in the form of copyrights, patents, trademarks, goodwill, trade secrets, customer lists, marketing rights, franchises, etc. which either arise on acquisition or are internally generated. 24. It is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copy-rights, trademarks, licences, franchises, etc. and all these ..... X X X X Extracts X X X X X X X X Extracts X X X X
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