9911796707
TMI Blog2010 (12) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... s order for the assessment years 2003-04 and 2004-05 is placed on record and from its perusal, we find that both the issues are covered against the assessees. Therefore, following the earlier order of the Tribunal, we dismiss these grounds and confirm the order of the CIT(A) in this regard. 3. Now the next issue involved in both the appeals relate to the disallowance of claim of depreciation on intangible assets i.e. Goodwill. 4. Brief facts borne out from the record in this regard are that the assessee claimed depreciation at Rs. 44,77,486/- in A.Y. 2005-06 and at Rs. 33,58,115/- in A.Y. 2006-07 at 25% on goodwill including in the block of intangible assets in the depreciation statement enclosed to the computation of total income. When the assessee was asked to explain how the goodwill is eligible for depreciation under clause (ii) of section 32(1) of the Income Tax Act (hereinafter referred as Act) the assessee submitted that the intangible assets value represents the difference between price paid by the assessee to the Government on closed tender for the purchase of Chagallu distillery. The price offered by the assessee company was Rs. 9 crores and the company took over assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter Completion any trade or service name or mark of NSL. "Transfer": The transfer of the Assets and Business pursuant to this Agreement". 6. It was further urged before the CIT(A) that it is evidently clear from the agreement for purchase of business that the purchase price is a consolidated price of Rs.9 crores and it means consideration for assets and business. He has also placed a document titled "Information memorandum and bid documents", with the submission that the goodwill has been clearly specified as the right to carry out distillery that forms part of sale. It was also specified therein that the Chagallu has potential access to molasses from nearby sources as well as from NSL Sugar Mills. It was further contended that the goodwill means the difference between the value of the asset acquired from NSL and amount paid to NSL only towards the right to manufacture rectified spirit. It is the only right to carry on the business but specifically forbidding the right to use the name. Besides, he has also placed a reliance upon some orders of the Tribunal in support of his contention but the assessee did not find the favour from the CIT(A) and CIT(A) accordingly confirmed the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore it is obvious that all intangible assets are not eligible for depreciation allowance. In the instant case, the differential amount as per the agreement was paid by the appellant towards the acquisition of goodwill. Therefore, the said payment did not come under either know how, patents, copy rights, trade marks, licenses, franchises. Any business or commercial right not similar in nature to the above mentioned six items cannot be treated as intangible assets qualified for depreciation. Those rights must be of similar nature to knowhow, patents, copy rights, trade marks, licenses, franchises. Therefore, in the light of the statutory provisions contained in sec. 32(1)(ii), the goodwill acquired by the appellant does not come under the expression of any other business or commercial right of the nature similar to knowhow, patents, copy rights, trade marks, licenses, franchises. In the instant case, the term 'goodwill' has been used in the agreement itself. Therefore, the same could not be equated with the expression of any other business or commercial right of similar nature occurring in section 32(1)(ii) of the Income-tax Act. In such circumstances, there was nothing on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the case of Kotak Forex Brokerage v. AC1T 41 DTR (Mum.) (Trib.) 387 in which the depreciation was allowed on goodwill. 8. The Ld. D.R. on the other hand has submitted that the goodwill is bundle of commercial rights and benefits acquired by an establishment over a period of time. It depends upon a location where the establishment situate, the nature of business, the nature of customers of an establishment, nature of rights to trade and also the reputation developed over a period of time. The Ld. D.R. further contended that the goodwill was defined by the apex court way back in 1960 in the case of S.C. Cambatta & Co. (P) Ltd. v. CIT 41 ITR 500(SC) in which it was held that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it and the lack of competition and many other factors go individually or together to make up goodwill, though locality always plays a considerable part. Goodwill includes the commercial benefits and the commercial rights. If the assessee acquires a commercial right which is akin to the know how, patents, copy rights, trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will". 10. The word "goodwill" has been defined repeatedly through judicial pronouncements by the apex court and the various High Courts. In the case of S.C. Cambatta & Co. Pvt. Ltd. (supra) their Lordship of the apex court had examined the interpretations of goodwill given in different cases and also by different authors. In IRC v. Muller & Co.'s Margarine Ltd. (1901) AC 217 Lord Macnaghten at pg.Nos.223 & 224 has made the following observations: "What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start............ if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again". 11. Their Lordship of this apex court in the case of S.C. Cambatta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt the possibility of appreciation or atleast retention of value of depreciable assets on which depreciation is allowed. While section 41(2) provides for assessment of profit arising on sale of tangible depreciable assets, section 50 provides for assessment of capital gains on sale of depreciable assets. Therefore, entitlement for depreciation on assets including intangible assets cannot be negatived on the ground that no erosion on value takes place on account of the use of the asset in business or profession. 13. In the light of these observations of the Kerala High court in the case of Ravindran, we are of the view that after the amendment in section 32, depreciation is to be allowed on tangible and intangible assets irrespective of the facts that there is no erosion in value of these assets. Therefore, the arguments of the Ld. D.R. that there is no erosion in the value of so called goodwill is not relevant to decide the controversy with regard to the entitlement of depreciation on goodwill purchased. Now the main controversy before us is whether the goodwill is business or commercial right of similar nature of know how, patents, copy rights, trade marks, license or franchises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It obviously had the name of a successful Hospital and that is why the assessee chose to continue the same business with the same name. It is the reputation of the Hospital that brings patients to it and the same may involve the quality of Doctors, staff, equipments and other facilities available in the Hospital. Even after purchase of the Hospital by the assessee, all the facilities and name continued to be the same and therefore, patients may not know even the change of management of the Hospital when they go for treatment in the Hospital after it's purchase by the assessee. The purpose of purchasing a business concern, whether it be Hospital or Hotel, is to ensure continuity of business with the same reputation. What is most important in the purchase of a Hospital, in our view, is the name of the Hospital and what is more important in this case is that the Hospital after purchase by the assessee continued to be run in the very same building, in the very same premises, in the very same town and with the same name. So much so, the purpose of paying a very huge amount for goodwill is for maintenance of the continued reputation of the Hospital which was run in so much so, purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the goodwill depends upon the past performance of the going concern; on the other hand the intellectual property rights (IPR) depends upon the probability of the future performance. Therefore, both have independent and divergent direction of valuation. Relying upon the orders of the other coordinate benches, the Tribunal has held that on other intangible assets which are not akin to know how, patents, copy rights, trade marks, license, franchises, the depreciation is not allowable. 17. In the case of R.G. Keswani v. ACIT (supra), the Tribunal has rather held that the goodwill is not an intangible asset within the meaning of section 32 (l)(ii), hence, the acquisition cost of goodwill is not entitled to depreciation. 18. In the case of Bharatbhai J. Vyas v. ITO (supra), the Tribunal has held that the legislature has inserted a fiction by which specified intangible assets are held to depreciate and allowances given to therefore Know how, patents, copy rights, trade marks etc. are sometimes assigned in different names and therefore by using the word "similar nature", the legislature has restricted the scope of intangible assets similar to the specified one. What it has paid fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofitably has to fall within the meaning of intangible assets. The definition further provides that business or commercial right should be of similar nature as know how, patents, copy rights, trade marks, license, franchise, etc. all these are the assets which are not manufactured or produced over night but brought into existence by experience and reputation. They assume importance in the commercial world as they represent a particular benefit or advantage or reputation built over a period of time and customer associate with such assets. Simiarly, goodwill is nothing but positive reputation built by a person/company/business/house over a period of time. Thus goodwill is a business or a commercial right of similar nature. The name 'Kotak' has tremendous importance as the business company was to be benefited by the usage of said name and it has gone as far as amending its name by including Kotak in its name. Therefore, it is of commercial value for which assessee has paid a substantial amount and is eligible for depreciation. The facts of this case are that assessee has acquired the foreign exchange broking business from M/s. Uday S. Kotak for a sum of Rs.5.90 crores out of which Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial rights are of similar nature, to that of knowhow, patents, copy right, trade mark, license or franchise. The business or commercial right must be of the same genesis. The goodwill has already been defined through various judicial pronouncements and it has been held that the goodwill is basically a bundle of commercial benefits and rights. It depends upon a variety of circumstances or a combination of them. The location, the service, the standing of business, the honesty of those who run it, the lack of competition and many other factors go individually or together to make up the goodwill. Goodwill also includes the certain business or a commercial rights move along with the establishment. Now the question arise whether all the components of the goodwill or the goodwill as a whole is entitled for depreciation? From looking to the nature of various components of the goodwill, we are of the view that certain components can be called to be business or a commercial rights. Therefore those commercial benefits which move along with the establishment on its sale and not akin to the know how, patents, copy rights, trade marks, license, franchises are not entitled for depreciation. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a going concern along with its name, trade mark, logo, etc. In those cases assessee has claimed the depreciation on one of the component of the goodwill which was in fact a commercial benefit and not the commercial right. Therefore, the Tribunal has rightly held that the depreciation is not allowable on the goodwill. 26. Turning to the facts of the case, we find that the assessee has made the excess payment over and above the cost of tangible assets and that excess payment was claimed to have been made against the goodwill. From the information, memorandum and bid document filed before us at pg.Nos.46 to 70 of the compilation we noticed from its clause 3.8, that under the head valuation, fair market value of the asset was estimated at Rs.475.56 lakhs and the realizable value estimated at Rs.587.52 lakhs. It was also stated under that clause that the definition of assets in the asset valuation report does not include contract, records and goodwill or the right to carry out distilling that form part of sale. It was stated on behalf of the assessee that purchase price of the complete establishment was consolidated price of Rs.9 crores and it includes the consideration for assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain right upon the assessees like above items it would be eligible for depreciation u/s 32(1) of the Act. But those intangible assets which confers only a commercial/business benefits upon the assessees, they are certainly not eligible for depreciation in as much as by acquiring that benefit assessee would not get an exclusive right to trade or to run its business in that way. 27. In the present case, the goodwill includes the location of the distillery, customers of the distillery, reputation of the distillery, etc. are the commercial benefits which move to the assessee along with the establishment on its purchase. But these benefits do not confer any right to trade upon the assessee. It is also brought to our notice that generally in the sugar factory, the factory owners entered into an agreement with the sugar cane growers to purchase their sugar cane at a particular rate and this right also moves along with the establishment on its sale. It is also brought to our notice that it is not easy to obtain a license to set up of sugar factory and distillery. It requires lot of efforts. That is why it has its own value and without licenses one cannot run distillery and sugar factor ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
