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TMI Blog2010 (6) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... ative to each other - Thus it can be concluded that even the legislature has intended that brand name or trade mark are similar intellectual properties - “Brand” falls within the ambit of section 32(1)(ii) of the I.T. Act and that the assessee is eligible for depreciation on the same - As far as goodwill is concerned, the assessee shall not be entitled to depreciation - Appeal is partly allowed Regarding the disallowance of expenditure - The AO has disallowed the claim of the appellant company on the plea that the company was started in the year under consideration and the question of allowing the expenditure incurred in the earlier years does not arise - Since the expenditure disallowed u/s. 40(a) and 43B of the I.T. Act is to be allowed on actual payment basis, therefore, it has to be allowed either in the case of the transferor company or the transferee company - Hon’ble Mumbai Tribunal has decided the issue in the case of M/s Anil Engineering Corporation vs. ITO 50 ITD 99 where it is held that the transferee of the business would be eligible to claim the deduction in respect of the liability taken over from the transferor for which the payment was made by the transferee subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Company and became operational on 26.12.2005. 3.3 Pursuant to the scheme, the whole of the undertaking and properties including all the movable and immovable assets and al debts, liabilities, contingent liabilities, duties and obligations of every kind of the Power Transmission Business of KEC Infrastructure Ltd was acquired by assessee for a total consideration of Rs.143.00 Cr. At the time of acquisition, the net worth of the undertaking was quantified at a negative sum of Rs.157.19 Cr. By the auditors of the KEC Infrastructure Ltd u/s 50B(3) of the Income Tax Act (the Act). In terms of the scheme, the assessee company has paid the sale consideration of Rs. 143 Cr. By way of equity and preference shares. The assessee company issued 3,76,35,858 equity shares of Rs.10 Each fully paid up at a total premium of Rs.92.36 Cr. Further, the assessee company has issued 12,99,966 Preference shares of Rs.100 each towards the sale consideration of the Power Transmission business. 3.4 At the time of transfer of the Power Transmission Business, the book values of assets acquired from KEV Infrastructure Ltd was a sum of Rs.35,43,13,504/-. After transfer of the undertaking the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the conditions stipulated u/s.2(19AA) of the I.T. Act. Further, he has held that section 43(6) of the Act defines the term written down value . He has also relied on the Explanation 2A and Explanation 2B to section 43(6) by holding that these are relevant for the appellant s case. iv) The AO has also observed that in the books of KEC Infrastructure Ltd., the intangible assets such as brand and goodwill were not there. The assessee company has valued the brand at a sum of Rs.240 crores and goodwill at Rs.3.63 crores. The AO has also held that under the Explanation 2B to section 43(6), the depreciation requires to be allowed on the WDV on the transferred assets of the demerged company. v) The AO has concluded that the appellant company cannot increase the actual cost of block of assets in the demerger. The word actual cost is defined in Section 43(1) of the I.T. Act. vi) The AO has further held that s per Explanation 7A to Section 43(1), the actual cost to the assessee shall be taken to be same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business. Thus, he has concluded that the assessee is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 32(1)(ii) has not allowed depreciation on brand account and goodwill and thirdly, the Hon ble Tribunal in the above said case has held that the depreciation is not allowable on goodwill and other intangible assets which are not covered in Section 32(1)(ii) of the I.T. Act, therefore, the claim of disallowance made by the AO on the claim of depreciation on intangible assets is upheld. Finally, the AO is directed to recompute the depreciation accordingly. Thus, the ground is partly allowed. 5. On the issue of disallowance of expenditure, the first appellate authority applied the decision of the jurisdictional Tribunal in the case of M/s Anil Engineering Corporation vs. ITO 50 ITD 99 and held that the transferee of the business would be eligible to claim deduction in respect of the liability taken over from the transferor for which the payment was made by the transferees subsequently. Aggrieved on the issue of disallowance of depreciation on Brand, the assessee filed an appeal on the following ground : On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals)-VII upheld the action of the Additional Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled the conditions laid down u/s 2(19AA) of the Act. On the second reason, he submitted that the first appellate authority has not accepted the contention of the assessee and the assessee is in appeal on this issue. 8. Mr. Dastur submitted that Brand is nothing but a rade mark and that it is covered by the word Trade Mark . Without prejudice to the above submission, he submitted that Brand can be considered as any other business or commercial rights of similar nature . He pointed out that the owner of the Brand can prevent the use of the Brand by another party, by way of a legal action, just as in the case of copy right, trade mark or knowhow. He took this bench to page 12 of the assessee s paper book, which consists of the composite scheme of arrangement and specifically para 13.1, 13.4, 14, 14.2, 15.3, 15.4, to drive home his argument that, this is a composite scheme, that the assets will be debited in the transferees book, liabilities will be credited, share capital will be credited and the difference will be goodwill or capital reserve and that the assessee shall get the assets valued and reflect the same in its books. He also pointed out that the movable asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not filed an appeal against this finding of the first appellate authority and hence the issue whether the transfer is a slump sale or a demerger is not before the Bench. Thus he agreed that the issue before the Tribunal is whether the Brand falls within the ambit of section 32(1)(ii) of the Act. Mr. Rana relied both on the reasons given by the AO as well as the CIT(Appeals) and vehemently contended that Brand is nothing but Goodwill . He submitted that in the case of Chitra Publicity Co. P. Ltd. vs. ACIT 127 TTJ (Ahd.) (T.M.), the Tribunal has loosely used Brand in conjunction with Goodwill . He relied on the decision of R.G. Keswani (supra) and submitted that the valuation in question is in fact a valuation of Goodwill and by applying the ratio of this decision of the Tribunal, the assessee is not entitled to any depreciation. He relied on a number decisions in support of his contention that no depreciation can be granted on Goodwill . He pointed out that the assessee in fact has transferred goodwill at a separate value and alternatively no depreciation should be allowed on the Goodwill . 12. Mr. Dastur, in reply, submitted that in the case of Chitra Publicity Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be, and some person having the right, either as proprietor or by way of permitted user, to use the mark whether with or without any indication of the identity of that person, and includes a certification trade mark or collective mark; Section 2(m) reads as follows : mark includes a device, brand, heading, label, ticket, name, signature, or any combination thereof. (Underlining ours) 16. As trademark includes a mark and mark includes a brand, we have to necessarily conclude that trademark includes Brand . 16.1 In K.J. Aiyar s judicial dictionary, Brand is defined as follows : BRAND. A distinguishing name, design or trade-mark, used, for putting on goods or on cases in which they are enclosed to define and distinguish ownership, class or quantity [Pears]. In Ramanatha Aiyar s Law Lexicon Volume 12005, defines Brand as follows : Brand. To burn or impress or make a mark upon with a hot iron. A distinguishing name. design, or trade mark used for putting on goods or packages. It generally defines ownership, class, or quality of the goods. To put a name (the brand name) on something or to design and package a product so that it is easily recognizable by a cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise.(1) a franchise granted by a professional sports league to field a team in that league. (2) The team itself. Trial franchise. A franchise having an initial term of lismited duration, such as one year. Franchise, vb. To grant (to another) the sole right of engaging in a certain business or in a business using a particular trademark in a certain area. Thus, franchising is a kind of business where franchisor grants a licence to the franchisee to use franchisor s intellectual property rights such as know-how, patents, trademarks, brand name, etc. to market the franchisor s products or services for consideration. At para 34, it held as follows : - - - - - - - - - - - - - Whereas, the intangible assets enumerated in section 32(1)(ii) of the Act form a class of intellectual property and since the common thread flowing in almost all the said expressions is the intellectual property rights, the expression licences would take colour from other expressions which are all referable to intellectual property rights. Thus, the decision of the Apex Court in the case of Scientific Engg. House (P) Ltd. (supra) does not support the case of the assessees. 18. From the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. It held that no fault has been found with the valuation report and, therefore, the same cannot be rejected. There is no proposition that trademark or trade name can be equated with goodwill. 23. Coming to the decision of the Tribunal in the case of R.G. Keswani vs. ACIT in ITA No. 1463/Mum/2005 dated 19-02-2008, relied upon both by the CIT(Appeals) as well as by the learned DR, it is held that any other business or commercial right of similar nature is provided as a residual category, is found in the company of expression like, know-how, patents, copy rights, trade marks, licences, franchises, and, therefore, in view of the principle of ejusdem generis, the above expression has to be read in the company of the preceding works. It held that in such circumstances, the expression any other business or commercial right of similar nature also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. 24. Nowhere in this judgment it is given that Brand does not fall in any of the category specified in section 32(1)(ii) of the Act. This case law is only limited to the issue whether the assessee is entitled to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure was relating to another company M/s.KEC Infrastructure, therefore, it is not allowed in the case of the appellant. Hence, he has disallowed the deduction of Rs.3,10,79,751/- u/s. 43B of the Act. 31. The assessee submitted that there is no dispute on the fact that the assessee had deducted and paid the tax in respect of liability pertaining to the expenses so disallowed in the hands of the transferor company and discharged the liability so assumed pursuant to the acquisition in question. He further submitted that the amounts disallowed u/s 43B in the hands of the transferor company, have been paid by the assessee company and the only issue is whether the assessee is entitled to deduction under the facts and circumstances of the case. It relied on the decision of Hon ble Supreme Court in the case of CIT vs. T. Veerabhadra Rao 155 ITR 152 (SC) and the decision of the Mumbai Bench of the Tribunal in the case of Anil Engineering Corporation vs. ITO 50 ITD 99. The learned CIT(Appeals) at para 2.8 held as follows : 2.8 I have gone through the submissions of the appellant and the order of the AO. It is noticed that the expenditure disallowed u/s. 40(b) and 43B of the I.T. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that account, the same right should be recognized in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded as belonging to the new owner. It is not imperative that the assessee referred to in sub-cl. (a) must necessarily mean the identical assessee referred to in sub-cl. (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub- cI. (b). The successor assessee, in effect, steps into the shoes of his predecessor. Unless the language of the statute plainly and clearly compels a construction to the contrary, the normal rule of the law should be given its proper play. The assessee had spent a sum of Rs.6,880 as legal expenses in connection with an appeal filed in the Supreme Court arising out of a suit which was filed by the predecessor to recover an amount due from the Central Government and continued by the assessee on taking over the assets and liabilities of the predecessor. Held, that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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