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TMI Blog2011 (4) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... rry on the business and also to secure further business. - This transaction cannot tantamount to only a paper transaction or sham transaction as there is no such evidence on record. - Depreciation allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000 2002-03 Pre-qualification rights 3,16,35,736 2003-04 Technical Proprietary information 1,87,50,000 2003-04 Pre-qualification rights 2,37,26,802 2004-05 Technical Proprietary information 1,40,62,500 2004-05 Pre-qualification rights 1,77,95,102 2005-06 Technical Proprietary information 1,05,46,875 2005-06 Pre-qualification rights 1,33,46,326 4. But the Assessing Officer disallowed this claim, for all the four assessment years under appeal, on the reasoning that the intangible assets would partake the character of 'goodwill' which is not eligible for depreciation under section 32(1)(ii) of the Act. The Assessing Officer treated the consideration amounts as having been paid for 'goodwill' as against claimed as a consideration for intangible assets. He has ignored the contention of the assessee that the transfer of business was based on the business-valuation-report given by M/s. Ernst & Young Pvt. Ltd., and as per this report, the transferor possessed pre-qualification rights and technical proprietary information at the value estimated and that the parties have agreed to consider this amount as a value for transfer. The assessee further substantiated its cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was entitled to deduction on account of technical know-how @ 1/6 every year as per section 35AB of the Act. From the records, the Assessing Officer found that except for the diversion of Rs. 9,13,00,000 by M/s. May Springs Investments Ltd., there was no actual payment to the holding company as the balance amount was partly adjusted against the value of equity shares to be allotted to the holding company and partly by treating it as a loan to the assessee company. By treating both the entities as separate for income-tax purposes, the Assessing Officer examined only the nature of payment and finally he concluded that this payment was towards goodwill only. He, therefore, disallowed depreciation on pre-qualification rights as well as on technical know-how as claimed by the assessee. Aggrieved, the assessee preferred appeal for all the four years before the ld. CIT(A), who has passed a common order for all the four years because the question to be settled in all the four years is exactly identical. After considering the submissions of the assessee and the Department, he has given a finding that the assessee is entitled to depreciation on both the items. Now, the Revenue is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as intangible assets eligible for depreciation under section 32 or these tantamount to 'goodwill' which will not admit any depreciation under the Income-tax Act, 1961. In our considered opinion, after going through the business transfer agreements entered into between the parties clause by clause, we can safely conclude that by no stretch of imagination, the pre-qualification rights and technical proprietary information can be treated as 'goodwill'. These have to be treated as 'intangible assets'. The valuation report given by the reputed Chartered Accountant's firm, a copy of which was placed before the Assessing Officer, cannot be lightly brushed aside and in our opinion, the Assessing Officer has erred in observing that the valuation of pre-qualification rights and technical know-how cannot be valuated as has been done. In fact, a commercial/business right is acquired by application and development of technical knowledge and experience in a chosen field of activity. The common examples for such rights are software/manufacturing process, patents, trademarks etc. It is the exclusive property of a person who is entitled to enjoy or to transfer at its will, it cannot be seen or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to the assessee; (vi) The pre-qualification rights include skills and expertise of the employees, transfer of the commercial rights or eligibility entitlement to quote for tender in the areas of business by virtue of having executed the works of similar nature and capacity; (vii) The pre-qualification right was valued on the basis of 5 per cent of the total sale value for the last five years of the project division of Best & Crompton Engineering Ltd. on the total sales (contract); (viii)As per section 32(1)(ii) introduced by the Finance Act, 1998 depreciation is allowable on intangible assets like know-how, patents, copyrights, trademarks, licence or franchise or any other business or commercial rights of similar nature. 6. With reference to the above admitted facts, it is not true that there is no basis for valuation of the intangible assets which are pre-qualification rights and technical proprietary information. There are numerous methods for valuation of business and the one such method which has been adopted by M/s. Ernst & Young Pvt. Ltd. and it is evident in the report itself, which has dealt the issues extensively to arrive at the business valuation. We can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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