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TMI Blog2012 (4) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of law involved in the present appeal the relevant facts necessary for disposal of ITA No.315/2010 are enumerated as below:- (i) The assessee Company is presently engaged in transmission and distribution business of power. The business involves, inter alia, designing, manufacturing, supplying, installation, testing, commissioning and servicing transmission and distribution system of power on turnkey basis. (ii) The assessee Company earlier was a subsidiary of an Indian Company viz. ALSTOM Projects India Ltd. (hereinafter referred to as the „transferor‟). Subsequently, the appellant Company became the subsidiary of Areva T & D Holdings SA France (hereinafter referred as the „transferee‟) w.e.f. 1st April, 2004 pursuant to transfer under a slump sale agreement dated 30th June, 2004. (iii) Under the transfer/slump sale agreement, the business was transferred by the transferor lock, stock and barrel to the assessee Company. However, the transferor retained its „trademark‟. (iv) The business of the transferor was acquired by the assessee Company for a total sale consideration of Rs.44.7 Crores. On bifurcation, it is revealed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A), the assessee Company preferred an appeal before the Income Tax Appellant Tribunal (ITAT), which deliberated on the rival contentions of the parties. The ITAT dismissed the appeal of the assessee Company by the impugned order dated 24th April, 2009. The impugned order held that the statutory expression of the provision granting depreciation on intangible assets does not include all the intangible assets and that the residual clause, viz., "any other business or commercial rights of similar nature" must be of similar nature to the intangible assets eligible for depreciation enumerated in the said provision prior to the aforesaid expression. (xii) Aggrieved by the impugned order, the appellant in ITA No.315/2010 has preferred the present appeal. 4. In so far as ITA No.1151/2010 and ITA No.1152/2010 are concerned though they pertain to different assessment years, namely, assessment year 2002-03 and assessment year 2005-06 respectively, raise and were admitted on the following substantial question of law: "Whether ITAT erred in deleting the addition of Rs.71,40,000/- made by the assessing officer on account of depreciation on goodwill?" 5. To appreciate the question of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an asset entitled to depreciation and depreciation was actually allowed in the past. The learned Assessing Officer, in our view, was not correct in making a departure from the past and in holding that payment was made for acquisition of "goodwill". Payment had been made for acquisition of commercial rights on which depreciation is permissible. The Assessing Officer was further not justified in treating entries in the books of account as conclusive and in taking payment in dispute as consideration for acquisition of goodwill. It is now more or less settled that entries in books cannot be treated as conclusive and true nature of transaction has to be determined with reference to law. The learned CIT (Appeals) in the impugned order examined the issue with reference to agreement and found that payment was made for acquisition of commercial rights. On facts and circumstances of the case, we do not find any error in the approach of the learned CIT(Appeals)." (viii) Aggrieved by the said impugned order rendered by the ITAT the Revenue has preferred the present appeals under Section 260A of the Act. 6. On behalf of the assessee it was urged that Section 32(1)(ii) of the Act enlist ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in respect of - (a) any motor car manufactured outside India, where such motor car is acquired by the Assessee after the 28th day of February, 1975 [but before the 1st day of April, 2001], unless it is used- (i) in a business of running it on hire for tourists; or (ii) outside India in his business or profession in another country; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under Section 42:] [Provided further that where an asset referred to in Clause (i) [or Clause (ii) or Clause (iia)], as the case may be, is acquired by the Assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this Sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under Clause (i) [or Clause (ii) or Clause (iia)], as the case may be:] [Provided also that where an asset being commercial vehicle is acquired by the Assessee on or after the 1st day of October, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se may be, in the ratio of the number of days for which the assets were used by them:] [Explanation 1. Where the business or profession of the Assessee is carried on in a building not owned by him but in respect of which the Assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the Assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure of work is a building owned by the Assessee.] [Explanation 2 .- [For the purposes of this Sub-section] "written down value of the block of assets" shall have the same meaning as in Clause (c)* of Sub-section (6) of Section 43:] [Explanation 3.- For the purposes of this Sub-section, [the expressions "assets"] shall mean - (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.] [Explanation 4.- For the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 3 to Section 32(1)(ii) the commercial or business right which is similar to a "licence" or "franchise" is declared to be an intangible asset. Moreover, under Rule 5 membership is a personal permission from the Exchange which is nothing but a "licence" which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in Section 32(1)(ii) of the 1961 Act. The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of Section 32(1)(ii)." 10. In Hindustan Coco Cola Beverages (P) Ltd.(supra) a Division Bench of this Court held as follows:- "It is worth noting, the scope of Section 32 has been widened by the Finance (No. 2) Act, 1998 whereby d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viewed the different approaches to the concept (pp.577, 578): It has been horticulturally and botanically viewed as "a seed sprouting" or an "acorn growing into the mighty oak of goodwill". It has been geographically described by locality. It has been historically described by locality. It has been historically explained as growing and crystallizing traditions in the business. It has been described in terms of a magnet as the "attracting force:. In terms of comparative dynamics, goodwill has been described as the "differential return of profit". Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a "habit" and sociologically it is a "custom". Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, trade style and name, marketing and distribution, territorial know-how, including information or consumption patterns and habits of consumers in the territory and the difference between the consideration paid for business and value of tangible assets. The tribunal has treated the same to be valuable commercial asset similar to other intangibles mentioned in the definition of the block of assets and, hence, eligible to depreciation. It has also been noted by the tribunal that the said facts were stated by the Assessee in the audit report and the assessing officer had examined the audit report and also made queries and accepted the explanation proferred by the Assessee. The acceptance of the claim of the Assessee by the assessing officer would come in the 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 acquisiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Agreement for the purposes of the following- To effect the sale of the Activity on an as is where is basis and the Activity Transferee wishes to purchase and assume as a going concern. The Activity Assets and the Assumed Liabilities of the Activity on the terms more specifically set out in this Agreement. NOW IT IS AGREED as follows: DEFINITIONS AND INTERPRETATION In this Agreement unless the context otherwise requires:- "Act" means the Companies Act 1956; "Activity" means all activities carried out by the Activity Transferor relating to the business of Transmission and Distribution (T & D). "Activity Assets" means all the undertaking and assets of the Activity Transferor at the Completion Date insofar as they relate to the Activity including the investments in ALSTOM T & D Lightning Arresters Pvt. Ltd., but excluding the Excluded Assets, ...................... „Business Claims‟ means the benefit of all rights and claims of the Activity Transferor arising out of or in connection with the Activity or any of the Activity Assets including:- (a) all claims against, or rights to make a claim against, any third party in respect of any goods, equipment, se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nders) relating to the Activity which have been entered into or undertaken by or on behalf of the Activity Transferor wholly or predominantly in the ordinary course of the Activity, and which have not expired at Completion Date, including contracts with customers, suppliers, agents or distributors, finance and/or equipment leases, and all arrangements relating to the provision of maintenance and support, security, disaster recovery, facilities management, bureau and on-line services to the Activity including assumed contracts listed in Exhibit 5.1. For the avoidance of doubt "Contracts‟ shall not include contracts of employment under which the Exployees are employed by the Transferor; "Debts" means the trade and other debts (including prepayments) due to the Activity Transferor in connection with the „Activity as at the Completion Date, whether or not invoiced; ................ SALE AND PURCHASE 2.1 The Activity Transferor shall sell and the Activity Transferee shall purchase, as on the Completion Date, with effect from the Effective Date, the Activity as on a going concern, alongwith the Acvity Assets and Assumed Liabilities including but not limited to those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are capable of assignment/transfer without the consent or approval of, or waiver from , other parties. 7.3 Insofar as any of the Contracts or Business Claims or not assignable/ transferable to the Acitivity Transferee without an agreement of novation executed by, or consent to assignment of, or approval or waiver from a third party; 7.3.1 the Activity Transferor, at the Activity Transferee‟s request, shall use reasonable endeavours, with the co-operation of the Activity Transferee to procure such novation or assignment with any necessary consent, approval, or waiver, as soon as reasonably possible following completion; 7.3.2 unless and until all such Contracts and Business Claims which shall be capable of novation or assignment shall have been novated or assigned with all necessary third party consents, approvals or waivers. The Activity Transferor shall hold such Contracts and Business Claims on trust for the Activity Trasnferee and its successors in title absolutely and the Activity Transferee shall (if such sub-contracting is permissible and lawful under the Contract in question) as the Activity Transferor‟s sub-contractor perform all the obligations of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eror or any member of the Activity Transferor‟s Group shall be provided to the Activity Transferee. 9.4 It is expressly provided that as far as the ALSTOM Projects India Ltd. - T & D Superannuation Fund, ALSTOM Projects India Ltd. - T&D Gratuity Fund and Provident Fund or any Fund created or existing (or the benefit of the employees pertaining to the Activity, shall after the Completion Date stand substituted in the name of the Activity Transferee in place of the name of the Activity Transferor and the Activity Transferee shall stand substituted for all purpose whatsoever related to the administration, management or operation of such schemes and / or Funds or in relation to the obligation to make contribution to the said funds in accordance to the provisions of such Schemes and/ or Funds as per the terms provided in the respective Trust Deed. It is the end and intent that all the rights, duties, powers and obligations if the Activity Transferor in relation to such funds shall become those of the Activity Transferee. It is clarified that the services of the employees will be treated as having been continued for the purpose of the aforesaid Funds. The name of the aforesaid Fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words "knowhow, patents, copyrights, trademarks, licenses, franchises". It was urged that the Supreme Court had clearly held in Techno Shares and Stocks Ltd.(supra) that "Our judgment should not be understood to mean that every business or commercial right would constitute a "licence" or a "franchise" in terms of section 32(1)(ii) of 1961 Act". 13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of "knowhow, patents, trademarks, licenses or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section. 15. In view of the above, it is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation under Section 32(1)(ii) of the Act. In the circumstances, the substantial question of law is decided in the affirmative and this appeal is allowed in favour of the assessee and against the Revenue and the impugned order is set aside. ITA No.1151/2010 and ITA No.1152/2010 16. In these appeals, the ITAT, relying upon the decision in assesse‟s own case ITA No.336/Del/08 dated 6th July, 2009 pertaining to assessment year 2005-06, held:- "5. On careful consideration of rival submission, we are of view that learned CIT(Appeals) has rightly allowed relief to the assessee after considering relevant facts and circumstances of the case. The assessee has not claimed depreciation on goodwill it acquired commercial rights to sell products under the trade name and paid consideration in dispute for acquiring marketing and territorial rights to sell through dealers and distributors i.e. the network created by the seller for sale in India. Under the agreement. It become entitled to use of infrastructure developed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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