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TMI Blog2015 (11) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of law was framed:- "Whether under the circumstances of the case the ITAT was justified in directing a remand to the assessing officer on the issue of calculation of the intangible given that it upset the findings of the lower authorities as to the genuineness and admissibility of such claim under Section 32(1b)?" 3. The principal grievance of the Assessee is that the ITAT has remitted the matter to the Assessing Officer (hereafter 'AO') to consider the question whether the valuation of goodwill of Rs. 40.58 crore is appropriate. According to the Assessee, the value of Rs. 40.58 crore has been arrived at by reducing the value of fixed assets of Rs. 2.56 crores and net current assets of Rs. 2.71 crores - aggregating Rs. 5.27 crores as reflected in the balance sheet as on 22nd September, 2006 - from the slump sale consideration of Rs. 45.85 crores. The said consideration had been paid pursuant to an agreement dated 22nd September, 2006 which was accepted by the ITAT. The Assessee contends that the said agreement having been accepted, the question of imputing any other value to goodwill does not arise. 4. The aforesaid controversy arises in the backdrop from the following f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 32 of the Act, the claim of the Assessee for depreciation was restricted to the opening Written Down Value of assets at the beginning of the Previous Year, in the hands of TPPL. Thus, the AO did not admit the Assessee's claim for depreciation on goodwill, which was value at the slump sale consideration less the value of net tangible assets. The AO further held the slump sale agreement was a colourable device to minimise the tax liability in the hands of TPPL and to maximise the claim of depreciation in the hands of the Assessee. 4.6 The AO also did not accept the valuation report that was submitted during the course of proceedings whereby the value of goodwill had been bifurcated into (a) technical knowhow at Rs. 26.18 crores; (b) valuation for the business on hand as on 22nd September, 2006 at Rs. 12.5 crores; (c) and non compete fees of Rs. 1.86 crores. In view of his findings, the AO disallowed the Assessee's depreciation claim of Rs. 10,14,68,882/- and added the same to the taxable income of the Assessee. 4.7 Aggrieved by the decision of the AO, the Assessee preferred an appeal before CIT(A). The CIT(A) observed that Mr Binoy Jacob was a principal promoter of TPPL and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and non-compete fee mentioned in the report. In respect of the alternative claim of the Assessee that the entire sum of Rs. 40,58,75,529/- paid towards intangibles be considered as a goodwill, the ITAT - following the decision of Supreme Court in CIT v. Smifs Securities Ltd.: 348 ITR 302 (SC) - upheld the Assessee's contention that depreciation could be claimed on goodwill; but, remanded the matter for the purposes of valuation of goodwill. 5. Mr Sabharwal, learned Senior Advocate appearing for the Assessee submitted at the outset, that the trifurcation of goodwill into separate components viz. technical know-how, 'brand name' and 'non-compete', were done by the Assessee after the conclusion of the slump sale and, thus, should be ignored; according to him, the entire amount of Rs. 40.58 crores should be considered as a goodwill. Mr Sabharwal referred to the slump sale agreement and the balance sheet of the Assessee prepared as on 22nd September, 2006, which clearly reflected Rs. 40,58,75,529/- as goodwill. He referred to the decision of the Supreme Court in Smifs Securities Ltd. (supra) in support of his contention that the depreciation was allowable on goodwill. He subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature :" 10. Explanation 3 states that the expression "asset" shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words "any other business or commercial rights of similar nature" in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 11. In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act." 12. In the present case the 'Business Identification Schedule' appended to the Agreement specified the business of TPPL, which was sold to the Assessee. Apart from the tangible assets the said Schedule also included the following:- "3) TPPL Contracts: The benefits and liabilities of TPPL's ongoing contracts as well as any other letters of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business." The Court had further explained that: "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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under:- "16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess id termed as 'goodwill'. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise." 18. It is also relevant to note that Smifs Securities Ltd. (supra) was a case where assets of company - YSN shares and Securities (P.) Ltd. were transferred to Smifs Securities Ltd. under a scheme of amalgamation. And, the excess consideration paid by the Assessee therein over the value of net assets of YSN Shares and Securities (P.) Ltd. acquired by the Assessee, was accounted as goodwill. 19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was righ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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