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TMI Blog2011 (9) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case and in law the ld. CIT (Appeals) has erred in :- (i) directing to allow depreciation of ₹ 7 crore on declared franchise and license rights of ₹ 28 crore despite the fact in reality no such franchise and license rights were devolved upon the assessee and as held by the AO the said payment of ₹ 28 crore was for goodwill. (ii) Further holding that depreciation is allowable even if the said payment of ₹ 28 crores is for goodwill without appreciating the fact that depreciation on goodwill is not allowable in terms of provisions of section 32(1) of the Income-tax Act, 1961. Similar grounds have been taken in other appeals for other years. However, there is a difference of amount of depreciation only. 3. The undisputed brief facts discussed by ld. CIT (A) in his order are that the assessee company was engaged in the business of manufacturing of Aerated water. During the year the assessee company has purchased the business of Delhi Territory of M/s Dhillon Kool Drinks and Beverages Ltd. vide business transfer agreement dt.26.8.2000 on the basis of slump sale for which the net amount paid was ₹ 12.5 crore. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e franchise agreement on the successful shifting the pet line and setting up and commissioning of the manufacturing facilities for the manufacture of the products in or around Delhi and this LOI shall terminate immediately on the execution of franchise agreement. It makes clear that in reality no franchise or license agreement was executed between PFL and the assessee. The AO had also referred the Supreme Court judgment in the case of McDowell reported in 154 ITR and with this discussion disallowed such depreciation claim of ₹ 7 crore as made by assessee company. 4. The detailed written submissions were filed before ld. CIT (A) which has been tabulated in the order of ld. CIT (A) at pages 4 to 9. The submissions are in detail and they are self explanatory. Therefore, it will be useful to reproduce the submissions here also which are as under :- The assessee is a private limited company. It is engaged in the business of manufacturing of Areated water for the last several years. It has maintained regular and proper books of accounts consisting of cash book, ledger, journal and such accounts are supported by bills, vouchers, production registers, stock details and other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany by PFL of the licence and franchise rights to use the trade marks of Pepsi brands of soft drinks, i.e. PEPSI, 7 UP, MIRINDA, SLICE, TEEM, EVERVESS AND LEHAR in the specified territory comprised in the Delhi Business. 1.4. In accordance with the above stated arrangements, the Seller and the assessee company made necessary efforts. An agreement was entered in between PepsiCo India Holdings Ltd. and the assessee on 10th day of August, 2000 (copy enclosed). Letter of Intent dated 26.08.2000 was issued by Pepsi Foods Limited. Copy of Letter of Intent dated 26.08.2000 as modified on 22.12.2000 is submitted herewith. PepsiCo India Holdings Limited also agreed to nominate the assessee company to acquire the Delhi Business from the seller. The Seller having caused the procurement of the aforesaid licence / franchise rights by the Assessee Company, a business transfer agreement dated 26th day of August, 2000 was entered into by and between the Seller and the Assessee Company. The consideration for the transfer was arrived at a lump-sum amount of ₹ 37.75 crores. The assessee company took over the liability for payment of ₹ 25.25 crores to the parties detailed in Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planning and no avoidance of payment of legitimate tax. The assessee Company has suffered heavy losses. Position of the Sales and returned income / loss for the assessment years 2000-2001 to assessment year 2004-05 are submitted as per Annexure -2. 1.9. We also refer to the latest judgment of the Supreme Court in Union of India vs. Azadi Bachao Andolan and Another (2003) 263- ITR -706. It approved Banyan and Berry Vs. CIT (1996) 222 ITR 831 (Gujrat) on page 759. We reproduce We may also refer to the judgment of the Gujarat High Court in Banyan and Berry Vs. Commissioner of Income tax (1996) 222 ITR 831 at 850 where referring to Mc. Dowell s case (1985) 154 ITR 148 (SC), the court observed : The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; and inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in Mc Dowell s case (1958) 154- ITR-148 (SC). The ratio of any dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is receiving the supplies, manufacturing the beverages and selling the products in the Delhi territory till to-day, without any objection from all concerned. In the absence of the sale agreement Letter of Intent, the assessee had no such rights. 1.12. The cost to the assessee Company was ₹ 37.75 Crores. Out of it value of tangible assets was computed at ₹ 7,57,42,323/- by the Approved Valuer and ₹ 2,17,56,800/- were for current assets. The balance of ₹ 28 Crores was in respect of license, franchises, and other business and commercial rights for the Delhi territory. The assessee Company had undertaken the liability of ₹ 25.25 Crores, which included an amount of ₹ 21.15 Crores payable by the Seller to Pepsico India Holding Ltd. The assessee Company has discharged that liability as detailed in para 1.5 hereinabove. As agreed to collect the outstanding amount of ₹ 21.15 Crores, Letter of Intent was executed no 26.8.2000 apart from the Business Transfer agreement dated 26.8.2000. The letter of intent has been acted upon and subsists to till today. It is being honoured by all concerned. The learned Assessing officer has admitted in clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Business Agreement transferred the licences and franchise rights and commercial rights to the assessee Company. The letter of Intent has been acted upon, has been honoured and is in existence and operative in law. In commercial world the Letter of Intent has its sanctity and PepsiCo/PFL are multinational Companies of repute. If the learned Assessing officer had any doubt or suspicion, he could and should have made necessary verification and satisfaction from PepsiCo / PFL, rather than rejecting the correct and valid claim of the assessee. 1.15 The Letter of Intent so issued is valid, operative, in existence, subsists and not terminated and not liable to be terminated. The inference drawn by the learned Assessing officer on page 8 in the last para is without any valid basis and not valid reason to deny the depreciation. Verification may be made by the Assessing officer or by your honour from the concerned parties. We have annexed details upto 31.03.2004. Same is position of sales/supplies thereafter. Uninterruptedly sales/supplies are being effected. 1.16. The Letter of Intent dated 26.8.2000 stands extended upto 30.09.2004 as per letter dated 29.03.2004 of Pepsi Foods Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PepsiCo/PFL. Huge amount remained due for long. We may also mention that their business of Punjab, Haryana Himachal Pradesh had to be sold by them in the years 2003/2004. Now DKD has only a Contract Packing arrangement with Pepsi from its Punjab Plant. Further name of DKD was not transferred to the assessee Company but only their Delhi business as a going concern was transferred to the assessee Company. The learned Assessing officer has not properly understood the meaning of Goodwill . In the present case there was no goodwill, rather there was negative goodwill. Goodwill is normally worked out, based on annual income of the business. There was no positive income and the business was in a bad shape. On established commercial principles there was no goodwill and value was NIL. Negative goodwill will arise when by adopting super-profit method, the figure arrived at is a super-loss or when by adopting Capitalised profit value method, the figure arrived at is less than the net value of the tangible assets. 1.21. The usual method of calculation of the valuation of goodwill is set out at pages 807 and 808 of advanced accounting by Batliboi, 16th Edition. After analyzing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 23 and it was submitted that ld. AO has considered the issue in great detail and has held that the consideration received by assessee was on account of goodwill only and on goodwill depreciation is not allowable. 7. On the other hand, the ld. Counsel of the assessee first placed reliance on the order of ld. CIT (A). It was further submitted that a copy of agreement is placed at page 14 onwards entered with Pepsico. As per agreement, the assessee has purchased right of license and franchise etc. and these are intangible assets and depreciation is allowable. Attention of the Bench was drawn on page 25 to 28 and 46 also. It was further submitted that the decision in case of Hindustan Coca Cola has been affirmed by Hon ble Delhi High Court vide its order dated 14.1.2011, copy of the same was also filed. It was further submitted that even in respect of goodwill, the depreciation is allowable as held by various bench of the Tribunal. Further reliance was placed in case of on the cases reported in 327 ITR 323, 238 CTR 1 (Del.) and 237 CTR 80 (Ker.). Further, attention of the Bench was drawn on copy of written submissions placed on record. In rejoinder, the ld. CIT D/R stated that dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icense and franchise rights that no such rights were devolved upon the assessment company through business transfer agreement dated 26.8.2000 between appellant and M/s Dhillon Kool Drinks and Beverages Ltd. but these were through the letter of intent executed on the same date i.e. 26.8.2000 given by Pepsi Food Ltd. to the appellant company. The assessing officer has raised the question of desirability to issue letter of intent if license and franchise rights devolved upon the assessee through the business transfer agreement According to AO since no agreement of license or franchise rights have devolved upon the assessee from Pepsi Food Ltd. therefore, the depreciation claim on license and franchise rights was held as not admissible. The AO had also observed that as per letter of intent it was to be replaced with appropriate trade mark licensing agreement and the letter of intent shall terminate immediately on the execution of the franchise agreement. According to AO it is implied that the said amount of ₹ 28 crore is not license and franchise rights but it forms part of goodwill devolved upon the assessee on which no depreciation is allowable. I have also gone through the cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed to the appellant company has referred their earlier letter of intent dated 26.8.2000 as amended from time to time and the validity of the said letter of intent was further extended upto 30.9.2004 under the same terms and conditions. The licenses and franchise rights earlier were with DKD and attached to Delhi business and when Delhi business as a going concern stood transferred to the appellant by DKD and in turn the appellant is uninterruptedly carrying on the business of bottling and selling in the same territory and necessary supplies are being made to the appellant by PFL Pepsico to manufacture the named beverages and syrup mix supported with letter of intent issued by Pepsi. Food Ltd. then obviously the licenses and franchise rights were also devolved upon the appellant. With such factual developments in my considered view the assessing officer was not justified in holding that no license and franchise rights were devolved upon the appellant company because for this purpose there is no agreement between the appellant and the seller namely DKD. In my considered view the assessing officer was also not justified in holding that said payment of ₹ 28 crore was for go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icenses, franchise etc. and in view of above position goodwill is also to be treated as an intangible assets of similar nature referred to in Clause II of S.32(1) and consequently, depreciation would be allowable on same. In the background of these 2 cases also if even the contention of assessing officer is accepted that said payment of ₹ 28 crore was made for goodwill then also the appellant is entitled for depreciation @ 25% of the same within the meaning of S.32(1)(ii) of I.T Act. With this discussion the AO is directed to allow the aforesaid depreciation claim of ₹ 7 crore. 8.1. After going through the finding of ld. CIT (A) and the arguments of ld. D/R and also taking into consideration the arguments of ld. A/R, we find that the ld. CIT (A) examined the issue at great length and found that the Pepsico India Holding Ltd. was interested in selling their Delhi business along with rights, interest, privileges, assets and liabilities in the National Capital Territory of Delhi for lwhich the assessee company offered to purchase the said business as a going concern subject to the seller arranging in favour of the assessee company by Pepsi Food Ltd. of the license and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal has decided the issue on merits also by which it was held that on good will, the depreciation is allowable and the AO was correct in allowing the depreciation. The ld. D/R has also placed reliance in case of Borkar Packaging (P) Ltd, 131 TTJ 99 (Panaji), in case of Bharatbhai J. Vyas, 279 ITR 41 (AT Portion) and in case of R.G. Keswani, 308 ITR 271 (AT ). No doubt, in these cases various benches of the Tribunal has held that the word good will is not provided in the provisions of section 32(1)(ii) by the Legislatures while mentioning various intangible other assets. Therefore, depreciation is not allowable. 8.2. However, we find that in case of B. Raveendran Pillai, 237 CTR 80 (Ker.), the Hon ble Kerala High Court has held that even on good will the depreciation is allowable. There are different views of the Benches of the Tribunal but there is no decision of any High Court that depreciation on good will cannot be allowed whereas there is a decision of Hon ble Kerala High Court in favour of the assessee i.e. in case of B. Raveendran Pillai (supra) wherein it is held that depreciation is allowable on good will. The ld. A/R has also informed that the decision of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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