M/s. Enco Shoes, CHENNAI V. ITO, CHENNAI

ITA 1167/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64661 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 07-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 25-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: ANAND DEVKUMAR; DEV NARENDRAN
• Keywords: Depreciation

Judgement Text

IN THE INCOME TAX APPELLATE RIBUNAL D BENCH CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ---------- ITA NO. 1167/MDS/2012 ASSESSMENT YEAR : 2007-08 M/S. ENCO SHOES, NO. 107, 7 TH STREET, A.K. SWAMY NAGAR, KILPAUK, CHENNAI. V. THE INCOME TAX OFFICER, BUSINESS WARD-XIII(4), CHENNAI. (PAN : AABFE1984E) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ANAND DEVKUMAR, CA & SHRI DEV NARENDRAN, ADVOCATE RESPONDENT BY : SHRI K.E.B. RENGARAJAN, JR. STANDING COUNSEL DATE OF HEARING : 07.1 1.2012 DATE OF PRONOUNCEMENT : 12.12.201 2 O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-XII, CHENNAI DATED 20-02-2012 F OR THE ASSESSMENT YEAR 2007-08. ITA NO.1167/MDS/2012 2 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A MA NUFACTURER AND EXPORTER OF SHOES. THE ASSESSEE HAD FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF ` 8,33,130/-. IN THE RETURN OF INCOME AND IN THE DEPRECIATION SCHEDULE, THE ASSESS EE CLAIMED DEPRECIATION OF ` 5,25,000/- ON ACCOUNT OF GOODWILL PAID BY THE ASSESSEE AT 25%. THE ASSESSING OFFICER OBSERVED IN THE ASSESSMENT ORDER THAT IN THE DEPRECIATION CHART THE ASSESSEE HAS CLAIMED GOODWILL AFTER THE RETIREMENT OF PARTNE RS AND CLAIMED DEPRECIATION AT 25%. HE FURTHER OBSERVED T HAT GOODWILL IS NOT A DEPRECIABLE HEAD AND ON EFFECTIVE CONTINUATION OF PROFIT AND IMAGE OF THE FIRM THE VALUE WAS BOUND TO INCREASE AT ANY COST. WHEN CALLED UPON TO OFFER EXPLANATION , THE AUTHORIZED REPRESENTATIVE POINTED TO KNOW-HOW, PAT ENT, COPYRIGHT, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OF COMMERCIAL RIGHTS OF SIMILAR NATURE IN PART B OF APPENDIX I TO RULE 5 OF THE INCOME TAX RULES, 1962 AND SUBMITTED THAT HE IS RIGHTLY ELIGIBLE FOR 25% DEPRE CIATION. AFTER CONSIDERING THE ABOVE EXPLANATION OF THE ASSESSEE, THE ASSESSING OFFICER HELD THAT GOODWILL IS NOT A PERIS HABLE ASSET AND AS THE FIRM CONTINUES, EARNS A NAME AND REPUTAT ION AND AT ITA NO.1167/MDS/2012 3 ANY COST, DEPRECIATION IS NOT POSSIBLE. IN THE CIRC UMSTANCES, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEPRECIAT ION. 3. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MAT TER BEFORE THE CIT(APPEALS) AND SUBMITTED THAT THE SHAR E OF GOODWILL ACCRUED TO THE FIRM OVER A PERIOD OF MORE THAN 5 YEARS ATTRIBUTABLE TO THE RETIRING PARTNERS IS ACQUIRED B Y THE REMAINING PARTNERS FOR A CONSIDERATION OF ` 40 LAKHS AND THE SAME WAS PAID FOR IN TERMS OF MACHINERY AND IT IS THEREFORE ACQUIRED/PURCHASED GOODWILL AND THE ASSESSING OFFIC ERS CONTENTION THAT GOODWILL IS NOT A PERISHABLE ASSET AND THEREFORE THE ASSESSEE IS NOT ENTITLED TO DEPRECIATION IS INC ORRECT BECAUSE TANGIBLE ASSETS LIKE KNOW-HOW, PATENT, TRADEMARK DO NOT PERISH AND THEY ARE ENTITLED TO DEPRECIATION @ 25%. SO PE RISHABILITY OR OTHERWISE OF THE TANGIBLE ASSET CANNOT BE THE CR ITERIA FOR DECIDING THE ELIGIBILITY FOR DEPRECIATION. BEFORE T HE LEARNED CIT(APPEALS) THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF B. RAVEENDRAN PILLA I (332 ITR 531. THE LEARNED CIT(APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THERE IS NO DOUBT THAT GOODWILL CONSTITUTED A BUSINESS ASSET. GOODWI LL IS INTANGIBLE IN ITS NATURE. ALL THE INTANGIBLE ASSE TS NEED NOT BE ITA NO.1167/MDS/2012 4 ENTITLED FOR DEPRECIATION UNDER THE PROVISIONS OF T HE INCOME TAX ACT/RULES. THE INTANGIBLE ASSETS WHICH ARE SPECIFI ED IN THE I.T. RULES ARE KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARK S, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OF COMMERCIAL RIGH TS OF SINGULAR NATURE. ANY OTHER INTANGIBLE ASSET IS N OT ELIGIBLE FOR DEPRECIATION AS THEY ARE NOT INCLUDED IN THE RULES UNDER THE CATEGORY OF INTANGIBLE ASSETS. SINCE THE GOODWILL IS NOT INCLUDED IN THE ABOVE LIST OF INTANGIBLE ASSETS, GOODWILL IS NOT ELIGIBLE FOR DEPRECIATION UNDER THE INCOME TAX RULES. HE ALSO O BSERVED THAT THE ASSESSEE HAS NOT ACQUIRED/PURCHASED ANY GO ODWILL AND THE CASE LAW HAS NO APPLICATION TO THE FACTS OF THE CASE AND ACCORDINGLY DISMISSED THE APPEAL FILED BY THE ASSES SEE. 4. ON BEING AGGRIEVED, THE ASSESSEE HAS FILED THE P RESENT APPEAL BEFORE THE TRIBUNAL. BEFORE US THE LEARNED C OUNSEL FOR THE ASSESSEE RE-ITERATED THE SAME SUBMISSION THAT W AS PUT FORTH BEFORE THE LEARNED CIT(APPEALS) THAT THE SHAR E OF GOODWILL ACCRUED TO THE FIRM OVER A PERIOD OF MORE THAN 5 YE ARS ATTRIBUTABLE TO THE RETIRING PARTNERS IS ACQUIRED B Y THE REMAINING PARTNERS FOR A CONSIDERATION OF ` 40 LAKHS AND THE SAME WAS PAID FOR IN TERMS OF MACHINERY AND IT IS THEREFORE ACQUIRED/PURCHASED GOODWILL AND THE ASSESSING OFFIC ERS ITA NO.1167/MDS/2012 5 CONTENTION THAT GOODWILL IS NOT A PERISHABLE ASSET AND THEREFORE NOT ENTITLED TO DEPRECIATION IS INCORRECT. THEREFO RE THE ASSESSEE WAS ENTITLED TO DEPRECIATION AT 25% AND SUBMITTED T HAT THE ORDER OF THE LEARNED CIT(APPEALS) WITHOUT CONSIDERI NG THE ISSUE PROPERLY AND CONFIRMING THE ORDER PASSED BY THE ASS ESSING OFFICER, IS NOT CORRECT. HE RELIED ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF B. RAVEENDRAN PILLA (332 ITR 531) (KER). HE ALSO RELIED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. SMIFS SECURITIE S LTD. IN CIVIL APPEAL NO. 5961 OF 2012 (ARISING OUT OF S.L.P . NO. 35600 OF 2009, REPORTED IN (2012) 24 TAXMAN 222 (SC ). HE FURTHER RELIED ON THE DECISION OF THE TRIBUNAL, AHM EDABAD BENCH A IN THE CASE OF TALENT INDIA, AHMEDABAD IN ITA NO. 1013 & 1014/AHD/2009 DATED DECEMBER, 2011. 5. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 6. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECORD S AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE UNDISPUTED FACTS ARE THAT THE SHARE OF GOODWILL WAS ACCRUED TO THE ASSESSEE OVER A PERIOD OF MORE THAN 5 YEARS AND THE RETIRING PARTNERS RECEIVED ` 40 LAKHS FROM THE REMAINING ITA NO.1167/MDS/2012 6 PARTNERS IN THE FIRM AND THE SAME WAS PAID FOR IN T ERMS OF MACHINERY. THESE FACTS ARE NOT DISPUTED BY THE AUT HORITIES BELOW. ACCORDING TO THE ASSESSING OFFICER THE GOOD WILL IS NOT A PERISHABLE ASSET AND THEREFORE NOT ELIGIBLE FOR DEP RECIATION. ACCORDING TO THE LEARNED CIT(APPEALS) THE GOODWILL IS NOT ELIGIBLE FOR DEPRECIATION AS PER THE INCOME TAX RUL ES, 1962 AND IT IS NOT COMPARABLE WITH TRADE MARK. 7. IN THE CASE OF B. RAVEENDRAN PILLAI, SUPRA, THE H ONBLE KERALA HIGH COURT HAS HELD THAT DEPRECIATION IS ALL OWABLE ON THE VALUE OF GOODWILL ACCORDING TO SEC. 32(1)(II) OF TH E ACT. THE HONBLE KERALA HIGH COURT OBSERVED AS UNDER: WHEN THE GOODWILL PAID IS FOR ENSURING RETENTION AND CONTINUED BUSINESS IN THE HOSPITAL, IT IS CERTAINLY FOR ACQUIRING A BUSINESS AND COMMERCIAL RIGHTS AND IT IS CERTAINLY COMPARABLE WITH TRADE MARK, FRANCHISE, COPYRIGHT ETC., REFERRED TO IN THE FIRST PART OF SUB-SECTION (II) OF SECTION 32(1) AND SO MUCH SO, IN OUR VIEW, GOODWILL IS COVERED BY THE ABOVE PROVISION OF THE ACT ENTITLING THE ASSESSEE FOR DEPRECIATION. WE, THEREFORE, ALLOW THE APPEAL BY REVERSING THE ORDERS OF THE TRIBUNAL AND THAT OF THE LOWER AUTHORITIES AND BY DIRECTING THE ASSESSING OFFICER TO ITA NO.1167/MDS/2012 7 REVISE THE ASSESSMENT BY GRANTING DEPRECIATION ON THE WRITTEN DOWN VALUE OF GOODWILL TO THE APPELLANT-ASSESSEE. 8. IN THE CASE OF CIT V. SMIFS SECURITIES LTD. (SUP RA), THE HON'BLE SUPREME COURT HAS HELD AS UNDER : 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 OF 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 GENERIC WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSI ON WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. 9. IN THE CASE OF TALENT INDIA, AHMEDABAD (SUPRA), THE AHMEDABAD A BENCH OF THIS TRIBUNAL HAS HELD AS UND ER: M/S. TALENT GUJARAT WERE ACQUIRED BY THE PARTNERS OF THE FIRM AND THEREFORE THE OUTGOING ITA NO.1167/MDS/2012 8 PARTNERS WERE TO BE PAID SOME CONSIDERATION AS THEY WERE FOREGOING THEIR RIGHTS TO THE INCOMING PARTNERS AND DENIAL OF THE DEPRECIATION ON GOODWILL WAS NOT JUSTIFIED. 10. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AND BY CONSIDERING THE JUDICIAL PRECEDENTS, WE HOLD THAT THE ASSESSEES CLAIM FOR DEPRECIATION ON GOODWILL COVER S EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT AND EL IGIBLE FOR DEPRECIATION. ACCORDINGLY, WE REVERSE THE ORDER PA SSED BY THE LEARNED CIT(APPEALS) AND ALLOW THE APPEAL FILED BY THE ASSESSEE. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 12 TH OF DECEMBER, 2012, AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) (V.DURGA R AO) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 12 TH DECEMBER, 2012. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE