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ITA 1299/DEL/2010

• Counselvise Citation: 129920114 RSA 2010
• Duration Of Justice: 3 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 01-10-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 25-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NIDHI SRIVASTAVA
• Keywords: Capital asset; Depreciation; Audit objection; Cost of acquisition
• Section: 143(3); 115JB; 32; 148

Judgement Text

ITA NO. 1299/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B, NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI J.S. REDDY, ACCOUNTANT MEMBER I.T.A. NO. 1299/DEL/2010 A.Y. : 200 5 - 06 M/S CYBER INDIA ONLINE LIMITED, (NOW CYBER MEDIA INDIA ONLINE LTD.), D-74, PANCHSHEEL ENCLAVE, NEW DELHI 110 017 (PAN: AACCC9831C) VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(1), CR BLDG., I.P. ESTATE, NEW DELHI (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. RAJAN BHATIA, ADV. DEPARTMENT BY : MS. NIDHI SRIVASTAVA, SR. D.R. ORDER ORDER ORDER ORDER PER PER PER PER J.S. REDDY: AM J.S. REDDY: AM J.S. REDDY: AM J.S. REDDY: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-VI, NE W DELHI DATED 03.12.2009 PERTAINING TO ASSESSMENT YEAR 2005-06. 2. THE GROUNDS RAISED READ AS UNDER:- (1) THAT THE ORDERS OF THE LOWER TAX AUTHORITIES A RE CONTRARY TO THE LAW AND FACTS OF THE CASE (2) THAT THE LEARNED AO HAS CONTRARY TO THE LAW AND FACTS OF THE CASE, WRONGLY, ARBITRARILY, WITHOUT AN Y JUSTIFICATION AND BASIS, MERELY ON SURMISES AND ITA NO. 1299/DEL/2010 2 CONJECTURES INITIATED THE PROCEEDINGS UNDER SECTION 147/148 OF THE I.T. ACT, 1961 AND THE CIT(A ), NEW DELHI HAD ALSO CONTRARY TO THE LAW AND FACTS O F THE CASE, WRONGLY, ARBITRARILY, WITHOUT ANY JUSTIFICATION AND BASIS, DESPITE DETAILED SUBMISSIONS AND DOCUMENTS FURNISHED BY THE ASSESSEE, MERELY ON SURMISES AND CONJECTURES HAVE UPHELD THE SAID REOPENING OF THE ASSESSMENT AND INITIATION OF THE PROCEEDINGS U/S. 147/148 OF THE I .T. ACT, 1961., (3) THAT WITHOUT PREJUDICE TO THE GROUND OF APPEAL NO. 2, THE LOWER TAX AUTHORITIES HAS CONTRARY TO THE L AW AND FACTS OF THE CASE, WRONGLY, ARBITRARILY WITHOUT ANY BASIS AND JUSTIFICATION AND PROPER OPPORTUNITY, MERELY ON SURMISES AND CONJECTURES AND DESPITE SUBMISSIONS ON MERITS FAILED TO APPRECIATE THAT GOODWILL IS ON INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION IN ACCORDANCE WITH THE INCOME TAX ACT, 1961 AND CONSEQUENTLY DISALLOWED THE DEPRECATION THEREON AMOUNTING TO RS. 16,69,020/- AND INCREASED THE TOTAL INCOME. (4) THAT THE LEARNED AO HAS CONTRARY TO THE LAW AND FACTS OF THE CASE, WRONGLY, ARBITRARILY WITHOUT ANY BASIS AND JUSTIFICATION AND SATISFACTION, MERELY ON SURMISES AND CONJECTURE INITIATED THE PROCEEDINGS UNDER SECTION 271(1)(C) OF THE I.T. ACT, 1961. 3. AT THE THRESHOLD, WE FIND THAT THE LD. COUNSEL O F THE ASSESSEE HAS NOT PRESSED THE GROUND NO. 2, THEREFORE, THE SA ME IS DISMISSED BEING NOT PRESSED. ITA NO. 1299/DEL/2010 3 4. APROPOS GROUND NO.3 WHICH PERTAINS TO DISALLOWA NCE OF DEPRECIATION ON GOODWILL AMOUNTING TO RS. 16,69,02 0/-. 4.1 BRIEFLY STATED FACTS OF THE CASE ARE THAT THE A SSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF ONLINE AND OTHER ELECTRONIC MEDIA AND OTHER BUSINESSES. DURI NG THE ASSESSMENT YEAR 2005-06 THE ASSESSEE FILED THE RETU RN OF A TOTAL INCOME OF RS. NIL AND THE BOOK PROFIT OF RS. 29,85, 574/- AND TAX PAYABLE THEREON OF RS. 2,23,918/- U/S. 115JB OF THE I.T. ACT, 1961. ON 28.2.2006 THE RETURN WAS PROCESSED UNDER SECTION 143(1) AND REFUND OF RS. 3,64,011/- WAS ISSUED TO THE ASSESSEE . HOWEVER, ON 15.2.2008 A NOTICE WAS SENT TO THE ASSSESSEE UNDER SECTION 148 OF THE I.T. ACT (REOPENING), REQUIRING THEM TO FILE T HE RETURN OF INCOME. BUT ASSESSEE VIDE ORDER DATED 17.3.2008 CHALLENGED THE VALIDITY OF THE REOPENING AND ALSO CHALLENGED THE JURISDICTION. ON 7.11.2008 BY A SPEAKING ORDER THE AO REPELLED THE CHALLENGE TO T HE JURISDICTION AND SENT A NOTICE TO THE ASSESSEE TO FILE THE OBJEC TION ON MERIT. THEREAFTER ON 18.11.2008 THE AO COMPLETED THE ASSE SSMENT U/S. 143(3) OF THE ACT WHEREIN HE DISALLOWED THE ASSESS EES CLAIM FOR DEPRECIATION OF RS. 16,99,020/- ON THE COST OF ACQU ISITION OF GOODWILL OF THE BUSINESS WHICH IT PURCHASED. 5. AGGRIEVED BY THE ORDER OF THE LD. AO, THE ASSESS EE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) AND VIDE ORDER DATE D 3.12.2009, THE LD. CIT(A) DISMISSED THE SAME. 5.1 THE RELEVANT FINDING OF THE LD. CIT(A) IS EXTRA CTED HERE UNDER TO FACILITATE READY REFERENCE:- 3.2 DURING THE PROCEEDINGS BEFORE ME, IT WAS SUBM ITTED THAT GOODWILL HAS ARISEN ON ACCOUNT OF PURCHASE OF BUSINESS. THE ASSESSEE COMPANY HAD ACQUIRED, INTER-ALIA, ALL THE INTEREST, CORPOREAL AND ITA NO. 1299/DEL/2010 4 INCORPORATED RIGHTS AND PRIVILEGES WHICH THE SELLER S WERE ENTITLED TO OR POSSESSED AND ALSO ALL OTHER PATENTS, TRADEMARKS OR COPYRIGHTS, PRIVILEGES AND INTERESTS OF THE SELLERS IN ANY INVENTION OR INVENT IONS WHATSOEVER AND THE BENEFITS OCCURRING FROM ALL CONTRACTS AND AGREEMENTS ENTERED INTO BY THE SELLER. GOODWILL IS A INTANGIBLE ASSET AS HELD IN MANY CASES AND AS PER THE ACCOUNTING STANDARD 26 ON INTANGIBLE ASSETS ISSUED AS PER THE INDIAN COMPANIES ACT, 1956 AND ALSO BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, GOODWILL IS AN INTANGIBLE ASSET. 3.3 .......I FIND THAT SIMILAR ISSUE CAME UP BEFORE HONBLE MUMBAI ITAT IN THE CASE OF R.G. KESWANI VS. ACIT, 308 ITR (AT) 0271, WHEREIN IT HAS BEEN HELD BY THE HONBLE TRIBUNAL THAT THE ACQUISITION COST OF GOODWILL IS NOT ENTITLED FOR DEPRECIATION......... ......IN THE LIGHT OF THE ABOVE IT IS EVIDENT THAT GOODWILL IS NOT AN INTANGIBLE ASSET ENTITLED FOR DEPRECIATION. THE ADDITION MADE BY THE AO IS, THEREFORE, UPHELD. 6. THIS DECISION OF THE LD. CIT(A) IS IN CHALLENGE BEFORE THIS TRIBUNAL. 7. THE LD. COUNSEL OF THE ASSESSEE BROUGHT TO OUR ATTENTION THE JUDGEMENT DATED 22.8.2012 OF THE HONBLE SUPREME CO URT IN THE CASE OF C.I.T., KOLKATA VS. SMIFS SECURITIES LTD. L D. COUNSEL CONTENDED THAT IN THE SAID JUDGMENT THE HONBLE S UPREME COURT HAS HELD THAT GOODWILL IS AN ASSET UNDER EXPLANATI ON 3(B) TO SECTION 32 OF THE ACT AND THAT THE ASSESSEE IS ENTITLED TO DEPRECIATION ON THE SAME. ALTERNATIVELY HE ALSO RELIED UPON THE JUDGEM ENT DATED ITA NO. 1299/DEL/2010 5 30.3.2012 OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF AREVA T&D INDIA LTD. VS. C.I.T. & C.I.T. VS. PARABOLIC SP RING LTD. AND SUBMITTED THAT WHAT WAS PAID AS GOODWILL BY THE ASS ESSEE WAS IN FACT A PAYMENT FOR OTHER BUSINESS OR COMMERCIAL RIG HTS AND HENCE SUCH ASSET WHEN PURCHASED ENTITLES THE ASSESSEE FOR DEPRECATION. LD. COUNSEL OF THE ASSESSEE STATED THAT THE ASSESSE E HAD PURCHASED THE BUSINESS AS A SLUMP SALE IN 1999 AND THE LD. DR DOES NOT OBJECT TO THE SAID FACT AND HE ANALYSED THE SLUM SALE AGRE EMENT AND THE PAYMENTS IN SUPPORT OF THIS CONTENTION. ACCORDING T O THE LD. COUNSEL FOR THE ASSESSEE THE FACTS OF THE CASE BEFORE HON BLE DELHI HIGH COURT IS IDENTICAL TO THE FACTS OF THE PRESENT CASE . 7.1 ON THE OTHER HAND, LD. DR SUPPORTED THE VIEWS O F THE LD. AO AND LD. CIT(A). 7.2 BEFORE WE DEAL WITH THE ISSUE IN HAND, LET US G AINFULLY REFER SECTION 32(1) AS UNDER:- ( 1) IN RESPECT OF DEPRECIATION OF (I) BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; (II) KNOW HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1 ST DAY OF APRIL, 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED. EXPLANATION 3(B) TO SECTION 32(1) READS AS UNDER:- ITA NO. 1299/DEL/2010 6 (B) INTANGIBLE ASSETS, BEING KNOW HOW, PATENTS, COPY RIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. 7.3 WE CAN ALSO GAINFULLY REFER THE MEANING OF GOO DWILL AS DEFINED IN LEXIS NEXIS TAX LAW DICTIONARY 2013 AS U NDER:- SHOULD BE RECORDED IN THE BOOKS ONLY WHEN SOME CONSIDERATION IN MONEY OR MONEYS WORTH HAS BEEN PAID FOR IT. WHENEVER A BUSINESS IS ACQUIRED FOR A PRICE (PAYABLE 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 SHOULD BE TERMED AS GOODWILL. IS TO BE CONSIDERED AS INTANGIBLE ASSETS. MORIROKU UT INDIA (P) LTD. VS. STATE OF UP. 2008 (224) ELT 365 (SC). 7.4 SECTION 32 OF THE I.T. ACT, 1961 PROVIDES FOR A DEDUCTION OF ALLOWANCE BEING MADE IN RESPECT OF DEPRECIATION OF BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSET S. VIDE FINANCE (NO. 2) ACT, 1998, THE PARLIAMENT THOUGH IT FIT TO EXTEND THE BENEFIT OF DEPRECIATION ALSO TO INTANGIBLE ASSET ENUMERATED IN SECTION 32(1)(II) IN RESPECT OF KNOW-HOW, PATENTS, COPYRIGH TS, TRADE MARKS, LICENSES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1 ST DAY OF APRIL, 1998. ASSESSEE BEFORE US, CLAIMS THAT GOODWILL IS AN INTANGIBLE ASSET AND CONSEQUENTLY, QUALIFIES FOR DE PRECIATION U/S. 32(1). ON THE OTHER HAND, IT IS THE CASE OF THE DE PARTMENT THAT GOODWILL IS NOT AN INTANGIBLE ASSET SINCE IT DOES N OT FIGURE IN THE ITA NO. 1299/DEL/2010 7 INTANGIBLE ASSETS PRESCRIBED U/S. 32(1)(II), THEREF ORE, THE CLAIM OF THE ASSESSEE FOR DEPRECIATION WAS NOT ADMISSIBLE U/S. 3 2(1)(II). 7.5 WE HAVE HEARD BOTH THE COUNSEL AND PERUSED TH E RECORDS. THE RELEVANT FACTS IN THIS CASE ARE THAT ONE M/S CYBER MEDIA (INDIA) LTD. (TRANSFEROR) WHICH WAS CARRYING ON THE BUSINES S AMONG OTHER BUSINESS OF ON-LINE AND OTHER ELECTRONIC MEDIA THRO UGH INTERNET AND OTHER NETWORKS INCLUDING DATABASES, ON-LINE MAGAZIN ES, NEWSLETTERS, ETC. UNDER THE NAME AND STYLE OF CYBER INDIA ONLINE HAD SIGNED AN AGREEMENT DATED 23.8.1999 WHEREBY THE ASSESSEE COMP ANY (TRANSFEREE) ACQUIRED THE SAID RUNNING CONCERNS ALO NG WITH ITS PROPERTIES, RIGHTS, PLANTS AND MACHINERY, FURNITURE AND FIXTURES, EQUIPMENTS AND ALL OTHER ASSETS WHICH WAS SPECIFIED IN SCHEDULE I & II TO THE SAID AGREEMENT. 7.6 IN THIS REGARD, IT WOULD ALSO BE NECESSARY TO C ONSIDER THE TERMS OF THE SLUMP SALE AGREEMENT ENTERED INTO BETWEEN TH E TRANSFEROR AND THE TRANSFEREE (ASSESSEE) AS UNDER:- 1. THE VENDOR DOES HEREBY SELL AND THE VENDEE DO ES HEREBY PURCHASE OF AND IN RESPECT OF THE SAID BUSINESS WITH EFFECT FROM SEPTEMBER 1, 1999: (A) ALL THE INTEREST, CORPOREAL AND INCORPORATED RIGHTS AND PRIVILEGES WHICH THE VENDORS ARE ENTITLED TO O R POSSESS AND ALSO ALL OTHER PATENTS, TRADEMARKS OR COPYRIGHTS, PRIVILEGES AND INTEREST OF THE VENDOR COMPANY IN ANY INVENTION OR INVENTIONS WHATSOEVER, WHICH SHALL HAVE BEEN OR DEEMED TO HAVE BEEN OWNED OR POSSESSED BY THE VENDOR COMPANY. (B) ........ ITA NO. 1299/DEL/2010 8 (C) THE BENEFITS OCCURRING TO THE VENDOR FROM ALL THE CONTRACTS AND AGREEMENTS (INCLUDING ALL LEASE AND RENTAL AGREEMENTS) SUBSISTING OR OTHERWISE AND THOSE FOR WHICH THE OPTION IS VESTING WITH THEM. (2) THE CONSIDERATION FOR THE SALE OF THE SAID BUSI NESS IS SETTLED AS RS. 1,00,00,000/- AND THE COMPANY SHALL CREDIT THE VENDOR FOR THE SAME AMOUNT AND SATISFY THIS CONSIDERATION BY ISSUE OF RS. 1,00,00,000 EQUI TY SHARES OF RS. 1/- EACH AT PAR FOR A TOTAL VALUE OF RS. 1,00,00,000/- IN THE CAPITAL OF THE VENDEE COMPANY CREDITED AS FULLY PAID IN CASH, RANKING PARI PASSU WITH THE EXISTING SHARES OF THE COMPANY. ................ 7.7 FROM THE ABOVE, IT IS SEEN THAT ASSESSEE VIDE SLUMP SALE AGREEMENT DATED 23.8.1999, ACQUIRED A GOING CONCERN , BUSINESS OF ON-LINE AND OTHER ELECTRONIC MEDIA THROUGH INTERNET AND OTHER NET WORKS, INCLUDING DATABASES, ON-LINE MAGAZINES, NEW SLETTERS W.E.F. 1.9.1999. AS AND THEREOF, THE RUNNING BUSINESS OF ONLINE AND OTHER ELECTRONIC MEDIA THROUGH INTERNET WAS ACQUIRED BY T HE TRANSFEREE (ASSESSEE) LOCK, STOCK AND BARREL MINUS THE OTHER B USINESS NOT INCLUDED IN THE AGREEMENT WHICH WAS RETAINED BY THE TRANSFEROR, FOR A LUMP SUM CONSIDERATION OF RS. 1 CRORE. IT IS FURT HER SEEN THAT THE BOOK VALUE OF THE NET TANGIBLE ASSETS (ASSETS MINUS LIABILITIES) ACQUIRED WAS RECORDED IN THE BALANCE SHEET OF THE T RANSFEREE. THE BALANCE PART OF RS. 1 CRORE OVER AND ABOVE THE BOO K VALUE OF NET TANGIBLE ASSETS, WAS ALLOCATED BY THE TRANSFEREE TO WARDS ACQUISITION OF BUNDLE OF BUSINESS AND COMMERCIAL RIGHTS, CLEAR LY DEFINED IN THE SLUMP SALE AGREEMENT, COMPENDIUM TERMED AS GOODWIL L IN THE BALANCE SHEET WHICH COMPRISED THE FOLLOWING : ITA NO. 1299/DEL/2010 9 (1) PATENTS ; (2) TRADE MARKS OR COPYRIGHTS; (3)PRI VILEGES & INTEREST OF THE VENDOR COMPANY IN ANY INVENTIONS; (4) EMPLO YEES 7.8 IT IS OBSERVED THAT LD. AO ON 28.2.2006 HAD PRO CESSED THE RETURN AND ACCEPTED THE DEPRECIATION CLAIMED BY THE ASSESSEE ON GOOD WILL AND REFUNDED RS. 3,64,011/-. THE AFTERT HOUGHT TO REOPEN AND DISALLOW THE DEPRECIATION ON THE INTANGIBLE AS SET OF GOODWILL WAS ONLY AFTER THE AUDIT OBJECTION AND APPROVAL TO GO-AHEAD WITH THE REOPENING WAS GIVEN BY THE COMMISSIONER. THE REASONS TO DISALLOW DEPRECIATION ALLOWANCE FOR GOODWILL AS STA TED BY THE LD. AO IS AS FOLLOWS:- THE GOODWILL IS NEITHER A CAPITAL ASSET NOR COVERE D INTANGIBLE ASSETS AS MENTIONED IN SECTION 32 FOR TH E PURPOSE OF DEPRECIATION. THEREFORE, DEPRECATION CLAIMED ON GOODWILL IS HEREBY DISALLOWED AND ADDED BACK TO THE RETURN INCOME OF THE ASSESSEE 7.9 THE LD. CIT(A) UPHELD THE AOS ORDER BY CITING ITATS ORDER IN THE CASE OF R.G. KESHWANI VS. ACIT 308 ITR (AT) 027 1, WHEREIN IT HAS BEEN HELD BY THE TRIBUNAL THAT THE ACQUISITION COST OF GOODWILL IS NOT ENTITLED FOR DEPRECIATION. 7.10 WE FIND THAT DECISION AND REASONING OF THE HON BLE DELHI HIGH COURT IN AN IDENTICAL MATTER WHICH HAS BEEN BROUGHT TO OUR NOTICE BY THE LD. COUNSEL OF THE ASSESSEE NEEDS TO BE LOOKED INTO. A PERUSAL OF THE ORDER REVEALS THAT THE FACTS DECIDED IN I.T. A. NO. 315/2010 IS SIMILAR TO THE CASE IN HAND AND THE QUESTION OF LA W ALSO IS PERTINENT TO THE ISSUE BEFORE US. FACTS OF THE CASE WAS TH AT THE ASSESSEE COMPANY ACQUIRED A GOING CONCERN, THE TRANSMISSION AND DISTRIBUTION BUSINESS OF TRANSFEROR COMPANY. IT WAS A SLUMP SALE FOR RS. 44 CRORES. THE BOOK VALUE OF THE NET TANGIBLE ASSETS ACQUIRED WAS RECORDED IN THE BALANCE SHEET ON THE DATE OF TR ANSFER WAS ITA NO. 1299/DEL/2010 10 RECORDED AS RS. 28.11 CRORES. THE BALANCE PART OF RS. 16,58,76,000/- OVER AND ABOVE THE BOOK VALUE OF NET TANGIBLE ASSETS, WAS ALLOCATED BY THE TRANSFEREE (AS THE VAL UE SHOWN AS GOOD WILL IN THE BALANCE SHEET). THE CLAIM OF THE ASSESS EE FOR DEPRECIATION WAS TURNED DOWN BY THE LD. AO; LD. CIT(A) & ITAT. IT WAS HELD THAT AFTER GOING THROUGH THE AGREEMENT THAT VALUE TOWAR DS ACQUISITION OF BUNDLE OF BUSINESS AND COMMERCIAL RIGHTS, WHICH WAS DEFINED IN THE SLUMP SALE AGREEMENT, COMPENDIOUSLY TERMED AS GOOD WILL IN THE BOOKS OF ACCOUNTS WHICH COMPRISED INTER-ALIA THE FO LLOWING:- I) BUSINESS CLAIM, (II) BUSINESS INFORMATION (I II) BUSINESS RECORDS, (IV) CONTRACTS, (V) SKILLED EMPLOYEES, ( VI) KNOW HOW. 7.11 THE HONBLE HIGH COURT HAS FURTHER HELD AS UND ER:- 'APPLYING THE PRINCIPLE OF EJUSDEM GENERIS, WHICH P ROVIDES THAT WHERE THERE ARE GENERAL WORDS FOLLOWING PARTIC ULAR AND SPECIFIC WORDS, THE MEANING OF THE LATTER WORDS SHA LL BE CONFINED TO THINGS OF THE SAME KIND, AS SPECIFIED F OR INTERPRETING THE EXPRESSION 'BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' SPECIFIED IN SECTION 32(1)(II), IT IS SEEN THAT SUCH RIGHTS NEED NOT ANSWER THE DESCRIPTION OF 'KNOW-HOW , 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 REFERR ED IN SECTION 32(1)(II) PRECEDING THE TERM 'BUSINESS OR COMMERCIA L RIGHTS OF SIMILAR NATURE - IT IS SEEN THAT THE AFORESAID INTA NGIBLE ASSETS ARE NOT OF THE SAME KIND AND ARE CLEARLY DISTINCT F ROM ONE ANOTHER. THE FACT THAT AFTER THE SPECIFIED INTANGIB LE ASSETS THE WORDS 'BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NAT URE' HAVE BEEN ADDITIONALLY USED, CLEARLY DEMONSTRATES THAT T HE LEGISLATURE DID NOT INTEND TO PROVIDE FOR DEPRECIAT ION ONLY IN ITA NO. 1299/DEL/2010 11 RESPECT OF SPECIFIED INTANGIBLE ASSETS BUT ALSO TO OTHER CATEGORIES OF INTANGIBLE ASSETS, WHICH WERE NEITHER FEASIBLE NOR POSSIBLE TO EXHAUSTIVELY ENUMERATE. IN THE CIRCUMST ANCES, THE NATURE OF 'BUSINESS OR COMMERCIAL RIGHTS' CANNOT BE RESTRICTED TO ONLY SIX CATEGORIES OF ASSETS, VIZ ., KNOW-HOW, PATENTS, TRADEMARKS, COPYRIGHTS, LICENSES OR FRANCHISES. THE NATURE OF 'BUSINESS OR COMMERCIAL RIGHTS' CAN BE OF THE SAME GENUS IN WHICH ALL THE AFORESAID SIX ASSETS FALL. ALL THE AB OVE FALL IN THE GENUS OF INTANGIBLE ASSETS THAT FORM PART OF THE TO OL OF TRADE OF AN ASSESSEE FACILITATING SMOOTH CARRYING ON OF THE BUSINESS. IN THE CIRCUMSTANCES, IT IS OBSERVED THAT IN CASE OF T HE ASSESSEE, INTANGIBLE ASSETS, VIZ., BUSINESS CLAIMS; BUSINESS INFORMATION; BUSINESS RECORDS; CONTRACTS; EMPLOYEES AND KNOW-HOW , WERE ALL ASSETS, WHICH WERE INVALUABLE AND RESULT IN CAR RYING ON THE TRANSMISSION AND DISTRIBUTION BUSINESS BY THE ASSES SEE, WHICH WAS HITHERTO BEING CARRIED OUT BY THE TRANSFEROR, W ITHOUT ANY INTERRUPTION. THE AFORESAID INTANGIBLE ASSETS WERE, THEREFORE, COMPARABLE TO A LICENSE TO CARRY OUT THE EXISTING T RANSMISSION AND DISTRIBUTION BUSINESS OF THE TRANSFEROR; IN THE ABSENCE OF THE AFORESAID INTANGIBLE ASSETS, THE ASSESSEE WOULD HAVE HAD TO COMMENCE BUSINESS FROM SCRATCH AND GO THROUGH TH E GESTATION PERIOD WHEREAS BY ACQUIRING THE AFORESAID BUSINESS RIGHTS ALONG WITH THE TANGIBLE ASSETS, THE ASSESSEE GOT AN UP AND RUNNING BUSINESS. [PARA 13} IN VIEW OF THE ABOVE DISCUSSION, IT WAS HELD THAT T HE SPECIFIED INTANGIBLE ASSETS ACQUIRED UNDER SLUMP SA LE AGREEMENT WERE IN THE NATURE OF 'BUSINESS OR COMMER CIAL RIGHTS OF SIMILAR NATURE' SPECIFIED IN SECTION 32(1 )(II) AND WERE ACCORDINGLY ELIGIBLE FOR DEPRECIATION UNDER THAT SE CTION. [PARA 14}. ITA NO. 1299/DEL/2010 12 7.12 IN THE PRESENT CASE ALSO IT IS SEEN THAT ASSE SSEE VIDE SLUMP SALE AGREEMENT DATED 23.8.1999, ACQUIRED A GOING CO NCERN, BUSINESS OF ON-LINE AND OTHER ELECTRONIC MEDIA TH ROUGH INTERNET AND OTHER NET WORKS INCLUDING DATABASES, INCLUDING DAT ABASES, ON-LINE MAGAZINES, NEWSLETTERS W.E.F. 1.9.1999 FOR RS. 1 CR ORE. THE BALANCE PART OF RS. 61,76,080- OVER AND ABOVE THE BOOK VALUE OF NET TANGIBLE ASSETS, WAS ALLOCATED BY THE TRANSFEREE (A S THE VALUE SHOWN AS GOOD WILL IN THE BALANCE SHEET). THE CLAIM OF TH E ASSESSEE FOR DEPRECIATION WAS TURNED DOWN BY THE LD. AO, AFTER REOPENING AND THE APPEAL BEFORE THE LD. CIT(A) ALSO FAILED ON THE GROUND THAT GOODWILL IS NOT AN INTANGIBLE ASSETS SINCE IT DOES NOT FIGURE IN THE INTANGIBLE ASSETS PRESCRIBED U/S. 32(1)(II) OF THE I.T. ACT, 1961 AND THEREFORE, THE CLAIM FOR DEPRECIATION WAS TURNED DO WN. THE CONSISTENT STAND OF THE ASSESSEE IS THAT THE SALE W AS A SLUMP SALE AND THE TOTAL CONSIDERATION WAS FOR RS. 1 CRORE. TH E BOOK VALUE OF THE NET TANGIBLE ASSETS WHEN SUBTRACTED FROM RS. 1 CRORE WILL BECOME RS. 61,76,080/- WHICH WAS SHOWN AS VALUE OF THE GOODWILL (INTANGIBLE ASSETS) AND THIS VALUE OF GOODWILL IS S HOWN IN THE BALANCE SHEET FROM THE YEAR 2000 ONWARDS. FROM A PERUSAL OF THE AGREEMENT DATED 28.3.1999 IT CAN BE SAID THAT THE TOTAL CONS IDERATION FOR SALE WAS RS. 1 CRORE. THE BOOK VALUE OF THE NET TANGIBLE ASSETS WHEN MINUS FROM RS. 1 CRORE COMES TO RS. 61,76,080/- WHI CH WAS SHOWN AS THE GOODWILL. THIS VALUE OF GOODWILL HAS NO T BEEN DISPUTED BY THE REVENUE. IT CAN BE NOTICED THAT RS. 61,76.080/- WHICH IS REFLECTED IN THE BALANCE SHEET AS GOODWILL WAS FOR ACQUISITION OF BUNDLE OF BUSINESS OR COMMERCIAL RIGHTS WHICH WA S DEFINED IN THE SLUMP SALE AGREEMENT, COMPENDIOUSLY TERMED AS GOOD WILL IN THE BOOKS OF ACCOUNTS WHICH COMPRISED INTER- ALIA THE F OLLOWING:- (1) PATENTS ; (2) TRADE MARKS OR COPYRIGHTS; (3)PRI VILEGES & INTEREST OF THE VENDOR COMPANY IN ANY INVENTIONS; (4) EMPLO YEES ITA NO. 1299/DEL/2010 13 7.13 IN THE CIRCUMSTANCES, IT IS OBSERVED THAT IN T HE CASE OF THE ASSESSEE, INTANGIBLE ASSETS VIZ. PATENTS, TRADEMARK S, COPY RIGHTS, INVENTIONS, EMPLOYEES ARE ALL ASSETS ARE INVALUABLE AND RESULT IN THE CARRYING ON THE BUSINESS OF ONLINE AND OTHER ELECTR ONICS MEDIA THROUGH INTERNET AND OTHER NETWORKS INCLUDING DATAB ASES, ONLINE MAGAZINES, NEWS LETTERS, ETC. BY THE ASSESSEE, WHI CH WAS HITHERTO CARRIED OUT BY THE TRANSFEROR WITHOUT ANY INTERRUPT ION. IT MAY BE NOTED THAT IN THE ABSENCE OF THE AFORESAID INTANGIB LE ASSETS, THE ASSESSEE WOULD HAVE HAD TO COMMENCE BUSINESS FROM S CRATCH AND GO THROUGH THE GESTATION PERIOD WHEREAS BY ACQUIRIN G THE AFORESAID BUSINESS RIGHTS ALONG WITH THE TANGIBLE ASSETS, THE ASSESSEE GOT AN UP AND RUNNING BUSINESS. 7.14 AS A MATTER OF FACT THERE IS NO DISPUTE ABOU T THE CONSIDERATION SHOWN AS GOODWILL IN THE SCHEDULE NO. 3 I.E. FIXED ASSETS IN THE BALANCE SHEET (PAGE 182 OF PAPER BOO K) OF THE ASSESSEE FOR THE YEAR ENDED ON 31.3.2000 ONWARDS. WE FIND THAT THE VALUATION OF THE GOODWILL HAS NOT BEEN OBJECTED BY THE LD. AO TILL THE IMPUGNED ASSESSMENT YEAR. WE ALSO FIND THAT BASED ON AN AUDIT OBJECTION DATED 3.9.2007 THE LD. AO HAS ISSUE D THE REOPENING NOTICE U/S. 148, AFTER TAKING THE APPROVAL OF THE LD. CIT. FROM THE AFORESAID FACTS, IT CAN BE SEEN THAT THE ASSESSEE H AD ACQUIRED THE BUSINESS, LOCK, STOCK & BARREL. THE ISSUE OF DEP RECIATION ON GOODWILL WAS RAISED FIRST BY THE AUDIT TEAM AND B ASED ON THAT ONLY THE LD. AO HAS REOPENED THE MATTER. THE ISSUE WIT H REGARD TO WHETHER THE AMOUNT SPENT ON ACQUISITION OF GOODWILL QUALIFY FOR DEPRECIATION U/S. 32 OF THE ACT IS NO LONGER RES IN TEGRA. WE FIND THAT ITA NO. 1299/DEL/2010 14 IN THE JUDGMENT REFERRED BY THE LD. COUNSEL OF THE ASSESSEE IN THE CASE AREVA T&D INDIA LTD. VS. C.I.T. & C.I.T. VS. P ARABOLIC SPRING LTD., (SUPRA) IN A SIMILAR MATTER THAT TOO IN RESPECT T O SLUMP SALE THE HONBLE HIGH COURT HAS HELD THAT DEPRECATION ON GOODWILL CAN BE ALLOWED U/S. 32. WE ALSO FIND THAT HONBLE SUPREM E COURT IN THE CASE OF C.I.T., KOLKATA VS. SMIFS SECURITIES LTD ( SUPRA) HELD THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECT ION 32(1) QUALIFIES FOR DEPRECIATION U/S. 32. IN THE SAID CASE THE QU ESTION BEFORE THE HONBLE SUPREME COURT IN THE CASE OF SMIFS SECRUITI ES (SUPRA) WAS THE FOLLOWING : (B). WHETHER GOODWILL IS AN ASSET WITHIN THE MEANING OF SECTION 32 OF THE I.T. ACT, 1961, WHETHE R DEPRECIATION ON GOOD WILL IS ALLOWABLE UNDER THE SAID SECTION? 7.15 WHILE ANSWERING THE ABOVE QUESTION, THE HONBL E SUPREME COURT HELD THAT IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECT ION 32(1) OF THE I.T. ACT. IN THE SAID CASE THE FACTS OF THE CASE W AS THAT THE ASSESSEE COMPANY AMALGAMATED AFTER IT WAS SANCTIONED BY T HE HIGH COURT OF MUMBAI AND KOLKATA. THE ASSESSEE CLAIMED DEPRECI ATION ON GOODWILL WHICH WAS DISALLOWED BY THE AO. ACCORDI NG TO THE LD. AO GOODWILL WAS NOT AN ASSET FALLING UNDER THE EXPLANA TION 3 TO SECTION ITA NO. 1299/DEL/2010 15 32(1) OF THE I.T. ACT. IN THE SAID CASE THE HONBL E SUPREME COURT STATED THAT EXPLANATION 3 STATES THAT THE EXPRESSIO N ASSET SHALL MEAN AN INTANGIBLE ASSET, BEING KNOW HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES, FRANCHISES OR ANY OTHER BU SINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING OF THE WORDS OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD UNDER T HE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILA R NATURE. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY W HILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATIO N 3(B). 7.16 IN THE LIGHT OF THE HONBLE SUPREME COURT AND THE HONBLE HIGH COURT OF DELHIS ORDER AND IN THE AFORESAID FA CTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT SINCE THE ASSESSEE PURCHASED THE BUSINESS LOCK STOCK & BARREL AND H AS SHOWN THE VALUE OF THE GOODWILL RIGHT FROM THE ACQUISITION ON WARDS I.E. FROM THE YEAR 2000 ONWARDS IN THE BALANCE SHEET AND BOOK OF ACCOUNT AND SINCE THERE WAS NO OBJECTION FROM THE REVENUE IN RE SPECT TO THE VALUE OF THE GOODWILL UNTIL THE IMPUGNED ASSESSMENT YEAR 2005-06, THEREFORE, WE ARE OF THE OPINION THAT GOODWILL DENO TES AN INTANGIBLE ASSET AND IS REQUIRED FOR ITS BUSINESS AND COMMERC IAL RIGHTS, WE HAVE NO HESITATION TO HOLD THAT THE LD. CIT(A) HAVE ERRED IN UPHOLDING THE AOS FINDING WHICH DISALLOWED THE DEP RECIATION ON GOODWILL AND THEREFORE THE IMPUGNED ORDER OF THE LD . CIT(A) IS SET ITA NO. 1299/DEL/2010 16 ASIDE AND THE ADDITION OF RS. 1,669,020/- MADE ON T HIS ACCOUNT IS DELETED. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27/11/2013. SD/ SD/ SD/ SD/- -- - SD/ SD/ SD/ SD/- -- - [ [[ [R.P. TOLANI R.P. TOLANI R.P. TOLANI R.P. TOLANI] ]] ] [ [[ [J.S. REDDY J.S. REDDY J.S. REDDY J.S. REDDY] ]] ] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 27/11/2013 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES