The DCIT, Circle-1, Ahmedabad V. Bhagwati Banquets & Hotels Ltd., Ahmedabad

ITA 1312/AHD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57223 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 02-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: S N DIVATIAAR
• Keywords: Depreciation; Valuation report
• Section: 32

Judgement Text

, , . .. . . .. . , , , , !' ! !' ! !' ! !' !. .. .#$ '#$ #$ '#$ #$ '#$ #$ '#$ , %& ' %& ' %& ' %& ' % % % % IN THE INCOME TAX APPELLATE TRIBUNAL : C BENCH : AHMEDABAD BEFORE SHRI G.C.GUPTA, HONBLE V.P. & SHRI A.MOHAN ALANKAMONY, HONBLE A.M.) ITA NO. 1312/AHD./2011 : ASSESSMENT YEAR 2007-2008 DCIT, CIRCLE-1, AHMEDABAD ( () /APPELLANT) -VS- M/S. BHAGWATI BANQUETS AND HOTELS LTD. , ABAD ( *+() /RESPONDENT ) (PAN : AABCD 6825A) () , - % / APPELLANT BY : SHRI S.K.GUPTA, CIT,D.R. *+() , - % / RESPONDENT BY : SHRI S.N.DIVATIA, A.R. $. , /0& / DATE OF HEARING : 02/12/2011 1#2 , /0& / DATE OF PRONOUNCEMENT : 28/02/2012 %3 %3 %3 %3 / ORDER PER SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER : THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE IMPUGNED ORDER OF THE LD. CIT (A)-VI, AHMEDABAD IN APPEAL NO. CIT (A)-VI/ ADDL. CIT, R- I/342/09-10 DATED 18.3.2011 FOR THE ASSESSMENT YEAR 2007-08 IN THE CASE OF M/S. BHAGWATI BANQUETS & HOTELS LIMITED, AHMEDAB AD. 2. THE REVENUE HAS RAISED A SOLITARY GROUND TO THE EFFECT THAT THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.1,46,50,83 4/- MADE ON ACCOUNT OF DISALLOWANCE OF DEPRECIATION ON GOODWILL. 3. THE FACTS OF THE ISSUE, IN BRIEF, ARE THAT THE A SSESSEE COMPANY (THE ASSESSEE IN SHORT) ENGAGED IN THE ACTIVITIES OF HO TEL, BANQUET AND RESTAURANT BUSINESS, FURNISHED ITS RETURN OF INCOME , DECLARING A TOTAL INCOME OF RS.2.99 CRORES AND ALSO CLAIMING DEPRECI ATION ON GOODWILL OF ITA NO.1312-AHD-2011 2 RS.1.46 CRORES. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, THE ASSESSEE WAS REQUIRED TO JUSTIFY ITS CLAIM FOR DEPR ECIATION ON GOODWILL. AFTER DUE CONSIDERATION OF THE ASSESSEES CONTENTIO NS AS RECORDED IN HIS IMPUGNED ORDER UNDER CONSIDERATION, THE LD.AO HAD, EXTENSIVELY QUOTING THE PROVISIONS OF SECTION 32(1), ANALYZING THE INTE RPRETATION OF INTANGIBLE ASSETS, TAKING REFUGE ON VARIOUS CASE LAWS AND ALSO DETAILING THE ASSESSEES SUBMISSIONS, OBSERVED: 8.13. FROM THE ABOVE, IT MAY BE SEEN THAT WHAT THE ASSESSEE HAS ACTUALLY PAID FOR, IS A CONSIDERATION FOR ACQUISITI ON OF ASSETS AT A HIGHER PRICE AND THE DIFFERENCE IN BOOK VALUE AND C ONSIDERATION FIXED IN ALL THREE CASES HAS BEEN STATED AS GOODWILL. TH IS, AS DISCUSSED IN NOT IN THE NATURE OF INTANGIBLE ASSETS CONTEMPLATED UNDER SECTION 32 FOR ALLOWING DEPRECIATION. 8.14. ACCORDINGLY, THE CLAIM OF THE ASSESSEE FOR DE PRECIATION ON GOODWILL OF RS.1,46,50,834/- IS DISALLOWED.. 4. AGITATED, THE ASSESSEE TOOK UP THE ISSUE, AMONG OTHERS, WITH THE LD.CIT (A) FOR RELIEF. AFTER DULY ANALYZING THE AS SESSEES CONTENTIONS COUPLED WITH VARIOUS JUDICIAL PRONOUNCEMENTS ON A S IMILAR ISSUE, THE LD.CIT (A) HAD RECORDED THE REASONS IN AN ELABORATE AND ILLUSTRATIVE MANNER IN HIS FINDINGS WHICH ARE, FOR APPRECIATION OF FACTS, EXTRACTED AS UNDER: 4.3..APPELLANT PURCHASED COMPLETE BUSINESS FROM T HREE CONCERNS AS PER FOLLOWING DETAILS: (I) M/S. BHAGWATI CATERERS PRIVATE LTD BUSINESS O F OUTDOOR CATERING ALONG WITH OTHER ASSETS; (II) M/S. TGB RESORTS KARNAVATI BUSINESS OF HOTEL AND RESTAURANTS IN KARNAVATI CLUB, AHMEDABAD ITA NO.1312-AHD-2011 3 (III) M/S. BHAGWATI INTERNATIONAL BUSINESS OF RES TAURANT RUN BY THIS FIRM THESE CONCERNS WERE ALSO OF BHAGWATI GROUP WHICH WA S EXISTED SINCE LAST MANY YEARS. A DETAILED REPORT FOR VALUA TION OF THESE CONCERNS TO BE TAKEN OVER BY THE APPELLANT WAS PREP ARED BY FOURTH VISION AND THE SAME WAS SUBMITTED TO THE ASS ESSING OFFICER AND ALSO IN THE APPEAL HEARING. AS PER THI S REPORT, THESE CONCERNS HAD SIGNIFICANT VALUE IN TERMS OF INTANGIB LE ASSET APART FROM TANGIBLE ASSETS SINCE THESE WERE HAVING SEVERA L BUSINESS RIGHTS, BRAND-NAME, CUSTOMER BASE AND ENTITLEMENTS. APPELLANT PAID MORE THAN THE BOOKS VALUE OF TANGIBLE ASSETS W ERE TAKEN OVER AT BOOK VALUE AND THE DIFFERENCE WAS ACCOUNTED FOR AS GOODWILL. APPELLANT CLAIMED DEPRECIATION ON INTANG IBLE ASSET ACQUIRED FROM THESE 3 CONCERNS UNDER SECTION 32 OF IT ACT. ASSESSING OFFICER REJECTED THE APPELLANTS CLAIM ON THE GROUND THAT APPELLANT HAS NOT ACQUIRED THE NATURE OF ASSETS MEN TIONED IN CLAUSE (II) TO SECTION 32(1) OF IT ACT. THE ISSUE HERE IS WHETHER APPELLANT ACQUIRED INTANGIBLE ASSETS ELIGIBLE FOR D EPRECIATION OR NOT? THE FACTS EMERGED ON THE BASIS OF APPELLANTS SUBMISSION, DETAILS AS PER PAPER BOOK AND ASSESSING OFFICERS O RDER ARE AS UNDER: 1. APPELLANT PAID THESE CONCERNS MORE THAN THE BOOK VALUE OF ASSETS FOR ACQUIRING THEIR BUSINESSES ALONG WITH THEIR ASSETS, ENTITLEMENTS, LICENSES, BUSINESS ASSIGNMENT S, PERMISSIONS ETC., 2. THE ADDITIONAL AMOUNT PAID IS ACCOUNTED FOR AS G OODWILL WHICH IS THE CONSIDERATION PAID FOR ACQUIRING INTAN GIBLE RIGHTS WHICH WERE HELD BY THESE CONCERNS PRIOR TO ACQUISITION. 3. ALL THE THREE CONCERNS WERE HAVING SUBSTANTIAL T URNOVER AND PROFIT BEFORE ACQUISITION. 4. AFTER ACQUISITION, THESE CONCERNS COMPLETELY STO PPED THESE ACTIVITIES AND APPELLANT BECAME ENTITLED TO C ARRY ON THE SAME IN THE SAME WAY THESE WERE CARRIED ON BY THEM. 5. AS PER CLAUSE- 5 OF THE AGREEMENTS, APPELLANT BE CAME ENTITLED TO ALL RIGHTS, ENTITLEMENTS, BUSINESS ASSI GNMENTS, ITA NO.1312-AHD-2011 4 PERMISSIONS, LICENSES ETC., CONCERNING THE BUSINESS OF THESE FIRMS AND AFTER ACQUISITION, ALL THESE WERE COMPLETELY VESTED IN THE APPELLANT. 6. AFTER ACQUISITION, APPELLANT BECAME ENTITLED TO CATERING RIGHTS OF KARNAVATI CLUB LTD EARLIER ENJOYED BY TGB RESORT KARNAVATI. ALL THE RIGHTS OF CATERING IN TH E CLUB WHICH IS IN THE NATURE OF COMMERCIAL RIGHT BECAME T HE PROPERTY OF THE APPELLANT. 7. OUTDOOR CATERING BUSINESS WHICH WAS EARLIER DONE BY BHAGWATI CATERERS PRIVATE LTD BECAME THE BUSINESS O F THE APPELLANT WITH ITS CLIENTS SPREAD OVER GUJARAT AND OTHER PARTS OF THE COUNTRY. APPELLANT CONTINUED TH E SAME BRAND NAME FOR THIS BUSINESS AND THE TRANSFEROR COMPANY STOPPED OUTDOOR CATERING BUSINESS BY SURRENDERING REGISTRATION NUMBER ETC. WITH THIS ACQUISITION, APPELLANT GOT COMMERCIAL RIGHT TO CARR Y ON OUTDOOR CATERING BUSINESS IN THE NAME OF BHAGWATI CATERERS WITH EXISTING CUSTOMER BASE WHICH HAS ITS BRAND VALUE. 8. ALL THESE CONCERNS WERE HAVING SUBSTANTIAL TURNO VER AND PROFIT AS PER THE DETAILS GIVEN IN APPELLANTS SUBM ISSION. BY SALE OF THEIR BUSINESSES WITH RIGHTS AND ENTITLE MENTS, THE BUSINESS OF THE APPELLANT COMPANY GREW SUBSTANTIALLY. TURNOVER OF THE APPELLANT INCREASED TO RS.35.79 CRORES FROM RS.23.13 CRORES IN FINANCIAL Y EAR 2006-07. THE SAME IS FURTHER INCREASED TO 62.72 CR ORES IN FY 2007-08. EVEN PROFIT INCREASED FROM RS.136.6 8 LACS TO RS.1003.85 LAKHS IN TWO YEARS. THIS MUCH INCREASE IN PROFIT AND TURNOVER IS NOT POSSIBLE UNL ESS INTANGIBLE ASSETS IN THE FORM OF COMMERCIAL RIGHTS AND ENTITLEMENTS WERE ACQUIRED FROM THESE THREE CONCERN S. 9. ALL THE THREE AGREEMENTS FOR PURCHASES OF BUSINE SSES HAVE CLEAR MENTION OF TRANSFER OF BUSINESS RIGHTS, ENTITLEMENTS, LICENSES ETC., HELD BY THE TRANSFEROR PRIOR TO SUCH TRANSFER. THE OTHER FACTS DISCUSSED EARLIER A LSO ESTABLISH TRANSFER OF VALUABLE COMMERCIAL AND BUSIN ESS RIGHTS ALONG WITH TANGIBLE ASSETS. HOWEVER FOR ACCOUNTING PURPOSES, THE DIFFERENCE BETWEEN ITA NO.1312-AHD-2011 5 CONSIDERATION PAID AND BOOK VALUE OF TANGIBLE ASSET S WERE ACCOUNTED FOR AS GOODWILL. THEREFORE, INTANGI BLE ASSETS ACQUIRED BY THE APPELLANT ARE BROADLY CATEGO RIZED AS GOODWILL BUT THE SAME IS NOTHING BUT VALUABLE BUSINESS AND COMMERCIAL RIGHTS. 10. WITHOUT INTANGIBLE ASSETS IN THE FORM OF VARIOU S RIGHTS AND ENTITLEMENTS, APPELLANT WOULD NOT HAVE BEEN IN A POSITION TO CARRY ON THE CATERING BUSINESS IN THE N AME OF BHAGWATI JUST BY ACQUIRING TANGIBLE ASSETS. SIMILA RLY BY ACQUIRING THE TANGIBLE ASSETS OF TGB RESORTS KARNAV ATI, APPELLANT WOULD NOT BE ENTITLED TO CARRY ON EXCLUSI VE CATERING BUSINESS IN KARNAVATI CLUB, AHMEDABAD. TH ESE ACTIVITIES COUPLED WITH SUBSTANTIAL INCREASE IN TUR NOVER AND PROFIT THE APPELLANT COMPANY CLEARLY SHOWS THAT APPELLANT HAD ACQUIRED INTANGIBLE ASSETS IN THE NAT URE OF COMMERCIAL AND BUSINESS RIGHT IN THE FORM OF GOODWI LL. FROM THE ABOVE, IT IS CLEAR THAT APPELLANT ACQUIRED BUSINESS AND COMMERCIAL RIGHTS ALONG WITH THE COMPLETE BUSINESSE S OF THESE THREE CONCERNS. THESE INTANGIBLE ASSETS ENABLED AP PELLANT TO IMMEDIATELY ESTABLISH THESE BUSINESSES AND TO CARRY ON FROM THE STAGE IT WAS CARRIED ON EARLIER BY THESE CONCERNS. DEPRECIATION IS ALLOWABLE UNDER SECTION 32(1)(II) ON KNOW-HOW, PATE NT, COPYRIGHT, TRADE MARK, LICENSES, FRANCHISEES OR ANY OTHER BUSI NESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. QUESTION HERE IS WHETHER APPELLANT ACQUIRED ANY RIGHT WHICH IS COVERED IN TH IS SECTION? APPELLANT RELIED UPON THE RECENT DECISION OF THE KE RALA HIGH COURT IN THE CASE OF B RAVINDRAN PILLAI V. CIT 234 CTR 80 WHICH IS QUOTED IN THE APPELLANTS SUBMISSION. IN THIS CAS E ALSO ASSESSEE PAID OVER AND ABOVE TANGIBLE ASSETS AND THE DIFFERE NCE WAS TREATED AS GOODWILL. HONORABLE COURT HELD THAT THE PURPOSE OF PAYING A VERY HUGE AMOUNT FOR GOODWILL IS FOR THE M AINTENANCE OF THE CONTINUED REPUTATION OF HOSPITAL WHICH WAS RUN IN THE SAME NAME FOR SEVERAL YEARS. THE HIGH COURT CONCLUDED T HAT- THE ASSESSEES INTENTION IS ONLY TO EARN GOOD BUSI NESS IN THE HOSPITAL AND SO MUCH SO, PURCHASED THE HOSPITAL AS A GOING CONCERN WITH ITS NAME AND TRADEMARK IS NOTHING BUT ACQUISITION OF GOODWILL EARNED BY THE HOSPITAL AND IT CANNOT BE TERMED ANYTHING OTHER THAN A COMMERCIAL OR BUSINESS RIGHT. IN FACT, IF THE PREVIOUS OWNER OF THE HOSPITAL WANTED TO RETAIN THE NAME, ITA NO.1312-AHD-2011 6 LOGO OR TRADEMARK OF THE HOSPITAL EVEN AFTER SALE O F THE BUILDING AND PREMISES, HE COULD HAVE RETAINED THE SAME WITHO UT TRANSFERRING IT TO THE ASSESSEE. .. WHEN GOODWILL PAID IS FOR ENSURING RETENTION AND CO NTINUED BUSINESS IN HOSPITAL IT IS CERTAINLY FOR ACQUIRING BUSINESS AND COMMERCIAL RIGHTS AND IT IS CERTAINLY COMPARABLE WI TH TRADEMARK, FRANCHISE, COPYRIGHT ETC REFERRED IN THE FIRST PART OF SUB-CLAUSE (II) OF SECTION 32(1) AND SO MUCH SO, GOODWILL IS COVERE D BY THE ABOVE PROVISIONS OF IT ACT ENTITLING THE ASSESSEE F OR DEPRECIATION [EMPHASIS PROVIDED] THE APPELLANTS CASE IS SIMILAR TO THE ABOVE CASE O F HOSPITAL. IN THIS CASE ALSO THE AMOUNT WAS PAID TO ACQUIRE GOOD BUSINESS OF THE TRANSFER FIRMS AND USE OF BRAND-NAME BHAGWATI. FROM THE FIGURES OF TURNOVER AND PROFIT OF THE APPELLANT AFT ER ACQUIRING THESE BUSINESSES, IT IS CLEAR THAT APPELLANT WAS ABLE TO EARN GOOD BUSINESSES OF THE EARLIER FIRMS. THEREFORE, THE AF ORESAID DECISION IS CLEARLY APPLICABLE TO THE FACTS OF THE APPELLANT S CASE. APPELLANT ALSO RELIED UPON THE DECISION OF HIGH COU RT OF DELHI IN THE CASE OF HINDUSTAN COCO COLA BEVERAGES PRIVATE L TD PASSED ON 14.1.2011. AS PER THIS DECISION RIGHTS ACQUIRED FO R CARRYING ON THE BUSINESS WITH EFFECTIVENESS COME WITHIN THE SWEEP O F THE MEANING OF INTANGIBLE ASSETS AND GOODWILL CONVEYS A POSITIV E REPUTATION BUILT OVER A CERTAIN SPAN OF TIME AND THE CUSTOMERS ASSOCIATED WITH THIS ASSET. AS PER THIS DECISION ALSO, APPELLANT I S ENTITLED TO CLAIM DEPRECIATION ON ASSETS ACQUIRED BY TAKING OVER BUSI NESS OF THREE FIRMS. ASSESSING OFFICER RELIED UPON THE DECISION OF ITAT AHMEDABAD WHICH IS RELATING TO PAYMENT OF GOODWILL TO RETIRIN G PARTNER. IN THIS CASE NO BUSINESS OR COMMERCIAL RIGHT WAS ACQUIRED A ND, THEREFORE, SUCH GOODWILL WAS NOT TREATED ELIGIBLE FOR DEPRECIA TION. IN OTHER DECISIONS OF TRIBUNALS PURE GOODWILL WAS DISTINGUIS HED WITH OTHER INTANGIBLE ASSETS ASSOCIATED WITH CARRYING ON OF E IN VIEW OF THE DECISION OF KERALA HIGH COURT AND HI GH COURT OF DELHI IN THE SIMILAR FACTS, APPELLANT IS ELIGIBLE F OR DEPRECIATION ON INTANGIBLE ASSETS ACQUIRED BY IT. THE INTANGIBLE A SSETS ARE IN THE ITA NO.1312-AHD-2011 7 NATURE OF VALUABLE COMMERCIAL AND BUSINESS RIGHTS W HICH WERE TO BE USED IN EXPANDING APPELLANTS BUSINESS RESULTING IN HUGE TURNOVER AND PROFIT. ACCORDINGLY, IT IS HELD THAT DEPRECIATION ON ACQUIRED INTANGIBLE ASSETS DISALLOWED BY THE ASSESS ING OFFICER IS NOT JUSTIFIED. ASSESSING OFFICER IS DIRECTED TO AL LOW DEPRECIATION ON GOODWILL WHICH IS IN THE NATURE OF COMMERCIAL AND B USINESS RIGHTS. 5. AGGRIEVED, THE REVENUE HAS COME UP WITH THE PRES ENT APPEAL. DURING THE COURSE OF HEARING, THE LD. D R FAIRLY PL ACED STRONG RELIANCE ON THE REASONING OF THE LD.AO IN REJECTING THE ASSESSE ES CLAIM AND FOUND FAULT WITH THE FINDINGS OF THE LD.CIT (A). THE LD. D R ALSO PUT STRONG STRESS ON THE WORDINGS OF THE PROVISIONS OF SECTION 32(1) AND ARGUED THAT THE ASSESSEE HAD NOWHERE ESTABLISHED THAT IT HAD ACQUIR ED ANY KNOW-HOW, PATENTS, COPYRIGHT, TRADEMARK ETC., TO MATCH WITH T HE PROVISIONS OF SECTION 32(1) OF THE ACT TO ENTITLE IT TO CLAIM DEPRECIATIO N ON ALLEGED GOODWILL. IT WAS, THEREFORE, PLEADED THAT THE STAND OF THE LD.AO WHICH HAS THE BACKING OF SOUND JUDICIAL VIEWS REQUIRES TO BE SUSTAINED. 5.1. ON THE OTHER HAND, THE LD. A R REITERATED MORE OR LESS WHAT WAS PORTRAYED BEFORE THE FIRST APPELLATE AUTHORITY. IN SUPPORT OF HIS CLAIM, HE HAD FURNISHED A COPY OF VALUATION REPORT OF THREE B USINESS ENTITIES WHICH WERE ACQUIRED BY THE ASSESSEE ALONG WITH NUMEROUS J UDICIAL PRECEDENTS ON A SIMILAR ISSUE. IN CONCLUSION, IT WAS PLEADED THAT THE FINDINGS OF THE LD.CIT(A) DESERVE TO BE SUSTAINED. 5.2. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS, DULY PERUSED THE RELEVANT CASE RECORDS, COPY OF THE VALUATION RE PORT AND ALSO THE CASE LAWS ON WHICH THE LD. A R HAD PLACED UNSTINTED CONF IDENCE. 5.3. FOR APPRECIATION OF FACTS, THE ISSUE, IN BRIEF , WAS THAT THE ASSESSEE HAD ENTERED INTO AGREEMENTS WITH (I) BHAGWATI CATER ERS LIMITED [BCL], (II) TGB RESORTS-KARNAVATI [TGB-K] AND (III) BHAGWATI I NTERNATIONAL [BI], ITA NO.1312-AHD-2011 8 ACCORDING TO WHICH, THE ENTIRE BUSINESSES OF THE TH REE ENTITIES WERE ACQUIRED FOR A CONSIDERATION RS.4.73 CRORES, RS.1.9 3 CRORES AND 2.77 LAKHS RESPECTIVELY WHICH INCLUDED PAYMENTS TOWARDS GOODWILL. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO TOOK A DIVERGENT VIEW THAT THE SAID PAYMENTS WERE NOT FOR GOODWILL , BUT CONSIDERATION FOR ACQUISITION OF ASSETS AT A HIGHER PRICE BUT THAT NO INTANGIBLE ASSET WAS ACQUIRED BY THE ASSESSEE. 5.4. THE ASSESSEE HAD CLAIMED DEPRECIATION U/S 32(1 )(II) OF THE ACT BY TREATING THE AFORESAID PAYMENT OF RS.6.69 CRORES AS FOR INTANGIBLE ASSETS BY WAY OF BUSINESS OR COMMERCIAL RIGHTS. THIS CLAI M OF THE ASSESSEE WAS STRENGTHENED BY THE FACT THAT IT HAD ACQUIRED THE F OLLOWING RIGHTS FROM THE THREE ENTITIES, NAMELY: (I) CATERING RIGHTS OF CATERING RIGHTS OF KARNAVATI CLUB LIMITED PATRONIZED BY TGB RESORTS-KARNAVATI; (II) OUTDOOR CATERING BUSINESS , BRAND VALUE OF BCP L; (III) KNOW-HOW RELATING TO FOOD PREPARATION AND MAN AGEMENT CALIBER OF BI; (IV) READYMADE CLIENTAGE SPREAD OVER OUTSIDE STATES SUCH AS RAJASTHAN, ANDHRA PRADESH (HYDERABAD) ETC., . 5.5. ON ACQUIRING THE ENTIRE BUSINESS OF THOSE ENTI TIES, THEY HAVE CLOSED THEIR SHOPS IN THE SENSE THAT NO BUSINESS ACTIVITIE S WERE CARRIED OUT, SURRENDERING OF THEIR REGISTRATION EARLIER OBTAINED AND VIRTUALLY THE ASSESSEE BROUGHT IN ITS STRIDE THEIR ENTIRE BUSINES S AND COMMERCIAL RIGHTS. ACCORDING TO THE ASSESSEE, IT HAD PAID RS.1.63 CROR ES TO ACQUIRE THE PLANT AND MACHINERY, LAND AND BUILDING AND COMMERCIAL VEH ICLES OF BCPL AND RS.4.73 CRORES TO POSSESS THE COMMERCIAL RIGHTS OF BUSINESS CARRIED ON BY BCPL WHICH GOES WITHOUT SAYING THAT THE LATTER FIRM S BUSINESS RIGHTS HAVE ITA NO.1312-AHD-2011 9 SINCE BEEN IMMOBILIZED BY SURRENDERING SUCH RIGHTS TO THE ASSESSEE AND, ACCORDING TO THE AGREEMENT ENTERED INTO, THE OUT-DO OR CATERING BUSINESS HAS BEEN PUT IN PLACE BY THE ASSESSEE. THIS CLEARL Y ESTABLISHES THAT THE ASSESSEE HAD ACQUIRED THE BUSINESS AND COMMERCIAL R IGHTS OF THE ERSTWHILE BCPL. CONSIDERING THE STANDING OF BCPL I N ITS OUT-DOOR CATERING BUSINESS [SOURCE: PAGES 17 TO 27 OF VALUAT ION REPORT], THE ASSESSEE WAS OBLIGED TO PART WITH THE WHOPPING RS.4 .73 CRORES TO ACQUIRE THE BUSINESS AND COMMERCIAL RIGHTS OF THE SAID COMP ANY. 5.6. IN CONSONANCE WITH THE AGREEMENT ENTERED INTO WITH TGB RESORTS KARNAVATI, THE ASSESSEE HAD PAID RS.1.93 CRORES TO ACQUIRE PLANT AND MACHINERY, COMMERCIAL VEHICLES AND COMMERCIAL RIGHT S OF TGB RESORTS- KARNAVAI TO CONTINUE THE SAME BUSINESS WITH KARNAVA TI CLUB. BEFORE ACQUIRING, THE TGB WAS IN AGREEMENT WITH THE SAID C LUB TO RUN ITS RESTAURANTS OF DIFFERENT TYPES GUJARAT RESTAURANT , THAI & CONTINENTAL RESTAURANT, SIDE-WALK CAF ETC. AND ALSO TO MAINT AIN ROOM SERVICES AND HAVING EXCLUSIVE RIGHTS TO RUN ALL THE RESTAURANTS. THE ASSESSEE HAD PAID RS.1.93 CRORES TO TGB RESORTS TO ACQUIRE ALL BUSINE SS RIGHTS FROM KARNAVATI CLUB WHICH WERE VESTED WITH TGB RESORTS. LIKEWISE, THE ASSESSEE AS PER AGREEMENT, PAID RS.2.77 LAKHS TO BI TO ACQUIRE ITS RIGHTS TO RUN THE RESTAURANT UNDER ITS BANNER. CONSIDERING THE ABOVE ASPECTS, IT EMERGES THAT (I) THE ASSESSEE HAD PAID MORE THAN BOOK VALUE OF A SSETS FOR ACQUIRING THEIR BUSINESS RIGHTS ALONG WITH ASSETS; (II) THE ADDITIONAL AMOUNTS PAID WERE ACCOUNTED FOR AS GOODWILL WHICH WERE THE CONSIDERATION FOR ACQUIRING INTANGIB LE RIGHTS; (III) THE ERSTWHILE ENTITIES WERE FLOURISHING IN TH EIR LINE OF BUSINESSES BEFORE ACQUIRING THE SAME BY THE ASSESSE E; ITA NO.1312-AHD-2011 10 (IV) ONCE THE ASSESSEE ACQUIRED THEIR BUSINESSES, T HE ERSTWHILE CONCERNS HAVE CEASED TO BE IN THEIR BUSINESSES WHIC H HAVE HENCEFORTH BEEN CARRIED ON BY THE ASSESSEE ON THE S AME TRACK; (V) AS FAR AS KARNAVATI CLUB LTD WAS CONCERNED, THE CATERING RIGHTS WHICH WERE SHOULDERED BY TGB RESORTS KARNAVA TI, NOW ADORNED BY THE ASSESSEE AND, THUS, THE RIGHTS OF CA TERING IN THE CLUB HAS NOW BECOME THE PROPERTY OF THE ASSESSE E; & (VI) WITH REGARD TO BCPL, THE ASSESSEE IS CARRYING ON THE OUT-DOOR CATERING BUSINESS IN THE SAME BRAND NAME, IN THE S ENSE THAT THE ASSESSEE HAD ACQUIRED THE COMMERCIAL RIGHTS OF THE ERSTWHILE COMPANY TO CARRY ON THE ODC BUSINESS IN T HE SAME NAME OF BHAGWATI CATERERS. 5.7. IN A NUT-SHELL, THE ASSESSEE, WITHOUT INTANGIB LE ASSETS IN THE SHAPE OF RIGHTS AND ENTITLEMENT OF COMMERCIAL RIGHTS OF T HE ERSTWHILE ENTITIES, WOULD NOT HAVE PROSPERED OR IN A POSITION TO CARRY ON THE CATERING BUSINESS ONLY BY ACQUIRING TANGIBLE ASSETS. BY ACQ UIRING TANGIBLE AND INTANGIBLE ASSETS OF THE ERSTWHILE CONCERNS CITED S UPRA, THE ASSESSEE HAD PROSPERED IN ITS BUSINESS BY POSTING SUBSTANTIAL TU RNOVER AND PROFITS WHICH IMPLICITLY EXHIBITS THAT THE ASSESSEE HAD, IN FACT, ACQUIRED INTANGIBLE ASSETS [BUSINESS AND COMMERCIAL RIGHTS] IN THE FORM OF GOODWILL. IN ESSENCE, THE INTANGIBLE ASSETS WERE IN THE NATURE O F VALUABLE COMMERCIAL AND BUSINESS RIGHTS WHICH WERE TO BE USED IN EXPAND ING THE ASSESSEES BUSINESS, RESULTING IN, HUGE TURNOVER AND PROFITS A S POINTED OUT SUPRA . 5.8 LET US NOW TURN OUR ATTENTION TOWARDS THE JUDIC IAL PRECEDENTS ON A SIMILAR ISSUE. ITA NO.1312-AHD-2011 11 (1) THE HONBLE MUMBAI TRIBUNAL, IN THE CASE OF K OTAK FOREX BROKERAGE LIMITED V. ACIT REPORTED IN (2010) 131 TTJ (MUMBAI) 404, HAS HELD THAT: BUSINESS OR COMMERCIAL RIGHTS ARE RIGHTS OBTAINED FOR EFFECTIVELY CARRYING ON THE BUSINESS OR COMMERCE. COMMERCE IS A WIDER TERM WHICH ENCOMPASSES BUSINESS IN ITS FOLD. THERE FORE, ANY RIGHT WHICH IS OBTAINED FOR CARRYING ON THE BUSINES S EFFECTIVELY AND PROFITABLY HAS TO FALL WITHIN THE MEANING OF INTANG IBLE ASSET. THE DEFINITION FURTHER PROVIDES THAT THE BUSINESS OR CO MMERCIAL RIGHTS SHOULD BE OF SIMILAR NATURE AS KNOW-HOW, PATENTS, C OPYRIGHTS, TRADEMARKS, LICENSES, FRANCHISES, ETC., ALL THESE A RE THE ASSETS WHICH ARE NOT MANUFACTURED OR PRODUCED OVERNIGHT BU T ARE BROUGHT INTO EXISTENCE BY EXPERIENCE AND REPUTATION . THEY ASSUME IMPORTANCE IN THE COMMERCIAL WORLD AS CUSTOM ERS ASSOCIATE WITH SUCH ASSETS. SIMILARLY, GOODWILL IS NOTHING BUT POSITIVE REPUTATION BUILT BY A PERSON/COMPANY/BUSIN ESS HOUSE OVER A PERIOD OF TIME. THUS, GOODWILL IS A BUSINE SS OR COMMERCIAL RIGHT OF SIMILAR NATURE. THE NAME KOT AK HAS TREMENDOUS IMPORTANCE AS THE ASSESSEE COMPANY WAS T O BE BENEFITED BY THE USAGE OF THE SAID NAME SAND IT HAS GONE AS FAR AS AMENDING ITS NAME BY INCLUDING KOTAK IN ITS NAME . THEREFORE, IT IS OF COMMERCIAL VALUE FOR WHICH THE ASSESSEE HA S PAID THE AMOUNT OF RS.1.88 CRORES AS GOODWILL. ONCE IT IS H ELD THAT THE GOODWILL IS ALSO AN INTANGIBLE ASSET OF THE SIMILAR NATURE REFERRED TO IN CL.(II) OF S.32(1) DEPRECIATION IS CONSEQUENT LY ALLOWABLE ON THE SAME (2) IN THE CASE OF B. RAVEENDRAN PILLAI V. CIT RE PORTED IN (2010) 194 TAXMAN 477/(2011) 237 CTR (KER) 80, THE HONBLE HIG H COURT OF KERALA HAS RULED THAT: THE QUESTION NOW TO BE CONSIDERED IS WHETHER THE FACTS IN THIS CASE CAN LEAD TO THE CONCLUSION THAT THE PURCHASE O F THE HOSPITAL BY THE ASSESSEE WITH ITS NAME AND TRADEMARK AS A GO ING CONCERN INVOLVES ANY PURCHASE OF GOODWILL. ADMITTEDLY THE HOSPITAL WAS RUN IN THE SAME BUILDING, IN THE SAME TOWN, IN THE SAME NAME FOR SEVERAL YEARS PRIOR TO PURCHASE BY THE ASSESSEE. I T OBVIOUSLY HAD THE NAME OF A SUCCESSFUL HOSPITAL AND THAT IS WHY T HE ASSESSEE CHOSE TO CONTINUE THE SAME BUSINESS WITH THE SAME N AME. IT IS THE REPUTATION OF THE HOSPITAL THAT BRINGS PATIENTS TO IT AND THE SAME MAY INVOLVE THE QUALITY OF DOCTORS, STAFF, EQU IPMENTS AND OTHER FACILITIES AVAILABLE IN THE HOSPITAL. EVEN A FTER PURCHASE OF ITA NO.1312-AHD-2011 12 THE HOSPITAL BY THE ASSESSEE, ALL THE FACILITIES A ND NAME CONTINUED TO BE THE SAME AND THEREFORE, PATIENTS MA Y NOW KNOW EVEN THE CHANGE OF MANAGEMENT OF THE HOSPITAL WHEN THEY GO FOR TREATMENT IN THE HOSPITAL AFTER ITS PURCHASE BY THE ASSESSEE. THE PURPOSE OF PURCHASING AS BUSINESS CONCERN, WHETHER IT BE HOSPITAL OR HOTEL, IS TO ENSURE CONTINUITY OF BUSIN ESS WITH THE SAME REPUTATION. SO MUCH SO, THE PURPOSE OF PAYING A VE RY HUGE AMOUNT FOR GOODWILL IS FOR MAINTENANCE OF THE CONTINUED REPUTATION OF THE HOSPITAL WHICH WAS RUN IN THE SAM E NAME FOR SEVERAL YEARS. THE ASSESSEES INTENTION IS ONLY TO EARN GOOD BUSINESS IN THE HOSPITAL AND SO MUCH SO, PURCHASED THE HOSPITAL AS A GOING CONCERN WITH ITS NAME AND TRADEMARK IS N OTHING BUT ACQUISITION OF GOODWILL EARNED BY THE HOSPITAL AND IT CANNOT BE TERMED ANYTHING OTHER THAN A COMMERCIAL OR BUSINESS RIGHT. IN FACT, IF THE PREVIOUS OWNER OF THE HOSPITAL WANTED TO RETAIN THE NAME, LOGO OR TRADEMARK OF THE HOSPITAL EVEN AFTER SALE OF THE BUILDING AND PREMISES, HE COULD HAVE RETAINED THE S AME WITHOUT TRANSFERRING IT TO THE ASSESSEE. BY TRANSFERRING T HE RIGHT TO USE THE NAME OF THE HOSPITAL ITSELF, THE PREVIOUS OWNER HAS TRANSFERRED THE GOODWILL TO THE ASSESSEE AND THE BENEFIT DERIVED BY THE ASSESSEE IS RETENTION OF CONTINUED TRUST OF THE PATIENTS WHO WERE PATIENTS OF THE PREVIOUS OWNERS. WHEN GOODWILL PAID IS FOR ENSU RING RETENTION AND CONTINUED BUSINESS IN HOSPITAL IT IS CERTAINLY FOR ACQUIRING BUSINESS AND COMMERCIAL RIGHTS AND IT IS CERTAINLY COMPARABLE WITH TRADEMARK, FRANCHISE, COPYRIGHT ETC REFERRED I N THE FIRST PART OF SUB-CLAUSE (II) OF SECTION 32(1) AND SO MUCH SO, GO ODWILL IS COVERED BY THE ABOVE PROVISIONS OF IT ACT ENTITLING THE ASSESSEE FOR DEPRECIATION (3) YET ANOTHER SIMILAR ISSUE, THE HONBLE HIGH COURT OF DELHI IN ITS WISDOM, IN THE CASE OF CIT V. HINDUSTAN COCO COLA B EVERAGES (P) LTD REPORTED IN (2011) 311 ITR 192(DEL)/(2011) 238 CTR (DEL) 1, HAS RULED THUS: THE SCOPE OF S.32 HAS BEEN WIDENED BY THE FINANCE (NO.2) ACT, 1998 WHEREBY DEPRECIATION IS NOW ALLOWED ON INTANGI BLE ASSETS ACQUIRED ON OR AFTER 1 ST APRIL, 1998. AS PER S.32(1)(II), DEPRECIATION IS ALLOWABLE IN RESPECT OF KNOW-HOW, PATENT, COPYRI GHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS O R COMMERCIAL RIGHTS OF SIMILAR NATURE BEING INTANGIBLE ASSETS. SCANNING THE ANATOMY OF THE SECTION, IT CAN SAFELY BE STATED THA T THE PROVISION ITA NO.1312-AHD-2011 13 ALLOWS DEPRECIATION ON BOTH TANGIBLE AND INTANGIBLE ASSETS AND CL. (II) ENUMERATES THE INTANGIBLE ASSETS ON WHICH DEPR ECIATION IS ALLOWABLE. THE ASSETS WHICH ARE INCLUDED IN THE DEF INITION OF INTANGIBLE ASSETS INCLUDE, ALONG WITH OTHER THING S, ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. O N A SCRUTINY OF THE ORDER PASSED BY THE TRIBUNAL, IT IS CLEAR AS CR YSTAL THAT THE DEPRECIATION WAS CLAIMED ON GOODWILL BY THE ASSESSE E ON ACCOUNT OF PAYMENT MADE FOR THE MARKETING AND TRADI NG REPUTATION, TRADE STYLE AND NAME, MARKETING AND DI STRIBUTION, TERRITORIAL KNOW-HOW, INCLUDING INFORMATION ON CONS UMPTION PATTERNS AND HABITS OF CONSUMERS IN THE TERRITORY A ND THE DIFFERENCE BETWEEN THE CONSIDERATION PAID FOR BUSIN ESS AND VALUE OF TANGIBLE ASSETS. . IT IS WORTH NOTING THAT THE MEANING OF BUSINESS OR COMMERCIAL RIGHTS O F SIMILAR NATURE HAS TO BE UNDERSTOOD IN THE BACKDROP OF S.32 (1)(II). COMMERCIAL RIGHTS ARE SUCH RIGHTS WHICH ARE OBTAINE D FOR EFFECTIVELY CARRYING ON THE BUSINESS AND COMMERCE, AND COMMERCE, AS IS UNDERSTOOD, IS A WIDER TERM WHICH E NCOMPASSES IN ITS FOLD MANY A FACET. STUDIED IN THIS BACKGROUN D, ANY RIGHT WHICH IS OBTAINED FOR CARRYING ON THE BUSINESS WITH EFFECTIVENESS IS LIKELY TO FALL OR COME WITHIN THE SWEEP OF MEANI NG OF INTANGIBLE ASSET. THE DICTIONARY CLAUSE CLEARLY STIPULATES TH AT BUSINESS OR COMMERCIAL RIGHTS SHOULD BE OF SIMILAR NATURE AS KN OW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES, FRANCHIS ES ETC., AND ALL THESE ASSETS ARE NOT MANUFACTURED OR PRODUCED OVERN IGHT BUT ARE BROUGHT INTO EXISTENCE BY EXPERIENCE AND REPUTATION . THEY GAIN SIGNIFICANCE IN THE COMMERCIAL WORLD AS THEY REPRES ENT A PARTICULAR BENEFIT OR ADVANTAGE OR REPUTATION BUILT OVER A CERTAIN SPAN OF TIME AND THE CUSTOMERS ASSOCIATE WITH SUCH ASSETS. GOODWILL, WHEN APPOSITELY UNDERSTOOD, DOES CONVEY A POSITIVE REPUTATION BUILT BY A PERSON/COMPANY/BUSINESS CONCE RN OVER A PERIOD OF TIME 5.9. IN VIEW OF THE FACTS AND CIRCUMSTANCES O F THE ISSUE AS DELIBERATED UPON IN THE FORE-GOING PARAGRAPHS AND ALSO IN CONFO RMITY WITH THE RULING OF VARIOUS JUDICIARIES, CHIEFLY, THE RULING OF THE HON BLE HIGH COURT OF KERALA REFERRED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THE CIT (A) WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE WAS ELIGIBLE FOR DEPRECIATION ON INTANGIBLE ASSETS ACQUIRED BY IT. IT IS ORDERED AC CORDINGLY. WE MAKE IT ITA NO.1312-AHD-2011 14 VERY CLEAR THAT WE HAVE ARRIVED AT THIS ABOVE CONCL USION FROM THE FACTS OF THIS CASE AS THE VALUATION REPORT SUBMITTED BY THE APPELLANT HAS NOT BEEN SUCCESSFULLY CHALLENGED BY THE REVENUE TO ESTABLISH THE TRANSACTION TO BE SHAM. THEREFORE, WE CONSIDER THE PAYMENT MADE ON AC COUNT OF GOODWILL IS GENUINE AND REASONABLE SINCE IT IS ARRIVED BASED ON A REASONABLE VALUATION AND COMPUTATION. 6. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED. 4 %3 , 1#2 5$'6 28 / 02 /201 2 # 7 , . SD/- SD/- (G.C.GUPTA) (A.MOHAN ALANKAMONY) VICE PRESIDENT ACCOUNTANT MEMBER DATED :28/02/2012 %3 %3 %3 %3 , ,, , */8 */8 */8 */8 9%82/6 9%82/6 9%82/6 9%82/6- -- - 1. () 2. *+() 3. '' / > 4. >- - 5. 8A */$ , , B 6. D E4 %3 %, / ' , B TALUKDAR/ SR. P.S.