Asstt.CIT, Panvel Circle, Panvel, V. Johnson Matthey Chemicals India Pvt.Ltd.,

ITA 1317/PUN/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2967 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-01-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 27-01-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 02-11-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Assessee Lawyers: P J PARDIWALA; BASANTI PATEL
• Keywords: Depreciation; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 32; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E , , !'!! # , $ % BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 1317/PN/2010 $& ' !(' / ASSESSMENT YEAR : 2003-04 ASSTT. COMMISSIONER OF INCOME TAX, PANVEL CIRCLE, INCOME TAX OFFICE, 3 RD FLOOR, TRIFED TOWER, SECTOR-17, OPP.: KHANDA COLONY, NEW PANVEL, DISTT.-RAIGAD ....... / APPELLANT )& / V/S. JOHNSON MATTHEY CHEMICALS INDIA PVT. LTD., PLOT NO. 6, MIDC INDUSTRIAL ESTATE, TALOJA, DISTT.-RAIGAD PAN : AABCJ1620M / RESPONDENT / ITA NO. 7547/PN/2010 $& ' !(' / ASSESSMENT YEAR : 2003-04 JOHNSON MATTHEY CHEMICALS INDIA PVT. LTD., PLOT NO. 6, MIDC INDUSTRIAL ESTATE, TALOJA, DISTT.-RAIGAD PAN : AABCJ1620M ....... / APPELLANT )& / V/S. ASSTT. COMMISSIONER OF INCOME TAX, PANVEL CIRCLE, INCOME TAX OFFICE, 3 RD FLOOR, TRIFED TOWER, SECTOR-17, OPP.: KHANDA COLONY, NEW PANVEL, DISTT.-RAIGAD / RESPONDENT ASSESSEE BY : SHRI P.J. PARDIWALA & BASANTI PATEL REVENUE BY : SHRI S.K. RASTOGI / DATE OF HEARING : 03-11-2015 / DATE OF PRONOUNCEMENT : 01-01-2016 2 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 * / ORDER PER VIKAS AWASTHY, JM : THESE CROSS APPEALS HAVE BEEN FILED BY THE REVENUE AND THE ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-I, THANE DATED 30-07-2010 FOR THE ASSESSMENT YEAR 2003-04. 2. THE FACTS OF THE CASE AS EMANATING FROM THE RECORDS ARE: THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND IS ENGAGED IN MA NUFACTURING AND SALE OF NICKEL HYDROGENATED CATALYSTS, NAPTHA REFORM ING CATALYSTS AND GAS REFORMING CATALYSTS. FOR THE IMPUGNED ASSESSME NT YEAR, THE ASSESSEE FILED RETURN OF INCOME ON 28-11-2003 DECLARING LOS S OF RS.10,11,17,770/-. THEREAFTER, THE ASSESSEE FILED REVISED RE TURN OF INCOME ON 29-10-2004 DECLARING LOSS OF RS.9,54,93,860/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICE U/S. 143(2) WAS ISSUED TO THE ASSESSEE ON 25-11-2004. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEPRECIATION ON GOODWILL AND NON-COMPETE FEES U/S. 32(1)(II) OF THE ACT. DURING THE YEAR THE ASSESSEE HAD INCURRED EXPENDITURE OF RS.30,19,500/- TOWARDS FILING FEES AND STAMP DUTY PAID TO TH E REGISTRAR OF COMPANIES (ROC) FOR INCREASE IN THE AUTHORIZED SHARE CAP ITAL. OUT OF THIS EXPENDITURE, THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.6,03,900/- U/S. 35D OF THE ACT. THE ASSESSING OFFICER DIS ALLOWED THE SAME BY PLACING RELIANCE ON THE DECISION OF HON'BLE SU PREME COURT OF INDIA IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMEN T CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX REPORTED AS 225 ITR 792 (SC): 93 TAXMAN 5 (SC). 3 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 AGGRIEVED BY THE ASSESSMENT ORDER DATED 28-02-2005, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) REJECTED THE APPEAL OF THE ASSESSEE ON ACCOUNT OF CLAIM OF DEPRECIATION ON GOODWILL AND NON-COMPETE FEES AND CONFIRMED THE ADDITION ON BOTH THE COUNTS. HOWEVER, IN RESPECT OF DISALLOWANCE OF RS.6,03,900/- THE COMM ISSIONER OF INCOME TAX (APPEALS) ACCEPTED THE CONTENTIONS OF THE A SSESSEE. THE COMMISSIONER OF INCOME TAX (APPEALS) BY FOLLOWING THE DECISION RENDERED IN THE CASE OF AUTOLITE INDIA LTD. VS. COMMISSIONE R OF INCOME TAX REPORTED AS 264 ITR 117 (RAJ.) DELETED THE ADDITION. AGAINST THESE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) BOTH, THE REVENUE AND THE ASSESSEE ARE IN APPE AL BEFORE THE TRIBUNAL. ITA NO. 1317/PN/2010 (APPEAL BY THE REVENUE) 3. THE REVENUE IN APPEAL HAS RAISED THE SOLITARY ISSUE AG AINST ALLOWING DEDUCTION OF RS.6,03,900/- U/S. 35D(2)(C)(IV). THE GROUND OF APPEAL RAISED BY THE REVENUE IS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A)-I, THANE HAS ERRED IN ALLOWING THE DEDUCTION U/S. 35D(2)(C)(IV) OF RS.6,03,900/- OVERLOOKING THE FACT THAT THE ASSESSE E IS A PVT. LTD. CO. AND THE EXPENDITURE HAS BEEN INCURRED FOR ISSUING 4 ,19,90,000/- EQUITY SHARES TO M/S. MATTHEY FINANCE BV, THE HOLDING COMP ANY. THE EXPENDITURE THUS INCURRED CANNOT BE CONSIDERED AS E XPENDITURE INCURRED IN CONNECTION WITH THE ISSUE OF SHARES FOR PUBLIC S UBSCRIPTION, WHICH IS A MANDATORY CONDITION TO BE SATISFIED BEFORE ALLOWING DEDUCTION U/S. 35D(2)(C)(IV). 4. SHRI S.K. RASTOGI REPRESENTING THE DEPARTMENT SUBMITTE D THAT THE ISSUE WITH REGARD TO EXPENDITURE INCURRED TOWARDS P AYMENT OF FEES TO ROC FOR INCREASING AUTHORIZED SHARE CAPITAL HAS BEEN D ECIDED BY THE 4 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 HON'BLE SUPREME COURT OF INDIA IN FAVOUR OF THE REVENUE. THE LD. DR PLACED RELIANCE ON THE DECISION RENDERED IN THE CASE OF P UNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX (SUPRA). THE LD. DR FURTHER SUBMITTED THAT A PERUSAL OF THE PROVISIONS OF SECTION 35D(2)(C)(IV) WOULD CLEARLY SHOW THAT SUC H EXPENDITURE IS NOT ALLOWABLE. 5. ON THE OTHER HAND SHRI P.J. PARDIWALA AND BASANTI P ATEL APPEARING ON BEHALF OF THE ASSESSEE VEHEMENTLY SUPPORTE D THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) ON THE ISSUE AND A LSO PLACED RELIANCE ON THE JUDGMENT OF HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF AUTOLITE INDIA LTD. VS. COMMISSIONER OF INCOME TAX (SUPRA). 6. BOTH THE SIDES HEARD. ORDERS OF THE AUTHORITIES BELOW PERUSED. WE FIND THAT THE ISSUE RELATING TO PAYMENT OF FEES TO ROC FOR INCREASING AUTHORIZED SHARE CAPITAL IS NO MORE RES INTEGRA. THE HON 'BLE SUPREME COURT OF INDIA IN THE CASE OF PUNJAB STATE INDUSTRIAL DEV ELOPMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX (SUPRA) WHILE ADJUDICATING THIS ISSUE HAS HELD AS UNDER: 7. WE DO NOT CONSIDER IT NECESSARY TO EXAMINE ALL THE DECISIONS IN EXTENSOR BECAUSE WE ARE OF THE OPINION THAT THE FEE PAID TO THE REGISTRAR FOR EXPANSION OF THE CAPITAL BASE OF THE COMPANY WA S DIRECTLY RELATED TO THE CAPITAL EXPENDITURE INCURRED BY THE COMPANY AND ALTHOUGH INCIDENTALLY THAT WOULD CERTAINLY HELP IN THE BUSIN ESS OF THE COMPANY AND MAY ALSO HELP IN PROFIT MAKING, IT STILL RETAIN S THE CHARACTER OF A CAPITAL EXPENDITURE SINCE THE EXPENDITURE WAS DIREC TLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY. WE AR E, THEREFORE, OF THE OPINION THAT THE VIEW TAKEN BY THE DIFFERENT HIGH C OURTS IN FAVOUR OF THE REVENUE IN THIS BEHALF IS THE PREFERABLE VIEW AS CO MPARED TO THE VIEW BASED ON THE DECISION OF THE MADRAS HIGH COURT IN K ISENCHAND CHELLARAM'S CASE [1981] 130 ITR 385. WE, THEREFORE, ANSWER THE QUESTION RAISED FOR OUR DETERMINATION IN THE AFFIRMATIVE, I. E., IN FAVOUR OF THE 5 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 REVENUE AND AGAINST THE ASSESSEE. 7. THE HON'BLE SUPREME COURT OF INDIA LATER ON IN THE CA SE OF BROOKE BOND INDIA LTD. VS. COMMISSIONER OF INCOME TAX REP ORTED AS 225 ITR 798 (SC) AFTER CONSIDERING CATENA OF JUDGMENTS H AS REITERATED THE LAW LAID DOWN IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX (SUPRA). THE HON'BLE APEX COURT IN THE CASE OF BROOKE BOND INDIA LTD. VS. COM MISSIONER OF INCOME TAX (SUPRA) HAS HELD : 6. DR. PAL HAS, HOWEVER, SUBMITTED THAT THIS DECIS ION DOES NOT COVER A CASE, LIKE THE PRESENT CASE, WHERE THE OBJECT OF ENHANCEMENT OF THE CAPITAL WAS TO HAVE MORE WORKING FUNDS FOR THE ASSE SSEE TO CARRY ON ITS BUSINESS AND TO EARN MORE PROFIT AND THAT IN SUCH A CASE THE EXPENDITURE THAT IS INCURRED IN CONNECTION WITH ISSUING OF SHAR ES TO INCREASE THE CAPITAL HAS TO BE TREATED AS REVENUE EXPENDITURE. I N THIS CONNECTION, DR. PAL HAS INVITED OUR ATTENTION TO THE SUBMISSIONS TH AT WERE URGED BY LEARNED COUNSEL FOR THE ASSESSEE BEFORE THE APPELLA TE ASSISTANT COMMISSIONER AS WELL AS BEFORE THE TRIBUNAL. IT IS N O DOUBT TRUE THAT BEFORE THE APPELLATE ASSISTANT COMMISSIONER AS WELL AS BEFORE THE TRIBUNAL IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE INCREASE IN THE CAPITAL WAS TO MEET THE NEED FOR WORKING FUNDS FOR THE ASSESSEE COMPANY. BUT THE STATEMENT OF CASE SENT BY THE TRIB UNAL DOES NOT INDICATE THAT A FINDING WAS RECORDED TO THE EFFECT THAT THE EXPANSION OF THE CAPITAL WAS UNDERTAKEN BY THE ASSESSEE IN ORDER TO MEET THE NEED FOR MORE WORKING FUNDS FOR THE ASSESSEE. WE, THEREFORE, CANNOT PROCEED ON THE BASIS THAT THE EXPANSION OF THE CAPITAL WAS UND ERTAKEN BY THE ASSESSEE FOR THE PURPOSE OF MEETING THE NEED FOR WO RKING FUNDS FOR THE ASSESSEE TO CARRY ON ITS BUSINESS. IN ANY EVENT, TH E ABOVE QUOTED OBSERVATIONS OF THIS COURT IN PUNJAB STATE INDUSTRI AL DEVELOPMENT CORPORATION LTD.'S CASE [1997] 225 ITR 792 CLEARLY INDICATE THAT THOUGH THE INCREASE IN THE CAPITAL RESULTS IN EXPANSION OF THE CAPITAL BASE OF THE COMPANY AND INCIDENTALLY THAT WOULD HELP IN THE BUS INESS OF THE COMPANY AND MAY ALSO HELP IN THE PROFIT MAKING, THE EXPENSES INCURRED IN THAT CONNECTION STILL RETAIN THE CHARACTER OF A CAPITAL EXPENDITURE SINCE THE EXPENDITURE IS DIRECTLY RELATED TO THE EXPANSIO N OF THE CAPITAL BASE OF THE COMPANY. 6 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 NOW, IT IS A WELL SETTLED LAW THAT THE EXPENDITURE INCURRED ON ISSUE OF FRESH SHARE AND EXPANSION OF CAPITAL BASE IS CAPITA L IN NATURE. THUS, IN VIEW OF THE LAW LAID DOWN BY THE HON'BLE APEX CO URT, WE ARE OF THE VIEW THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN ALLOWING DEDUCTION CLAIMED BY THE ASSESSEE ON EXPENDITURE FOR INCREASING THE AUTHORIZED SHARE CAPITAL OF THE ASSESSEE. THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE ARE REVERSE AND THE APPEAL OF THE REVENUE IS ALLOWED. ITA NO. 7547/PN/2010 (APPEAL BY THE ASSESSEE) 8. THE ASSESSEE IN APPEAL HAS RAISED SIX GROUNDS. IN G ROUND NOS. 1 TO 3 THE ASSESSEE HAS CHALLENGED THE FINDINGS OF COMMISSION ER OF INCOME TAX (APPEALS) IN DISALLOWING DEPRECIATION CLAIMED ON PAYM ENT OF NON-COMPETE FEES. IN GROUND NOS. 4 TO 6 THE ASSESSEE HAS ASSAILED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN DISALLOWING DEPRECIATION CLAIMED ON GOODWILL U/S. 32(1)(II). 9. THE LD. AR SUBMITTED THAT DURING THE PERIOD RELEVANT T O THE ASSESSMENT YEAR UNDER APPEAL THE ASSESSEE HAD PURCHA SED CATALYST BUSINESS FROM M/S. ICI INDIA LTD. AS PART OF TAKEOVER, TH E ASSESSEE PAID A SUM OF RS.10,73,30,000/- ON ACCOUNT OF GOODWILL AND RS.3,51,00,000/- TOWARDS NON-COMPETE AGREEMENT ENTERED INTO WITH M/S. ICI INDIA LTD. THE ASSESSEE CLAIMED DEPRECIATION OF RS.1,78,03,790/- AGAINST THE ABOVE SAID INTANGIBLE ASSETS @ 25 FOR HALF- YEAR. THE PAYMENT TOWARDS NON-COMPETE COVENANT IS CA PITAL IN NATURE AND THUS, THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON THE SAME U/S. 32(1)(II) OF THE ACT. IN SUPPORT OF HIS SUBMISSIONS, THE LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS: 7 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 I. COMMISSIONER OF INCOME TAX VS. INGERSOLL RAND INTERNATION AL IND. LTD., 227 TAXMAN 176 (KAR); II. SERUM INSTITUTE OF INDIA LTD. VS. ADDL. COMMISSIONER OF INCO ME TAX, 135 ITD 69 (PUNE); III. M/S. SCHOTT GLASS INDIA PVT. LTD. VS. DCIT, ITA NO. 1698/MUM/2003 FOR THE ASSESSMENT YEAR 1998-99 DECIDED ON 07-09-2011; AND IV. ASSISTANT COMMISSIONER OF INCOME TAX VS. REAL IMAGE TECH. (P.) LTD., 120 TTJ (CHENNAI) 983. IN RESPECT OF CLAIM OF DEPRECIATION ON GOODWILL THE ASSESSEE PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT O F INDIA IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SMIFS SECURITIES LTD. REPORTED AS 24 TAXMANN.COM 222 (SC) AND THE JUDGMENTS OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME T AX VS. BIRLA GLOBAL ASSET FINANCE CO. LTD. REPORTED AS 221 TAXMA N 176 (BOM) (MAG.) AND IN THE CASE OF TOYO ENGINEERING INDIA LIMITED VS. T HE DY. COMMISSIONER OF INCOME TAX REPORTED AS INCOME TAX APPE AL (L) NO. 1330 OF 2012 DECIDED ON 30-10-2012. 10. ON THE OTHER HAND THE LD. DR VEHEMENTLY DEFENDED T HE ORDERS OF AUTHORITIES BELOW IN REJECTING THE DEPRECIATION CLAIMED BY T HE ASSESSEE ON NON-COMPETE PAYMENT AND GOODWILL. THE LD. DR SUBMITTE D THAT GOODWILL INCREASE WITH THE PERIOD OF TIME IN A GROWING BUSI NESS. IT IS ONLY IN THE CASE WHERE THERE IS A SHARP DECLINE IN THE B USINESS, THE VALUE OF GOODWILL MAY COME DOWN. IN THE CASE OF ASSESSEE IT IS EVIDENT FROM THE RECORDS THAT THE ASSESSEE IS HAVING PROGRESSIV E BUSINESS. THEREFORE, THERE IS NO QUESTION OF GOODWILL GETTING DEPRECIAT ED. THE LD. 8 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 DR IN SUPPORT OF IS SUBMISSIONS PLACED RELIANCE ON THE FOLLOWIN G DECISIONS: I. SHARP BUSINESS SYSTEMS (INDIA) LTD. VS. DY. COMMISSIONER OF INCOME TAX, 133 ITD 275 (DELHI); AND II. ARKEMA PEROXIDES INDIA (P.) LTD. VS. ASSISTANT COMMISSIONER O F INCOME TAX, 31 TAXMANN.COM 4 (CHENNAI-TRIB.). 11. THE LD. AR REBUTTING THE SUBMISSIONS MADE BY THE LD. DR SUBMITTED THAT THE DECISIONS ON WHICH THE REVENUE HAS P LACED RELIANCE HAVE NOT CONSIDERED THE DECISIONS RENDERED BY THE HON' BLE KARNATAKA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. I NGERSOLL RAND INTERNATIONAL IND. LTD. (SUPRA). THE DECISION OF HON' BLE DELHI HIGH COURT IN THE CASE OF CIT VS. HINDUSTAN COCA COLA BEV ERAGES P. LTD. REPORTED AS 331 ITR 192 (DEL) ON WHICH THE CHENNAI B ENCH OF TRIBUNAL HAS PLACED RELIANCE IS ON DIFFERENT SET OF FACTS. TH EREFORE, THE CASE LAWS ON WHICH THE LD. DR HAS PLACED RELIANCE WILL HAVE N O APPLICATION. 12. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESE NTATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF AUTHORITIES BE LOW. WE HAVE ALSO PERUSED THE DECISIONS ON WHICH THE RIVAL SIDES HAVE P LACED RELIANCE. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE IS D ISALLOWANCE OF CLAIM OF DEPRECIATION ON NON-COMPETE PAYMENT. THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. I NGERSOLL RAND INTERNATIONAL IND. LTD. (SUPRA) HAD OCCASION TO DECIDE THIS ISSUE. THE QUESTION BEFORE HON'BLE HIGH COURT WAS: WHETHER THE TRIBUNAL WAS CORRECT IN HOLDING THAT N ON-COMPETE FEE BEING IN THE NATURE OF CAPITAL EXPENDITURE, DEPRECIATION IS TO BE ALLOWED ON THE 9 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 NON-COMPETE FEE AS IT CONSTITUTES A COMMERCIAL OR A BUSINESS RIGHT UNDER SEC. 32(1)(II) OF THE ACT? 13. THE HON'BLE HIGH COURT AFTER CONSIDERING AND DISCUSSIN G VARIOUS JUDGMENTS CITED BY THE RIVAL SIDES HELD AS UNDER: 7. SECTION 32 HAS BEEN WIDENED BY THE FINANCE ACT NO.2 (ACT OF 1998) WHEREBY DEPRECIATION IS ALLOWED ON INTANGIBLE ASSET S ACQUIRED ON OR AFTER 1ST APRIL 1998. AS PER SEC.32(1)(II), DEPRECIATION IS ALLOWABLE IN RESPECT OF KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCE S, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATU RE. THE ASSETS WHICH ARE INCLUDED IN THE DEFINITION OF INTANGIBLE ASSETS INCLUDES ALONG WITH OTHER THINGS EXPRESSLY ENUMERATED, ANY OTHER BUSINE SS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. THEREFORE THE EXPRESSION 'BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' NEED NOT ANSWER THE DESCR IPTION OF KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHI SES, BUT MUST BE OF SIMILAR NATURE AS THE SPECIFIED ASSETS. THE FACT TH AT AFTER 'THE SPECIFIED INTANGIBLE ASSETS', THE WORDS 'BUSINESS OR COMMERCI AL RIGHTS OF SIMILAR NATURE' HAVE BEEN ADDITIONALLY USED, CLEARLY DEMONS TRATES THAT THE LEGISLATURE DID NOT INTEND TO PROVIDE FOR DEPRECIAT ION ONLY IN RESPECT OF SPECIFIED INTANGIBLE ASSETS, BUT ALSO TO OTHER CATE GORIES OF INTANGIBLE ASSETS WHICH WERE NEITHER FEASIBLE NOR POSSIBLE TO EXHAUSTIVELY ENUMERATE. THE WORDS 'SIMILAR NATURE' IS A SIGNIFIC ANT EXPRESSION. THE APEX COURT IN THE CASE OF NAT STEEL EQUIPMENT (P.) LTD. (SUPRA) EXPLAINING THE MEANING OF THE WORD 'SIMILAR', HELD THAT IT DOES NOT MEAN IDENTICAL BUT IT MEANS CORRESPONDING TO OR RESEMBLI NG TO IN MANY RESPECTS SOMEWHAT LIKE OR HAVING A GENERAL LIKENESS. THE STA TUTE DOES NOT CONTEMPLATE THAT GOODS CLASSIFIED UNDER THE WORDS O F SIMILAR DESCRIPTION, SHALL IN ALL RESPECTS BE THE SAME. IF IT DID, THESE WORDS WOULD BE UNNECESSARY. 8. THEREFORE WHAT IS TO BE SEEN IS, WHAT ARE THE NA TURE OF INTANGIBLE ASSETS WHICH WOULD CONSTITUTE BUSINESS OR COMMERCIA L RIGHTS TO BE ELIGIBLE FOR DEPRECIATION. IN THIS REGARD, IT IS NE CESSARY TO NOTICE THAT THE INTANGIBLE ASSETS ENUMERATED IN SEC.32 OF THE ACT E FFECTIVELY CONFER A RIGHT UPON AN ASSESSEE FOR CARRYING ON A BUSINESS M ORE EFFICIENTLY BY UTILIZING AN AVAILABLE KNOWLEDGE OR BY CARRYING ON A BUSINESS TO THE EXCLUSION OF ANOTHER ASSESSEE. A NON-COMPETE RIGHT ENCOMPASSES A RIGHT UNDER WHICH ONE PERSON IS PROHIBITED FROM COMPETING IN BUSINESS WITH ANOTHER FOR A STIPULATED PERIOD. IT WOULD BE THE RI GHT OF THE PERSON TO CARRY ON A BUSINESS IN COMPETITION BUT FOR SUCH AGR EEMENT OF NON- 10 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 COMPETE. THEREFORE THE RIGHT ACQUIRED UNDER A NON-C OMPETE AGREEMENT IS A RIGHT FOR WHICH A VALUABLE CONSIDERATION IS PAID. THIS RIGHT IS ACQUIRED SO AS TO ENSURE THAT THE RECIPIENT OF THE NON-COMPE TE FEE DOES NOT COMPETE IN ANY MANNER WITH THE BUSINESS IN WHICH HE WAS EARLIER ASSOCIATED. THE OBJECT OF ACQUIRING A KNOW-HOW, PAT ENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES IS TO CARRY ON BU SINESS AGAINST RIVALS IN THE SAME BUSINESS IN A MORE EFFICIENT MANNER OR TO PUT IT DIFFERENTLY IN A BEST POSSIBLE MANNER. THE OBJECT OF ENTERING INTO A NON-COMPETE AGREEMENT IS ALSO THE SAME IE., TO CARRY ON BUSINES S IN A MORE EFFICIENT MANNER BY AVOIDING COMPETITION, ATLEAST FOR A LIMITE D PERIOD OF TIME. ON PAYMENT OF NON-COMPETE, THE PAYER ACQUIRES A BUNDLE OF RIGHTS SUCH AS RESTRICTING RECEIVER DIRECTLY OR INDIRECTLY PARTICI PATING IN A BUSINESS WHICH IS SIMILAR TO THE BUSINESS BEING ACQUIRED, FROM DIR ECTLY OR INDIRECTLY SOLICITING OR INFLUENCING CLIENTS OR CUSTOMERS OF T HE EXISTING BUSINESS OR ANY OTHER PERSON EITHER NOT TO DO BUSINESS WITH THE PERSON WHO HAS ACQUIRED THE BUSINESS AND PAID THE NON-COMPETE FEE OR TO DO BUSINESS WITH THE PERSON RECEIVING THE NON-COMPETE FEE TO DO BUSINESS WITH A PERSON WHO IS DIRECTLY OR INDIRECTLY IN COMPETITION WITH THE BUSINESS WHICH IS BEING ACQUIRED. THE RIGHT IS ACQUIRED FOR CARRYING ON THE BUSINESS AND THEREFORE IT IS A BUSINESS RIGHT. THE WORD 'COMMERCIAL'' IS DEFINED IN BLACK'S LAW DICTIONARY AS RELATED TO OR CONNECTED WITH TRADE AND COMMERCE IN GENERAL', 'COMMERCE' IS DEFINED AS 'THE EXCHANGE OF GOODS, PRODUCTIONS OR PROPERTY OF ANY KIND; THE BUY ING, SELLING AND EXCHANGING OF ARTICLES'. A RIGHT BY WAY OF NON-COMP ETE IS ACQUIRED ESSENTIALLY FOR TRADE AND COMMERCE AND THEREFORE IT WILL ALSO QUALIFY AS A COMMERCIAL RIGHT. A RIGHT ACQUIRED BY WAY OF NON-CO MPETE CAN BE TRANSFERRED TO ANY OTHER PERSON IN THE SENSE THAT T HE ACQUIRER GETS THE RIGHT TO ENFORCE THE PERFORMANCE OF THE TERMS OF AG REEMENT UNDER WHICH A PERSON IS RESTRAINED FROM COMPETING. WHEN A BUSINESSMAN PAYS MONEY TO ANOTHER BUSINESSMAN FOR RESTRAINING THE OTHER BU SINESSMAN FROM COMPETING WITH THE ASSESSEE, HE GETS A VESTED RIGHT WHICH CAN BE ENFORCED UNDER LAW AND WITHOUT THAT, THE OTHER BUSI NESSMAN CAN COMPETE WITH THE FIRST BUSINESSMAN. WHEN BY PAYMENT OF NON-COMPETE FEE, THE BUSINESSMAN GETS HIS RIGHT WHAT HE IS PRAC TICALLY GETTING IS KIND OF MONOPOLY TO RUN HIS-BUSINESS WITHOUT BOTHERING A BOUT THE COMPETITION. GENERALLY, NON-COMPETE FEE IS PAID FOR A DEFINITE P ERIOD. THE IDEA IS THAT BY THAT TIME, THE BUSINESS WOULD STAND FIRMLY ON IT S OWN FOOTING AND CAN SUSTAIN LATER ON. THIS CLEARLY SHOWS THAT THE COMME RCIAL RIGHT COMES INTO EXISTENCE WHENEVER THE ASSESSEE MAKES PAYMENT FOR N ON-COMPETE FEE. THEREFORE THAT RIGHT WHICH THE ASSESSEE ACQUIRES ON PAYMENT OF NON- COMPETE FEE CONFERS IN HIM A COMMERCIAL OR A BUSINE SS RIGHT WHICH IS 11 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 HELD TO BE SIMILAR IN NATURE TO KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES. THEREFORE THE COMMERCI AL RIGHT THUS ACQUIRED BY THE ASSESSEE UNAMBIGUOUSLY FALLS IN THE CATEGORY OF AN 'INTANGIBLE ASSET'. THEIR RIGHT TO CARRY ON BUSINESS WITHOUT COMPETITI ON HAS AN ECONOMIC INTEREST AND MONEY VALUE. THE TERM 'OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' HAS TO BE INTE RPRETED IN SUCH A WAY THAT IT WOULD HAVE SOME SIMILARITIES AS OTHER ASSET S MENTIONED IN CL.(B) OF EXPLN.3. HERE THE DOCTRINE OF EJUSDEM GENERIS WOULD COME INTO OPERATION AND THEREFORE THE NON-COMPETE FEE VESTS A RIGHT IN THE ASSESSEE TO CARRY ON BUSINESS WITHOUT COMPETITION WHICH IN TURN CONFE RS A COMMERCIAL RIGHT TO CARRY ON BUSINESS SMOOTHLY. WHEN ONCE THE EXPEND ITURE INCURRED FOR ACQUIRING THE SAID RIGHT IS HELD TO BE CAPITAL IN N ATURE, CONSEQUENTLY THE DEPRECIATION PROVIDED UNDER SEC.32(1)(II) IS ATTRAC TED AND THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTION AS PROVIDED IN T HE SAID PROVISION I.E., PRECISELY WHAT THE TRIBUNAL HAS HELD. [EMPHASIS APPLIED BY US] IN VIEW OF THE ABOVE JUDGMENT OF HON'BLE HIGH COURT IT IS UNAMBIGUOUSLY CLEAR THAT NON-COMPETE PAYMENT IS CAPITAL IN NATURE AND FALLS IN THE CATEGORY OF AN INTANGIBLE ASSET. THUS, NON- COMPETE PAYMENT IS ELIGIBLE FOR DEPRECIATION U/S. 32(1)(II) OF THE ACT. ACCORDINGLY, GROUND NOS. 1 TO 3 RAISED IN THE APPEAL OF TH E ASSESSEE ARE ALLOWED. 14. THE NEXT ISSUE RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO DISALLOWANCE OF DEPRECIATION CLAIMED ON GOODWILL U/S. 32(1)(II) O F THE ACT. IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SMIFS S ECURITIES LTD. (SUPRA) ONE OF THE QUESTION BEFORE THE HON'BLE APEX COURT FOR ADJUDICATION WAS: WHETHER GOODWILL IS AN ASSET WITHIN THE MEANING OF SECTION 32 OF THE INCOME TAX ACT, 1961, AND WHETHER DEPRECIATION ON G OODWILL IS ALLOWABLE UNDER THE SAID SECTION? 12 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 THE HON'BLE SUPREME COURT OF INDIA ANSWERED THE QUESTIO N IN AFFIRMATIVE AS UNDER: ANSWER: IN THE PRESENT CASE, THE ASSESSEE HAD CLAI MED DEDUCTION OF RS.54,85,430/- AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING, THE EXPLANATION REGARDING ORIGIN OF SUCH GOODWILL WAS G IVEN AS UNDER: 'IN ACCORDANCE WITH SCHEME OF AMALGAMATION OF YSN S HARES & SECURITIES (P) LTD WITH SMIFS SECURITIES LTD (DULY SANCTIONED BY HON'BLE HIGH COURTS OF BOMBAY AND CALCUTTA) WITH RE TROSPECTIVE EFECT FROM 1ST APRIL, 1998, ASSETS AND LIABILITIES OF YSN SHARES & SECURITIES (P) LTD WERE TRANSFERRED TO AND VEST IN THE COMPANY. IN THE PROCESS GOODWILL HAS ARISEN IN THE BOOKS OF THE COMPANY.' IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES PRIVATE LIMITED [AMALGAMATING COMPANY] SHOULD BE CON SIDERED AS GOODWILL ARISING ON AMALGAMATION. IT WAS CLAIMED TH AT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTIN G CLIENTELE. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX AC T, 1961 [`ACT', FOR SHORT]. WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: 'EXPLANATION 3.-- FOR THE PURPOSES OF THIS SUB-SECT ION, THE EXPRESSIONS `ASSETS' AND `BLOCK OF ASSETS' SHALL ME AN-- [A] TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNIT URE; [B] INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COP YRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSIN ESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE.' EXPLANATION 3 STATES THAT THE EXPRESSION `ASSET' SH ALL MEAN AN INTANGIBLE ASSET, BEING KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMA RKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE. A READING THE WORDS `ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 INDICATES TH AT GOODWILL WOULD FALL UNDER THE EXPRESSION `ANY OTHER BUSINESS OR COMMERC IAL RIGHT OF A SIMILAR 13 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 NATURE'. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STR ICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT `GOOD WILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IN THE PRE SENT CASE, THE ASSESSING OFFICER, AS A MATTER OF FACT, CAME TO THE CONCLUSION THAT NO AMOUNT WAS ACTUALLY PAID ON ACCOUNT OF GOODWILL. TH IS IS A FACTUAL FINDING. THE COMMISSIONER OF INCOME TAX (APPEALS) [ `CIT(A)', FOR SHORT] HAS COME TO THE CONCLUSION THAT THE AUTHORISED REPR ESENTATIVES HAD FILED COPIES OF THE ORDERS OF THE HIGH COURT ORDERING AMA LGAMATION OF THE ABOVE TWO COMPANIES; THAT THE ASSETS AND LIABILITIE S OF M/S. YSN SHARES AND SECURITIES PRIVATE LIMITED WERE TRANSFERRED TO THE ASSESSEE FOR A CONSIDERATION; THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTED GOODWILL AND THAT THE ASSES SEECOMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGH T IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE A SSESSEE-COMPANY STOOD INCREASED. THIS FINDING HAS ALSO BEEN UPHELD BY INCOME TAX APPELLATE TRIBUNAL [`ITAT', FOR SHORT]. WE SEE NO R EASON TO INTERFERE WITH THE FACTUAL FINDING. ONE MORE ASPECT WHICH NEEDS TO BE MENTIONED IS THAT , AGAINST THE DECISION OF ITAT, THE REVENUE HAD PREFERRED AN APPE AL TO THE HIGH COURT IN WHICH IT HAD RAISED ONLY THE QUESTION AS TO WHET HER GOODWILL IS AN ASSET UNDER SECTION 32 OF THE ACT. IN THE CIRCUMSTA NCES, BEFORE THE HIGH COURT, THE REVENUE DID NOT FILE AN APPEAL ON THE FI NDING OF FACT REFERRED TO HEREINABOVE. FOR THE AFORE-STATED REASONS, WE ANSWER QUESTION NO .[B] ALSO IN FAVOUR OF THE ASSESSEE. FOLLOWING THE DECISION RENDERED IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SMIFS SECURITIES LTD. (SUPRA), THE HON'BLE B OMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. BIRLA G LOBAL ASSET FINANCE CO. LTD. (SUPRA) AND IN THE CASE OF TOYO ENGINEERING INDIA LIMITED VS. THE DY. COMMISSIONER OF INCOME TAX (SUPRA) HELD THAT 14 ITA NOS. 1317 & 7547/PN/2010 A.Y. 2003-04 DEPRECIATION IN RESPECT OF INTANGIBLE ASSETS CONSTITUTING GO ODWILL IS ALLOWABLE. 15. IN VIEW OF THE LAW LAID DOWN BY THE HON'BLE SUPREME C OURT OF INDIA WITH RESPECT TO CLAIM OF DEPRECIATION ON GOODWILL, WE AR E OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW HAVE ERRED IN DISALLOWING THE CLAIM OF DEPRECIATION ON GOODWILL. ACCORDINGLY, GROUND NOS. 4 TO 6 RAISED IN THE APPEAL ON THIS ISSUE IS ALLOWED AND IMPUGNED ORDER IS SET ASIDE. 16. IN THE RESULT, THE APPEAL OF THE REVENUE AND THE A PPEAL OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON FRIDAY, THE 01 ST DAY OF JANUARY, 2016. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 01 ST JANUARY, 2016 RK *+,$-.'/'(- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-I, THANE 4. ' / THE CIT-II, THANE 5. !*+ %%,- , ,- , . /01 , / DR, ITAT, A BENCH, PUNE. 6. + 2 34 / GUARD FILE. // ! % // TRUE COPY// #5 / BY ORDER, %6 ,1 / PRIVATE SECRETARY, ,- , / ITAT, PUNE