C.L.C. & Sons Pvt. Ltd., V. ACIT, Circle-3(1),

ITA 1976/DEL/2006

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6647 (ITAT-DELHI)
• Duration Of Justice: 12 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 29-06-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 01-06-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY VARMA
• Assessee Lawyers: MRS MEENAL GOYAL; ROHIT JAIN SHRI DEEPESH JAIN
• Keywords: Depreciation; Valuation report
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SPECIAL BENCH : NEW DELHI BEFORE SHRI G.D. AGRAWAL, PRESIDENT, SHRI R.S. SYAL, VICE PRESIDENT AND SHRI BHAVNESH SAINI, JUDICIAL MEMBER ITA NO.1976/DEL/2006 ASSESSMENT YEAR : 2001-02 M/S CLC & SONS PVT. LTD., A-60, OKHLA INDUSTRIAL AREA, PHASE II, NEW DELHI. PAN: AABCC7980K VS. ACIT, CIRCLE 3(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ROHIT JAIN, ADVOCATE, SHRI DEEPESH JAIN, CA & MRS. MEENAL GOYAL, CA DEPARTMENT BY : SHRI VIJAY VARMA, CIT, DR DATE OF HEARING : 18.07.2018 DATE OF PRONOUNCEMENT : 19.07.2018 ORDER PER R.S. SYAL, VP: THE DIVISION BENCH WHICH HEARD THE INSTANT APPEAL, MADE A REFERENCE TO THE HONBLE PRESIDENT FOR CONSTITUTION OF A SPEC IAL BENCH ON 31.08.2009 ITA NO.1976/DEL/2006 2 ON THE QUESTION OF ENTITLEMENT OF DEPRECIATION ON G OODWILL BY MENTIONING CONTRARY SETS OF DECISIONS VIZ., ONE SET ALLOWING D EPRECIATION ON GOODWILL AND THE OTHER NOT ALLOWING IT. THE SPECIAL BENCH E SPOUSED THE MATTER. IT WAS PUT FORTH ON BEHALF OF THE ASSESSEE THAT THE TR IBUNAL ALLOWED DEPRECIATION ON GOODWILL IN THE CASE OF A RELATED C ONCERN, NAMELY, CLC GLOBAL PVT. LTD., AND THE REVENUE TOOK THE MATTER BEFORE THE HONBLE HIGH COURT, WHICH WAS STILL PENDING. THE ASSESSEE PRAYED THAT THE HEARING OF THE SPECIAL BENCH BE KEPT IN ABEYANCE AS ITS DECISION C AN IMPINGE ON THE ISSUE EITHER WAY BEFORE THE HONBLE HIGH COURT. THE SPECI AL BENCH ACCEDED TO THE REQUEST MADE ON BEHALF OF THE ASSESSEE AND VIDE ITS ORDER DATED 19.03.2010, INTER ALIA, REFRAMED THE FOLLOWING QUESTION FOR CONSIDERATION AND DECISION BY THE SPECIAL BENCH:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION U/S 32 O F THE INCOME TAX ACT ON THE INTANGIBLE ASSETS TERMED GOODWILL ACQUIRED BY THE ASSESSEE FOR RS.10 CRORE. 2. THE ASSESSEE HAS NOW MOVED A FRESH APPLICATION REQUESTING FOR THE DISPOSAL OF ITS APPEAL. THIS IS HOW, THE SPECIAL BE NCH HAS BEEN RE- ITA NO.1976/DEL/2006 3 CONSTITUTED BY THE HONBLE PRESIDENT TO DECIDE THE QUESTION ALREADY FORMULATED BY THE PREDECESSOR COMBINATION OF THE SP ECIAL BENCH. 3. THE FACTUAL PANORAMA IS THAT THE ASSESSEE COMPAN Y WAS INCORPORATED ON 21.08.1997 WITH THE ORIGINAL SUBSCRIBERS OF SHAR ES VIZ., SHRI MUKUND CHAUDHARY, SHRI KAPIL CHAUDHARY AND SHRI AJAY KUMAR CHAUDHARY. THE ASSESSEE COMPANY TOOK OVER ALL THE ASSETS AND LIABI LITIES OF M/S CLC & SONS, A PARTNERSHIP FIRM WITH EFFECT FROM 01.04.200 0. AN AGREEMENT FOR TRANSFER OF ALL THE ASSETS AND LIABILITIES WAS SIGN ED BETWEEN THE ASSESSEE COMPANY AND CLC & SONS ON 11.02.2000. AS PER CLAUS E 2 OF THE SAID AGREEMENT, ALL THE ASSETS IN THE BOOKS OF THE PARTN ERSHIP FIRM WERE TAKEN OVER BY THE ASSESSEE COMPANY AT BOOK VALUE OF RS. 1 ,20,54,320/-. IN ADDITION, GOODWILL OF THE PARTNERSHIP FIRM WAS VALU ED AT RS.10 CRORE, WHICH WAS ALSO TRANSFERRED TO THE ASSESSEE COMPANY. IN A LL, THE ASSESSEE AGREED TO ISSUE SHARES TO THE PARTNERS OF THE FIRM WORTH RS.1 1,20,54,320/- (RS.10 CRORE TOWARDS GOODWILL AND RS.1.20 CRORE TOWARDS CA PITAL OF THE PARTNERS AS ON 31.03.2000). DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, THE AO NOTICED THAT CLC & SONS HAD FIVE PARTNERS ON 31.03. 2000, NAMELY, SHRI AJAY KUMAR CHAUDHARY, SHRI MUKUND CHAUDHARY, SHRI K APIL CHAUDHARY, ITA NO.1976/DEL/2006 4 SMT. ROMILA CHAUDHARY AND SMT. RITU CHAUDHARY. ON TAKING OVER THE PARTNERSHIP FIRM, THE FIRST THREE PARTNERS OF THE F IRM WERE APPOINTED AS DIRECTORS OF THE ASSESSEE COMPANY. ON BEING CALLED UPON TO EXPLAIN THE BASIS OF VALUATION OF GOODWILL OF THE PARTNERSHIP F IRM, THE ASSESSEE COMPANY FURNISHED A VALUATION REPORT DATED 25.01.2000, COMP UTING THE AMOUNT OF GOODWILL ON THE BASIS OF SIX YEARS PURCHASE OF SUP ER PROFITS. SUCH CALCULATION OF GOODWILL HAS BEEN SET OUT ON PAGE 7 OF THE ASSESSMENT ORDER. THE AO FOUND CERTAIN INFIRMITIES IN SUCH CALCULATIO N BY OBSERVING THAT : (I) PROFIT BEFORE TAX OF VARIOUS YEARS TAKEN BY THE VAL UER WAS EXCESSIVELY HIGH AND UNREALISTIC; (II) THE VALUER HAD WRONGLY TAKEN RATE OF YIELD OF THE BUSINESS AT 9%, BEING, THE AVERAGE INTEREST ON FIXE D DEPOSITS; AND (III) THE VALUER HAD WRONGLY VALUED THE GOODWILL AT SIX YEARS PURCHASE OF SUPER PROFIT. AFTER CONSIDERING THE IMPACT OF THE ABOVE THREE AND CERTAIN OTHER RELATED FACTORS, THE AO CAME TO HOLD THAT IF THE PA ST PERFORMANCE OF THE FIRM AND THE DECLINING PROFITS WERE TO BE TAKEN INTO ACC OUNT, THERE WOULD BE NIL VALUE OF GOODWILL OF THE PARTNERSHIP FIRM. NOTWITHS TANDING THE ABOVE, THE AO OBSERVED IN PARA 6.5 OF HIS ORDER THAT IT IS A C ASE WHERE THE FIRM IS SUCCEEDED BY A COMPANY AND ALL THE PARTNERS HAVE BE COME THE SHAREHOLDERS ITA NO.1976/DEL/2006 5 OF THE COMPANY, WHICH WAS PROMOTED BY THE PARTNERS THEMSELVES. IN THE ABOVE HUE, HE HELD THAT NO TRANSFER OF GOODWILL IN REAL SENSE WAS INVOLVED. IT WAS THUS OPINED THAT THE WHOLE EXERCISE DONE BY THE ASSESSEE IN VALUING THE GOODWILL AND ISSUING SHARES OF EQUAL AMOUNT TO THE ERSTWHILE PARTNERS OF THE FIRM WAS A WIN-WIN SITUATION, AIMED AT BENEFITT ING SUCH PARTNERS ON ONE HAND WITH INCREASE IN THEIR CAPITALS BY RS.10 CRORE AND ON THE OTHER HAND BY CLAIMING DEPRECIATION ON SUCH GOODWILL IN THE HANDS OF THE SUCCESSOR COMPANY. AFTER OBSERVING IN PARA 7 OF THE ASSESS MENT ORDER THAT THOUGH THERE WAS NO GOODWILL OF THE PARTNERSHIP FIRM CAPAB LE OF TRANSFER TO THE ASSESSEE COMPANY, THE AO STILL PROCEEDED TO DISCUSS THE LEGAL ISSUE OF DEPRECIATION ON GOODWILL AS CLAIMED BY THE ASSESSEE . ON GOING THROUGH THE MANDATE OF SECTION 32(1), HE CONCLUDED THAT THE EXP RESSION OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE EMPLOYED IN SECTION 32(1) DID NOT ENCOMPASS GOODWILL OF A BUSINESS AS THE SAME WAS DI FFERENT IN NATURE FROM KNOW-HOW, PATENT, COPYRIGHTS AND TRADE MARKS ETC., USED BY THE LEGISLATURE IN THE EARLIER PART OF THE PROVISION. EX CONSEQUENTI, THE AO DISALLOWED DEPRECIATION OF RS.2.50 CRORE CLAIMED BY THE ASSESS EE ON THE AMOUNT OF ITA NO.1976/DEL/2006 6 GOODWILL. THE LD. CIT(A) COUNTENANCED THE VIEW TAK EN BY THE AO ON THIS POINT. 4. BEFORE ESPOUSING THE QUESTION POSED BEFORE THE S PECIAL BENCH, IT IS APPOSITE TO NOTE THAT THE AO MADE OTHER ADDITIONS/D ISALLOWANCES IN THE ASSESSMENT ORDER, WHICH HAVE ALSO BEEN ASSAILED BEF ORE THE TRIBUNAL. BESIDES, THE ASSESSEE HAS NOT ONLY CHALLENGED THE V IEW TAKEN BY THE AUTHORITIES THAT THERE WAS NO GOODWILL IN THE BUSIN ESS OF THE PARTNERSHIP FIRM WHICH COULD HAVE BEEN TRANSFERRED TO THE ASSES SEE COMPANY BY SUCCESSION AND ITS VALUATION, THE ASSAIL IS ALSO TO THE PER SE NON-GRANTING OF DEPRECIATION ON GOODWILL U/S 32(1) OF THE INCOME-TA X ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT). 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS VIVID FROM THE DISCUSSION MADE SUPRA THAT QUA THE ISSUE OF DEPRECIATION ON GOODWILL, THE AUTHORITIES BELOW HAVE DIVIDED IT INTO TWO BROADER COMPARTMENTS BY HOLDING THAT I) NO DEPR ECIATION CAN BE LEGALLY ALLOWED ON THE AMOUNT OF GENUINE GOODWILL IN TERMS OF SECTION 32 OF THE ACT; AND II) WHEN A FIRM IS SUCCEEDED BY A COMPANY AND ALL ITS NET ASSETS ITA NO.1976/DEL/2006 7 VEST IN THE COMPANY, THERE IS NO TRANSFER OF GOODWI LL IN REAL SENSE AND FURTHER THE VALUATION OF GOODWILL DONE BY THE ASSES SEE IN THE INSTANT CASE IS FALLACIOUS. 6. INSOFAR AS THE LEGAL QUESTION OF DEPRECIATI ON ON GENUINE GOODWILL, BEING THE FIRST BROADER ASPECT, IS CONCERNED, THE CONTROVERSY CAN BE BETTER APPRECIATED ON THE TOUCHSTONE OF THE PRESCRIPTION O F SECTION 32, WHOSE RELEVANT PART IS EXTRACTED AS UNDER : - `(1) IN RESPECT OF DEPRECIATION OF (I) BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; (II) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LI CENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED F OR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTION S SHALL BE ALLOWED . 7. IT IS OVERT FROM THE COMMAND OF CLAUSE (II) OF SECTION 32(1) OF THE ACT THAT DEPRECIATION IS PERMISSIBLE IN RESPECT OF INTA NGIBLE ASSETS LISTED HEREIN, ACQUIRED ON OR AFTER 01.04.1998. THIS CLAUSE CONTA INS CERTAIN SPECIFIED AND UNSPECIFIED SPECIES OF INTANGIBLE ASSETS. WHEREAS T HE SPECIFIED INTANGIBLE ASSETS ENSHRINED IN THE PROVISION INCLUDE KNOW-HOW, PATENT AND COPYRIGHTS ITA NO.1976/DEL/2006 8 ETC., THE UNSPECIFIED INTANGIBLE ASSETS HAVE BEEN D ESCRIBED WITH THE EXPRESSION OR ANY OTHER BUSINESS OR COMMERCIAL RIG HTS OF SIMILAR NATURE. IT IS NOBODYS CASE THAT GOODWILL IS A SPECIFIED INTAN GIBLE ASSET. THE ASSESSEE HAS SOUGHT TO COVER `GOODWILL WITHIN THE EXPRESSIO N DEPLOYED TO DEFINE UNSPECIFIED INTANGIBLE ASSETS. AU CONTRAIRE, THE A.O. HAS CANVASSED A VIEW THAT THE EXPRESSION USED IN THE PROVISION FOR DEFIN ING UNSPECIFIED INTANGIBLE ASSETS CANNOT EMBRACE SOMETHING WHICH IS INEXTRICAB LY LINKED WITH THE BUSINESS OF THE ASSESSEE. HE BOLSTERED HIS POINT O F VIEW BY NOTING THAT THE SPECIFIED ASSETS IN THE PROVISION ARE SUCH WHICH AR E DETACHABLE FROM THE BUSINESS OF THE ASSESSEE AND TRANSFERRABLE INDIVIDU ALLY AND SEPARATELY. IN THIS LIGHT, HE HELD THAT THE EXPRESSION OR ANY OTH ER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE WOULD INCLUDE ONLY SUCH A SSETS WHICH ARE TRANSFERRABLE DISTINCTLY. GOODWILL OF A BUSINESS, BEING, AN INTANGIBLE ASSET WHICH CANNOT BE TRANSFERRED SEPARATELY DE HORS THE TRANSFER OF BUSINESS, WAS, ERGO, HELD TO BE NOT INCLUDIBLE IN THE EXPRES SION USED IN THE PROVISION TO EXPLAIN THE UNSPECIFIED INTANGIBLE ASSETS. IN OUR CONSIDERED OPINION, THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HON'BLE SUMMIT COURT IN CIT VS. SMIFS SECURITIES LTD. (2012) 348 ITR 302 (S C) IN WHICH IT ITA NO.1976/DEL/2006 9 HAS BEEN HELD: THAT GOODWILL WILL FALL UNDER THE EXPRESSION OR A NY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE AND, HENCE, QUALIFIES FOR DEPRECIATION U/S 32(1) OF THE ACT. WE, THEREFORE, A NSWER THE LEGAL ISSUE RAISED IN THE QUESTION BEFORE THE SPECIAL BENCH IN AFFIRMATIVE BY HOLDING, IN PRINCIPLE, THAT DEPRECIATION IS AVAILABLE ON GENUIN E GOODWILL. 8. IT HAS BEEN NOTED ABOVE THAT THE A.O. HAS CLAS SIFIED DISCUSSION ON THE ISSUE OF DEPRECIATION ON GOODWILL IN TWO BROADER LI MBS. FIRSTLY, HE HELD THAT NO DEPRECIATION CAN BE GRANTED ON GENUINE GOODWILL IN TERMS OF SECTION 32(1) OF THE ACT, WHICH OPINION STANDS OVERTURNED H EREINABOVE. SECONDLY, HE HELD THAT IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, A FIRM HAS BEEN SUCCEEDED BY A COMPANY AND NET ASSETS OF THE F IRM HAVE VESTED IN THE COMPANY, AND CONSEQUENTLY THERE IS NO TRANSFER OF G OODWILL IN REAL SENSE AND FURTHER THE VALUATION OF GOODWILL DONE BY THE A SSESSEE IN THE INSTANT CASE WAS ERRONEOUS. BOTH THE SIDES CANDIDLY ACCEPTE D THAT THE SECOND BROADER LIMB INVOLVED IN THE INSTANT APPEAL DOES NO T PRECISELY EMANATE FROM THE SUBSTANCE OF THE QUESTION REFERRED TO THE SPECI AL BENCH. IT WAS URGED THAT THE SAME MAY BE RETURNED TO THE DIVISION BENCH FOR DISPOSAL ALONG WITH THE OTHER GROUNDS RAISED BY THE ASSESSEE. WE AGREE WITH SUCH A ITA NO.1976/DEL/2006 10 COMMON CONTENTION AND, ACCORDINGLY, SEND THE MATTER BACK TO THE DIVISION BENCH FOR DISPOSING OFF THE APPEAL IN ABOVE TERMS. SD/- SD/- SD/- [G.D. AGRAWAL] [BHAVNESH SAINI] [R.S. SYAL] PRESIDENT JUDICIAL MEMBER VICE PRESIDENT DATED,19 TH JULY, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.