DCIT RG 10(3), MUMBAI V. TOYO ENGINEERING INDIA LTD, MUMBAI

ITA 3279/MUM/2008

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8134 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 5 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 28-08-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 12-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR
• Keywords: Capital asset; Depreciation; Scheme of amalgamation
• Section: 32

Judgement Text

L IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, AM AND VIVEK VARMA, JM ./I.T.A. NO. 3279/M/2008 (AY:2003 - 2004) DCIT - RANGE 10(3), 451, AAYAKAR BHAVAN, 4 TH FLOOR, M.K. MARG, MUMBAI - 400 020. / VS. M/S. TOYO ENGINEERING INDIA LIMITED, TOYO HOUSE, LBS MARG, KANJUR MARG (W), MUMBAI 400 078. PAN:AAACT1772H ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI NARENDRA KUMAR, DR / RESPONDENT BY : SHRI RAJAN VORA & MR. NIKHIL TIWARI / DATE OF HEARING : 28.08.2014 / DATE OF PRONOUNCEMENT : 13 .10.2014 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE REVENUE ON 12.5.2008 IS AGAINST THE ORDER OF THE CIT (A) - XXXII, MUMBAI DATED 25.1.2008 FOR THE ASSESSMENT YEAR 2003 - 2004. 2. DURING THE PROCEEDINGS BEFORE US, AT THE OUTSET, SHRI RAJAN VORA & MR. NIKHIL TIWARI, LD COUNSELS FOR THE ASSESSEE MENTIONED THAT THIS IS THE SEC OND ROUND OF THE PROCEEDINGS BEFORE THE TRIBUNAL. IN THE FIRST ROUND, THE REVENUES APPEAL WITH ITS 5 GROUNDS WAS ADJUDICATED BY THE TRIBUNAL AND THE APPEAL WAS PARTLY ALLOWED VIDE ITA NO.3279/M/2008, ORDER DATED 25.5.2012. THE MATTER TRAVELLED TO THE HONBLE HIGH COURT AND THE ISSUE RELATING TO THE ALLOWABILITY OF DEPRECIATION ON GOODWILL, RAISED IN GROUND NO.1 WAS RESTORED TO THE FILE OF THE ITAT FOR FRESH DECISION ON MERITS AND IN ACCORDANCE WITH LAW. THEREFORE, THE PRESENT PROCEEDINGS ARE PLACED BEFORE US. THE SAID GROUND NO.1 READS AS UNDER: 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) HAS ERRED IN DIRECTIN G THE AO TO GRANT DEPRECIATION ON GOODWILL WITHOUT APPRECIATING THAT DEPRECIATION IS NOT ALLOWABLE U/S 36(1)(II) OF THE ACT, SINCE GOODWILL IS NOT AN INTANGIBLE ASSET IN THE NATURE OF KNOW - HOW, A PATENTS, COPYRIGHT, TRADEMARK, LICENSES, FRANCHISES OR ANY O THER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE FALLING WITHIN THE MEANING OF SECTION 32(1)(II) OF THE ACT. 3. THE ONLY ISSUE INVOLVED IN THIS GROUND RELATES TO THE ALLOWABILITY OF DEPRECIATION ON GOODWILL. ON THIS ISSUE, THE HON BLE HIGH COURT DELIV ERED ITS DECISION VIDE INCOME TAX APPEAL (L) NO.1330 OF 2012, DATED 30 TH OCTOBER, 2012 AND THE SAME READS AS UNDER: 1. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN DISALLOWING THE DEPRECIATION ON GOODWILL UNDER SECTION 32(1)(II) OF THE INCOME TAX ACT, 1961 IS THE BASIC QUESTION RAISED IN THIS APPEAL. 2. THE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SMIFS SECURITIES LIMITED REPORTED IN 348 ITR 302 (SC) HAS HELD THAT THE DEPRECIATION WOULD BE ALLOWABLE ON GOODWILL. IN THIS VIEW OF THE MATTER, THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IS QUASHED AND SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL FOR FRESH DECISION ON MERITS AND IN ACCORDANCE WITH LAW. 3. THE APPEAL IS ACCOR DINGLY DISPOSED OF IN ABOVE TERMS WITH NO ORDER OF COSTS. 4. BEFORE US, A S PER THE LD COUNSEL, SINCE THE HONBLE HIGH COURT HAS QUASHED TH E FINDING OF THE TRIBUNAL ON THIS ISSUE AND DIRECTED THE TRIBUNAL TO DECIDE THE SAME IN THE LIGHT OF THE RATIO OF THE APEX COURT JUDGMENT IN THE CASE OF SMIFS SECURITIES LIMITED [348 ITR 302 (SC)], THE CLAIM OF THE ASSESSEE IS REQUIRED TO BE ALLOWED IN FULL. FURTHER, ELABORATING ON THE DIRECTION OF THE HONBLE HIGH COURT RELATING TO THE FRESH DECISION ON MERITS AND IN ACCORDANCE WITH LAW, ON THE ISSUE OF THE VERY NATURE OF THE GOODWILL, LD COUNSEL FOR THE ASSESSEE MENTIONED THAT THERE IS NO DISPUTE ON THE NATURE OF GOODWILL AS DECIDED BY THE HONBLE HIGH COURT WHILE APPROVING THE SCHEME OF AMALGAMATION. IN THIS REGA RD, LD COUNSEL BROUGHT OUR ATTENTION TO THE ORDER OF THE HONBLE HIGH COURT IN THE MATTER OF SCHEME OF AMALGAMATION OF CASABLANCAS GANNON ENGINEERING LIMITED WITH TOYO ENGINEERING INDIA LIMITED AND READ OUT THE FOLLOWING RELEVANT PORTION FROM PAGE 97 OF TH E PAPER BOOK WHICH READS AS UNDER: .AND THIS COURT DOTH FURTHER ORDER THAT ON AND FROM THE EFFECTIVE DATE, AS DEFINED IN THE SCHEME, THE ASSETS AND LIABILITIES APPEARING IN THE BOOKS OF TRANSFEROR COMPANY AS ON THE APPOINTED DATE SHALL BECOME AND BE SH OWN AS ASSETS AND LIABILITIES OF THE TRANSFEREE COMPANY AT THE SAME VALUES AS THEY APPEARED IN THE BOOKS OF THE TRANSFEROR COMPANY AND THAT THE DIFFERENCE, IF ANY, BETWEEN THE VALUES OF THE ASSETS AND LIABILITIES TAKEN OVER FROM THE TRANSFEROR COMPANY SHALL BE 3 TRANSFERRED TO THE GOODWILL OF THE TRANSFEREE COMPANY AND THIS COURT DOTH FURTHER ORDER THAT THE PET ITIONER COMPANY DO WITHIN THIRTY DAYS AFTER THE DATE OF THE 5. WHAT IS CLAIMED UNDER THE HEAD GOODWILL IS BASED ON THE FIGURES APPEARED IN THE BOOKS OF THE TRANSFEREE COMPANY . T HEREFORE, THERE IS NO DISPUTE ABOUT THE QUANTUM AS WELL AS THE NATURE OF THE GOODWILL. FURTHER, LD COUNSEL ALSO RELIED ON THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF SADANAND S. VARDE & ORS. VS. STATE OF MAHARASHTRA & ORS [2001] 247 ITR 609 (BOM) AND DEMONSTRATED THAT IT IS A STATUTORY NOW THAT THE AO SHOUL D RELY ON THE BOOK VALUES ONLY AND SHOULD NOT CONSIDER THE MARK ET VALUES OF THE ASSETS IN QUESTION. IN THIS REGARD, LD COUNSEL READ OUT THE FOLLOWING FROM PAGE 23 OF THE SAID JUDGMENT. THE COURT HAS DISCRETION AND POWER TO REJECT A SCHEME EVEN IF ALL THE SHAREHOLDERS AND CREDITORS HAVE AGREED TO IT. BUT ONCE THE SCHEME IS SCRUTINIZED BY THE COMPANY COURT AND SANCTIONED BY AN ORDER MADE BY IT UNDER SECTION 391 OF THE COMPANIES ACT, IT CEASES TO RETAIN THE CHARACTER OF CONTRACT AND OPERATES BY FORCE OF THE STATUTE . FOR THE ABOVE, THE HONBLE HIGH COURT RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF J.K. (BOMBAY) PVT. LTD VS. NEW KAISER - I - HIND SPINNING & WEAVING CO. LTD (1970) 40 COMP CAS 689. THUS, IT IS THE ARGUMENT OF THE LD C OUNSEL THAT BY VIRTUE OF THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CONTEXT OF AMALGAMATION, THE DIFFERENCE SHOULD BE CONSIDERED AS GOODWILL AND THE SAME HAS TO COMPUTED BASED ON THE BOOK VALUES ONLY. COMING TO THE ISSUE OF GRANTING OF DEPRECI ATION U/S 32(1)(II) IN RESPECT OF THE INTANGIBLE ASSET (GOODWILL), IT IS A SETTLED LAW IN VIEW OF THE APEX COURT JUDGMENT IN THE CASE OF SMIFS SECURITIES LIMITED (SUPRA) THAT THE SAME IS A DEPRECIABLE ASSET. 6. ON THE OTHER HAND, LD DR RELIED ON THE ORDER OF THE AO. FURTHER, HE MENTIONED THAT THE ISSUE MAY BE REMANDED TO THE FILE OF THE AO FOR DECIDING THE ISSUE ON MERITS. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE CITED JUDGMENTS OF THE HIGHER JUDICI ARY. ON CONSIDERING THE RELEVANCE AND IMPORTANCE OF THE SAID JUDGMENTS, WE HAVE EXTRACTED THE RELEVANT PORTIONS IN THE ABOVE MENTIONED PARAS OF THIS ORDER. IT IS NOW BINDING ON US THAT THE DIFFERENCE, IF ANY, BETWEEN THE BOOK VALUE OF THE ASSETS AND THE LIABILITIES, SHOULD BE 4 TRANSFERRED TO GOODWILL ACCOUNT OF THE ASSESSEE. THEREFORE, CONSIDERING THE JUDGMENT OF THE B OMBAY HIGH COURT, NEITHER THE NATURE OF THE GOODWILL NOR THE QUANTITY OF THE GOODWILL CAN BE NOW DISPUTED. IN ANY CASE, IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THERE ARE ANY DIFFERENCES IN QUANTITY OF THE GOODWILL. IT IS ALSO A DECIDED ISSUE IN VIEW OF THE APEX COURT JUDGMENT IN THE CASE OF SMIFS SECURITIES LIMITED (SUPRA) THAT THE GOODWILL IS NOW ELIGIBLE FOR DEPRECIATION. RELEVA NT PORTION FROM THE SAID SUPREME COURT JUDGMENT READS AS UNDER: TAXPAYER HAD ACQUIRED A CAPITAL ASSET IN THE FORM OF GOODWILL PURSUANT TO AMALGAMATION. FURTHER, THE SC IN A BRIEF ORDER OBSERVED THAT THE WORDS ANY OTHER BUSINESS OR COMMERCIAL RIGHTS O F SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 TO SECTION 32 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING T HE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION (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. 8. CONSIDE RING THE ABOVE SETTLED POSITION, THE ISSUE OF ALLOWABILIT Y OF DEP RECIATION ON GOODWILL SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE . AS SUCH, REVENUE HAS NOT BOUGHT ANY CONTRARY MATERIAL TO SUGGEST THAT THE CLAIM OF DEPRECIATION ON GOODWILL IS NOT GENUINE AND THE SAME IS NOT ELIGIBLE FOR DEPRECIATION . ACCORDINGLY GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. GROUND NOS. 2, 3A, 3B AND 4 NEED NO SPECIFIC ADJUDICATION AS THEY WERE ALREADY ADJUDICATED AND DECIDED BY THE TRIBUNAL IN THE FIRST ROUND VIDE ITS ORDER DATED 25 TH MAY, 2012 (SUPRA). 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH OCTOBER, 2014. SD/ - SD/ - ( VIVEK VARMA ) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 13 .10.2014 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 5 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI