M/s. VIDEO EFFECTS, MUMBAI V. ITO - 11(1)(4), MUMBAI

ITA 3928/MUM/2008

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8281 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 06-07-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 04-06-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PAWAN KU MAR BEERLA
• Assessee Lawyers: KETAN L VAJANI
• Keywords: Capital asset; Depreciation; Additional depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUM BAI , , BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARO RA, AM ./ I.T.A. NO. 3928/MUM/2008 ( / ASSESSMENT YEAR: 2003-04) VIDEO EFFECTS B-1, TWINKLE APARTMENT, 1 ST FLOOR, FLAT NO.1, OPP. KAMAT CLUB, LKHANDWALA, OFF. LINK ROAD, ANDHERI (W), MUMBAI-400 053 / VS. INCOME TAX OFFICER-11(1)(4), ROOM NO. 438, 4 TH FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 ! ./' ./PAN/GIR NO. AAAFV 1891 N ( !# /APPELLANT ) : ( $%!# / RESPONDENT ) !# & ' / APPELLANT BY : SHRI KETAN L. VAJANI $%!# & ' / RESPONDENT BY : SHRI PAWAN KUMAR BEERLA ( )*+ & ,- / DATE OF HEARING : 27.11.2014 ./0 & ,- / DATE OF PRONOUNCEMENT : 10.12.2014 1 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-XI, MUMBAI (CIT(A) FOR SH ORT) DATED 28.04.2008, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT VID E ORDER DATED 28.02.2006 U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FO R THE ASSESSMENT YEAR (A.Y.) 2003-04. 2. THE ISSUE ARISING IN THE INSTANT APPEAL IS THE M AINTAINABILITY IN LAW OF THE ASSESSEES CLAIM FOR DEPRECATION ON GOODWILL. THE SAME, CLAIMED AT RS.5,41,399/- PER 2 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO THE RETURN OF INCOME, STANDS NOW CLAIMED AT RS.6,63 ,384/- PER THE ADDITIONAL GROUND. IN- AS-MUCH AS, THEREFORE, THE ADDITIONAL GROUND CONCER NS THE CORRECT QUANTIFICATION OF THE ASSESSEES CLAIM FOR DEPRECIATION, WHICH IS THE SUB JECT MATTER OF APPEAL, WE CONSIDER IT AS INTRINSIC TO THE ISSUE ARISING IN THIS APPEAL AND, CONSEQUENTLY, ADMIT THE SAME. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PARTNERSHIP FIRM IN THE BUSINESS OF SUPPLY OF EQUIPMENTS FOR SHOOTING AND EDITING TE LEFILMS, ETC. WITH COMPUTERIZED DIGITAL GRAPHICS ON HIRE, SINCE 10.04.1995. TWO OF ITS PART NERS, HOLDING 20% SHARE EACH IN THE PROFITS (OR LOSSES) OF THE FIRM, RETIRED THERE-FROM DURING THE FINANCIAL YEAR 2001-02, THE PREVIOUS YEAR CORRESPONDING TO THE IMMEDIATELY PREC EDING ASSESSMENT YEAR (I.E., A.Y. 2002-03), AND WERE PAID THEIR SHARE OF GOODWILL A T AN AGGREGATE OF RS.26,53,536/-, AS UNDER: DATE OF RETIREMENT NAME OF PARTNER GOODWILL PAID % OF SHARE HELD BY HIM ON DATE OF RETIREMNET 31.01.2002 MR. RAZAK SHEIKH 14,03,536/- 20% 30.05.2001 MR. RAMZAN SHEIKH 12,50,000/- 20% THE ASSESSEES CLAIM OF DEPRECATION ON GOODWILL, AS AN INTANGIBLE ASSET OF THE FIRM, TO WHICH ACCOUNT THE SAID SUM WAS CAPITALIZED IN IT S BOOKS OF ACCOUNT, WAS NEGATED BY THE REVENUE AND, FURTHER, CONFIRMED BY THE TRIBUNAL FOL LOWING ITS DECISION IN R.G. KESWANI VS. ASST. CIT [2009] 116 ITD 133 (MUM). GOODWILL, IT WAS THE CONSTANT REFRAIN, IS NOT AN INTANGIBLE ASSET WITHIN THE MEANING OF EXPLANATION 3(B) TO SECTION 32(1)(II), WHICH READS AS UNDER, FOLLOWING THE PRINCIPLE OF EJUSDEM GENERIS : DEPRECIATION. 32. (1) IN RESPECT OF DEPRECIATION OF ( I ) BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; ( II ) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICE NCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1 998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED F OR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTIONS SH ALL BE ALLOWED- ( I ) IN THE CASE OF ASSETS OF AN UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER, SUCH PERCENTA GE ON THE ACTUAL COST THEREOF TO THE ASSESSEE AS MAY BE PRESCRIBED; 3 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO ( II ) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCENTAGE ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED EXPLANATION 3. FOR THE PURPOSES OF THIS SUB-SECTION, THE EXPRESSIO N ASSETS SHALL MEAN ( A ) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLAN T OR FURNITURE; ( B ) INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COPYR IGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE. THE MATTER HAS SINCE BEEN CLARIFIED BY THE APEX COU RT VIDE ITS DECISION IN CIT VS. SMIFS SECURITIES LTD. [2012] 348 ITR 302 (SC), SO THAT GOODWILL IS, FOL LOWING THE SAID PRINCIPLE, A DEPRECIABLE ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1). THE DECISION BY THE TRIBUNAL IN ITS OWN CASE, AS WELL AS BY THE RE VENUE AUTHORITIES, PER THEIR RESPECTIVE ORDERS, FOR THE IMMEDIATELY PRECEDING YEAR, WOULD T HEREFORE BE TO NO AVAIL. FURTHER, NO DEPRECIATION HAVING BEEN ADMITTEDLY ALLOWED FOR THE IMMEDIATELY PRECEDING YEAR, THE WRITTEN DOWN VALUE (WDV) OF THE RELEVANT BLOCK OF A SSETS, WHICH CONSISTS ONLY OF GOODWILL AT RS.26.54 LACS, AND NOT THE AMOUNT ARR IVED AT BY REDUCING THERE-FROM THE ASSESSEES CLAIM FOR DEPRECIATION FOR THE SAID PREC EDING YEAR, I.E., RS.4,87,943/-, SINCE DISALLOWED. THIS IS AS THE WDV IS, BY DEFINITION, T O BE COMPUTED BY REDUCING THE DEPRECATION ACTUALLY ALLOWED, WHICH EXPRESSION ST ANDS EXPLAINED PER A HOST OF DECISIONS, TO MEAN DEPRECIATION, AS ACTUALLY ALLOWED AS AGAINS T A NOTIONAL DISALLOWANCE. NO DEPRECATION HAVING BEEN ALLOWED FOR A.Y. 2002-03, T HE WDV OF THE RELEVANT BLOCK OF ASSETS SHALL CONTINUE TO BE AT RS.26.54 LACS, RESUL TING IN AN ENHANCEMENT IN THE ASSESSEES CLAIM VIS--VIS AS MADE PER ITS RETURN, I.E., BY DE DUCTING DEPRECIATION CLAIMED FOR THE SAID PRECEDING YEAR. THIS SUMS UP THE ASSESSEES CASE AS MADE BEFORE US. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE ASSESSEES CASE IS PRINCIPALLY LEGAL. THOUGH CL AIMED TO BE COVERED IN ITS FAVOUR BY THE DECISION BY THE APEX COURT IN SMIFS SECURITIES LTD. (SUPRA), THE SAME, NOTWITHSTANDING THE APPLICABILITY OF THE SAID DECIS ION, IN-AS-MUCH AS IT SETTLES THE ISSUE OF GOODWILL BEING AN INTANGIBLE ASSET U/S.32(1)(II) R/W EXPLANATION 3(B) THERETO, FAILS. THE 4 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO REASON FOR THE SAME, EVEN AS OBSERVED DURING HEARIN G, IS THAT NO GOODWILL HAS BEEN ACTUALLY ACQUIRED BY THE FIRM ON THE PAYMENT OF THE IMPUGNED SUM/S. THE RELEVANT CLAUSES, IDENTICALLY WORDED FOR BOTH THE RETIREMENT DEEDS, I.E., DATED 30.05.2001 AND 31.01.2002 (PB PGS.33-36, 37-40), I.E., EXCEPT FOR THE AMOUNT INVOLVED AND ITS PAYMENT DETAILS, READ AS UNDER (PB PGS.33 TO 36): 1. THAT THE RETIRING PARTY MR. RAMZAN SHAIKH WILL RETIRE FROM THE BUSINESS OF PARTNERSHIP WITH EFFECT FROM 30 TH MAY, 2001 AND THE CONTINUING PARTIES SHALL PAY TO THE RETIRING PARTNER AS THE PURCHASE MONEY FOR HIS SHARE AND INTEREST IN THE PARTNERSHIP AND THE CAPITAL EFFECTS AND GOODWILL TH EREOF A SUM OF RUPEES 12,50,000/- (RUPEES TWELVE LAKHS FIFTY THOUSAND ONL Y) (*). 2. THAT THE SAID PURCHASE MONEY OF RS.12,50,000/- S HALL BE PAID TO THE RETIRING PARTY AS UNDER OF THIS AGREEMENT VIDE CHEQUES NO. DATED . AMOUNT OF RS.2,50,000/-, RS.3,00,000/-, RS.3,00,000/- AND RS. 4,00,000/- RESPECTIVELY ALL CHEQUES ARE IN BANK OF RAJASTHAN. THE RETIRING PART Y SHALL ACCEPT PAYMENT IN FULL DISCHARGE AND SATISFACTION OF HIS RIGHTS AND INTERE ST IN THE SAID PARTNERSHIP BUSINESS. 3. THAT ALL THE ASSETS (INCLUDING GOODWILL, TENANCY RIGHTS, PERMIT LICENCE) AND LIABILITIES OF THE PARTNERSHIP SHALL BE TAKEN OVER BY THE CONTINUING PARTIES AND RETIRING PARTY WILL NOT HAVE ANY CLAIM AGAINST THE FIRM. 4. THAT THE CONTINUING PARTIES SHALL PAY ALL DEBTS AND LIABILITIES (INCLUDING INCOME TAX LIABILITIES) OF THE PARTNERSHIP AND SHAL L INDEMNIFY THE RETIRING PARTNER AGAINST THE SAME AND ALL ACTIONS, PROCEEDINGS, COST S, CLAIMS DEMANDS IN RESPECT THEREOF. 5. THE CONTINUING PARTIES SHALL BE AT LIBERTY TO US E THE NAME OF THE FIRM. [(*) RS.11,00,000/- IN CASE OF MR. RAZAK SHEIKH] FIRSTLY, THEREFORE, THERE IS NOTHING ON RECORD TO S HOW THAT THE SUMS STATED IN THE RETIREMENT DEEDS ARE PAID OVER AND ABOVE THE BALANC E OUTSTANDING IN THE CAPITAL (OR THE CURRENT) ACCOUNT OF THE RETIRING PARTNERS. TRUE, IN THAT CASE THE PAYMENTS, TO THAT EXTENT, WOULD GET DEBITED TO THEIR RESPECTIVE ACCOUNTS, AND NOT TO THE GOODWILL ACCOUNT, AS STATED BY THE LD. AUTHORIZED REPRESENTATIVE (AR), T HE ASSESSEES COUNSEL, DURING HEARING, UPON BEING SO QUERIED, BUT THIS WOULD NEED TO BE DE MONSTRATED, AS THE RETIREMENT DEEDS CLEARLY SPECIFY ONLY THESE SUMS TO BE PAID TO THE R ETIRING PARTNER/S TOWARD THE PURCHASE OF 5 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO THEIR SHARE IN THE PARTNERSHIP AND ALL CAPITAL EFFE CTS. THE BOOK VALUE OF A PARTNERS CAPITAL ACCOUNT ONLY REPRESENTS HIS SHARE IN THE PARTNERSHI P, INCLUDING UNDEFINED SHARE IN ITS ASSETS. AS SUCH, THE PAYMENTS AGREED TO BE PAID TO THE RETIRING PARTNERS INCLUDE THAT DUE ON ACCOUNT OF THEIR CAPITAL AS OUTSTANDING IN THE FIRM S BOOKS OF ACCOUNT. SO, HOWEVER, THIS ASPECT ONLY INVOLVES THE QUANTUM OR THE AMOUNT WHIC H COULD BE CONSIDERED AS PAID TOWARD GOODWILL AND, ACCORDINGLY, VERIFIABLE WITH REFERENCE TO THE ASSESSEES BOOKS BY THE ASSESSING OFFICER (A.O.), WHERE AND IF WE WERE TO ACCEPT ITS CLAIM IN PRINCIPLE. IN FACT, THE PAYMENT TO MR. RAZAK SHEIKH UNDER THE RET IREMENT DEED IS ONLY RS.11 LACS, SO THAT THE NATURE OF THE ADDITIONAL PAYMENT TO HIM (R S.3.04 LACS) WOULD HAVE TO BE ASCERTAINED IN-AS-MUCH AS THE ACCOUNTING ENTRIES CA NNOT BE TREATED AS CONCLUSIVE. THEN, AGAIN, THE QUESTION IS AS TO THE BASIS OF THE SAID ACCOUNTING TREATMENT? BE THAT AS IT MAY, WHAT HAS BEEN PAID IS NOT BY THE FIRM PER SE, BUT BY THE CONTINUING PARTNERS, TOWARD THE PURCHASE OF THE SHA RE OF THE RETIRING PARTNERS IN THE ASSETS OF THE FIRM NOTHING MORE AND NOTHING LESS. THE SAID PAYMENT SHALL NOT BY ITSELF CREATE A CAPITAL ASSET IN THE HANDS OF THE FIRM. GO ODWILL, TENANCY RIGHTS AND PERMIT LICENCE, ALREADY EXIST WITH THE FIRM PRIOR TO THE R ETIREMENT/S, AND CONTINUES THEREWITH, POST IT, AS DO ALL OTHER ASSETS, IN-AS-MUCH AS THE BUSIN ESS SURVIVES THE RETIREMENT/S, WHICH IS THUS ON A GOING CONCERN BASIS. THAT IS, THERE IS NO ACCRETION TO THE ASSET BASE OF THE ASSESSEE-FIRM. WHAT ALL HAS BEEN DONE BY AND THROUG H THE SAID PAYMENT TO THE RETIRING PARTNERS - WHICH COULD BE FINANCED BY EITHER BORROW ING CAPITAL OR INTRODUCING FUNDS BY THE CONTINUING PARTNERS, IS THAT THEY HAVE THEREBY ENSURED THAT THERE IS NO DEPLETION IN THE CAPITAL BASE OF THE FIRM. THE SHARE IN THE ASSETS, ALBEIT UNDEFINED, WHICH PRIOR TO THE RETIREMENT/S VESTED IN FIVE PARTNERS, DOES WITH THR EE CONTINUING PARTNERS SUBSEQUENT TO THE SECOND RETIREMENT. RATHER, AS APPARENT FROM THE BAL ANCE-SHEET FOR THE YEAR ENDING 31.03.2003 (PB PGS.4-17), ANOTHER PARTNER HOLDING 1 2.5% SHARE (IN THE PROFIT AND LOSS OF THE FIRM) RETIRED DURING THAT YEAR, LEAVING ONLY TW O PARTNERS, I.E., VINOD S. CHOUDHARY AND NARESH S. CHOUDHARY, WITH 50% SHARE EACH AS ON 31. 03.2003. NO CHANGE IN THE GOODWILL ACCOUNT IS OBSERVED FOR THAT YEAR, SO THAT APPARENT LY NO PAYMENT, STRANGELY, WAS MADE TO THE THIRD RETIRING PARTNER, I.E., SIREH KANWAR BAFN A. 6 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO CONTINUING FURTHER, THE ONLY DIFFERENCE BETWEEN THE SE INTANGIBLE ASSETS, I.E., GOODWILL, TENANCY RIGHTS AND PERMIT LICENCE, AND TH E OTHER ASSETS OF THE FIRM, IS THAT WHILE THE LATTER ARE ACCOUNTED, THE FORMER ARE NOT. THIS IS FOR THE REASON THAT THESE ARE SELF GENERATED AND NO COST HAS BEEN INCURRED BY THE FIRM FOR THEIR ACQUISITION. THE PAYMENT TO THE ERSTWHILE PARTNERS WOULD NOT IMPLY ACQUISITION OF THESE ASSETS, BUT IS IN FACT TOWARD THE SHARE OF THE RETIRING PARTNERS IN THE EXISTING ASSETS. AND THIS IS PRECISELY WHAT THE RETIREMENT DEED/S, PER CLAUSES (1) TO (5), EXPLICIT LY STATE. WE MAY EXPLAIN THIS BY AN EXAMPLE. AN ASSET, SAY, LAND AND BUILDING, OUTSTAND S IN THE FIRMS BOOKS AT RS.10 LACS. ITS MARKET VALUE ON THE DATE OF RETIREMENT IS RS.60 LAC S. THE SHARE OF THE RETIRING PARTNERS IN THE UNREALIZED VALUE, HOLDING 40% SHARE THEREIN, WO ULD THUS WORK TO RS.20 LACS, WHICH IS PAID BY THE CONTINUING PARTNERS. DEBIT OF THIS SUM TO THE RELEVANT ASSET ACCOUNT WOULD NOT INCREASE THE COST OF THE LAND AND BUILDING IN THE H ANDS OF THE FIRM TO RS.30 LACS, I.E., THE AMOUNT AT WHICH THE SAID ACCOUNT WOULD THUS GET REF LECTED IN ITS BOOKS. THE ADDITIONAL SUM BEING INVESTED BY THE CONTINUING PARTNERS, SO T HAT IT INCREASES THEIR CAPITAL CONTRIBUTION IN THE FIRM, ACCOUNTANCY WOULD SUGGEST A CREDIT TO THEIR RESPECTIVE CAPITAL ACCOUNTS IN THE RATIO IN WHICH THEY PAY, OR AGREE T O BEAR THE ADDITIONAL PAYMENT. AS REGARDS THE FIRM, WHICH IS UNDER THE ACT, A PERSON SEPARATE AND DISTINCT FROM ITS PARTNERS FOR THE TIME BEING, IT CONTINUES TO BE THE OWNER OF THE ASSETS BOTH PRIOR AND SUBSEQUENT TO THE RETIREMENT/S OR PAYMENT/S, SO THAT ALL THAT HAS ALTERED IS THE VALUE OF THE ASSET IN ITS BOOKS. IN FACT, THE PROPER ACCOUNTING (SUBJECT OF C OURSE TO THE PARTNERSHIP DEED SPECIFYING ANY DIFFERENTLY IN THE MATTER) WOULD BE TO RECOGNIZ E THE FULL VALUE OF THE ASSET IN THE ACCOUNTS, CREDITING EACH PARTNER TO THE EXTENT OF H IS SHARE THEREIN. IN THE CONTEXT OF GOODWILL, A SELF GENERATED ASSET, WHICH THEREFORE DOES NOT APPEAR ON THE FIRMS BOOKS, IT WOULD TRANSLATE INTO REFLECTING THE SAME IN ITS ACC OUNTS AT ITS FULL VALUE, AT RS.60 LACS (SAY). EACH OF THE PARTNERS IMMEDIATELY BEFORE RETI REMENT WOULD STAND TO BE CREDITED TO THE EXTENT OF HIS SHARE THEREIN. IT IS THIS SHARE F OR AND TOWARD WHICH THE PAYMENT IS BEING MADE BY THE FIRM, IMPLYING THE CONTINUING PARTNERS OF THE FIRM. SO DONE, WHICH REPRESENTS THE CORRECT ACCOUNTING TREATMENT, IT WOULD MAKE IT INCONSEQUENTIAL AS TO, FIRSTLY, WHEN THE PAYMENT TO THE RETIRING PARTNERS (SAY, AT RS.24 LAC S) IS MADE AND, TWO, HOW IS THE SAME 7 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO FINANCED. IN THIS CONTEXT, WE OBSERVE THAT THE SECO ND RETIRING PARTNER, MR. RAZAK SHEIKH, IS PAID, APART FROM RS.11 LACS IN CASH/CHEQUE, IN K IND, BY WAY OF TAKEOVER OF FOUR DEBTORS, AGGREGATING IN VALUE TO RS.79,310/-. THE FIRM FOLLO WS CASH METHOD OF ACCOUNTING, SO THAT IT RECOGNIZES REVENUE ONLY ON RECEIPT BASIS. THERE IS, ACCORDINGLY, NO QUESTION OF ANY TRADE DEBTOR STANDING IN ITS BOOKS. THE TAKEOVER OF THE DEBTOR ACCOUNTS HOWEVER IMPLIES THAT THE AMOUNT IN RESPECT THEREOF STANDS CRYSTALLI ZED AND TAKEN INTO ACCOUNT, I.E., FOR THE PURPOSE OF SETTLEMENT OF THE RETIRING PARTNERS SHA RE, AT THE VALUES STATED. THE SAME, AS FAR AS THE FIRM IS CONCERNED, HAVE BEEN REALIZED AT THE SAID AMOUNT/S, WHICH THEREFORE OUGHT ALSO TO HAVE BEEN ACCOUNTED FOR; CREDITING, FIRSTLY , THE REVENUE ACCOUNT BY DEBITING THE ACCOUNT OF THE RESPECTIVE DEBTORS, AND THEN CREDITI NG THEM WITH CORRESPONDING DEBIT/S TO THE RETIRING PARTNER TAKING OVER OR PURCHASING THE SAME. COMING BACK TO OUR DISCUSSION IN THE MATTER, THE LD . AR UPON BEING QUESTIONED LIKEWISE DURING HEARING, WOULD EXPLAIN AS TO WHY TH E FIRM HAS RIGHTLY CONSIDERED THE PAYMENT TO THE ERSTWHILE PARTNERS AS RESULTING IN T HE FIRM ACQUIRING GOODWILL. THERE WAS, FIRSTLY, NO DISPUTE BETWEEN THE PARTIES ON THI S, THE SOLE GROUND ON WHICH DEPRECIATION WAS DISALLOWED BY THE REVENUE, WHICH FOUND THE TRIB UNALS ACCEPTANCE, IS OF GOODWILL BEING NOT A QUALIFYING ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1)(II). THE RETIRING PARTNERS, HE CONTINUED, COULD START THEIR OWN VENTU RE, GREATLY IMPEDING THE FIRMS, WHOSE NAME CARRIES A BRAND VALUE IN THE TRADE, BUILT OVER TIME, PROSPECTS/BUSINESS. IT IS TO RESTRAIN THEM FROM SO DOING THAT THE PAYMENT, BY PU RCHASING THEIR SHARE IN THE INTANGIBLE ASSETS OF THE FIRM, HAD BEEN MADE. ON BEING POINTED OUT THAT THE (RETIREMENT) AGREEMENT DOES NOT RESTRAIN THE OUTGOING PARTNERS FROM CARRY ING TRADE, HE WOULD STATE THAT THEY HAVE IN FACT NOT. THE ARGUMENT OR EXPLANATION DOES NOT C ARRY THE ASSESSEES CASE ANY FURTHER; WHAT BEING EXPLAINED IS THE RATIONALE OF THE PAYMEN T, WHICH IS NEITHER DOUBTED OR IN DISPUTE. THE RETIRING PARTNER/S HAVING A SHARE IN T HE FIRMS ASSETS, INCLUDING INTANGIBLE ASSETS, WAS PAID TOWARD THE SAME. THIS WOULD ENABLE THE FIRM TO FUNCTION AS A BUSINESS UNIT/ENTERPRISE JUST AS IT DID PRIOR TO THE RETIREM ENT/S. ALL THAT, THEREFORE, IS LOST THERETO IS, OF COURSE, THE HUMAN RESOURCE REPRESENTED BY OR IN THE FORM OF THE TWO RETIRING PARTNERS. HAD THEY ALSO PARTOOK A PART OF THE FIRMS ASSETS A LONG WITH, IT WOULD HAVE MEANT THAT THE 8 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO RETIREMENT/S IS ACCOMPANIED BY A DEPLETION OF OR AN IMPAIRMENT IN ITS CAPITAL STRUCTURE OR ITS PROFIT MAKING APPARATUS TO THAT EXTENT. AS SUC H, ALL THAT THE PAYMENT SIGNIFIES IS THAT THE FIRM HAS BEEN ABLE TO RETAIN ITS OPERATIONAL C APABILITY CONSEQUENT TO THE RETIREMENT/S. THERE IS NO PURCHASE OR ACQUISITION OF ANY ASSET, T ANGIBLE OR INTANGIBLE. RATHER, TO THE EXTENT GOODWILL OF THE FIRM IS ATTACHED TO THE PART NERS, REPRESENTING ITS HUMAN AND THUS MOST VITAL, RESOURCE, A PART OF THE GOODWILL OF THE FIRM STANDS DEFINITELY ERODED . AS REGARDS THE RETENTION OF THE OPERATIONA L CAPABILITY, TO WHAT EXTENT IT MATERIALIZES IS SOMETHING THAT LIES IN THE WOMB OF FUTURE, AND W OULD SURELY DEPEND UPON IF THE RETIRING PARTNERS ACTUALLY WORKED IN THE RELEVANT TRADE AFTE R RETIREMENT, AS ALSO THE AREA OF THEIR OPERATIONS. FURTHER, ONE OF THE TWO PARTNERS ALSO T AKING OVER SOME DEBTOR ACCOUNTS WOULD RATHER SUGGEST OF THEIR CONTINUING, OR INTENDING TO CONTINUE TO WORK. THERE IS, IN FACT, AS STATED EARLIER, NO RESTRAIN PLACED UPON THEM IN THE MATTER. BE THAT AS IT MAY, THAT IS SOMETHING THAT WOULD NOT DETAIN US IN THIS MATTER I N-AS-MUCH AS THIS NEITHER FLOWS FROM THE RETIREMENT DEED NOR IS CONTENDED BY EITHER PART Y; WE HAVING EXPLAINED THE NATURE OF THE PAYMENT TO BE AN ATTEMPT TO ENSURE, AS FAR AS P OSSIBLE, THE MAINTENANCE OF THE FUNCTIONAL CAPACITY OF THE FIRM, I.E., POST RETIREM ENT, BY THE CONTINUING PARTNERS, WHO HAVE AN IDENTITY SEPARATE FROM THE FIRM. NO GOODWILL O R ANY OTHER TANGIBLE OR INTANGIBLE ASSET, THUS, STANDS ACQUIRED BY THE FIRM CONSEQUENT TO THE PAYMENT TO THE RETIRING PARTNERS IN PURSUANCE OF THE RETIRING DEED/S. RATHER, THE SECON D RETIRING PARTNER, HAVING ALONG WITH THE OTHER CONTINUING PARTNERS, ACQUIRED SHARE (20%) IN THE GOODWILL OF THE FIRM OF THE FIRST RETIRING PARTNER, THE PAYMENT TO HIM SUBSEQUENTLY I NCLUDES HIS SHARE IN THE SAID SHARE, SO THAT THERE IS IN FACT TO THAT EXTENT A DOUBLE PAYME NT, I.E., VIS--VIS THE TOTAL SHARE IN THE FIRMS ASSETS OF THE TWO PARTNERS. CONSIDERING, HOW EVER, THE TRANSACTION IN RIGHT PERSPECTIVE, I.E., AS ONE BETWEEN THE PARTNERS INTER SE , WOULD RESOLVE SUCH ISSUES, WHICH ARISE ONLY ON MISCONSTRUING THE TRANSACTIONS AS ONE OF PURCHASE/ACQUISITION OF GOODWILL BY THE ASSESSEE-FIRM. WITH REGARD TO THE CONTENTION OF THIS ASPECT BEING NOT IN DISPUTE, THE SAME IS AGAIN MISCONCEIVED. NEITHER THE VIEW OF THE ASSESSEE NOR OF THE REVENUE IS BINDING ON THE APPELLATE COURT OR TRIBUNAL. IT IS THE CORRECT LEGA L POSITION THAT IS RELEVANT AND NOT THE VIEW 9 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO THAT THE PARTIES MAY TAKE OF THEIR RIGHTS IN THE MA TTER (REFER: CIT VS. C. PARAKH & CO. (INDIA) LTD. [1956] 29 ITR 661 (SC); AND KEDARNATH JUTE MFG. CO. LTD. VS. CIT [1971] 82 ITR 363 (SC)). REFERENCE IN THIS CONTEXT MAY ALSO B E MADE TO THE DECISION BY AHMEDABAD ELECTRICITY CO. LTD. VS. CIT [1993] 199 ITR 351 (BOM)(FB). FURTHER, THE TRIBUNAL FOR A.Y. 2002-03 DID NOT EITHER EXAMINE TH IS TRANSACTION OR ISSUE ANY FINDING IN THE MATTER. THE ASSESSEES COUNSEL, CONCEDING TO TH E ISSUE BEING COVERED AGAINST IT BY THE DECISION BY THE TRIBUNAL, IT FORECLOSED THE MATTER, STATING SO. REFERENCE IN THIS REGARD IS MADE TO PARA 3 OF THE TRIBUNALS ORDER FOR A.Y. 200 2-03 (IN ITA NO.7435/MUM/2005 DATED 28.10.2009), WHICH READS AS UNDER: 3. IT WAS SUBMITTED BY THE LD. COUNSEL OF THE ASSE SSEE THAT THIS ISSUE MAY BE DECIDED AGAINST THE ASSESSEE IN LIGHT OF THE DECISION OF THE TRIBUNAL IN THE CASE OF R G KESWANI REPORTED IN 116 ITD 133 (MUM). THEREFORE, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE. 5. THE ASSESSEES GROUND NO. 1 IS, IN VIEW OF THE F OREGOING, DISMISSED. 6. WE, NEXT, TAKE UP THE ASSESSEES ADDITIONAL GROU ND. WE HAVING ALREADY FOUND THAT NO GOODWILL STANDS ACQUIRED BY THE ASSESSEE FIRM UP ON THE IMPUGNED PAYMENT/S, THE QUESTION OF THE EXTENT OF THE DEPRECIATION THEREON DOES NOT ARISE FOR CONSIDERATION. SO, HOWEVER, OUR ORDER BEING APPEALABLE AND, ACCORDINGL Y, SUBJECT TO MODIFICATION, WE MAY DWELL, ALBEIT BRIEFLY, ON THIS ASPECT OF THE MATTER AS WELL. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. FIRSTLY, AS STATED HERE-IN-BEFORE, THE NATURE OF TH E ADDITIONAL PAYMENT OF RS.3,03,536/- TO THE SECOND RETIRING PARTNER NOT AR ISING OUT OF HIS RETIREMENT DEED, WOULD HAVE TO BE EXAMINED/DETERMINED. ON MERITS, WE AGAIN FIND THE ASSESSEES CLAIM AS NOT TENABLE. WITHOUT DOUBT, NO DEPRECIATION, AS IS APPA RENT, HAS BEEN ALLOWED ON GOODWILL, AND IT IS ONLY THE DEPRECIATION AS ACTUALLY ALLOWED THAT WOULD BE ELIGIBLE FOR BEING DEDUCTED IN COMPUTING THE WDV OF THE RELEVANT BLOCK OF ASSETS (REFER: MADEVA UPENDRA SINAI VS. UNION OF INDIA [1975] 98 ITR 209 (SC)). AT THE SAME TIME, HOWEVER , 10 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO EXPLANATION 5 BELOW SECTION 32(1)(II), READING AS UNDER, INSER TED BY FINANCE ACT, 2001 W.E.F. 01.04.2002, CANNOT BE LOST SIGHT OF: DEPRECIATION. 32. (1) IN RESPECT OF DEPRECIATION OF ( I ) (II) . EXPLANATION 5. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED TH AT THE PROVISIONS OF THIS SUB-SECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED THE DEDUCTION IN RESPECT OF DEPRECIATION IN COMPUTING HIS TOTAL INCOME. THE SAME, IN EFFECT, STATES THAT DEPRECIATION ALLOW ANCE QUA ANY DEPRECIABLE ASSET WOULD HAVE TO BE NECESSARILY ALLOWED WHILE COMPUTIN G THE TOTAL INCOME FOR ANY YEAR. THE ASSESSEES CLAIM STANDS DENIED BY THE REVENUE. WE H AVE CONFIRMED THE SAME, FOR A DIFFERENT REASON THOUGH, DISPUTING NOT THE ELIGIBIL ITY TO DEPRECIATION PER SE , BUT ON THE FACTUAL ASPECT OF ACQUISITION OF THE GOODWILL AT A COST. THIS FINDING SHALL RELATE BACK TO THE DATE OF TRANSACTION/S, I.E., 30.05.2001 AND 31.01.2 002. ON THE LEGAL ASPECT, THE ASSESSEES CLAIM FOR DEPRECIATION WOULD STAND COVERED BY THE D ECISION BY THE APEX COURT IN SMIFS SECURITIES LTD. (SUPRA), WHICH SHALL AGAIN RELATE BACK IN TIME, I.E ., TO THE YEAR SINCE WHICH THE SUBSTITUTED S.32, PROVIDING FOR DEPRECIATION ON INTANGIBLE ASSETS, CAME INTO EFFECT, I.E., 01.04.1999. THAT IS, THE SAME SHALL APPLY EQUALLY FOR A.Y. 2002-03, I.E., AS TO THE CURRENT YEAR. EVEN OTHERWISE, EACH YEAR IS AN INDEPENDENT U NIT OF ASSESSMENT, AND THEREFORE THE CLAIM FOR ONE YEAR CANNOT BE ALLOWED TO PREJUDICE O R INFLUENCE THAT FOR ANOTHER. THE NON- CLAIM OR NOT PRESSING OF ITS CLAIM FOR DEPRECIATION BY THE ASSESSEE HAS BEEN SPECIFICALLY REMOVED BY LAW AS A GROUND FOR NOT GIVING EFFECT TO THE PROVISION OF DEPRECIATION. THE FACTUAL FINDING WITH REGARD TO THE NATURE OF THE TR ANSACTION CRYSTALLIZES ON ITS OCCURRING, WHILE THE DECISION BY THE APEX COURT SETTLING THE L AW IN THE MATTER WOULD ALSO RELATE BACK TO THE DATE OF THE EXTANT LAW. SUCH A COURSE IS EVE N OTHERWISE INCUMBENT ON THE A.O. IN VIEW OF THE BOARD CIRCULAR NO. 68 DATED 17.11.1971, CLARIFYING OF A POSITION INCONSISTENT WITH A SUBSEQUENT DECISION BY THE APEX COURT TO BE A MISTAKE RECTIFIABLE U/S.154, I.E., WERE THE ASSESSEE TO MOVE HIM IN TIME. FURTHER, THIS WOU LD EQUALLY APPLY TO THE ORDER BY THE 11 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO TRIBUNAL (I.E., FOR A.Y. 2002-03) IN-AS-MUCH AS IT WOULD ALSO BE SAID TO BEAR THE SAME MISTAKE. THAT THE ASSESSEE CONCEDED TO THE SAID POS ITION, EVEN OTHERWISE NOT MATERIAL FROM THE STANDPOINT OF LAW (REFER: C. PARAKH & CO. (INDIA) LTD. (SUPRA)), STANDS SPECIFICALLY REMOVED BY LAW AS A CONSIDERATION QUA THE CLAIM FOR DEPRECIATION. THE A.O. IN OUR VIEW IS THUS OBLIGED IN LAW TO ALLOW DEPRECI ATION FOR A.Y. 2002-03 WHILE GIVING EFFECT TO OUR ORDER, READ WITH THE ORDER OF THE HON BLE COURT, IF ANY, MODIFYING IT, WITH WHICH IT WILL STAND TO MERGE. ACCORDINGLY, THE ASSE SSEE, IN THE EVENT OF OUR VIEW OF IT HAVING NOT ACQUIRED GOODWILL, OR ANY OTHER DEPREC IABLE ASSET FOR THAT MATTER, THUS, I.E., UPON PAYMENT OF THE IMPUGNED SUMS TO THE RETIRING P ARTNERS, GETS REVERSED TO ANY EXTENT, SO THAT THE ASSESSEES CLAIM BECOMES VALID (TO THAT EXTENT), THE SAME SHALL HAVE TO BE ALLOWED. THE ASSESSEE SHALL, THEREFORE, UPON A FAVORABLE VER DICT BY THE HONBLE HIGH COURT, BE (ACTUALLY) ALLOWED DEPRECIATION BOTH FOR THE CURRENT YEAR AS WELL AS FOR THE IMMEDIATELY PRECEDING YEAR IN ACCORDANCE WITH LAW . THIS IS MORE SO AS THE TWO AMOUNTS ARE INTERRELATED. WE, THEREFORE, WITHOUT PREJUDICE TO OUR DECISION THAT THE ASSESSEES CLAIM FOR DEPRECIATION IS NOT VALID, HOLD THAT THE SAME S HALL IN ANY CASE BE RESTRICTED TO THE CLAIM AS PREFERRED PER THE ORIGINAL RETURN. THE ASSESSEE S CLAIM FOR ADDITIONAL DEPRECIATION, ON THE BASIS OF HAVING NOT BEEN ALLOWED DEPRECATION FO R A.Y. 2002-03, IS ACCORDINGLY REJECTED; THAT FOR THE SAID YEAR STANDING TO BE ALL OWED, TO IT. WE DECIDE ACCORDINGLY. 8. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. 20,3 )452, & 2 & , 6 ORDER PRONOUNCED IN THE OPEN COURT ON DECEMBER 10, 2014 SD/- SD/- (JOGINDER SINGH) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ( 7+ MUMBAI; 8) DATED : 10.12.2014 *.). ./ ROSHANI , SR. PS 12 ITA NO. 3928/MUM/2008 (A.Y. 2003-04) VIDEO EFFECTS VS. ITO !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. !# / THE APPELLANT 2. $%!# / THE RESPONDENT 3. ( 9, ( ) / THE CIT(A) 4. ( 9, / CIT - CONCERNED 5. <*= $,)4 , - 40 , ( 7+ / DR, ITAT, MUMBAI 6. >5 ?+ / GUARD FILE !' ) / BY ORDER, */)+ , (DY./ASSTT. REGISTRAR) , ( 7+ / ITAT, MUMBAI