ACIT, CHENNAI V. Consolidated Interiors, CHENNAI

ITA 520/CHNY/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96563 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 28-10-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 27-03-2013
• Court: TRIBUNAL
• Department Lawyers: A B KOLI JCIT
• Assessee Lawyers: A S SRIRAMAN
• Keywords: Depreciation
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.520 /MDS./2013 ( ! '! / ASSESSMENT YEAR :2007-08) ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(3), CHENNAI -34. VS. M/S.CONSOLIDATED INTERIORS , 32-B KASTURI AVENUE, M.R.C.NAGAR, R.A.PURAM, CHENNAI 600 028. PAN AACCC 8135 D ( / APPELLANT ) ( / RESPONDENT ) #$ % & / APPELLANT BY : MR.A.B.KOLI,JCIT, D.R '(#$ % & / RESPONDENT BY : MR.A.S.SRIRAMAN, ADVOCATE ) * % +, / DATE OF HEARING : 28.10.2015 -' % +, /DATE OF PRONOUNCEMENT : 18.12.2015 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-IX, CHENN AI DATED ITA NO.520 /MDS/2013 2 28.12.2012 IN ITA NO.512/09-10 PASSED UNDER SEC.14 3(3) READ WITH SECTION 250 OF THE ACT. 2. THE REVENUE HAS RAISED THREE ELABORATE GROUNDS IN ITS APPEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT THE REVENUE IS AGGRIEVED BY THE ORDER OF THE LD. CIT (A), WHO HAD DIRECTED THE LD. ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF ` 12,50,000/- BEING CLAIM OF DEPRECIATION @ 25% ON GOODWILL PAYMENT OF ` 50 LAKHS TO MR.R.SRINIVASAN. 3.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF INTERIOR DECORATORS, FI LED ITS E-RETURN ON 27.10.2007 ADMITTING INCOME OF ` 64,05,650/- AFTER CLAIMING DEPRECIATION @ 25% ON GOODWILL PAID TO SHRI R.SRINI VANAN. SUBSEQUENTLY, THE RETURN WAS TAKEN FOR SCRUTINY THR OUGH CASS AND ASSESSMENT U/S.143(3) OF THE ACT WAS COMPLETED ON 2 4.12.2009 WHEREIN THE LD. A.O MADE DISALLOWANCE OF RS.12,50,0 00/- BEING THE DEPRECIATION ON GOODWILL CLAIMED U/S.32(1)(II) OF T HE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. ASSESSING OFFICER ON VERIFYING THE FIXED ASSET SCHEDULE NOTICED THAT THE ASSESSEE HAD ITA NO.520 /MDS/2013 3 CLAIMED DEPRECIATION @ 25% AMOUNTING TO RS.12,50,00 0/- ON GOOD WILL PAYMENT OF RS.50 LAKHS TO SRI R.SRINIVASAN ON 11.05.2006. IN SUPPORT OF THE CLAIM THE ASSESSEE HAD PRODUCED THE COPY OF GOODWILL PURCHASE AND PERFORMANCE AGREEMENT ENTERED BETWEEN THE ASSESSEE AND MR.SRINIVASAN DATED 17 TH MAY, 2006. THE LD.A.R FURTHER EXPLAINED THAT SINCE THE ASSISTANCE OF MR.SRINIVASA N WERE REQUIRED FOR THE RUNNING OF THE BUSINESS OF THE ASSESSEE; HE WAS APPOINTED AS THE CHIEF EXECUTIVE OFFICER IN THE ASSESSEE COMPANY. IT WAS THEREFORE SUBMITTED THAT THE GOODWILL PURCHASED FROM MR.R.S RINIVASAN IS SIMILAR IN CHARACTER TO THAT OF PURCHASE OF KNOW H OW AND HAS TO BE CLASSIFIED AS INTANGIBLE ASSET. HENCE, IT WAS ARGUE D THAT THE PROVISIONS OF SECTION 32(1)(II) OF THE ACT WILL BE APPLICABLE TO THE CASE OF THE ASSESSEE. HOWEVER, THE LD. ASSESSING OFFICER WAS OF THE OPINION THAT IT IS A GRATUITOUS PAYMENT AND ANY VIO LATION ON THE PART OF SHRI SRINIVASAN WOULD NOT DISENTITLE HIM OF THIS PA YMENT. HENCE, IT CANNOT BE TREATED AS ANY OTHER BUSINESS OR COMMERC IAL RIGHT OF SIMILAR NATURE U/S.32(1) OF THE ACT AND ACCORDINGLY THE CLAIM OF DEPRECIATION WAS DENIED. ITA NO.520 /MDS/2013 4 3.2 ON APPEAL, THE LD. CIT (A) DELETED THE ADDITIO N MADE BY THE LD. ASSESSING OFFICER BY OBSERVING AS UNDER:- 6. I HAVE CONSIDERED THE ASSESSMENT ORDER, GROUNDS, OF APPEAL AND THE WRITTEN SUBMISSIONS OF THE AR OF THE APPELLANT. WHILE MAKIN G THE DISALLOWANCE THE AO OBSERVED IN THE ASSESSMENT ORDER AS UNDER:- ON VERIFICATION, IT IS SEEN THAT IN THE FIXED ASSE T SCHEDULE THE ASSESSEE HAD CLAIMED DEPRECIATION @ 25% AMOUNTING TO RS 1250 000/- ON GOODWILL PAID OF RS. 50 LAKHS. THIS AMOUNT OF RS. 5 0 LAKHS WAS, PAID TO SHRI. R. SRINIVASARI SB. RAMACHANDRAN, NO. 11, RMS APARTMENTS,. 12, GOPALAKRISHNA ROAD, CHENNAI -600 017 ON 11.05.2006 AND THE COPY OF THE GOODWILL PURCHASE AND PERFORMANCE AGREEMENT WER E ALSO PROVIDED. THE ASSESSEE HAD TREATED THIS PAYMENT AS RESULTING IN A CREATION OF AN INTANGIBLE ASSET AND HENCE CLAIMED DEPRECIATION @ 2 5%. THE AUTHORIZED REPRESENTATIVE TRIED TO FURTHER HIS CAUS E BY A WRITTEN SUBMISSION DATED 03.12.2009 THAT IN THIS CASE, SINC E THE INPUTS OF SHRI. R. SRLNIVASAN ARE REQUIRED FOR RUNNING OF THE BUSIN ESS IN WHICH HE WAS ENGAGED AS CHIEF EXECUTIVE OFFICER, THE GOODWILL IS AKIN IN CHARACTER TO KNOW HOW AND HAS TO BE CLASSIFIED AS .PTHER BUSIN ESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. THIS CONTENTION OF THE AU THORIZED REPRESENTATIVE CANNOT BE ACCEPTED. LNTANGIBLE ASSETS THE FINANCE (NO. 2) ACT 1998 HAD MAIE INTANGIBLE A SSETS ACQUIRED ON OR AFTER 01.04.1998 ELIGIBLE FOR DEPRECIATION W.E.F A.Y. 1999-2000. THE INTANGIBLE ASSETS INCLUDE KNOW-HOW, PATENT COPYRIGH TS TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER COMMERCIAL RIGHTS OF SIMILAR NATURE. THE ABOVE TERMS, EXCEPT THE TERM KNOW-HOW HAVE NO T BEEN DEFINED IN THE INCOME-TAX ACT AND HENCE THE MEANING OF THESE T ERMS SHALL BE TAKEN ITA NO.520 /MDS/2013 5 AS PER THE COMMERCIAL SENSES THE EERAL MEANING OF T HESE TERMS IS GIVEN BELOW: (I) COPYRIGHT - THE EXCLUSIVE RIGHT GIVEN BY LAW FO R A CERTAIN TERM OF YEARS TO AN AUTHOR, COMPOSER, ETC. (OR HIS ASSIGNEE OR HE IRS), TO PRINT, PUBLISH AND SELL COPIES OF HIS ORIGINAL WORK OR TRANSLATION THEREOF. (II) LICENSE - AN AUTHORITY TO DO SOMETHING WHICH W OULD OTHERWISE BE INOPERATIVE, WRONGFUL OR ILLEGAL; A FORMAL PERMISSI ON FROM A CONSTITUTED AUTHORITY TO DO SOMETHING. (III) PATENT - A GRANT FROM THE GOVERNMENT TO A PER SON CONFERRING FAR A CERTAIN DEFINITE TIME THE EXCLUSIVE PRIVILEGE OF MA KING, USIAG OR SELLING SOME NEW INVENTION. (IV) TRADE MARK - A MARK (NOW ONE SECURED BY LEGAL REGISTRATION USED BY A MANUFACTURER OR TRADER TO DISTINGUISH HIS GOODS F ROM THE GOODS OF OTHER CONCERNS. (V) KNOW-HOW - THE EXPRESSION KNOW-HOW MEANS ANY INDUSTRIAL INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MA NUFACTURE OR PROCESSING OF GOODS OR IN THE WORKING OF A MINE, OIL-WELL OR O THER SOURCES F MINERAL DEPOSITS (INCLUDING SEARCHING FOR DISCOVERY OR TEST ING OF DEPOSITS FAR THE WINNING OF ACCESS THERETO). I ACQUISITION OF THESE ITEMS, THERE IS A RIGHT EMBEDDED TO IT. ANY VIOLATION OR INFRINGEMENT CAN B E SUED IN THE COURT OF LAW. SUCH A CONDITION DOES NOT PREVAIL IN THE CASE OF GOODWILL. IT IS A GRATUITOUS PAYMENT AND ANY VIOLATION ON PART OF SHR I. SRLNIVASAN WOULD NOT DISENTITLE HIM OF THIS PAYMENT. THEREFORE, IT C ANNOT BE TREATED AS ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATUR E. 4. THAT DEPRECIATION IS NOT ALLOWABLE ON GOODWILL S INCE IT CANNOT BE TREATED AS AN INTANGIBLE ASSET WAS SO HELD BY THE I TAT, MUMBAI H BENCH IN THE CASE OF R.G. KESWANI VS. ACIT (116 LTD 133) RECENUY. IT WAS PRONOUNCED THAT IN THE LIGHT OF THE STATUTORY PROVISIONS CONTAINED IN SECTION 32(1)(II), THE, GOODWILL ACQUIRED BY THE AS SESSEE DOES NOT COME ITA NO.520 /MDS/2013 6 UNDER THE EXPRESSION OF ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF THE NATURE SIMILAR TO KNOW-HOW, PATENTS, COPYRIGHTS ETC . THE RATIONALE EXPRESSED IN THIS CASE LAW APPLIES EXACTLY TO THE I NSTANT CASE AND THEREFORE, THE CLAIM OF. DEPRECIATION ON GOODWILL I S NOT ENTERTAINABLE AND HENCE DISALLOWED AND ADDED TO THE TAXABLE INCOME OF THE ASSESSEE. 5. BASED ON THE ABVE DISCUSSED FACTS, THE TOTAL INC OME OF THE ASSESSEE IS COMPUTED AS UNDER: - COMPUTATION OF INCOME: RS. TOTAL INCOME RETURNED : . 6,405,650 ADD: DISALLOWANCE OF DEPREDATION ON GOODWILL 1 ,250,000 ASSESSED TOTAL INCOME 7,65,650 COMPUTATION OF TAX IS APPENDED TO THIS ORDER AS A NNEXURE. ASSESSED U/S, 143(3) OF THE INCOME-TAX ACT, 1961. 6.1 FROM THE ABOVE, IT IS SEEN THAT THE AO HAS NOT CON SIDERED THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) AN D HENCE DEPRECIATION WAS NOT ALLOWED. THE ASSESSING OFFICER HAS FOLLOWED THE DEC ISION RENDERED BY THE ITAT, MUMBAI H BENCH IN THE CASE OF R.G. KESWANI VS. AC IT (116 LTD 133). HOWEVER, IT MAY BE MENTIONED HERE THAT HONBLE SUPR EME COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD. (012) 24 TAXMAN.COM 2 22 (SC) HAS HELD THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SE CTION 32(1) AND THE DEPRECIATION ON THE SAME IS ALLOWABLE. THE HONBLE APEX COURT WHILE INTERPRETING THE PROVISION OF EXPLANATION 3(B) TO SEC. 32(1) OF THE ACT, AND WHILE DETERMINING NATURE OF ASSET UNDER THE RESIDUARY CLAUSE ANY OTH ER BUSINESS OR COMMERCIAL RIGHTS, HELD THAT THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY AND OBSERVED THAT A READING OF THE WORDS ANY OTHER BUS INESS OR COMMERCIAL RIGHTS OF A SIMILAR NATURE IN CLAUSE(B) OF EXPLANATION 3 IND ICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION ANY OTHER BUSINESS OR COMMERC IAL RIGHTS OF A SIMILAR NATURE. 6.2 HENCE, RESPECTFULLY FOLLOWING THE ABOVE DECISION, I HEREBY DIRECT THE AQ TO DELETE THE ADDITION OF RS.12,50,000/- MADE IN THIS REGARD. ITA NO.520 /MDS/2013 7 4. BEFORE US, THE LD. A.R ARGUED IN SUPPORT OF THE ORDER OF THE LD. CIT (A) AND ON THE OTHER HAND LD. D.R RELIED IN THE ORDER OF THE LD. ASSESSING OFFICER. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PER USED THE MATERIALS AVAILABLE ON RECORD. ON PERUSING THE ORD ERS OF BOTH THE REVENUE AUTHORITIES AND THE GOODWILL PURCHASED AND PERFORMANCE AGREEMENT DATED 17.5.2006, WE ARE OF THE VIEW THAT THE LOWER AUTHORITIES HAS NOT GONE THROUGH AND ANALYSED THE ENTIRE AGREEMENT IN ORDER TO APPRECIATE THE FACTS OF THE CASE. IN T HE AGREEMENT, THERE ARE ADDITIONAL UNDERTAKINGS UNDERTAKEN BY THE SELLE R IN CLAUSE-3(A) WHEREIN IT IS MENTIONED THAT THE SELLER AGREES TO T RANSFER THE VACANT OF LAND 53 CENTS SITUATED AT THAIYUR PANCHAYAT AT A PR EDETERMINED PRICE OF ` 1/- LAKH. THE VALUE OF LAND HAS TO BE CONSIDERABLY MORE THAN WHAT IS MENTIONED IN THE AGREEMENT WHICH HAS DIRECT BEAR ING TO THE CONSIDERATION PAID OF ` 50 LAKHS AS GOODWILL. SIMILARLY THERE IS AN ELEMENT OF NON-COMPETE FEE, TO PROVIDE THE DETAILS OF THE CLIENTS OF THE SELLER, TO JOIN THE ASSESSEE AS THE CHIEF EXECU TIVE OFFICER ETC.. WHILE CONSIDERING THE ABOVE TERMS & CONDITIONS AND THE VARIOUS OTHER ITA NO.520 /MDS/2013 8 COMMITMENTS MADE BY THE ASSESSEE AND THE SELLER IN THE AGREEMENT WE FAILED TO UNDERSTAND AS TO HOW THE ENTIRE AMOUNT OF ` 50 LAKHS CAN BE TERMED AS GOOD WILL OR AN ASSET IN THE NATURE OF INTANGIBLE. CONSIDERING THE FACTS OF THE CASE THE CASE LAWS REL IED BY THE ASSESSEE IS ALSO DEVOID OF MERITS. THEREFORE IN TH E INTEREST OF JUSTICE WE REMIT BACK THE ENTIRE MATTER TO THE FILE OF LD. ASSESSING OFFICER FOR DENOVO CONSIDERATION. 6. IN THE RESULT, THE APPEAL OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSES ORDER PRONOUNCED ON THE 18 TH DECEMBER, 2015 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 18 TH DECEMBER, 2015. K S SUNDARAM. % '+./ 0 /'+ /COPY TO: 1. #$ /APPELLANT 2. '(#$ /RESPONDENT 3. ) 1+ () /CIT(A) 4. ) 1+ /CIT 5. /4 '+5 /DR 6. 6! 7* /GF