ACIT, CHENNAI V. M/s. Cema Electric Lighting Products IndiaPvt.Ltd., CHENNAI

ITA 733/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64523 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 31-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 09-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GURU BASHYAM IRS
• Assessee Lawyers: B RAMAKRISHNAN F
• Keywords: Depreciation; Retrospective amendment; Scheme of amalgamation
• Section: 143(3); 32

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL C BENCH, CHENNAI. BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT & SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NOS.731 AND 733/MDS/2012 ASSESSMENT YEARS: 2007-08 AND 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(3), CHENNAI. VS. M/S. CEMA ELECTRIC LIGHTING PRODUCTS INDIA PVT. LTD., NO. 10, ANNA AVENUE, BAKTHAVATSALAM NAGAR, ADYAR, CHENNAI 600 020. [PAN:AACCC9663Q] (APPELLANT) (RESPONDENT) A PPELLANT BY : SHRI GURU BASHYAM, IRS, JCIT RESPONDENT BY : SHRI B. RAMAKRISHNAN, F.C.A. DATE OF HEARING : 31.10.2012 DATE OF PRONOUNCEMENT : 07.11.2012 ORDER PER S.S. GODARA, JUDICIAL MEMBER THESE TWO REVENUES APPEAL ARISE FROM DIFFERENT O RDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS) III CHENNAI BO TH DATED 17.01.2012 IN ITA NOS. 764/09-10/A.III AND 441//2010-11/A.III FOR ASSESSMENT YEARS 2007-08 AND 2008-09 RESPECTIVELY; IN PROCEEDINGS UN DER SECTION 143(3) OF THE INCOME TAX ACT 1961 [IN SHORT THE ACT]. SINCE GROUNDS RAISED IN BOTH APPEALS ARE IDENTICAL, FOR CONVENIENCE AND BREVITY, WE TAKE UP I.T.A. NO. 731/MDS/2012 AS LEAD CASE. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 2 I.T.A. NO. 731/MDS/2012 2. REFERRING TO THE GROUNDS RAISED IN THE APPEAL, IT HAS BEEN STATED ON BEHALF OF THE REVENUE THAT THE CIT(A) HAS WRONGLY A LLOWED THE ASSESSEES CLAIM FOR DEPRECIATION ON GOODWILL BY UPSETTING T HE FINDINGS OF THE ASSESSING OFFICER. ON THE OTHER HAND, THE ASSESSEE HAS PLACED STRONG RELIANCE ON CIT(A)S ORDER. KEEPING IN VIEW THE DIFFERENCE IN T HE STANDS OF BOTH PARTIES REGARDING CORRECTNESS OF CIT(A)S ORDER, WE FRAME T HE FOLLOWING ISSUE FOR OUR ADJUDICATION: WHETHER, THE CIT(A) HAS RIGHTLY INTERFERED IN THE F INDINGS OF THE ASSESSING OFFICER BY ACCEPTING CLAIM OF DEPRECIATIO N ON GOODWILL RAISED BY THE ASSESSEE? 3. FACTS APROPOS ARE THAT THE ASSESSEE COMPANY, WH O IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF ELECTRICAL LIGHTING, PRODUCTS FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YEAR ON 31.10. 2007 AND ADMITTED LOSS OF ` .5,43,26,979/-. IN SCRUTINY PROCEEDINGS, THE ASSESS ING OFFICER NOTICED THAT IN ITS FIXED ASSET SCHEDULE, THE ASSESSEE HAD CLAIMED DEPRECIATION ON GOODWILL OF ` .3,87,70,000/- @ 12.5% OF ` .31,01,60,000/-. IN SUPPORT THEREOF, THE ASSESSEE PRODUCED BEFORE THE ASSESSING OFFICER COPY OF BUSINESS PURCHASE AGREEMENT ENTERED INTO WITH M/S. G.E. INDI A INDUSTRIAL PVT. LTD. AND CONTENDED THAT THE AMOUNT SHOWN AS GOODWILL WAS , IN FACT, BUSINESS TRADE MARK AND OTHER TECHNOLOGY AS PER SECTION 2.02 OF THE AGREEMENT ABOVE SAID. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 3 4. THE ASSESSING OFFICER WAS NOT CONVINCED WITH TH E ASSESSEES EXPLANATION AND OBSERVED THAT FROM THE AGREEMENT, T HE SELLER IN QUESTION HAD SOLD THE UNDERTAKING WITH ITS GOODWILL, BUT THE BASIS OF ASCERTAINING THE QUANTUM OF GOODWILL WAS NOT FORTHCOMING WITH ANY TECHNICAL REASONING. PER ASSESSING OFFICER, THE AGREEMENT ALSO DID NOT MENTI ON ANYTHING ABOUT THE QUANTIFICATION OF THE ITEMS. ACCORDINGLY, HE ASSUME D THAT 50% OF THE VALUE OVER AND ABOVE THE VALUE OF THE ASSETS STATED IN TH E AGREEMENT I.E. ` .15,50,50,000/- WAS ATTRIBUTABLE TO THE GOODWILL. THEREFORE, HE RELIED ON THE ITAT MUMBAI BENCH DECISION IN THE CASE OF RG KESWAN I VS. ACIT 116 ITD 133 AND DECLINED ASSESSEES CLAIM OF DEPRECIATION O N GOODWILL OF ` .1,93,85,000/-. TO THE ABOVE EXTENT, HE REDUCED THE LOSS RETURNED BY THE ASSESSEE VIDE ASSESSMENT ORDER DATED 31.12.2009. 5. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). DURING THE PENDENCY OF THE SAID APPEAL, THE ASSESSING OFFI CER ALSO SENT PROPOSAL TO THE CIT(A) FOR ENHANCING THE ASSESSEES INCOME TO T HE EXTENT OF ` .1,93,85,000/- (SUPRA) STATING THEREIN THAT THE AMO UNT PAID BY THE ASSESSEE IN SLUMP SALES IN EXCESS OF THE VALUE OF THE ASSET OVER ITS LIABILITY HAD TO BE TREATED AS VALUE OF GOODWILL. AS THE RECORD REVEALS , THE CIT(A) ISSUED NOTICE OF THE PROPOSAL TO THE ASSESSEE. THEREAFTER, VIDE T HE IMPUGNED ORDER AND AFTER CONSIDERING BUSINESS TRANSFER AGREEMENT IN QU ESTION DATED 18.01.2007 ENTERED INTO BY THE ASSESSEE WITH M/S. G.E. INDIA I NDUSTRIAL PVT. LTD., THE CIT(A) HAS OBSERVED THAT THERE WAS HARDLY ANY DOUBT THAT THE DIFFERENCE I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 4 BETWEEN THE ASSETS AND LIABILITIES CAME TO BE ` .31,01,60,000/-. BY PLACING RELIANCE ON THE HONBLE KERALA HIGH COURTS JUDGMEN T IN THE CASE OF B. RAVEENDRAN PILLAI V. CIT 237 CTR 80 AND DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT V. HINDUSTAN COCA COLA BEVERAGES (P) LTD. 133 ITR 192, THE CIT(A) HAS OBSERVED THAT THE ASSESSEE HAD ENTERED INTO BUSINESS TRANSFER AGREEMENT BY TREATING IT AS A GOI NG CONCERN. THEREFORE, PAYMENT MADE TOWARDS GOODWILL FOR ENSURING RETENTIO N AND CONTINUITY OF THE BUSINESS IS COVERED BY SECTION 32((1) (II) OF THE ACT. HENCE THE ASSESSEE HAS BEEN HELD ENTITLED FOR RELIEF OF DEPRECIATION ( SUPRA) ON GOODWILL. THEREFORE, THE REVENUE IS AGGRIEVED. 6. ON BEHALF OF THE REVENUE, THE DR HAS VEHEMENTLY ARGUED THAT THE CIT(A) HAS ERRED IN ACCEPTING ASSESSEES CLAIM OF G OODWILL ON DEPRECIATION. IN SUPPORT THEREOF, HE HAS PLACED RELIANCE ON BHARA BHAI J. VYAS VS. ITO (ITAT, AHD) (97 ITD 248), GURUJI ENTERTAINMENT NETW ORK LTD. (ITAT, DEL.)(108 TTJ 180) AND RG KESWANI VS. ACIT (116 ITD 133 (MUM)(AT) AND PRAYED FOR RESTORING THE ORDER OF THE ASSESSING OFF ICER. 7. OPPOSING THE SUBMISSIONS OF THE REVENUE, THE AR REPRESENTING THE ASSESSEE HAS STRONGLY SUPPORTED THE ORDER OF THE CI T(A) AND STATED THAT THE ISSUE IS NO MORE RES INTEGRA AS THE HONBLE APEX CO URT IN THE CASE OF CIT V. SMIFS SECURITIES LTD. [2012] 24 TAXMANN.COM 222(SC) DATED 22.08.2012 HAS HELD THAT UNDER SECTION 32(1) EXPLANATION 3, THE GO ODWILL IS AN INTANGIBLE ASSET ENTITLED FOR RELIEF OF DEPRECIATION. HE HAS A LSO PRODUCED COPY OF THE I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 5 HONBLE KERALA HIGH COURTS JUDGMENT IN THE CASE OF B. RAVEENDRAN PILLAI V. CIT (SUPRA) AS WELL AS COPY OF THE BUSINESS TRANSFE R AGREEMENT ENTERED INTO BY THE ASSESSEE AND PRAYED FOR UPHOLDING THE CIT(A) S ORDER. 8. WE HAVE CONSIDERED THE ISSUE AT LENGTH AND ALSO PERUSED RELEVANT FINDINGS AS WELL AS CASE LAW CITED BY THE PARTIES. THE STRIFE BETWEEN THE PARTIES IS THAT THE ASSESSEE SAYS THAT SINCE IT HAD PAID THE CONSIDERATION IN LIEU OF EXECUTING BUSINESS TRANSFER AGREEMENT OVER AND ABOVE THE VALUE OF THE ASSET SPECIFIED, THEREFORE, THE BALANCE CONSIDE RATION WAS TOWARDS INTANGIBLE ASSET AND MORE SO GOODWILL WHICH IS EN TITLED FOR DEPRECIATION. ON THE OTHER HAND, WHILE REPELLING ASSESSEES CONTENTI ON, THE ASSESSING OFFICER WAS OF THE OPINION THAT THE ASSESSEES CLAIM WAS NO T LIABLE TO BE ACCEPTED AS THERE WAS NOTHING SPECIFIED IN THE AGREEMENT AS WELL AS CASE LAW OF MUMBAI ITAT (SUPRA) WAS AGAINST THE ASSESSEE. FACED WITH THIS SITUATION, WE FIND THAT THE HONBLE SUPREME COURT HAS SETTLED THE LAW ON THIS ISSUE IN CASE OF SMIFS SECURITIES LTD. (SUPRA), WHEREIN THEI R LORDSHIPS HAVE BEEN PLEASED TO HOLD AS UNDER: QUESTION NO.[B]: 'WHETHER GOODWILL IS AN ASSET WIT HIN THE MEANING OF SECTION 32 OF THE INCOME TAX ACT, 1961, AND WHETHER DEPRECIATION ON `GOODWILL' IS ALLOWABLE UNDER THE SAID SECTION?' ANSWER: IN THE PRESENT CASE, THE ASSESSEE HAD CLAIM ED DEDUCTION OF RS.54,85,430/- AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING, THE EXPLANATION REGARDING ORIGIN OF SUCH GOODWILL W AS GIVEN 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 I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 6 RETROSPECTIVE EFFECT FROM 1ST APRIL, 1998, ASSETS A ND 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 CO NSIDERED 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 RETAI N ITS EXISTING 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 MEAN-- [A] TAN GIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE; [B] INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COP YRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE.' EXPLANATION 3 STATES THAT THE EXPRESSION `ASSET' SH ALL MEAN AN INTANGIBLE ASSET, BEING KNOW-HOW, PATENTS, COPYRIGH TS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE. A READING THE WORDS `ANY OTHER BUSI NESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANAT ION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION `ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPL E OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EX PRESSION 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 I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 7 SHORT] HAS COME TO THE CONCLUSION THAT THE AUTHORIS ED REPRESENTATIVES HAD FILED COPIES OF THE ORDERS OF THE HIGH COURT OR DERING AMALGAMATION OF THE ABOVE TWO COMPANIES; THAT THE A SSETS AND LIABILITIES OF M/S. YSN SHARES AND SECURITIES PRIVA TE LIMITED WERE TRANSFERRED TO THE ASSESSEE FOR A CONSIDERATION; TH AT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CO NSTITUTED GOODWILL AND THAT THE ASSESSEE- COMPANY IN THE PROCESS OF AM ALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BE CAUSE OF WHICH THE MARKET WORTH OF THE ASSESSEE-COMPANY STOOD INCREASE D. THIS FINDING HAS ALSO BEEN UPHELD BY INCOME TAX APPELLATE TRIBUN AL [`ITAT', FOR SHORT]. WE SEE NO REASON TO INTERFERE WITH THE FACT UAL 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 T O WHETHER GOODWILL IS AN ASSET UNDER SECTION 32 OF THE ACT. IN THE CIRCUM STANCES, BEFORE THE HIGH COURT, THE REVENUE DID NOT FILE AN APPEAL ON T HE FINDING OF FACT REFERRED TO HEREINABOVE. FOR THE AFORE-STATED REASONS, WE ANSWER QUESTION NO .[B] ALSO IN FAVOUR OF THE ASSESSEE. AFTER PERUSING THE AFORESAID LAW CASE OF HONBLE AP EX COURT, WE ARE OF THE OPINION THAT FACTS OF THE CASE IN HAND ARE IDENTICA L TO THAT BEFORE THEIR LORDSHIPS. IN THE SAID CASE AS WELL, THE HONBLE SU PREME COURT HAD TREATED THE DIFFERENCES IN THE NET VALUE OF THE ASSETS AND THE CONSIDERATION PAID TO BE THAT OF GOODWILL ETC. FURTHER IT HAS ALSO BEEN H ELD THAT GOODWILL IS AN ASSET COVERED UNDER THE STATUTORY PROVISIONS OF THE ACT I.E. SECTION 32(1) EXPLANATION 3. IN VIEW OF THIS MATTER, WE FIND THAT THE SAID CASE LAW ALSO COVERS THE ISSUE IN HAND. ALTHOUGH THE DR HAS CITED THREE CASES (SUPRA), BUT THEY ARE BY THE TRIBUNAL. ON THE OTHER HAND, THER E IS LAW SETTLED BY THE HONBLE SUPREME COURT. ACCORDINGLY, IN OUR OPINION, THE CIT(A) HAD RIGHTLY HELD THAT ASSESSEES CLAIM OF DEPRECIATION ON GOODW ILL IS LIABLE TO BE I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .731 & 733 731 & 733 731 & 733 731 & 733/M/ /M/ /M/ /M/12 1212 12 8 ACCEPTED. 9. THEREFORE, WE CONFIRM THE FINDINGS OF THE CIT(A ) AND DECIDE THE ISSUE IN HAND AGAINST THE REVENUE AND IN FAVOUR OF THE AS SESSEE. I.T.A. NO. 733/MDS/2012 10. BOTH THE REPRESENTATIVES HAVE CONCEDED THAT TH E GROUNDS IN THIS CASE ARE IDENTICAL TO THOSE INVOLVED IN I.T.A. NO. 731/M DS/2012 DECIDED HEREINABOVE. WE HAVE ALSO PERUSED THE GROUNDS AND F IND THAT THE AFORESAID STATEMENT OF BOTH REPRESENTATIVES IS CORRECT. APPRE CIATING THE FAIR SUBMISSIONS, WE ALSO UPHOLD CIT(A)S FINDING OF DEP RECIATION OF GOODWILL IN VIEW OF HONBLE SUPREME COURTS DECISION (SUPRA), W HICH WAS DECLINED BY THE ASSESSING OFFICER AGAINST THE ASSESSEE BUT ACCE PTED BY THE CIT(A). 11. TO SUM UP, BOTH THE APPEALS FILED BY THE REVEN UE ARE DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 7 TH NOVEMBER, 2012 AT CHENNAI. SD/- SD/- (DR. O.K. NARAYANAN) VICE - PRESIDENT (S.S. GODARA) JUDICIAL MEMBER CHENNAI, DATED, THE 07.11.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.