M/s The Jeypore Sugar Company Limited, Chagallu v. The ACIT, Central Circle-1, Visakhapatnam

ITA 256/VIZ/2010 | 2006-2007
Pronouncement Date: 21-12-2010 | Result: Partly Allowed

Appeal Details

RSA Number 25625314 RSA 2010
Assessee PAN AAACT9942R
Bench Visakhapatnam
Appeal Number ITA 256/VIZ/2010
Duration Of Justice 8 month(s) 1 day(s)
Appellant M/s The Jeypore Sugar Company Limited, Chagallu
Respondent The ACIT, Central Circle-1, Visakhapatnam
Appeal Type Income Tax Appeal
Pronouncement Date 21-12-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted DB
Tribunal Order Date 21-12-2010
Date Of Final Hearing 30-11-2010
Next Hearing Date 30-11-2010
Assessment Year 2006-2007
Appeal Filed On 19-04-2010
Judgment Text
ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO. 255&256 /VIZAG/ 20 10 ASSESSMENT YEAR : 2005 - 06 & 2006 - 07 M/S. JEYPORE SUGAR COMPANY LTD CHAGALLU ACIT CENTRAL CIRCLE - 1 VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO.AAACT 9942R APPELLANT BY: SHRI SUBRATA SARKAR DR RESPONDENT BY: SHRI G.V.N. HARI CA ORDER PER SHRI S.K. YADAV JUDICIAL MEMBER : - THES E APPEALS ARE PREFERRED BY THE ASSESSEE AGAINST THE RESPECTIVE ORDER OF THE CIT(A) ON COMMON GROUNDS. THEREFORE THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF THROUGH THIS CONSOLIDATED ORDER. 2. GROUND NOS.1&2 IN THESE APPEALS RELATE TO DISALLOWANCE OF EXPENDITURE INCURRED BY THE ASSESSEE FOR THE UNITS OF THE COMPANY M/S. RAMAKRISHNA MAIZE PRODUCTS & M/S. GSR SUGARS. THE DISALLOWANCE IN THIS REGARD WAS REPEATEDLY MADE IN EARLIER YEARS AND IT WAS CONFIRMED BY THE TRIBUNAL ALSO. THE LD. C OUNSEL FOR THE ASSESSEE HAS CANDIDLY ADMITTED DURING THE COURSE OF HEARING OF THE APPEAL THAT BOTH THESE GROUNDS ARE COVERED AGAINST THE ASSESSEE BY THE ORDERS OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2002 - 03 TO 2004 - 05. COPY OF THE TRIBUNALS ORDER FOR TH E ASSESSMENT YEAR 2003 - 04 AND 2004 - 05 IS PLACED ON RECORD AND FROM ITS PERUSAL WE FIND THAT BOTH THE ISSUES ARE COVERED AGAINST THE ASSESSEES. THEREFORE FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL WE DISMISS THESE GROUNDS AND CONFIRM THE ORDER OF THE C IT(A) IN THIS REGARD. 3 . NOW THE NEXT ISSUE INVOLVED IN BOTH THE APPEALS RELATE TO THE DISALLOWANCE OF CLAIM OF DEPRECIATION ON INTANGIBLE ASSETS I.E. GOODWILL. ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 2 4 . BRIEF FACTS BORNE OUT FROM THE RECORD IN THIS REGARD ARE THAT THE ASSESSEE CLAIMED DEPRE CIATION AT RS.44 77 486/ - IN A.Y. 2005 - 06 AND AT RS.33 58 115/ - IN A.Y. 2006 - 07 AT 25% ON GOODWILL INCLUDING IN THE BLOCK OF INTANGIBLE ASSETS IN THE DEPRECIATION STATEMENT ENCLOSED TO THE COMPUTATION OF TOTAL INCOME. WHEN THE ASSESSEE WAS ASKED TO EXPLAI N HOW THE GOODWILL IS ELIGIBLE FOR DEPRECIATION UNDER CLAUSE (II) OF SECTION 32(1) OF THE INCOME TAX ACT (HEREINAFTER REFERRED AS ACT) THE ASSESSEE SUBMITTED THAT THE INTANGIBLE ASSETS VALUE REPRESENTS THE DIFFERENCE BETWEEN PRICE PAID BY THE ASSESSEE TO T HE GOVERNMENT ON CLOSE D TENDER FOR THE PURCHASE OF CHAGALLU DISTILLERY . T HE PRICE OFFERED BY THE ASSESSEE COMPANY WAS RS.9 CRORES AND THE COMPANY TOOK OVER ASSETS VALUED AT RS.4 75 46 800/ - AS PER THE DETAILS IN THE ANNEXURE. IT WAS FURTHER STATED THAT B ALANCE AMOUNT REPRESENTS THE AMOUNTS PAID AS CONSIDERATION TOWARDS TRANSFER OF DISTILLERY LICENSE WHICH OTHERWISE WOULD NOT HAVE BEEN POSSIBLE TO ACQUIRE. THE A.O. HAS EXAMINED THE CLAIM OF THE ASSESSEES. BEING NOT CONVINCED WITH IT HE DISALLOWED THE CLA IM OF DEPRECIATION ON GOODWILL. 5. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT ASSESSEE HAD ACQUIRED A DISTILLERY UNIT BY NAME CHAGALLU DISTILLERY FROM M/S. NIZAM SUGAR LIMITED (NSL). THE SELLER NSL IS A GOVERNMENT COMPA NY IN WHICH SUBSTANTIAL SHARE HOLDING TO THE EXTENT OF 98.88% IS OWNED BY THE GOVERNMENT OF ANDHRA PRADESH. THE SALE OF DISTILLERY UNIT TOOK PLACE CONSEQUENT TO THE DECISION OF THE GOVERNMENT OF ANDHRA PRADESH UNDER THE PRIVATIZATION PROCESS IN WHICH THE CHAGALLU DISTILLERY HAS BEEN INCLUDED. AS PER THE SALE AND PURCHASE AGREEMENT THE PURCHASE PRICE OF THE DISTILLERY UNIT WAS TERMED AS A SINGLE PRICE OF RS.9 CRORES AS PER ITS CLAUSE 2.3 BESIDES SEPARATE PAYMENT OF STOCKS. IT WAS FURTHER STATED THAT AS P ER CLAUSE 1 SPECIFYING CONSTRUCTION AND INTERPRETATION THE VARIOUS TERMS HAS BEEN DEFINED AS FOLLOWS: PURCHASE PRICE: THE CONSIDERATION FOR THE ASSETS AND BUSINESS SET OUT IN CLAUSES 2AND3. THE TERM ASSETS AND BUSINESS HAS BEEN DEFINED AS NSLS RI GHT TITLE AND INTEREST IN THE FOLLOWING ASSETS: I) PREMISES II) IMMOVABLE AND MOVABLE FIXED ASSETS MORE PARTICULARLY DESCRIBED IN SCHEDULE 1 TO THIS AGREEMENT ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 3 III) GOODWILL AND RECORDS IV) STOCKS V) ASSUMED LIABILITIES EACH AS DEFINED IN THE AGREEMENT. GOODWILL: GOODWILL ALL THE GOODWILL INTEREST AND CONNECTION OF NSL IN AND CONCERNING THE BUSINESS TOGETHER WITH THE RIGHT TO REPRESENT THE PURCHASER AS CARRYING ON THE BUSINESS AS A GOING CONCERN IN SUCCESSION TO NSL BUT NOT INCLUDING ANY RIGHT TO THE USE OF THE NAME OF THE NIZAM SUGARS LIMITED OR ANY ASSOCIATED OR RELATED NAME. PREMISES: THE PREMISES PARTICULARS OF WHICH ARE SET OUT IN SCHEDULE 1 (AND INCLUDES LAND AND ANY PART THEREOF AND/OR ANY BUILDING STRUCTURE AND/OR WORKS THEREON AND ANY EASEMENT THAT NSL ENJO YS AT THE ASSETS AND THE BUSINESS. `EXCLUDED ASSETS: (A) CASH IN HAND OR AT BANK AND ALL OTHER CHEQUES AND OTHER SECURITIES REPRESENTING THE SAME; (B) ANY RIGHT TO USE OR CONTINUE TO USE AFTER COMPLETION ANY TRADE OR SERVICE NAME OR MARK OF NSL. TRANSFER: THE T RANSFER OF THE ASSETS AND BUSINESS PURSUANT TO THIS AGREEMENT. 6 . IT WAS FURTHER URGED BEFORE THE CIT(A) THAT IT IS EVIDENTLY CLEAR FROM THE AGREEMENT FOR PURCHASE OF BUSINESS THAT THE PURCHASE PRICE IS A CONSOLIDATED PRICE OF RS.9 CRORES AND IT MEANS CO NSIDERATION FOR ASSETS AND BUSINESS. HE HAS ALSO PLACED A DOCUMENT TITLED INFORMATION MEMORANDUM AND BID DOCUMENTS WITH THE SUBMISSION THAT THE GOODWILL HAS BEEN CLEARLY SPECIFIED AS THE RIGHT TO CARRY OUT DISTILLERY THAT FORMS PART OF SALE. IT WAS AL SO SPECIFIED THEREIN THAT THE CHAGALLU HAS POTENTIAL ACCESS TO MOLASSES FROM NEARBY SOURCES AS WELL AS FROM NSL SUGAR MILLS. IT WAS FURTHER CONTENDED THAT THE GOODWILL MEANS THE DIFFERENCE BETWEEN THE VALUE OF THE ASSET ACQUIRED FROM NSL AND AMOUNT PAID T O NSL ONLY TOWARDS THE RIGHT TO MANUFACTURE RECTIFIED SPIRIT. IT IS THE ONLY RIGHT TO CARRY ON THE BUSINESS BUT SPECIFICALLY FORBIDDING THE RIGHT TO USE THE NAME. BESIDES HE HAS ALSO PLACED A RELIANCE UPON SOME ORDERS OF THE TRIBUNAL IN SUPPORT OF HIS C ONTENTION BUT THE ASSESSEE DID NOT FIND THE FAVOUR FROM THE CIT(A) AND CIT(A) ACCORDINGLY CONFIRMED THE DISALLOWANCE ON DEPRECIATION MADE BY THE A.O. A FTER HAVING OBSERVED THAT IN THE LIGHT OF THE STATUTORY PROVISIONS CONTAINED IN SECTION 32(1)(II) THE G OODWILL ACQUIRED BY THE ASSESSEE DOES NOT COME UNDER THE EXPRESSION OF ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF THE NATURE SIMILAR TO ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 4 KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES . THE RELEVANT OBSERVATION OF THE CIT(A) ARE EXTRACTED HEREUNDER: I HAVE CONSIDERED THE ABOVE FACTS OF THE CASE THE APPELLANTS SUBMISSIONS AS WELL AS A.OS CONTENTION. IN THIS CASE THE APPELLANT HAD ACQUIRED A DISTILLERY UNIT BY NAME CHAGALLU DISTILLERY FROM M/S. NIZAM SUGARS LTD. (NSL). AS PER THE SALE AND PURCHASE AGREEMENT THE APPELLANT HAD PAID A CONSOLIDATED PRICE OF RS.9.00 CRORES FOR ACQUIRING THE UNIT. THE EXCESS OF THE AMOUNT PAID OVER THE VALUE OF THE FIXED ASSETS ACQUIRED AMOUNTING TO RS.4.75 CRORES HAS BEEN TERMED AS THE PAYMENT TOWARDS `GOO DWILL AS PER THE AGREEMENT. IT IS THE APPELLANTS CONTENTION THAT THE TERM `GOODWILL HAS BEEN EMPLOYED AS CONVEYING ONLY THE RIGHT TO CARRY ON THE BUSINESS OF OPERATION OF DISTILLERY AND THE PURCHASE PRICE IS FOR ASSETS AND BUSINESS PUT TOGETHER AND PU RCHASE OF BUSINESS CAN ONLY MEAN THE PURCHASE OF THE RIGHT TO CARRY ON THE BUSINESS. THEREFORE GOODWILL HAS TO BE CONSIDERED AS AN INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION. THE APPELLANTS CLAIM HAS BEEN REJECTED BY THE A.O. ON THE GROUND THAT DEPREC IATION CANNOT BE ALLOWED ON `GOODWILL AS THE LEGISLATURE HAS CONSCIOUSLY EXCLUDED GOODWILL FROM THE PURVIEW OF SEC. 32(1) OF THE I.T. ACT. FURTHER THE APPELLANTS CLAIM THAT IT IS SIMILAR TO THE RIGHT AND LICENSE PAID FOR ACQUIRING THE RIGHT TO CARRY ON THE BUSINESS OF THE UNIT WAS ALSO REJECTED AS A.O. IS OF THE VIEW THAT THE LICENSE WAS NOT PURCHASED DIRECTLY AND THE APPELLANT HAS PAID PREMIUM FOR PURCHASE OF ASSETS OF M/S. NIZAM SUGARS. I ENTIRELY AGREE WITH THE VIEW EXPRESSED BY THE A.O. THAT GOODWI LL CANNOT BE TREATED AS INTANGIBLE ASSET THEREFORE NOT DEPRECIABLE. IT IS ALSO NOT IN THE NATURE OF BUSINESS OR COMMERCIAL RIGHT. THE LAW HAS SPECIFIED ITEMS OF INTANGIBLE ASSETS ELIGIBLE FOR DEPRECIATION IN THE FOLLOWING CATEGORIES: I. KNOWHOW II. PATENTS III. C OPY RIGHTS IV. TRADE MARKS V. LICENSES VI. FRANCHISES AS STATED ABOVE THE LAW HAS SPECIFIED SIX CATEGORIES OF INTANGIBLE ASSETS ENTITLED FOR DEPRECIATION THEREFORE IT IS OBVIOUS THAT ALL INTANGIBLE ASSETS ARE NOT ELIGIBLE FOR DEPRECIATION ALLOWANCE. IN THE INSTAN T CASE THE DIFFERENTIAL AMOUNT AS PER THE AGREEMENT WAS PAID BY THE APPELLANT TOWARDS THE ACQUISITION OF GOODWILL. THEREFORE THE SAID PAYMENT DID NOT COME UNDER EITHER KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSES FRANCHISES. ANY BUSINESS OR C OMMERCIAL RIGHT NOT SIMILAR IN NATURE TO THE ABOVE MENTIONED SIX ITEMS CANNOT BE TREATED AS INTANGIBLE ASSETS QUALIFIED ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 5 FOR DEPRECIATION. THOSE RIGHTS MUST BE OF SIMILAR NATURE TO KNOWHOW PATENTS COPY RIGHTS TRADE MARKS LICENSES FRANCHISES. THEREFOR E IN THE LIGHT OF THE STATUTORY PROVISIONS CONTAINED IN SEC.32(1)(II) THE GOODWILL ACQUIRED BY THE APPELLANT DOES NOT COME UNDER THE EXPRESSION OF ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF THE NATURE SIMILAR TO KNOWHOW PATENTS COPY RIGHTS TRADE MARKS LICENSES FRANCHISES. IN THE INSTANT CASE THE TERM `GOODWILL HAS BEEN USED IN THE AGREEMENT ITSELF. THEREFORE THE SAME COULD NOT BE EQUATED WITH THE EXPRESSION OF ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE OCCURRING IN SEC.32(1)(II) OF THE INCOMETAX ACT. IN SUCH CIRCUMSTANCES THERE WAS NOTHING ON RECORD INCLUDING IN THE AGREEMENT TO SHOW THAT THE APPELLANT HAD PAID THE AMOUNT FOR SOMETHING OTHER THAN GOODWILL. THE DEPARTMENTS VIEW IS ALSO SUPPORTED BY THE HONBLE ITAT HAS HELD THAT G OODWILL DOES NOT FALL IN THE CATEGORY OF INTANGIBLE ASSETS AS PRESCRIBED UNDER SEC.32(1)(II) AND THEREFORE ACQUISITION COST OF GOODWILL IS NOT ENTITLED FOR DEPRECIATION. THEREFORE THE ACQUISITION COST OF GOODWILL IS NOT AN INTANGIBLE ASSET ENTITLED FOR D EPRECIATION. THIS GROUND OF APPEAL IS DECIDED AGAINST THE APPELLANT. THIS GROUND OF APPEAL STANDS AS DISMISSED. 7 . AGGRIEVED THE ASSESSEE HAS PREFERRED AN APPEAL AND REITERATED ITS CONTENTIONS. THE LD. COUNSEL FOR THE ASSESSEE MR. G.V.N. HARI HAS CON TENDED THAT GOODWILL IS A BUNDLE OF RIGHTS WHICH MOVE ALONG WITH THE ESTABLISHMENT/INDUSTRY/UNIT. THE VALUE OF THE GOOD WILL DEPENDS UPON THE LOCATION OF THE ESTABLISHMENT OF THE INDUSTRY/UNIT AND THE NATURE OF COMMERCIAL BENEFITS WHICH ARE BEING TRANSFER RED ALONG WITH THE ESTABLISHMENT/INDUSTRY/UNIT. THEREFORE IN A SALE OF GOING CONCERN THE VALUE OF THE GOODWILL IS TO BE DETERMINED SEPARATELY AND SINCE IT IS AN INTANGIBLE ASSET AKIN TO THE KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISE S ETC. IT IS ELIGIBLE FOR DEPRECIATION U/S 32(1)(II) OF THE ACT. MR. HARI HAS ALSO INVITED OUR ATTENTION TO THE PROVISIONS OF SECTION 32 OF THE ACT WITH THE SUBMISSION THAT CLAUSE 2 OF SUB - SECTION 1 OF SECTION 32 IS AN INCLUSIVE SECTION AND NOT AN EXCLUS IVE. ACCORDING TO THIS SECTION OTHER BUSINESS OR COMMERCIAL RIGHTS WHICH ARE OF SIMILAR NATURE OF KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER 1 ST APRIL 1998 ARE ELIGIBLE FOR DEPRECIATON A T A PRESCRIBED RATE. SINCE THE GOODWILL IS A BUNDLE OF COMMERCIAL RIGHTS AND BENEFITS AND BEING INTANGIBLE ASSET IT IS ELIGIBLE FOR DEPRECIATION AS PER THE PRESCRIBED RATE. IN SUPPORT OF HIS CONTENTION HE HAS PLACED A RELIANCE UPON THE JUDGEMENT OF THE KERALA HIGH COURT IN THE CASE OF B. RAVINDRAN PILLAI VS. CIT IN IT APPEAL NO.1741 OF 2009 IN ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 6 WHICH THE DEPRECIATION WAS ALLOWED ON WRITTEN DOWN VALUE OF THE GOODWILL. HE HAS ALSO PLACED A RELIANCE UPON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF TECHN O S HARES AND STOCKS LIMITED VS. CIT CIVIL APPEAL NO.7780 - 7781 OF 2010 IN WHICH THE DEPRECIATION WAS ALLOWED ON BSE MEMBERSHIP CARD. HE HAS ALSO PLACED A RELIANCE UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF KOTAK FOREX BROKERAGE VS. ACIT 41 DTR (MUM) (TR IB) 387 IN WHICH THE DEPRECIATION WAS ALLOWED ON GOODWILL. 8 . THE LD. D.R. ON THE OTHER HAND HAS SUBMITTED THAT THE GOODWILL IS BUNDLE OF COMMERCIAL RIGHTS AND BENEFITS ACQUIRED BY AN ESTABLISHMENT OVER A PERIOD OF TIME. IT DEPENDS UPON A LOCATION WHER E THE ESTABLISHMENT SITUATE THE NATURE OF BUSINESS THE NATURE OF CUSTOMERS OF AN ESTABLISHMENT NATURE OF RIGHTS TO TRADE AND ALSO THE REPUTATION DEVELOPED OVER A PERIOD OF TIME. THE LD. D.R. FURTHER CONTENDED THAT THE GOODWILL WAS DEFINED BY THE APEX C OURT WAY BACK IN 1960 IN THE CASE OF S.C. C A MBATTA & CO. (P) LTD. VS. CIT 41 ITR 500(SC) IN WHICH IT WAS HELD THAT THE GOODWILL OF A BUSINESS DEPENDS UPON A VARIETY OF CIRCUMSTANCES OR A COMBINATION OF THEM. THE LOCATION THE SERVICE THE STANDING OF THE BUSINESS THE HONESTY OF THOSE WHO RUN IT AND THE LACK OF COMPETITION AND MANY OTHER FACTORS GO INDIVIDUAL LY OR TOGETHER TO MAKE UP GOODWILL THOUGH LOCALITY ALWAYS PLA YS A CONSIDERABLE PART. GOODWILL INCLUDES THE COMMERCIAL BENEFITS AND THE COMMERCIAL RI GHTS. IF THE ASSESSEE ACQUIRES A COMMERCIAL RIGHT WHICH IS AKIN TO THE KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES BEING AN INTANGIBLE ASSET IT MAY BE ELIGIBLE FOR DEPRECIATION U/S 32 OF THE ACT. BUT THE COMMERCIAL BENEFITS WHICH AR E ACCRUED ON ACCOUNT OF ITS LOCATION REPUTATION THE LACK OF COMPETITION AND FOR OTHER VARIOUS REASONS THE SAME ARE NOT ELIGIBLE FOR DEPRECIATION U/S 32 OF THE I.T. ACT. IN SUPPORT OF HIS CONTENTION THAT GOODWILL THOUGH IT IS AN INTANGIBLE ASSET BUT IT IS NOT OF SIMILAR NATURE OF THAT KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES ; THEREFORE NOT ELIGIBLE FOR DEPRECIATION. HE PLACED A RELIANCE UPON THE FOLLOWING JUDGEMENTS: 1. BORKAR PACKAGING (P) LTD. VS. ACIT 131 TTJ 99 2. GURUJI ENTERT AINMENT NETWORK LTD. VS. ACIT 108 TTJ (DEL) 180 3. CIT & ANR VS. MANGALORE GANESH BEEDI WORKS 264 ITR 142 ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 7 4. BHARATBHAI J. VYAS VS. ITO 97 ITD 248 (AHD) 5. R.G. KESWANI VS. ACIT 116 ITD 133 9 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF RECO RD WE FIND THAT THE SOLE CONTROVERSY IN THESE APPEALS REVOLVES AROUND AN ISSUE WHETHER GOODWILL BEING AN INTANGIBLE ASSET IS ELIGIBLE FOR DEPRECIATION U/S 32 OF THE I.T. ACT. THE SECTION 32 WAS AMENDED BY THE FINANCE ACT 1998 W.E.F. 1.4.99. AFTER THIS AMENDMENT DEPRECIATION IS ALLOWED ON KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER 1 ST DAY OF APRIL 1998. DISPUTE ARISES WITH R EGARD TO THE BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE BEING INTANGIBLE ASSETS. EMPHASIS GIVEN ON THE WORDS OF SIMILAR NATURE. MEANING THEREBY ONLY THOSE BUSINESS OR COMMERCIAL RIGHTS ARE ELIGIBLE FOR DEPRECIATION WHICH ARE EITHER AKIN TO KNOW HO W PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES OR FALLS WITHIN THE SAME GENESIS. THE RESIDUARY CATEGORY ANY OTHER BUSINESS OR COMMER CIAL RIGHTS OF SIMILAR NATURE AS FOUND IN THE COMPANY OF EXPRESSION KNOW HOW PATENTS COPY RIGHTS TRADE MARK S LICENSE FRANCHISES HAS TO BE READ EJUSDEM GENERIS HENCE MUST BE IN THE SAME GENESIS. MEANING THEREBY THAT ALL SORT OF INTANGIBLE ASSETS FALLS IN THE RESIDUARY CATEGORY ARE ELIGIBLE FOR DEPRECIATION. NOW THE QUESTION ARISE WHETHER THE GOODWILL FALLS WITHIN THE RESIDUARY CATEGORY I.E. ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE . BEFORE DEALING WITH THIS ISSUE WE HAVE TO FIRST UNDERSTAND THAT WHAT IS GOODWILL. 10 . THE WORD GOODWILL HAS BEEN DEFINED REPEATEDLY THROUGH JUDICIAL P RONOUNCEMENTS BY THE APEX COURT AND THE VARIOUS HIGH COURTS. IN THE CASE OF S.C. CAMBATTA & CO. PVT. LTD (SUPRA) THEIR LORDSHIP OF THE APEX COURT HAD EXAMINED THE INTERPRETATIONS OF GOODWILL GIVEN IN DIFFERENT CASES AND ALSO BY D IFFERENT AUTHORS. IN IRC VS. MULLER & CO.S MARGARINE LTD. (1901) AC 217 LORD MACNAGHT E N AT PG.NO S .223 & 224 HAS MADE THE FOLLOWING OBSERVATIONS: WHAT IS GOODWILL? IT IS A THING VERY EASY TO DESCRIBE VERY DIFFICULT TO DEFINE. IT IS THE BENEFIT AND ADVANTAGE OF THE GOOD NAM E REPUTATION AND CONNECTION OF A BUSINESS. IT IS THE ATTRACTIVE FORCE WHICH BRINGS IN CUSTOM. IT IS THE ONE THING WHICH ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 8 DISTINGUISHES AN OLD ESTABLISHED BUSINESS FROM A NEW BUSINESS AT ITS FIRST START.IF THERE IS ONE ATTRIBUTE COMMON TO ALL CASES OF GOODWILL IT IS THE ATTRIBUTE OF LOCALITY. FOR GOODWILL HAS NO INDEPENDENT EXISTENCE. IT CANNOT SUBSIST BY ITSELF. IT MUST BE ATTACHED TO A BUSINESS. DESTROY THE BUSINESS AND THE GOODWILL PERISHES WITH IT THOUGH ELEMENTS REMAIN WHICH MAY PERHAPS BE G ATHERED UP AND BE REVIVED AGAIN. 11 . THEIR LORDSHIP OF THIS APEX COURT IN THE CASE OF S.C. CAMBATTA & CO. FINALLY CONCLUDED THAT THE GOODWILL OF A BUSINESS DEPENDS UPON A VARIETY OF CIRCUMSTANCES OR A COMBINATION OF THEM. THE LOCATION THE SERVICE THE STANDING OF BUSINESS THE HONESTY OF THOSE WHO RUN IT AND THE LACK OF COMPETITION AND MANY OTHER FACTORS GO INDIVIDUALLY OR TOGETHER TO MAKE UP THE GOODWILL THOUGH LOCALITY ALWAYS PLAYS A CONSIDERABLE PART. SHIFT THE LOCALITY AND THE GOODWILL MAY BE LOST . THEIR LORDSHIP FURTHER OBSERVED THAT AT THE SAME TIME LOCALITY IS NOT EVERYTHING. THE POWER TO ATTRACT CUSTOMERS DEPENDS UPON ONE OR MORE OF THE OTHER FACTORS AS WELL. IN THE CASE OF K HUSHAL KHEMGAR SHAH VS. MRS. KHORSHED BANU DADIBA BOATWA UA AIR 1970 SC 1147 THEIR LORDSHIP OF THE APEX COURT HAVE EXAMINED THE GOODWILL BY HOLDING THAT IT IS THE BENEFIT AND ADVANTAGE OF THE GOOD NAME REPUTATION AND CONNECTION OF BUSINESS. IT IS THE ATTRACTIVE FORCE WHICH BRINGS IN CUSTOMERS. IT IS THE MAGNETIC QUALIT Y OF A PARTICULAR TRADE OF BUSINESS WHICH ATTRACTS CUSTOMERS TO IT AS A MATTER OF COURSE. THIS QUALITY SPRINGS FROM AND IS DEVELOPED BY VARIOUS CONTRIBUTING FACTORS THAT EARN A REPUTATION FOR HONEST DEALING QUALITY AND STANDARD. IT IS AN INTANGIBLE ASSE T BEING THE WHOLE ADVANTAGE OF THE REPUTATION AND CONNECTIONS FORMED WITH THE CUSTOMERS TOGETHER WITH THE CIRCUMSTANCES WHICH MAKES CONNECTION DURABLE. IT IS A COMPONENT OF TOTAL VALUES OF THE UNDERTAKING WHICH IS ATTRIBUTABLE TO THE ABILITY OF THE CONCER N TO EARN PROFIT OVER A COURSE OF YEARS BECAUSE OF ITS REPUTATION LOCATION AND OTHER FEATURES. IN THE CASE OF CIT VS. B.C. SRINIVASA SETTY REPORTED IN 128 ITR 294 THE HONBLE SUPREME COURT HAVE HELD THAT IN A PROGRESSING BUSINESS GOODWILL TENDS TO SHOW PROGRESSIVE INCREASE AND IN FAILING BUSINESS IT MAY BEGIN TO WANE. 1 2 . IN THE CASE OF RAVINDRAN (SUPRA) THEIR LORDSHIP OF KERALA HIGH COURT HAVE HELD THAT THE DEPRECIATION THOUGH IS AN ALLOWANCE TAKE CARE OF LOSS OR ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 9 EROSION IN VALUE OF THE ASSETS IN TH E COURSE OF TIME ON ACCOUNT OF USE SUCH CONSEQUENCES NEED NOT ACTUALLY TAKE PLACE FOR THE PURPOSE OF ENTITLING ASSESSEE FOR THE RELIEF IN TERMS OF STATUTORY PROVISIONS. IN FACT IT IS COMMON KNOWLEDGE THAT ON ACCOUNT OF INFLATION EVEN TANGIBLE ASSETS SUC H AS BUILDING MACHINERY PLANT OR FURNITURE WILL FETCH HIGHER PRICE IN THE LATER YEARS THOUGH IN THE ASSESSEES BOOK VALUE GOT ERODED ON ACCOUNT OF DEPRECIATION WRITTEN OFF. THE INCOME TAX ACT ALSO TAKES INTO ACCOUNT THE POSSIBILIT Y OF APPRECIATION OR AT LEAST RE TENTION OF VALUE OF DEPRECIABLE ASSETS ON WHICH DEPRECIATION IS ALLOWED. WHILE SECTION 41(2) PROVIDES FOR ASSESSMENT OF PROFIT ARISING ON SALE OF TANGIBLE DEPRECIABLE ASSETS SECTION 5 0 PROVIDES FOR ASSESSMENT OF CAPITAL GAINS ON SALE OF DEPRECIAB LE ASSETS. THEREFORE ENTITLEMENT FOR DEPRECIATION ON ASSETS INCLUDING INTANGIBLE ASSETS CANNOT BE NEGATIVE D ON THE GROUND THAT NO EROSION ON VALUE TAKES PLACE ON ACCOUNT OF THE USE OF THE ASSET IN BUSINESS OR PROFESSION. 1 3 . IN THE LIGHT OF THESE OBSERV ATIONS OF THE KERALA HIGH COURT IN THE CASE OF RAVINDRAN WE ARE OF THE VIEW THAT AFTER THE AMENDMENT IN SECTION 32 DEPRECIATION IS TO BE ALLOWED ON TANGIBLE AND INTANGIBLE ASSETS IRRESPECTIVE OF THE FACTS THAT THERE IS NO EROSION IN VALUE OF THESE ASSETS . THEREFORE THE ARGUMENTS OF THE LD. D.R. THAT THERE IS NO EROSION IN THE VALUE OF SO CALLED GOODWILL IS NOT RELEVANT TO DECIDE THE CONTROVERSY WITH REGARD TO THE ENTITLEMENT OF DEPRECIATION ON GOODWILL PURCHASED. NOW THE MAIN CONTROVERSY BEFORE US IS W HETHER THE GOODWILL IS BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE OF KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE OR FRANCHISES. 1 4 . WE HAVE ALSO EXAMINED THE FACTS OF THE CASE OF RAVINDRAN AND WE FIND THAT ASSESSEE PURCHASED A HOSPITAL WITH I TS LAND BUILDING EQUIPMENTS STAFF NAME TRADE MARK AND GOODWILL AS A GOING CONCERN UNDER 2 SEPA RATE SALE DEEDS. WHILE IM MOVABLES ARE COVERED BY ONE SALE DEED MOVABLES COVERING TRADE MARK GOODWILL ETC. ARE COVERED BY ANOTHER SALE DEED. IN SCH EDULE `B BESIDES THE NAME AND G ET UP THE PARTIES HAVE GIVEN THE EMBLEM OR TRADE MARK OF HOSPITAL PURCHASED BY THE ASSESSEES. UNDER THE SALE DEED THE VALUE OF GOODWILL WHICH INCLUDES THE NAME OF THE HOSPITAL AND ITS LOGO AND TRADE ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 10 MARK WAS DECLARED AS RS.2 CR ORES. THE DEPRECIATION U/S 32(1)(II) OF THE ACT WAS CLAIMED ON GOODWILL AND WHILE DEALING WITH THE ISSUE THEIR LORDSHIP HAVE OBSERVED THAT THE VALUE OF THE GOODWILL COVERS THE TRADE MARK OR LOGO AND THE NAME OF THE HOSPITAL. WITHOUT RESORTING TO RESIDU ARY ENTRY THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON THE NAME TRADE MARK LOGO UNDER THE SPECIFIC HEAD PROVIDED U/S 32(1)(II) WHICH COVERS TRADE MARK AND FRANCHISE. IT WAS FURTHER OBSERVED THAT TRADE MARK AND FRANCHISE COVERS NAME LOGO ETC. TH E VALUE OF WHICH ARE INCLUDED IN THE VALUE OF GOODWILL CLAIMED FOR THE PURPOSE OF DEPRECIATION BY THE ASSESSEE. THEIR LORDSHIP FURTHER OBSERVED THAT BY TRANSFERRING THE RIGHT TO USE THE NAME OF THE HOSPITAL ITSELF THE PREVIOUS OWNER HAS TRANSFERRED THE G OODWILL TO THE ASSESSEE AND THE BENEFIT DERIVED BY THE ASSESSEE IS RETENTION OF CONTINUED TRUST OF THE PATIENTS WHO ARE PATIENTS OF THE PREVIOUS OWNER. WHEN THE GOODWILL PAID IS FOR ENSURING RETENTION AND CONTINUED BUSINESS IN THE HOSPITAL IT IS CERTAINL Y FOR ACQUIRING A BUSINESS AND COMMERCIAL RIGHT AND IT IS CERTAINLY COMPARABLE WITH THE TRADE MARK FRANCHISE COPY RIGHT ETC. REFERRED TO IN FIRST PART OF SUBJECT CLAUSE ( II ) OF SECTION 32(1) AND SO MUCH SO THE GOODWILL IS COVERED BY THE ABOVE PROVISIONS OF THE ACT ENTITLING THE ASSESSEE FOR DEPRECIATION. THE RELEVANT OBSERVATIONS OF THE KERALA HIGH COURT ARE EXTRACTED HEREUNDER: THE QUESTION NOW TO BE CONSIDERED IS WHETHER THE FACTS IN THIS CASE CAN LEAD US TO THE CONCLUSION THAT THE PURCHASE OF THE HOSPITAL BY THE ASSESSEE WITH ITS NAME AND TRADE MARK AS A GOING CONCERN INVOLVES ANY PURCHASE OF GOODWILL. ADMITTEDLY THE HOSPITAL WAS RUN IN THE SAME BUILDING IN THE SAME TOWN IN THE SAME NAME FOR SEVERAL YEARS PRIOR TO PURCHASE BY THE ASSESSEE. IT OBVIOUSLY HAD THE NAME OF A SUCCESSFUL HOSPITAL AND THAT IS WHY THE ASSESSEE CHOSE TO CONTINUE THE SAME BUSINESS WITH THE SAME NAME. IT IS THE REPUTATION OF THE HOSPITAL THAT BRINGS PATIENTS TO IT AND THE SAME MAY INVOLVE THE QUALITY OF DOCTORS STAFF EQ UIPMENTS AND OTHER FACILITIES AVAILABLE IN THE HOSPITAL. EVEN AFTER PURCHASE OF THE HOSPITAL BY THE ASSESSEE ALL THE FACILITIES AND NAME CONTINUED TO BE THE SAME AND THEREFORE PATIENTS MAY NOT KNOW EVEN THE CHANGE OF MANAGEMENT OF THE HOSPITAL WHEN THEY GO FOR TREATMENT IN THE HOSPITAL AFTER ITS PURCHASE BY THE ASSESSEE. THE PURPOSE OF PURCHASING A BUSINESS CONCERN WHETHER IT BE HOSPITAL OR HOTEL IS TO ENSURE CONTINUITY OF BUSINESS WITH THE SAME REPUTATION. WHAT IS MOST IMPORTANT IN THE PURCHASE OF A HOSPITAL IN OUR VIEW IS THE NAME OF THE HOSPITAL AND WHAT IS MORE IMPORTANT IN THIS CASE IS THAT THE HOSPITAL AFTER PURCHASE BY THE ASSESSEE CONTINUED TO BE ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 11 RUN IN THE VERY SAME BUILDING IN THE VERY SAME PREMISES IN THE VERY SAME TOWN AND WITH THE S AME NAME. SO MUCH SO THE PURPOSE OF PAYING A VERY HUGE AMOUNT FOR GOODWILL IS FOR MAINTENANCE OF THE CONTINUED REPUTATION OF THE HOSPITAL WHICH WAS RUN IN SO MUCH SO PURCHASE OF HOSPITAL AS A GOING CONCERN WITH ITS NAME AND TRADE MARK IS NOTHING BUT AC QUISITION OF GOODWILL EARNED BY THE HOSPITAL AND IT CANNOT BE TERMED ANYTHING OTHER THAN A COMMERCIAL OR BUSINESS RIGHT. IN FACT IF THE PREVIOUS OWNER OF THE HOSPITAL WANTED TO RETAIN THE NAME LOGO OR TRADE MARK OF THE HOSPITAL EVEN AFTER SALE OF BUILDI NG AND PREMISES HE COULD HAVE RETAINED THE SAME WITHOUT TRANSFERRING IT TO THE APPELLANT - ASSESSEE. BY TRANSFERRING THE RIGHT TO USE THE NAME OF THE HOSPITAL ITSELF THE PREVIOUS OWNER HAS TRANSFERRED THE GOODWILL TO THE APPELLANT - ASSESSEE AND THE B ENEFIT DERIVED BY THE APPELLANT - ASSESSEE IS RETENTION OF CONTINUED TRUST OF THE PATIENTS WHO WERE PATIENTS OF THE PREVIOUS OWNERS. WHEN THE GOODWILL PAID IS FOR ENSURING RETENTION AND CONTINUED BUSINESS IN THE HOSPITAL IT IS CERTAINLY FOR ACQUIRING A BUSINESS AND COMMERCIAL RIGHTS AND IT IS CERTAINLY COMPARABLE WITH TRADE MARK FRANCHISE COPY RIGHT ETC. REFERRED TO IN FIRST PART OF SUB - CLAUSE (II) OF SECTION 32(1) AND SO MUCH SO IN OUR VIEW GOODWILL IS COVERED BY THE ABOVE PROVISION OF THE ACT ENTITLING THE ASSESSEE FOR DEPRECIATION. WE THEREFORE ALLOW THE APPEAL BY REVERSING THE ORDERS OF THE TRIBUNAL AND THAT OF THE LOWER AUTHORITIES AND BY DIRECTING THE ASSESSING OFFICER TO REVISE THE ASSESSMENT BY GRANTING DEPRECIATION ON THE WRITTEN DOWN VALUE OF GOO DWILL TO THE APPELLANT - ASSESSEE. 15 . WE HAVE ALSO EXAMINED THE JUDGEMENT IN THE CASE OF CIT VS. MANGALORE GANESH BEEDI WORKS (SUPRA) REFERRED TO BY THE LD. D.R. BUT THIS JUDGEMENT IS NOT ON THE POINT OF CONTROVERSY. IT TALKS ABOUT THE DEPRECIATION OF TR ADE MARK COPY RIGHT AND TECHNICAL KNOWHOW AND THERE IS NO DISPUTE IN THIS REGARD. THEREFORE THE JUDGEMENT WILL NOT RENDER ANY ASSISTANCE IN RESOLVING THE CONTROVERSY. 1 6 . WE HAVE ALSO EXAMINED THE JUDGEMENT OF THE PU N E BENCH OF THE TRIBUNAL IN THE CAS E OF MODULAR INFOTECH PRIVATE LTD. VS. DCIT 40 DTR PU NE (TRIB) 172 IN WHICH IT HAS BEEN HELD THAT SECTION 32 PRESCRIBES THE ENTITLEMENT OF DEPRECIATION W.E.F. 1 ST APRIL 1998 IN RESPECT OF CERTAIN INTANGIBLE ASSETS SUCH AS KNOW HOW PATENTS COPY RIGHTS T RAD E MARKS LICENSES OR ANY OTHER COMMERCIAL RIGHTS OF SIMILAR NATURE ACQUIRED. THIS SECTION HAS MADE IT CLEAR THAT IF SUCH INTANGIBLE ASSET IS ACQUIRED WHOLLY OR PARTLY BY THE ASSESSEE AND USED FOR THE PURPOSE OF BUSINESS THEN IT IS ENTITL ED FOR DEPRECI ATION. THE TRIBUNAL FURTHER HELD THAT THE GOODWILL DEPENDS UPON THE PAST PERFORMANCE OF ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 12 THE GOING CONCERN; ON THE OTHER HAND THE INTELLECTUAL PROPERTY RIGHTS (IPR) DEPENDS UPON THE PROBABILITY OF THE FUTURE PERFORMANCE. THEREFORE BOTH HAVE INDEPENDENT A ND DIVERGENT DIRECTION OF VALUATION. RELYING UPON THE ORDERS OF THE OTHER COORDINATE BENCHES THE TRIBUNAL HAS HELD THAT ON OTHER INTANGIBLE ASSETS WHICH ARE NOT AKIN TO KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES THE DEPRECIATION IS NOT ALLOWABLE. 1 7 . IN THE CASE OF R.G. KESWANI VS. ACIT (SUPRA) THE TRIBUNAL HAS RATHER HELD THAT THE GOODWILL IS NOT AN INTANGIBLE ASSET WITHIN THE MEANING OF SECTION 32 (1)(II) HENCE THE ACQUISITION COST OF GOODWILL IS NOT ENTITLED TO DEPRECIATION. 1 8 . IN THE CASE OF BHARATBHAI J. VYAS VS. ITO (SUPRA) THE TRIBUNAL HAS HELD THAT THE LEGISLATURE HAS INSERTED A FICTION BY WHICH SPECIFIED INTANGIBLE ASSETS ARE HELD TO DEPRECIAT E AND ALLOWANCES GIVEN TO THE REFORE K NOW HOW PATENTS COPY RIGHTS TRADE MA RKS ETC. ARE SOMETIMES ASSIGNED IN DIFFERENT NAMES AND THEREFORE BY USING THE WORD SIMILAR NATURE THE LEGISLATURE HAS RESTRICTED THE SCOPE OF INTANGIBLE ASSETS SIMILAR TO THE SPECIFIED ONE. WHAT IT HAS PAID FOR IN THIS CASE SIMPLICITOR I S AN AMOUNT A S A CONSIDERATION FOR RETIREMENT OF ONE PARTNER AS GOODWILL WHICH AMOUNTS TO GIVING COMPENSATION TO A RETIRING PARTNER AND THE TERM HAS BEEN USED AS A GOODWILL. THIS DOES NOT SIGNIFY ACQUISITION OF ANY KNOW HOW PATENTS COPY RIGHTS TRADE MARK ETC. OR ANY BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. THERE MAY BE AN INNUMERABLE NUMBER OF INTANGIBLE ASSETS WHICH MAY BE TRANSACTED IN BUSINESS REALITIES. THERE CANNOT BE A DISPUTE ABOUT TERMING SUCH COMPENSATION AS GOODWILL BUT WHILE DECIDING THE ALL OWABILITY OF DEPRECIATION ONE HAS TO TAKE RECOURSE OF SPECIFIC PROVISIONS. THEREFORE THE AMOUNT PAID BY THE ASSESSEE TO RETIRING PARTNERS TOWARDS GOODWILL WAS NOT ELIGIBLE FOR DEPRECIATION U/S 32(1)(II) AS THE PAYMENT DID NOT RESULT IN ANY ACQUISITION I N KNOW HOW PATENTS COPY RIGHTS TRADE MARK ETC. AS PRESCRIBED IN THAT SECTION. ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 13 1 9 . IN THE CASE OF GURUJI ENTERTAINMENT NETWORK LIMITED VS. ACIT (SUPRA) THE TRIBUNAL HAS ALSO HELD THAT THOUGH THE ASSESSEE WAS NOT ELIGIBLE FOR DEPRECIATION ON GOODWIL L IT WAS ENTITLED FOR DEPRECIATION IN RESPECT OF OTHER INTANGIBLE ASSETS SUCH AS COPY RIGHTS TELECAST RIGHTS ETC. 20 . IN THE CASE OF BORKAR PACKAGING PVT. LIMITED VS. ACIT (SUPRA) THE TRIBUNAL HAS HELD THAT ASSESSEE COMPANY HAVING NOT ACQUIRED ANY S PECIAL RIGHTS OF BUSINESS OR COMMERCIAL NATURE IN THE COURSE OF AMALGAMATION OF THREE COMPANIES WITH IT THE GOODWILL APPEARING IN ITS BOOKS OF ACCOUNTS AS BALANCING FIGURE OF THE ASSETS ACQUIRED AND THE PRICE PAID IS GOODWILL SIMPLICITOR AND THEREFORE IT IS NOT ELIGIBLE FOR DEPRECIATION. 21 . IN THE CASE OF KOTAK FOREX BROKERAGE LTD. VS. ACIT (SUPRA) OF WHICH HEAVY RELIANCE WAS PLACED BY THE LD. COUNSEL FOR THE ASSESSEE THAT TRIBUNAL HAS HELD THAT ANY RIGHT WHICH IS OBTAINED FOR CARRYING ON THE BUSINESS EF FECTIVELY AND PROFITABLY HAS TO FALL WITHIN THE MEANING OF INTANGIBLE ASSETS. GOODWILL IS NOTHING BUT POSITIVE REPUTATION BUILT BY A PERSON/COMPANY/BUSINESS/HOUSE OVER A PERIOD OF TIME. THUS GOODWILL IS A BUSINESS OR A COMMERCIAL RIGHT OF A SIMILAR NATU RE THEREFORE ENTITLED FOR DEPRECIATION. THEY FURTHER HELD THAT THE BUSINESS OR COMMERCIAL RIGHTS ARE RIGHTS OBTAINED FOR EFFECTIVELY CARRYING ON THE BUSINESS OR COMMERCE. COMMERCE IS A WIDER TERM WHICH ENCOMPASSES BUSINESS IN ITS FOLD. THEREFORE ANY RIGHT WHICH IS OBTAINED FOR CARRYING ON THE BUSINESS EFFECTIVELY AND PROFITABLY HAS TO FALL WITHIN THE MEANING OF INTANGIBLE ASSETS. THE DEFINITION FURTHER PROVIDES THAT BUSINESS OR COMMERCIAL RIGHT SHOULD BE OF SIMILAR NATURE AS KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISE ETC. ALL THESE ARE THE ASSETS WHICH ARE NOT MANUFACTURED OR PRODUCED OVER NIGHT BUT BROUGHT INTO EXISTENCE BY EXPERIENCE AND REPUTATION. THEY ASSUME IMPORTANCE IN THE COMMERCIAL WORLD AS THEY REPRESENT A PARTICULAR BENEFIT OR ADVANTAGE OR REPUTATION BUILT OVER A PERIOD OF TIME AND CUSTOMER ASSOCIATE WITH SUCH ASSETS. SIMIARLY GOODWILL IS NOTHING BUT POSITIVE REPUTATION BUILT BY A PERSON/COMPANY/BUSINESS/HOUSE OVER A PERIOD OF TIME. THUS GOODWILL IS A BUSINESS OR A COMMERCIAL RIGHT O F SIMILAR NATURE. THE NAME `KOTAK HAS TREMENDOUS IMPORTANCE AS THE BUSINESS COMPANY WAS ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 14 TO BE BENEFITED BY THE USAGE OF SAID NAME AND IT HAS GONE AS FAR AS AMENDING ITS NAME BY INCLUDING KOTAK IN ITS NAME. THEREFORE IT IS OF COMMERC IAL VALUE FOR WHICH ASSESSEE HAS PAID A SUBSTANTIAL AMOUNT AND IS ELIGIBLE FOR DEPRECIATION. THE FACTS OF THIS CASE ARE THAT ASSESSEE HAS ACQUIRED THE FOREIGN EXCHANGE BROKING BUSINESS FROM M/S. UDAY S. KOTAK FOR A SUM OF RS.5.90 CRORES OUT OF WHICH RS.1. 88 CRORES WAS TOWARDS GOODWILL AND RS.3.83 CRORES WAS TOWARDS NET CURRENT ASSETS. THE ASSESSEE CLAIMED DEPRECIATION ON GOODWILL AND ON FOREX BUSINESS RIGHTS U/S 32(1)(II) OF THE ACT BEING INTANGIBLE ASSETS. IT WAS ALSO STATED THAT ASSESSEE PROPOSED TO CH ANGE THE NAME OF THE COMPANY TO KOTAK FOREX BROKERAGE LIMITED SUBJECT TO RECEIPT OF NECESSARY APPROVALS FROM THE ROC MUMBAI TO ENSURE SMOOTH TRANSITION OF THE BUSINESS THE SELLER PERMITS THE PURCHASER TO CARRY ON THE BUSINESS STYLE AS UDAY S. KOTAK U NTI L SUCH TIME AS THE PURCHASER OBTAINS THE APPROVAL OF THE ROC FOR THE CHANGE OF ITS NAME TO KOTAK FOREX BROKERAGE LIMITED. IN THE LIGHT OF THESE FACTS THE TRIBUNAL HAS HELD THAT THE ASSESSEE IS ENTITLED FOR DEPRECIATION O N GOODWILL BEING AN INTANGIBLE ASSE T. 2 2 . WE HAVE ALSO EXAMINED THE JUDGEMENT OF THE APEX COURT IN THE CASE OF TECHNO SHARES & STOCKS LIMITED (SUPRA) RECENTLY RENDERED IN WHICH THEIR LORDSHIP HAVE HELD THAT THE RIGHT OF MEMBERSHIP WITH THE EXCHANGE IS A BUSINESS OR A COMMERCIAL RIGHT WHI CH GIVES NON - DEFAULTING CONTINUING MEMBER A RIGHT TO ACCESS THE EXCHANGE AND TO PARTICIPATE THEREIN AND IN THAT SENSE IT IS A LICENSE OR AKIN TO LICENSE IN TERMS OF SECTION 32(1)(II) OF THE I.T. ACT. WHILE RENDERING JUDGEMENT THEIR LORDSHIP HAS CLARIFIED CATEGORICALLY THAT THIS JUDGEMENT IS CONFINED TO THE RULES AND BY LAWS OF BSE AS THEY STOOD DURING THE RELEVANT ASSESSMENT YEAR. THE JUDGEMENT SHOULD NOT BE UNDERSTOOD TO MEAN THAT EVERY BUSINESS OR COMMERCIAL RIGHT WOULD CONSTITUTE A LICENSE OR A FRANCH ISE IN TERMS OF SECTION 32(1)(II) OF THE ACT. 23 . HAVING CAREFULLY EXAMINED THE AFORESAID JUDGEMENTS OF THE APEX COURT VARIOUS HIGH COURT S AND ALSO OF THE TRIBUNAL WE ARE OF THE VIEW THAT DEPRECIATION U/S 32(1)(I)&(II) IS TO BE ALLOWED ON TANGIBLE AND I NTANGIBLE ASSETS. INTANGIBLE ASSETS SHOULD EITHER BE KNOWHOW PATENTS COPY RIGHTS TRADE MARK LICENSE FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 15 SIMILAR NATURE. IN THE CASE OF B. RAVINDRAN (SUPRA) IT HAS BEEN CATEGORICALLY HELD THAT THE EROSION IN THE VALUE OF THE ASSETS IS NOT A RELEVANT FACTOR TO DECIDE WHETHER IT IS ENTITLED FOR DEPRECIATION OR NOT. IN CLAUSE (II) OF SECTION 32(1) DEPRECIATION IS TO BE OUTRIGHTLY ALLOWED ON KNOWHOW PATENTS COPY RIGHTS TRADE MARK LICENSES AND FRANC HISE BUT WITH RESPECT TO OTHER IN TANGIBLE ASSETS DEPRECIATION WOULD ONLY BE ALLOWED IF BUSINESS OR COMMERCIAL RIGHTS ARE OF SIMILAR NATURE TO THAT OF KNOWHOW PAT E N TS COPY RIGHT TRADE MARK LICENSE OR FRANCHISE. THE BUSINESS OR COMMERCIAL RIGHT MUST BE OF THE SAME GENESIS. THE GOODWILL HAS ALREADY BEEN DEFINED THROUGH VARIOUS JUDICIAL PRONOUNCEMENTS AND IT HAS BEEN HELD THAT THE GOODWILL IS BASICALLY A BUNDLE OF COMMERCIAL BENEFITS AND RIGHTS. IT DEPENDS UPON A VARIETY OF CIRCUMSTANCES OR A COMBINAT ION OF THEM . T HE LOCATION THE SERVICE THE STANDING OF BUSINESS THE HONESTY OF THOSE WHO RUN IT THE LACK OF COMPETITION AND MANY OTHER FACTORS GO INDIVIDUALLY OR TOGETHER TO MAKE UP THE GOODWILL. GOODWILL ALSO INCLUDES THE CERTAIN BUSINESS OR A COMMER CIAL RIGHTS MOVE ALONG WITH THE ESTABLISHMENT. NOW THE QUESTION ARISE WHETHER ALL THE COMPONENTS OF THE GOODWILL OR THE GOODWILL AS A WHOLE IS ENTITLED FOR DEPRECIATION? FROM LOOKING TO THE NATURE OF VARIOUS COMPONENTS OF THE GOODWILL WE ARE OF THE VIEW THAT CERTAIN COMPONENTS CAN BE CALLED TO BE BUSINESS OR A COMMERCIAL RIGHTS. THEREFORE THOSE COMMERCIAL BENEFITS WHICH MOVE ALONG WITH THE ESTABLISHMENT ON ITS SALE AND NOT AKIN TO THE KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES ARE N OT ENTITLED FOR DEPRECIATION . THE LEGISLATURE HAS USED THE WORD IN A RESIDUARY CLAUSE IS OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE . THE COMMERCIAL RIGHTS CANNOT BE EQUATED WITH THE COMMERCIAL BENEFITS. COMMERCIAL RIGHTS CONFERS CERTAIN RIG HT UPON THE PURCHASER TO CARRY ON ITS TRADE IN A PARTICULAR MANNER IN ORDER TO EARN MORE PROFIT. THEREFORE THE COMMERCIAL RIGHTS CAN BE CALLED TO BE EQUATED WITH THE KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES AS ALL THESE ITEMS CONF ERS CERTAIN RIGHTS UPON THE OWNER TO CARRY ON ITS TRADE IN A PARTICULAR WAY. THEREFORE WE ARE OF THE CONSIDERED VIEW THAT THE COMMERCIAL BENEFITS WHICH MOVES ALONG WITH THE ESTABLISHMENT ON ITS SALE ARE NOT AKIN TO OR DO NOT BELONG TO THE SAME GENESIS OF KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES BECAUSE THEY DO NOT CONFER ANY RIGHT UPON THE PURCHASER. THESE BENEFITS ARE LIKE THE LOCALITY PARTICULAR TYPE ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 16 OF CUSTOMER THE PERSON WHO OWNED IT ETC. AND THESE BENEFITS THOUGH THEY ARE THE PART OF THE GOODWILL BUT THEY ARE NOT ENTITLED FOR DEPRECIATION U/S 32(1)(II) OF THE ACT. WHEREAS THE BUSINESS OR COMMERCIAL RIGHTS WHICH CONFERS UPON THE PURCHASER A RIGHT TO CARRY ON ITS TRADE IN A PARTICULAR MANNER ARE AKIN TO THE KNOW HOW PATEN TS COPY RIGHTS T RADE MARKS LICENSE FRANCHISES ETC. THAT IS WHY THEIR LORDSHIP OF THE APEX COURT IN THE CASE OF TECHNO SHARES (SUPRA) HAVE HELD THAT MEMBERSHIP OF A STOCK EXCHANGE WHICH CONFERS THE RIGHT UPON THE ASSESSEE TO TRADE IS ENTITLED FOR DEPR ECIATION BEING A COMMERCIAL RIGHT OF SIMILAR NATURE AS THAT OF KNOW HOW PATENTS COPY RIGHTS TRADE MARKS LICENSE FRANCHISES. SIMILAR WAS THE CASE OF RAVINDRAN IN WHICH THE ENTIRE HOSPITAL ALONG WITH ITS LOGO AND TRADE MARK STAFF EQUIPMENTS AS A GOIN G CONCERN WAS PURCHASED . E XCEPT THE PURCHASERS AND THE SELLER SALE WAS NOT KNOWN RATHER TO THE PATIENTS . THE ENTIRE MANAGEMENT OF THE HOSPITAL IS CHANGED IN HANDS ON ACCOUNT OF ITS SALE. THEREFORE THEIR LORDSHIP HA VE HELD THAT THE GOODWILL COMPRISE OF NAME OF THE HOSPITAL LOGO TRADE MARK STAFF EQUIPMENTS ETC. IS ENTITLED FOR DEPRECIATION. 2 4 . SIMILAR WAS THE CASE OF KOTAK FOREX BROKERAGE LIMITED (SUPRA) WHERE THE COMPANY WAS SOLD ALONG WITH ITS NAME TRADE MARK AND ALL ASSETS. 2 5 . BUT IN OTHER C ASES IN WHICH THE TRIBUNAL HAS HELD THAT GOODWILL IS NOT ENTITLED FOR DEPRECIATION U/S 32(1)(II) OF THE ACT THE ENTIRE COMPANY WAS NOT SOLD AS A GOING CONCERN ALONG WITH ITS NAME TRADE MARK LOGO ETC. IN THOSE CASES ASSESSEE HAS CLAIMED THE DEPRECIATIO N ON ONE OF THE COMPONENT OF THE GOODWILL WHICH WAS IN FACT A COMMERCIAL BENEFIT AND NOT THE COMMERCIAL RIGHT. THEREFORE THE TRIBUNAL HAS RIGHTLY HELD THAT THE DEPRECIATION IS NOT ALLOWABLE ON THE GOODWILL. 2 6 . TURNING TO THE FACTS OF THE CASE WE FIND THAT THE ASSESSEE HAS MADE THE EXCESS PAYMENT OVER AND ABOVE THE COST OF TANGIBLE ASSETS AND THAT EXCESS PAYMENT WAS CLAIMED TO HAVE BEEN MADE AGAINST THE GOODWILL. FROM THE INFORMATION MEMORANDUM AND BID DOCUMENT FILED BEFORE US AT PG.NO.46 TO 70 OF THE COMPILATION WE NOTICED FROM ITS CLAUSE 3.8 THAT UNDER THE HEAD VALUATION FAIR MARKET VALUE OF THE ASSET WAS ESTIMATED AT RS.475.56 LAKHS ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 17 AND THE REALIZABLE VALUE ESTIMATED AT RS.587.52 LAKHS. IT WAS ALSO STATED UNDER THAT CLAUSE THAT T HE DEFINITION OF ASSETS IN THE ASS ET VALUATION REPORT DOES NOT INCLUDE CONTRACT RECORDS AND GOODWILL OR THE RIGHT TO CARRY OUT DISTILLING THAT FORM PART OF SALE. IT WAS STATED ON BEHALF OF THE ASSESSEE THAT PURCHASE PRICE OF THE COMPLETE ESTABLISHMENT WAS CONSOLIDATED PR ICE OF RS.9 CRORES AND IT INCLUDES THE CONSIDERATION FOR ASSETS AND BUSINESS. IT WAS ALSO EXPLAINED THAT THE GOODWILL MEANS THE RIGHT TO CARRY ON BUSINESS WITH A SPECIFIC PROVISIONS FROM THE USE OF THE NAME `NIZAM SUGARS LIMITED. THERE IS NO DISPUTE THA T ASSESSEE HAS PAID THE EXCESS AMOUNT AGAINST THE COST OF GOODWILL AND THE GOODWILL WAS DEFINED IN THE SALE AND PURCHASE AGREEMENT EXECUTED ON 26 TH APRIL 2001 WHICH IS AVAILABLE AT PG.NO.3 TO 38 ACCORDING TO WHICH GOODWILL IS ALL THE GOODWILL INTEREST AN D CONNECTION OF NSL (NIZAM SUGARS LIMITED) IN AND CONCERNING THE BUSINESS TOGETHER WITH THE RIGHT TO REPRESENT THE PURCHASER AS CARRYING ON BUSINESS AS A GOING CONCERN IN SUCCESSION TO NSL BUT NOT INCLUDING ANY RIGHT TO USE THE NAME OF NIZAM SUGARS LIMITE D OR ANY ASSOCIATED OR RELATED NAME. THEREFORE BY VIRTUE OF A GOODWILL ASSESSEE HAS ACQUIRED ALL BUSINESS/COMMERCIAL BENEFITS OR RIGHTS TO RUN THE CHAGALLU DISTILLERY BUT WITHOUT USING THE NAME OF NIZAM SUGARS LIMITED OR ANY OF ITS ASSOCIATES. WE HAVE ALREADY DISCUSSED IN FOREGOING PARAS THAT GOODWILL IS A BUNDLE OF BUSINESS/COMMERCIAL BENEFITS AND RIGHTS. UNDISPUTEDLY IN THE INSTANT CASE ASSESSEE HAS MADE THE EXCESS PAYMENT OVER AND ABOVE THE COST OF THE TANGIBLE ASSETS. NO DOUBT THE GOODWILL IS AN INTANGIBLE ASSET BUT ALL INTANGIBLE ASSETS ARE NOT ELIGIBLE FOR DEPRECIATION AS PER TH E RATIO LAID DOWN BY THE APEX COURT AND VARIOUS HIGH COURTS THROUGH THEIR JUDICIAL PRONOUNCEMENTS. ONLY THOSE INTANGIBLE ASSETS WHICH ARE AKIN TO OR BELONG TO THE SAME GENESIS OF KNOW HOW PATENTS COPY RIGHTS TRADE MARK LICENSE OR FRANCHISE ARE ELIGIBLE FOR DEPRECIATION . OTHER INTANGIBLE ASSETS WHICH DO NOT FALL WITHIN TH E CATEGORY ARE NOT ELIGIBLE FOR DEPRECIATION U/S 32 OF THE ACT . THE KNOW HOW PATENTS COPY RIG HT TRADE MARK LICENSE AND FRANCHISE ARE KNOWN AS INTELLECTUAL PROPERTY RIGHTS (IPR) IN THE PRESENT WORLD AND THAT IS WHY THE LEGISLATURE HAS BROUGHT THE AMENDMENT UNDER SECTION 32(1) TO MAKE THEM ELIGIBLE FOR DEPRECIATION THOUGH THEIR VALUE MAY NOT ERO DE IN THE YEARS TO COME. ALL THESE ITEMS ARE OF THE SAME GENESIS AND THEY DO CONFER CERTAIN RIGHTS UPON THE ASSESSEE TO TRADE OR TO RUN ITS BUSINESS BY ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 18 UTILIZING THEM IN A PARTICULAR MANNER TO EARN MORE PROFIT . AFTER ACQUIRING THE KNOW HOW PATENTS COPY RIGHTS TRADE MARK LICENSE OR FRANCHISE A SSESSEE ACQUIRES CERTAIN RIGHT TO RUN ITS BUSINESS IN A PARTICULAR WAY. MEANING THEREBY WHEREVER ANY INTANGIBLE ASSETS CONFERS CERTAIN RIGHT UPON THE ASSESSEES LIKE ABOVE ITEMS IT WOULD BE ELIGIBLE FOR DEPR ECIA TION U/S 32(1) OF THE ACT. BUT THOSE INTANGIBLE ASSETS WHICH CONFERS ONLY A COMMERCIAL/BUSINESS BENEFITS UPON THE ASSESSEES THEY ARE CERTAINLY NOT ELIGIBLE FOR DEPRECIATION IN AS MUCH AS BY ACQUIRING THAT BENEFIT ASSESSEE WOULD NOT GET AN EXCLUSIVE RIGHT TO TRADE OR TO RUN ITS BUSINESS IN THAT WAY . 2 7 . IN THE PRESENT CASE THE GOODWILL INCLUDES THE LOCATION OF THE DISTILLERY CUSTOMERS OF THE DISTILLERY REPUTATION OF THE DISTILLERY ETC. ARE THE COMMERCIAL BENEFITS WHICH MOVE TO THE ASSESSEE ALONG WIT H THE ESTABLISHMENT ON ITS PURCHASE. BUT THESE BENEFITS DO NOT CONFER ANY RIGHT TO TRADE UPON THE ASSESSEE. IT IS ALSO BROUGHT TO OUR NOTICE THAT GENERALLY IN THE SUGAR FACTORY THE FACTORY OWNERS ENTERED INTO AN AGREEMENT WITH THE SUGAR CANE GROWERS TO PURCHASE THEIR SUGAR CANE AT A PARTICULAR RATE AND TH IS RIGHT ALSO MOVE S ALONG WITH THE ESTABLISHMENT ON ITS SALE. IT IS ALSO BROUGHT TO OUR NOTICE THAT IT IS NOT EASY TO OBTAIN A LICENSE TO SET UP OF SUGAR FACTORY AND DISTILLERY . IT REQUIRES LOT OF EFFO RTS. THAT IS WHY IT HAS ITS OWN VALUE AND WITHOUT LICENSE S ONE CANNOT RUN DISTILLERY AND SUGAR FACTORY. BESIDE THIS LICENSE OTHER LICENSES OR PERMISSION ARE REQUIRED FROM VARIOUS AGENCIES TO RUN A SUGAR FACTORY SMOOTHLY AND IT HAS ITS OWN VALUE. A LUMP SUM AMOUNT OVER AND ABOVE THE COST OF THE TANGIBLE ASSETS IS CONSIDERED TO BE THE COST OF THE GOODWILL WHICH INCLUDES BUSINESS OR COMMERCIAL BENEFITS AND RIGHTS . THERE IS NO BIFURCATION OF THE TOTAL COST WHICH CAN BE ALLOCATED TOWARDS THE COMMERCIAL BENE FITS AND THE COMMERCIAL RIGHTS ACQUIRED BY THE ASSESSEES. COMPLETE DETAILS OF COST OF ACQUISITION OF THE COMMERCIAL BENEFITS AND THE COMMERCIAL RIGHTS CANNOT BE AVAILABLE ON RECORD. IT IS ONLY A QUESTION OF ESTIMATE. SINCE WE HAVE ALSO TAKEN A VIEW THAT IN SUCH TYPE OF CASES GOODWILL IS A BUNDLE OF COMMERCIAL BENEFITS AND COMMERCIAL RIGHTS AND C OMMERCIAL BENEFITS ARE NOT ELIGIBLE FOR DEPRECIATION WHEREAS THE COMMERCIAL RIGHTS BEING AKIN TO THE KNOW HOW PATENT COPY RIGHT TRADE MARK LICENSE OR FRANCHI SE ARE ELIGIBLE FOR DEPRECIATION IN AS MUCH AS ON ACCOUNT OF THOSE RIGHTS THE ASSESSEE WOULD BE ITA 255&256/VIZ/2010 JEYPORE SUGAR CO. LTD. CHAGALLU 19 ABLE TO CARRY ON ITS BUSINESS SMOOTHLY . THEREFORE WE ARE OF THE VIEW THAT TOTAL GOODWILL COST SHOULD BE BIFURCATED IN TWO EQUAL PARTS ; ONE IS FOR COMMERCIAL B ENEFITS AND THE OTHER IS FOR COMMERCIAL RIGHTS AND THE AMOUNT INCURRED IN ACQUIRING THE COMMERCIAL RIGHT SHOULD BE ELIGIBLE FOR DEPRECIATION U/S 32 OF THE ACT. THEREFORE WE DIRECT THE A.O. TO DIVIDE THE ENTIRE COST OF GOODWILL IN TWO PARTS AND 50% OF THE COST OF THE GOODWILL BE TREATED AS A COST OF ACQUISITION OF THE COMMERCIAL RIGHT S AND TO ALLOW THE DEPRECIATION THEREON AT A PRESCRIBED RATE . 2 8 . IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OP EN COURT ON 21 - 12 - 20 10 SD/ - SD/ - (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM DATED 21 - 12 - 20 10 COPY TO 1 THE JEYPORE SUGAR COMPANY LIMITED CHAGALLU WEST GODAVARI DISTRICT 2 ACIT CENTRAL CIRCLE - 1 VISAKHAPATNAM 3 THE CI T VISAKHAPATNAM 4 THE CIT (A) VISAKHAPATNAM 5 THE DR ITAT VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM