Depreciation allowable on GOODWILL

[pawansingla]

GOODWILL is covered by provision of section 32(1)(ii) entitling an assessee to depreciation on same.(kerala).www.taxmann.com

[pawansingla]

ncome-tax : Goodwill is covered by provision of section 32(1)(ii) entitling an assessee to depreciation on same

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, copyright, etc., referred to in first part of clause (ii) of section 32(1)

Assessee's entitlement for depreciation on assets including intangible assets cannot be negatived on the ground that no erosion in value takes place on account of use of the asset in business or profession - [2010] 7 TAXMANN.COM 92 (KER.)

[pawansingla]

Income-tax : After the amendment in section 32, depreciation is to be allowed on tangible and intangible assets irrespective of facts that there is no erosion in value of these assets.

   l  Therefore, entitlement for depreciation on assets including intangible assets cannot be negatived on the ground that no erosion on value takes place on account of the use of the asset in business or profession.



[2011] 9 taxmann.com 122 (VISAKHAPATNAM – ITAT)

ITAT, VISAKHAPATNAM BENCH, VISAKHAPATNAM

Jeypore Sugar Company Ltd.

v.

ACIT

ITA NOS. 255 & 256/VIZAG/2010

DECEMBER 21, 2010



ORDER



Per Shri S.K. Yadav, Judicial Member. - These 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 of through this consolidated order.


3. Now the next issue involved in both the appeals relate to the disallowance of claim of depreciation on intangible assets i.e. Goodwill.

4. Brief facts borne out from the record in this regard are that the assessee claimed depreciation 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 explain 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 the Government on closed tender for the purchase of Chagallu distillery. The 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 balance 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 claim 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 company 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 per 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 NSL's right, title and interest in the following assets:

  (i)  Premises

 (ii)  Immovable and Movable Fixed Assets More particularly described in Schedule 1 to this Agreement

(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 enjoys 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 transfer 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 consideration 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 also 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 to 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 contention 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., after having observed that in the light of the statutory provisions contained in section 32(1)(II), the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to know how, patents, copy rights, trade marks, license, franchises.
7. Aggrieved, the assessee has preferred an appeal and reiterated its contentions. The Ld. Counsel for the assessee Mr. G.V.N. Hari has contended 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 transferred 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, franchises etc. it is eligible for depreciation u/s 32(l)(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 exclusive. 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 1st April, 1998 are eligible for depreciaton at 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 judgment of the Kerala High Court in the case of B. Ravindran Pillai v. CIT in IT appeal No. 1741 of 2009 in which the depreciation was allowed on written down value of the goodwill. He has also placed a reliance upon the judgment of the apex court in the case of Techno Shares and Stocks Limited v. CIT civil appeal Nos.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 v. AC1T 41 DTR (Mum.) (Trib.) 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 where 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 court way back in 1960 in the case of S.C. Cambatta & Co. (P) Ltd. v. 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 individually or together to make up goodwill, though locality always plays a considerable part. Goodwill includes the commercial benefits and the commercial rights. 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 are 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 IT. 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 judgments:

  1.  Borkar Packaging (P) Ltd. v. ACIT 131 TTJ 99

  2.  Guruji Entertainment Network Ltd. v. ACIT 108 TTJ (Del) 180

  3.  CIT & ANR v. Mangalore Ganesh Beedi Works 264 ITR 142

  4.  Bharatbhai J. Vyas v. ITO 97 ITD 248 (Ahd.)

  5.  R.G. Keswani v. ACIT 116 ITD 133

9. Having heard the rival submissions and from a careful perusal of record, 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 IT. Act. The section 32 was amended by the Finance Act, 1998 w.e.f. 1.4.1999. 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 1st day of April, 1998. Dispute arises with regard 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 how, patents, copy rights, trade marks, license, franchises or falls within the same genesis. The residuary category "any other business or commercial rights of similar nature" as found in the company of expression know how, patents, copy rights, trade marks, 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 pronouncements 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 different authors. In IRC v. Muller & Co.'s Margarine Ltd. (1901) AC 217 Lord Macnaghten at pg.Nos.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 name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which 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 gathered up and be revived again".


26. 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.Nos.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 and the realizable value estimated at Rs.587.52 lakhs. It was also stated under that clause that the definition of assets in the asset 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 price 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 that assessee has paid the excess amount against the cost of goodwill and the goodwill was defined in the sale and purchase agreement executed on 26th April, 2001 which is available at pg.Nos.3 to 38 according to which goodwill is all the goodwill, interest and 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 Limited 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 the 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 the category, are not eligible for depreciation u/s 32 of the Act. The know how, patents, copy right, 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 erode 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 utilizing them in a particular manner to earn more profit. After acquiring the know how, patents, copy rights, trade mark, license or franchise, assessee 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 depreciation 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.

27. 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 with 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 this right also moves 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 efforts. That is why it has its own value and without licenses 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 lumpsum 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 benefits 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 commercial benefits are not eligible for depreciation whereas the commercial rights being akin to the know how, patent, copy right, trade mark, license or franchise are eligible for depreciation in as much as on account of those rights the assessee would be 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 benefits 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 rights and to allow the depreciation thereon at a prescribed rate.

28. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Pronounced in the open Court on 21-12-2010

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