2011 (9) TMI 1046 - AT - Income Tax

Tribunal upholds depreciation on franchise rights and goodwill, affirming assessee's entitlement.

The ACIT, Circle-5, Jaipur Versus M/s. Jai Drinks Pvt. Ltd.

The Tribunal dismissed the department's appeals, confirming the assessee's entitlement to depreciation on declared franchise and license rights. It upheld ... Depreciation on goodwill - Held that:- We are not inclined to go into detail whether depreciation on good will is allowable or not but the fact remains that the assessee has not purchased any good will but has purchased license, interest, privilege, franchise etc. from M/s. DKD which are undisputedly covered by section 32(1)(ii) and, therefore, the depreciation is allowable and the ld. CIT (A) has allowed the depreciation on these intangible assets, and we have no hesitation in confirming the order of ld. CIT (A) on this aspect. Accordingly we confirm the order of ld. CIT (A). Issues Involved:1. Allowance of depreciation on declared franchise and license rights.2. Determination of whether the payment was for goodwill or franchise and license rights.3. Allowance of depreciation on goodwill under Section 32(1) of the Income-tax Act, 1961.Detailed Analysis:1. Allowance of Depreciation on Declared Franchise and License Rights:The core issue was whether the assessee was entitled to depreciation on declared franchise and license rights amounting to Rs. 28 crore, which the Assessing Officer (AO) contended were actually for goodwill. The assessee argued that the payment was for intangible assets such as licenses and franchise rights, which are eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.The assessee had purchased the Delhi business of M/s Dhillon Kool Drinks and Beverages Ltd. (DKD) through a business transfer agreement dated 26.08.2000. The total cost of the purchase was Rs. 37.75 crore, with Rs. 9.75 crore allocated to tangible assets and Rs. 28 crore to intangible assets (license and franchise rights). The AO disallowed the depreciation claim, arguing that no documentary evidence supported the valuation of Rs. 28 crore for license and franchise rights, and that these rights were not directly transferred by DKD to the assessee but procured through a letter of intent from Pepsi Foods Limited (PFL).2. Determination of Whether the Payment was for Goodwill or Franchise and License Rights:The AO's position was that the Rs. 28 crore payment was for goodwill, not for license and franchise rights, and thus not eligible for depreciation. The AO referenced the Supreme Court judgment in McDowell to support the disallowance, suggesting the transaction was a colorable device to claim depreciation.The assessee countered by providing detailed submissions and documentary evidence, including agreements and letters of intent from PFL, demonstrating that the payment was indeed for the acquisition of intangible assets necessary for the business. The CIT (A) accepted the assessee's argument, noting that DKD's business was in bad shape and had substantial liabilities, which negated the possibility of the payment being for goodwill. The CIT (A) concluded that the payment was for license and franchise rights, which are intangible assets eligible for depreciation.3. Allowance of Depreciation on Goodwill under Section 32(1) of the Income-tax Act, 1961:Even if the payment was considered for goodwill, the CIT (A) held that depreciation was allowable on goodwill under Section 32(1)(ii) of the Income-tax Act, 1961. This position was supported by precedents, including the ITAT Delhi Bench's decision in Hindustan Coca Cola Beverages Pvt. Ltd. and ITAT Mumbai Bench's decision in Kotak Forex Brokerage Ltd., which treated goodwill as an intangible asset eligible for depreciation.The Tribunal, after considering the submissions and material on record, upheld the CIT (A)'s decision. It was noted that the assessee had acquired valuable business rights, including licenses and franchises, necessary for operating the business. The Tribunal also acknowledged the decision of the Hon'ble Delhi High Court affirming the ITAT's decision in Hindustan Coca Cola Beverages Pvt. Ltd., which supported the allowance of depreciation on goodwill.Conclusion:The Tribunal dismissed the department's appeals, confirming that the assessee was entitled to depreciation on the declared franchise and license rights. The Tribunal also upheld the CIT (A)'s alternative finding that depreciation on goodwill was allowable, aligning with judicial precedents. The order emphasized that the assessee had acquired intangible assets essential for the business, and the transaction was genuine, not a colorable device.