2012 (4) TMI 79 - HC - Income Tax

Intangible Assets in Slump Sale Qualify as Business Rights Under Section 32(1)(ii) for Depreciation

The HC held that intangible assets acquired under a slump sale agreement, including business claims, information, records, contracts, employees, and ... Depreciation on intangible assets including know-how, patents, trade marks, licences, franchises and any other business or commercial rights of similar nature - Application of ejusdem generis / noscitur sociis to the phrase 'any other business or commercial rights of similar nature' - Goodwill versus identifiable business or commercial rights acquired under a slump sale - Allowability of depreciation on marketing and territorial rights / commercial rights - Allocation of slump sale consideration between tangible assets and intangible business rightsDepreciation on intangible assets including know-how, patents, trade marks, licences, franchises and any other business or commercial rights of similar nature - Application of ejusdem generis / noscitur sociis to the phrase 'any other business or commercial rights of similar nature' - Goodwill versus identifiable business or commercial rights acquired under a slump sale - Allocation of slump sale consideration between tangible assets and intangible business rights - Specified intangible assets and the other business and commercial rights acquired under the slump sale agreement were of the same genus as assets enumerated in Section 32(1)(ii) and were eligible for depreciation under that provision. - HELD THAT: - The Court applied the principle of ejusdem generis to construe the residual phrase 'any other business or commercial rights of similar nature' in Explanation 3(b) to Section 32(1). While the listed items (know how, patents, copyrights, trade marks, licences, franchises) are distinct, the addition of the residual phrase shows the legislature intended to include other intangible rights of the same genus - i.e., intangible, valuable rights facilitating the carrying on of business. The slump sale agreement transferred the business as a going concern, with the transferee allocating the excess of lump sum over net tangible book value to a bundle of defined business and commercial rights (business claims, business information, business records, contracts, skilled employees, know how) described in the agreement and recorded in the transferee's books. Those items operate as identifiable intangible assets enabling the transferee to continue the transmission and distribution business without starting afresh and are comparable to a licence enabling access to the market. The approach in Techno Shares (membership as a licence) and the reasoning in Hindustan Coca Cola (recognising goodwill and marketing rights as intangible assets) fortify this view. As the AO had accepted the allocation between tangible and intangible parts of the slump consideration (though disallowing depreciation on the ground that it was 'goodwill'), the Court held that the specified intangible assets acquired under the slump sale fell within Section 32(1)(ii) and depreciation was allowable on them. [Paras 12, 13, 14]Appeal allowed; the excess consideration allocated to the defined bundle of business and commercial rights acquired under the slump sale is eligible for depreciation under Section 32(1)(ii).Allowability of depreciation on marketing and territorial rights / commercial rights - Goodwill versus identifiable business or commercial rights acquired under a slump sale - Payments made for acquisition of marketing and territorial rights (commercial rights to sell through dealers and distributors / network) were not payments for mere 'goodwill' and were eligible for depreciation; the ITAT rightly deleted the addition made by the AO. - HELD THAT: - On the facts of the assessee's transactions for the relevant assessment years, the tribunal found, and this Court endorsed, that the assessee had acquired commercial rights to sell under a trade name - including use of the seller's infrastructure and dealer/distributor network - which had been treated as assets and depreciated in earlier years. The Assessing Officer's deviation from past treatment and characterisation of the payment as 'goodwill' was incorrect; entries in books are not conclusive and the true nature of the transaction must be determined on the agreement and surrounding facts. Given that the consideration was for identifiable commercial rights that enable the assessee to access the market and carry on business effectively, depreciation on those rights is permissible. The ITAT's deletion of the addition was therefore upheld. [Paras 16, 17]Appeals dismissed (in favour of the assessee); depreciation allowable on the acquired marketing/territorial commercial rights and the ITAT's deletion of the addition is confirmed.Final Conclusion: The High Court held that intangible rights acquired as part of the slump sale - being identifiable business or commercial rights of the same genus as the assets enumerated in Section 32(1)(ii) - are eligible for depreciation; likewise, payments for marketing and territorial commercial rights (not merely 'goodwill') are depreciable, and the appellate tribunals' decisions in favour of the assessee are upheld. Issues Involved:1. Whether the Tribunal erred in law in holding that know-how, business contacts, business information, etc., acquired as part of the slump sale described as 'goodwill' were not entitled to depreciation under Section 32(1)(ii) of the Income Tax Act.2. Whether ITAT erred in deleting the addition made by the assessing officer on account of depreciation on goodwill.Issue-Wise Detailed Analysis:Issue 1: Depreciation on Goodwill under Section 32(1)(ii)The primary issue in ITA No. 315/2010 was whether the Tribunal erred in denying depreciation on goodwill, which included know-how, business contacts, and business information, under Section 32(1)(ii) of the Income Tax Act.Relevant Facts:- The assessee company, engaged in transmission and distribution of power, acquired the business from ALSTOM Projects India Ltd. through a slump sale.- The business was acquired for Rs. 44.7 Crores, with tangible assets valued at Rs. 28.11 Crores and the remaining Rs. 16,58,76,000 categorized as 'goodwill.'- The assessee claimed depreciation on this goodwill amount under Section 32(1)(ii).Assessment and Appeals:- The Assessing Officer (AO) disallowed the depreciation claim, stating that goodwill is not eligible for depreciation under Section 32(1)(ii).- The CIT(A) and ITAT upheld the AO's decision, stating that goodwill is not specifically included under Section 32(1)(ii).Arguments:- The assessee argued that the term 'any other business or commercial rights of similar nature' in Section 32(1)(ii) should include goodwill, relying on the Supreme Court decision in Techno Shares and Stocks Ltd. v. CIT.- The Revenue argued that the business or commercial rights acquired did not fall within the definition of intangible assets eligible for depreciation.Court's Analysis:- The court referred to the Supreme Court's decision in Techno Shares and Stocks Ltd., which held that certain business rights could be considered intangible assets eligible for depreciation.- The court also referred to Hindustan Coco Cola Beverages (P) Ltd., where goodwill was considered an intangible asset eligible for depreciation.- The court examined the slump sale agreement, noting that the excess amount paid over the tangible assets was for acquiring various business and commercial rights, categorized as goodwill.Conclusion:- The court concluded that the specified intangible assets acquired under the slump sale agreement were in the nature of 'business or commercial rights of similar nature' as specified in Section 32(1)(ii) and were eligible for depreciation.- The appeal was allowed in favor of the assessee, and the impugned order was set aside.Issue 2: Depreciation on Commercial RightsThe second issue in ITA No. 1151/2010 and ITA No. 1152/2010 was whether the ITAT erred in deleting the addition made by the AO on account of depreciation on goodwill.Relevant Facts:- The assessee company, engaged in manufacturing and marketing of Leaf Parabolic Spring, claimed depreciation for acquiring marketing and territorial rights.- The AO disallowed the depreciation claim, treating the payment as consideration for acquiring goodwill.- The CIT(A) allowed the appeal, and the ITAT upheld this decision.Arguments:- The assessee argued that the payment was made for acquiring commercial rights, not goodwill, and thus eligible for depreciation.- The Revenue argued that the payment was for goodwill, which is not eligible for depreciation.Court's Analysis:- The court examined the ITAT's decision, which stated that the assessee had acquired commercial rights to sell products under a trade name and through a network created by the seller.- The ITAT found that the payment was for commercial rights, not goodwill, and depreciation was permissible.Conclusion:- The court upheld the ITAT's decision, stating that the payment was for acquiring commercial rights on which depreciation is permissible.- The appeals were dismissed in favor of the assessee, and the impugned order was confirmed.Summary:The court ruled in favor of the assessee on both issues, allowing depreciation on goodwill categorized under various business and commercial rights acquired through a slump sale and confirming that payments made for acquiring commercial rights are eligible for depreciation. The court emphasized the broader interpretation of intangible assets under Section 32(1)(ii) and upheld the ITAT's findings.