2012 (4) TMI 79 - HC - Income Tax

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

AREVA T & D INDIA LTD. Versus THE DEPUTY COMMISSIONER OF INCOME-TAX and THE COMMISSIONER OF INCOME TAX - II Versus JAI PARABOLIC SPRING LTD

The HC held that intangible assets acquired under a slump sale agreement, including business claims, information, records, contracts, employees, and ... Depreciation on intangible assets being “business and commercial rights” - principle of ejusdem generis - slump sale described as 'goodwill' - assessee, vide slump sale agreement, acquired power transmission and distribution business as a going concern for a total sale consideration of ₹ 44.7 crores out of which ₹ 16.58 crores were paid for acquisition of “business and commercial rights” being business claims; business information; business records; contracts; skilled employees; know-how described as “goodwill” - disallowance of depreciation on the amount described as goodwill by Revenue – Held that:- In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression “business or commercial rights of similar nature” specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of “knowhow, patents, trademarks, licenses or franchises” but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) of the Act preceding the term “business or commercial rights of similar nature”, it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words “business or commercial rights of similar nature” have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd.[2010 (9) TMI 6 - SUPREME COURT]wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a “license” or “akin to a license” which is one of the items falling in Section 32(1)(ii) of the Act. Therefore, specified intangible assets acquired under slump sale agreement were in the nature of “business or commercial rights of similar nature” specified in Section 32(1)(ii) and were accordingly eligible for depreciation. It is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation u/s 32(1)(ii) – Decided in favor of assessee. 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.