TaxTMI 
TaxTMI 
2011 (1) TMI 1226
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....ficer be directed to allow the said depreciation as claimed in the return. (5) Alternatively, the Commissioner of Income-tax (Appeals) ought to have allowed the entire amount as revenue expenditure since the same is incurred wholly and exclusively for the purpose of business and by the admission of the Assessing Officer the same does not bring into existence any asset nor gives any enduring benefit. The Assessing Officer be directed to allow the entire amount as revenue expenditure." Briefly the facts are that the assessee is engaged in the business of mining, export of iron ore, ship and crane building. From the assessment year under consideration the assessee also undertook business of manufacture of pellets after amalgamation of Mandovi Pellets Ltd. ("MPL" for short), into Chowgule and Co. Ltd. as a going concern pursuant to approval of scheme by the order dated December 10, 2004 of the hon'ble High Court of Bombay, at Goa, Panaji with effect from April 1, 2004. In the audited profit and loss account submitted along with the return of income, the assessee had written off an amount of Rs. 4,605.90 lakhs as exceptional item "goodwill arising out of amalgamation written off".....
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....ess of net assets of the transferor company recorded in the books of the transferee company over the book value as on the effective date shall be credited to capital reserve account and in case of there being a shortfall, the same shall be debited to goodwill account. We also draw the attention to accounting standard AS-14 which is prescribed by the Institute of Chartered Accountants of India for accounting relating to amalgamation and also section 211(3C) of the Companies Act, 1956 which makes the following of AS-14 mandatory on all the companies. Under AS-14, the accounting of the merger by way of "pooling of interest method" is prescribed when the following conditions are fulfilled : (1) All the assets and liabilities of the transferor company are transferred to the transferee company. (2) 90 per cent. of the equity holders of the transferor company continue as the equity shareholders of the transferee company. (3) Payment of consideration is by way of issue of equity shares of the transferee company. (4) The business so acquired is continued by the transferee company. (5) All the assets and liabilities of the transferor company are recorded at book v....
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....of Rs. 46,05,90,029 has arisen as a result of court order December 10, 2004 and in accordance with the purchase method prescribed in Accounting Standard 14 on accounting for amalgamations issued by the Institute of Chartered Accountants of India. The entire goodwill has been written off in the books of account. The company has been advised that depreciation on goodwill can be claimed as deduction in computation of business income. However, such depreciation has not been considered in this annexure." The Assessing Officer examined the claim with reference to material on record and the statutory provisions as contained under section 32(1)(ii) of the Act as well as certain case law. He found that in the instant case the good will has been self generated on amalgamation, so as to say, it is only a balancing figure after allocating share capital and it is not acquired on amalgamation by the assessee-company. Vide paragraph 5.12 of the assessment order, the Assessing Officer also stated that the assessee has also relied upon Accounting Standard 14 issued by the Institute of Chartered Accountants in India. Accounting Standard 14 talks only about the treatment to be given to goodwill....
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....ght given by law for a certain term of years to an author, composer, etc., to print, publish and sell copies of original work or translation thereof. The copyrights are governed by the provisions of the Copyrights Act, 1914. Licence : An authority to do something, which would otherwise be inoperative, wrongful or illegal. It is a formal permission from a constituted authority to do something. Licences are also granted to a person for definite period of time to do something legally. Patent : A grant from the Government to a person to persons conferring for a certain definite time the exclusive privilege of making, using or selling some new invention. The patent rights are governed by the provisions of the Patent Act. Trade mark : A mark secured by legal registration used by a manufacturer or trader to distinguish his goods from the goods of other concerns. Franchise : Franchise has been defined in Black's Law Dictionary as a licence from the owner of a trademark or trade name permitting other person to sell a product or service under that mark or name. It is a system by which independent firm are authorised to use a common business system, which include brand....
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....td. v. CIT [1978] 114 ITR 323 (Cal) ; and (iv) CIT v. Hoogly Mills Co. Ltd. [2006] 287 ITR 333 (SC). The alternative claim of the assessee that goodwill is a deemed asset also stood disallowed in the light of detailed analysis contained in paragraph 5.16 of his order in view of the increase in performance of the assessee over a period of time. In the result, the Assessing Officer disallowed the claim of depreciation of Rs. 11,51,47,507 made in the return and calculated the total income in terms of the revised return of income filed by the assessee after allowing set-off of losses and unabsorbed depreciation of the amalgamating company M/s. Mandovi Pellets Ltd. The total income thus stood assessed at Rs. 66,42,87,180. The learned Commissioner of Income-tax (Appeals) after considering the detailed submission made before him upheld the findings and reasons given in the assessment order. He also found that the Assessing Officer is justified in denying the claim of depreciation. The learned Commissioner of Income-tax (Appeals) also rejected the assessee's alternate claim of allowing the entire expenditure on acquisition of goodwill as allowable as the same was a capital expendi....
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....depreciation has been disallowed by the Assessing Officer." Relying on the statement of facts as aforesaid and stating that the assessee has paid amount for purchase of goodwill on the basis of the aforesaid facts, the assessee's counsel Shri R. Srinivasan contends that the assessee has claimed depreciation on goodwill and placed strong reliance on the judgment rendered by the hon'ble High Court of Kerala in the case of B. Raveendran Pillai v. CIT [2011] 332 ITR 531 ; [2010] 194 Taxman 477 as also by the Appellate Tribunal Mumbai "F" Bench in the case of Kotak Forex Brokerage Ltd. v. Asst. CIT [2009] 33 SOT 237 and contends that the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of depreciation on goodwill which is an allowable deduction in terms of clause (ii) of section 32(1) of the Act. It has also been contended that in case there are two possible views on the issue, the view favourable to the assessee has to be accepted for allowing the claim of the assessee. For this purpose reliance has been placed on the judgment rendered by the hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. On the....
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.... left it to the appellant to claim depreciation on such self generated goodwill, in the nature of income. Such an advice thus was not given as a consultant or advisor but was to be taken only as a casual remark in performance of their professional duties as tax auditors in terms of section 44AB of the Act. The advice so given cannot also be taken as bona fide as the same is unconnected with the scope of duty of the tax auditors in that regard. In its reply to the show-cause notice issued by the assessing authority, the assessee vide his letter dated June 7, 2007, has appended a note on goodwill and depreciation claimed thereon whereby it has stated that the write off of goodwill is not considered as an allowable expenditure in the computation of income. It has made the order passed by the hon'ble High Court in amalgamation proceedings in Company Petition No. 16/C of 2004 as a part of the reply and also placed the scheme of the amalgamation on assessment record drawing specific reference to paragraph 14.1(c) of the scheme which states that the excess of net assets of the transferor-company recorded in the books of the transferee-company over the book value as on the effective dat....
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....ries, no real asset as goodwill in fact comes into existence. That is how the accounting treatment to be given was clearly stated in the scheme and no payment on account of any such asset was made by the appellant in this scheme which stood approved by the aforesaid order of the hon'ble High Court. Paragraph 5 of the said order in Company Petition No. 16/C of 2004 orders, is reproduced as under : "Upon the coming into effect of this scheme and with effect from the appointed date and subject to the provisions of this scheme, all the assets of the transferor-company comprised in the undertaking shall, pursuant to the provisions of sections 391 to 394 and other relevant provisions of the Act, without any further act, instrument or deed, be and stand transferred to and vested in or be deemed to have been and stand transferred to and vested in the petitioner-company as a going concern so as to become, as and from the appointed date, the undertakings, business, properties and assets of the transferee company and in respect of such of the properties and assets of the transferor company as are movable in nature and capable of transfer by manual delivery or by endorsement or endorsement ....
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....) all the debts, liabilities, duties and obligations of the transferor company as on the appointed day (hereinafter referred to as the `liabilities') ; (c) without prejudice to the generality of sub-clause (a) above, the undertaking of the transferor company shall include all the transferor company's reserves, movable and immovable properties, assets including investments, claims, powers, authorities, allotments, approvals, consents, registration, contracts, engagements, arrangements, rights, title, interests, benefits, advantages, lease-hold rights, other intangibles, industrial and other licences, permits, authorisations, quota rights, trade marks, patents and other industrial and intellectual properties, import quotas, telephones, telex, facsimile and other communication facilities and equipments rights and benefits of all agreements and all other interests, rights and powers of every kind, nature and description whatsoever, privileges, liberties, easements, advantages, benefits and approvals of whatsoever nature and wheresoever situated, belonging to or in the ownership, power or possession or control of the transferor company." The said order thus, clearly states that th....
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....serves of the company or allow it to be capitalised as `intangible asset'. The court has appreciated the fact that the company was acquiring a valuable asset by making payment for the same. Hence it did not direct the same to be reduced from the reserves of the company in which case it would have amounted to `loss of capital'. Instead of going into each specific intangible asset and assign the value thereto, the hon'ble court gave the same nomenclature as 'goodwill'. The hon'ble court was fully aware of losses incurred by the transferor company and hence it was apparent that it would not have 'goodwill' in a literal sense. However this direction of the hon'ble court and nomenclature given by it could not be overlooked while accounting the transactions. But at the same time, the company has very explicitly mentioned the true nature of this asset in its accounts." The assessee's claim that it has followed the purchase method and not the pooling method is also of no consequence. These methods of standard accounting practices have been prescribed for giving accounting treatment as to how the entries in such cases are to be made upon amalgamation. However, the provisions of the Incom....
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....ls and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The case law on which learned counsel for the assessee strongly relied also do not have any application to the present facts of the case inasmuch as in the judgment rendered by the hon'ble Kerala High Court in B. Raveendran Pillai v. CIT [2011] 332 ITR 531 ; [2010] 194 Taxman 477 the hon'ble High Court has found that the appellant before it purchased a hospital in Quilon with its land, building, equipment, staff, name, trade mark and goodwill as a going concern under two separate sale deeds. In the case before the "F" Bench of the Mumbai Tribunal in Kotak Forex Brokerage Ltd. [2009] 33 SOT 237 the Tribunal has proceeded on the factual finding that the 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 forex broking rights and balance towards net current assets. In both the aforesaid judgments the depreciation was allowed on the factual finding that goodwill had been purchased by them and thereafter the hon'ble High Court of Kerala in B. Raveendran Pillai [2011] 332 ITR 531 ; [2010] 194 ....