TaxTMI 
TaxTMI 
2011 (9) TMI 1046
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....g the fact that depreciation on goodwill is not allowable in terms of provisions of section 32(1) of the Income-tax Act, 1961." Similar grounds have been taken in other appeals for other years. However, there is a difference of amount of depreciation only. 3. The undisputed brief facts discussed by ld. CIT (A) in his order are that the assessee company was engaged in the business of manufacturing of Aerated water. During the year the assessee company has purchased the business of Delhi Territory of M/s Dhillon Kool Drinks and Beverages Ltd. vide business transfer agreement dt.26.8.2000 on the basis of slump sale for which the net amount paid was Rs. 12.5 crore. As per Point No.2.2 of article 2 of the said agreement dt. 26.8.2000 the assets and liabilities were taken over. Since, the liabilities taken over were at Rs. 25,24,99,123/- therefore, the total cost of the said Delhi business purchase was at Rs. 37,74,99,123/-. The assessee had bifurcated this cost as assets taken over at a value of Rs. 9,74,99,123/- and differential amount was considered as payment or license and franchise rights at Rs. 28 crore. During the course of assessment proceedings, in respect of depreciation....
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.... assessee company. 4. The detailed written submissions were filed before ld. CIT (A) which has been tabulated in the order of ld. CIT (A) at pages 4 to 9. The submissions are in detail and they are self explanatory. Therefore, it will be useful to reproduce the submissions here also which are as under :- "The assessee is a private limited company. It is engaged in the business of manufacturing of Areated water for the last several years. It has maintained regular and proper books of accounts consisting of cash book, ledger, journal and such accounts are supported by bills, vouchers, production registers, stock details and other supporting record. The product is exciseable and Excise RG 1 and other records have been maintained and examined and accepted by the Excise Authorities. The accounts have been audited by the Statutory Auditors as well as Tax Auditors. No defects have been noticed by the auditors. Trading results have been accepted by the Assessing officer. 1.1. Pepsico India Holdings Limited having its principal `place of business at DLF Corporate Park, Phase III, Block S, Qutab Enclave, Gurgaon 122001, Haryana and office at 13th Floor, Mohan Dev Buildin....
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....ted. Copy of Letter of Intent dated 26.08.2000 as modified on 22.12.2000 is submitted herewith. PepsiCo India Holdings Limited also agreed to nominate the assessee company to acquire the Delhi Business from the seller. The Seller having caused the procurement of the aforesaid licence / franchise rights by the Assessee Company, a business transfer agreement dated 26th day of August, 2000 was entered into by and between the Seller and the Assessee Company. The consideration for the transfer was arrived at a lump-sum amount of Rs. 37.75 crores. The assessee company took over the liability for payment of Rs. 25.25 crores to the parties detailed in Schedule II annexed with the agreement. Balance of Rs. 12.50 crores was to be paid to the Seller. Copy of business transfer agreement dated 26.08.2000 is submitted herewith. 1.5. In accordance with the above stated arrangement / agreement, the assessee - company discharged its liability and paid the amount of Rs. 25,15,28,123.80 as per details enclosed by way of Annexure - 1. A paltry amount of about Rs. 9,18,000/- only is payable by way of security deposit to dealers. 1.6. The assessee - Company received a show cau....
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....Gujarat High Court in Banyan and Berry Vs. Commissioner of Income - tax (1996) 222 - ITR 831 at 850 where referring to Mc. Dowell's case (1985) 154 - ITR 148 (SC), the court observed : "The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; and inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in Mc Dowell's case (1958) 154- ITR-148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to Mc. Dowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colorable device which may properly be called a device or a dubious meth....
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....ranchises, and other business and commercial rights for the Delhi territory. The assessee - Company had undertaken the liability of Rs. 25.25 Crores, which included an amount of Rs. 21.15 Crores payable by the Seller to Pepsico India Holding Ltd. The assessee - Company has discharged that liability as detailed in para 1.5 hereinabove. As agreed to collect the outstanding amount of Rs. 21.15 Crores, Letter of Intent was executed no 26.8.2000 apart from the Business Transfer agreement dated 26.8.2000. The letter of intent has been acted upon and subsists to till today. It is being honoured by all concerned. The learned Assessing officer has admitted in clear words on page 7 in the bottom "Licenses & Franchise rights devolved upon the assessee only through the Letter of Intent executed also on 26.8.00". We submit whether the Licences & Franchiese rights devolved on the assessee by the Business Transfer Agreement or Letter of Intent, both of the same date, is of no consequence. The Licences & Franchise rights for Delhi Territory, earlier existing with the seller, devolved on the assessee Company and for a consideration of Rs. 28 Crores. Out of it admittedly a sum of Rs. 21.15 Crores we....
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....m of the assessee. 1.15 The Letter of Intent so issued is valid, operative, in existence, subsists and not terminated and not liable to be terminated. The inference drawn by the learned Assessing officer on page 8 in the last para is without any valid basis and not valid reason to deny the depreciation. Verification may be made by the Assessing officer or by your honour from the concerned parties. We have annexed details upto 31.03.2004. Same is position of sales/supplies thereafter. Uninterruptedly sales/supplies are being effected. 1.16. The Letter of Intent dated 26.8.2000 stands extended upto 30.09.2004 as per letter dated 29.03.2004 of Pepsi Foods Pvt. Ltd. (copy enclosed). It could not be submitted as the assessment proceedings were closed on 24.03.2004. Request was made to provide time but being time barring assessment, was not allowed. As submitted Letter of Intent exists till date and has not been terminated. We may also mention that in furtherance, the assessee - company has acquired Land measuring about 9 Acres in Greater Noida for Rs. 2.60 Crores on 27.02.2004 from Greater Noida Industrial Development Authority and is in the process of putting Bottling....
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....derstood the meaning of "Goodwill". In the present case there was no goodwill, rather there was negative goodwill. Goodwill is normally worked out, based on annual income of the business. There was no positive income and the business was in a bad shape. On established commercial principles there was no goodwill and value was NIL. Negative goodwill will arise when by adopting "super-profit" method, the figure arrived at is a "super-loss" or when by adopting "Capitalised profit" value method, the figure arrived at is less than the net value of the tangible assets. 1.21. The usual method of calculation of the valuation of goodwill is set out at pages 807 and 808 of advanced accounting by Batliboi, 16th Edition. After analyzing the method of Patna High Court in Das & Company Vs. CIT (1962) 45-ITR 369 at 378 held "In the matter of valuation of the goodwill of the business the proper approach is to ascertain the net annual earnings of the business after a careful investigation of the books of accounts and calculating the average net annual earning on the basis of the past three to five years. From the average net profits thus arrived at, it is usual to deduct as a matte....
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...., the assessee has purchased right of license and franchise etc. and these are intangible assets and depreciation is allowable. Attention of the Bench was drawn on page 25 to 28 and 46 also. It was further submitted that the decision in case of Hindustan Coca Cola has been affirmed by Hon'ble Delhi High Court vide its order dated 14.1.2011, copy of the same was also filed. It was further submitted that even in respect of goodwill, the depreciation is allowable as held by various bench of the Tribunal. Further reliance was placed in case of on the cases reported in 327 ITR 323, 238 CTR 1 (Del.) and 237 CTR 80 (Ker.). Further, attention of the Bench was drawn on copy of written submissions placed on record. In rejoinder, the ld. CIT D/R stated that decision of the Tribunal in case of Hindustan Coca Cola is not applicable as facts are distinguishable. On a query from the Bench that the rights were also sold by the assessee and how they have been shown in the Profit & Loss account, it was replied by letter dated 9.9.2011 by ld. Counsel of the assessee that this information is not necessary as they do not relate or pertain to the assessment year pending here before the Tribunal. However....
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....license and franchise rights devolved upon the assessee through the business transfer agreement According to AO since no agreement of license or franchise rights have devolved upon the assessee from Pepsi Food Ltd. therefore, the depreciation claim on license and franchise rights was held as not admissible. The AO had also observed that as per letter of intent it was to be replaced with appropriate trade mark licensing agreement and the letter of intent shall terminate immediately on the execution of the franchise agreement. According to AO it is implied that the said amount of Rs. 28 crore is not license and franchise rights but it forms part of goodwill devolved upon the assessee on which no depreciation is allowable. I have also gone through the copy of business transfer agreement dated 26.8.2000 between Dhillon Kool Drinks and Beverages Ltd. with the appellant, letter of intent issued by Pepsi Food Ltd. to the appellant on 26.8.2000 and agreement dated 10.8.2000 between Pepsico India Holding Ltd. with the appellant. Pepsico India Holding Ltd. is a subsidiary company of Pepsico Inc New York who is engaged in the business of manufacturing and distribution of Soft Drinks Beverages....
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....ninterruptedly carrying on the business of bottling and selling in the same territory and necessary supplies are being made to the appellant by PFL & Pepsico to manufacture the named beverages and syrup mix supported with letter of intent issued by Pepsi. Food Ltd. then obviously the licenses and franchise rights were also devolved upon the appellant. With such factual developments in my considered view the assessing officer was not justified in holding that no license and franchise rights were devolved upon the appellant company because for this purpose there is no agreement between the appellant and the seller namely DKD. In my considered view the assessing officer was also not justified in holding that said payment of Rs. 28 crore was for goodwill because in the business transfer agreement between the appellant and DKD there is no such mention and in any case the goodwill can only be transferred when there are profits with the transferor undertaking and undisputedly the transferor undertaking. namely DKD was in bad financial shape which could not pay more than Rs. 20 crore to Pepsico India Holding Ltd. and because of which they had to transfer their business to the appellant and....
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....n the meaning of S.32(1)(ii) of I.T Act. With this discussion the AO is directed to allow the aforesaid depreciation claim of Rs. 7 crore." 8.1. After going through the finding of ld. CIT (A) and the arguments of ld. D/R and also taking into consideration the arguments of ld. A/R, we find that the ld. CIT (A) examined the issue at great length and found that the Pepsico India Holding Ltd. was interested in selling their Delhi business along with rights, interest, privileges, assets and liabilities in the National Capital Territory of Delhi for lwhich the assessee company offered to purchase the said business as a going concern subject to the seller arranging in favour of the assessee company by Pepsi Food Ltd. of the license and franchise rights to use the trade marks of Pepsi brand of the soft drinks. In view of these intentions an agreement was entered in between Pepsico India Holding Ltd. (PIH) and the assessee on 10.8.2000 in which PIH had agreed to nominate the assessee to acquire Delhi business from Dhillon Kool Drinks & Beverages Ltd. (DKD) and the formal authorizations from PFL and PSI to undertake and conduct Delhi business was also to be obtained from the respective pa....