2008-VIL-425-ITAT-

Equivalent Citation: [2009] 308 ITR 271, ITD 116, 133, TTJ 120, 1081,

Income Tax Appellate Tribunal BOMBAY

Date: 19.02.2008

RG. KESWANI.

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 19 (3), MUMBAI.

BENCH

Member(s)  : DR. O. K. NARAYANAN., SMT. ASHA VIJAYARAGHAVAN.

JUDGMENT

Per Dr. O.K. Narayanan, Accountant Member.-This appeal is filed by the assessee. The relevant assessment year is 2002-03. The appeal is directed against the order of the CIT(A)-XIX at Mumbai, dated 31-12-2004 and arises out of the assessment completed under section 143(3) of the Income- tax Act, 1961.

2. The only ground raised in this appeal is that the lower authorities have erroneously declined to accept the claim of depreciation of Rs. 4,68,705, made by the assessee on goodwill of Rs. 25,00,000, which was purchased by the assessee in the previous year relevant to the assessment year under appeal.

3. The assessee had commenced its business on 1-6-2000 by acquiring goodwill and the name of an existing firm "M/s. R.G. Keswani & Engrep". The said firm was running its business since 1988 as indenting agent. According to the assessee, the said firm had developed reliable business relationship with foreign principals and had earned a goodwill and trade name in the line of business. Therefore, while acquiring the said goodwill and name of the said name M/s. R.G. Keswani & Engrep., the assessee had paid an amount of Rs. 25,00,000 in the trade name, goodwill and for all other business and commercial rights. According to the assessee, what was acquired by the assessee by paying Rs. 25,00,000 was an intangible asset and, therefore, entitled for depreciation under the provisions of section 32(1)(ii). The assessee had explained that as the goodwill was utilized by the assessee for carrying on the business, its business increased manifold and the goodwill and the name of the old firm have been extensively used for the performance of the assessee-company. In the assessment order, this contention was not accepted by the Assessing Authority for the reason that the goodwill cannot be treated as intangible asset and, therefore, not depreciable. The Assessing Officer also observed that goodwill would not fall under "any other business or commercial rights of similar nature". In first appeal, the CIT(A) held that the only issue to be considered is whether the goodwill acquired by the assessee would be covered by the expression "any other business or commercial rights of similar nature", being intangible asset in nature. He held that the consideration was in the nature of a capital payment. In the table of rates prescribed for depreciation, the goodwill is not separately dealt with. The intangible assets explained in law including know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature are clubbed together on which depreciation is admissible at the rate of 25 per cent. He further observed that section 55(2) of the Income-tax Act deals with cost of acquisition, in relation to capital assets, being goodwill of business or trademark or brand name associated with the business or right to manufacture, process, any article or things, tenancy rights etc. In case of acquisition of such assets by the assessee by purchase from previous owner, the cost of acquisition means the amount of purchase price. Thus, if the present case is the one, the future of the goodwill acquired by the assessee could be considered against the acquisition cost of Rs. 25,00,000, while computing the capital gains. On the basis of the above logic, the CIT(A) observed that no depreciation is contemplated in computing the cost of acquisition of the good-will of a business. In case of asset on which depreciation is contemplated, it is explained in section 50 that written down value has been taken as cost of acquisition. Therefore, the CIT(A) observed that if the purpose was to allow depreciation on goodwill, it would have been specifically mentioned in section 32(1)(ii) of the Act, as has been mentioned regarding know-how, patent, copyright, etc. The CIT(A) further held that goodwill by itself is not in the nature of business or commercial right. He, therefore, concluded that the provisions related to depreciation on capital assets as well as the provision relating to the computation of capital gains, do not contemplate providing of depreciation on goodwill. Accordingly, the first appeal was dismissed.

4. It is against the above that the assessee has come in second appeal before us.

5. The two grounds raised by the assessee in this appeal read as below:-

"On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals)-XIX, Mumbai-

(1) erred in confirming the disallowance of the appellant's claim of depreciation of Rs. 4,68,750 on goodwill (which also included trade name and the entire gamut of business and commercial rights).

(2) erred in drawing an analogy from section 55(2) of the Income-tax Act, 1961 to disallow the appellant's claim for depreciation under section 32(1)(ii) of the Income-tax Act, 1961."

6. Shri R.R. Vora, the learned Chartered Accountant appearing for the assessee invited our attention to clause (b) of Explanation (3) provided in section 32(1). So also clause (ii) of section 32(1). He explained that section 32(1)(ii) provides for depreciation on intangible assets like know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1-4-1998. As per clause (b) to Explanation (3), the expression "assets" and "other assets" shall mean intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

7. The learned Chartered Accountant, in the light of the above statutory provisions, submitted that what was acquired by the assessee was not the goodwill per se, as considered in common parlance. He, therefore, submitted that in the agreement, the expression "goodwill" has been used as a generic term but if the agreement entered into by the assessee is perused in an objective manner, the payment was made for transferring the existing trade name of the erstwhile firm along with the goodwill and including of business and commercial rights. He explained that the statutory provisions relating to the depreciation on intangible assets specifically mentioned that the business or commercial rights in the nature of intangible assets. The assessee in the present case had acquired the trade name, which is very important in retaining and developing the business of the erstwhile firm, which is definitely in the nature of an invaluable commercial right. He invited our attention to the various covenance provided in the agreement and held that the true nature of the rights required by the assessee should be considered and the rights acquired by the assessee should be treated as intangible assets.

8. As an alternate contention, the learned Chartered Accountant further submitted that if the consideration of Rs. 25,00,000 also included goodwill, which could not be treated as an intangible asset, a reasonable portion of the consideration attributable to the said goodwill may be excluded from the value of the intangible assets and the depreciation may be granted on the remainder amount.

9. Shri R.R. Vora, relied on the decision of the ITAT Mumbai 'D' Bench in the case of Techno Shares & Stocks Ltd. v. ITO [2006] 101 TTJ (Mum.) 349 and the decision of the ITAT Cochin Bench in the case of Peninsular Capital Market Ltd. v. Asstt. CIT [2008] 19 SOT 421, in support of his arguments. In those decisions, the membership card of stock exchange has been treated as intangible assets eligible for depreciation.

10. Shri Anjaneyelu U., the learned Senior D.R. appearing for the revenue contended that the goodwill cannot be treated as an item of intangible asset as held by the ITAT Ahmedabad Bench in the case of Bharatbhai J. Vyas v. ITO [2005] 97 ITD 248 wherein the Tribunal has held that there may be enumerable number of intangible assets, which may be transacted in business realities. There cannot be a dispute about terming such compensation as a 'goodwill', but while deciding the allow ability of depreciation, one has to take recourse to specific provisions. The Tribunal held in the above facts and circumstances of the case that the amount paid by the assessee as goodwill did not result into acquisition of any know-how, patents, copyrights, trademarks, etc. as prescribed in this behalf. The Tribunal held that the assessee is not entitled to claim depreciation on the payment of goodwill. The learned Senior D.R. also relied on the decision of the Delhi Tribunal in the case of Guruji Entertainment Network Ltd. v. Asstt. CIT [2007] 14 SOT 556 wherein the Tribunal has held that the assessee was not eligible for depreciation on goodwill and depreciation is available only in respect of intangible assets such as copyrights, telecast rights, etc. He has also relied on the decision of the Karnataka High Court in the case of CIT v. Mangalore Ganesh Beedi Works [2003] 264 ITR 142.

11. In reply, Shri R.R. Vora, on the other hand, submitted that the decision of the ITAT Ahmedabad Bench in the case of Bharatbhai J. Vyas relied on by the revenue does not rule out the grant of depreciation on goodwill, as such. The Tribunal has held that goodwill could be granted if the assessee had acquired any know-how, patents, copyrights, trademarks, etc. Therefore, it depends on the facts of the case. In the present case, by making of Rs. 25,00,000 as "goodwill", the assessee has acquired invaluable business and commercial rights, which have been specifically defined as an intangible asset under section 32(1)(ii). Therefore, he submitted that in the facts of the present case; the said decision must be to the advantage of the assessee.

12. We heard both sides in detail and considered the matter. The statutory expression of the provision granting depreciation on intangible asset is that-

"know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1-4-1998."

13. A reading of the above statutory expression brings home the point that the law has specified items of intangible assets eligible for depreciation in the following categories:-

(i) Know-how

(ii) Patents

(iii) Copyrights

(iv) Trademarks

(v) Licences

(vi) Franchises

14. As seen above, the law has specified six categories of intangible assets entitled for depreciation. Therefore, it is very obvious that all intangible assets are not eligible for depreciation allowance.

15. In the present case, the amount of Rs. 25,00,000 was paid by the assessee towards the acquisition of goodwill. Therefore, the said payment does not come under either know-how, patents, copyrights, trademarks, licences, franchises. The only remaining category is the residual one "any other business or commercial rights of similar nature". It is to be seen that any other business or commercial rights are not by themselves intangible assets eligible for depreciation. Those rights must be of similar nature; all similar nature to know-how, patents, copyrights, trademarks, licences, franchises. Any business or commercial rights not similar in nature to the above mentioned six items cannot be treated as intangible assets qualified for depreciation.

16. This is because "any other business or commercial rights of similar nature" provided as a residual category is found in the company of expression like know-how, patents, copyrights, trademarks, licences, franchises and, therefore, in view of the principle of ejusdem generis, the above expression "any other business or commercial rights" has to be read in the company of the preceding words. Ejusdem generis rule is the rule of generic words following more specific one. The rule is that when general words follow specific word$ of same nature, the general words must be confined to the things of the same kind as those specified. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like know-how, patents, copyrights, etc., form a distinct genesis or category inasmuch as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression "any other business or commercial rights of similar nature" also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in section 32(1)(ii), the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to know-how, patents, copyrights, etc.

17. Another argument advanced by the learned Chartered Accountant on this juncture is that even though the consideration was stated to be paid for acquiring the goodwill, the assessee has specified the rights acquired by the assessee, more particularly, in the agreement which included "all business and commercial rights". The expression "all business and commercial rights" used in the agreement is too a generic expression which does not find similarity with the specific expressions like know-how, patents, licences, etc. Therefore, such a very general expression of business and commercial rights cannot be equated with the expression of "any other business or commercial rights of similar nature" occurring in section 32(1)(ii).

18. In these circumstances, there is nothing on record including in the agreement to show that the assessee had paid the amount of Rs. 25,00,000 for something other than goodwill. The Tribunal through its decisions has already held that the goodwill is not an intangible asset entitled for depreciation. Useful reference may be made to Bharatbhai J. Vyas' case, Guruji Entertainment Network Ltd.'s case and CIT v. Mangalore Ganesh Beedi Works' case.

19. In the facts and circumstances of the case, we find that the contention of the assessee is not tenable either in facts or in law. Therefore, we hold that the lower authorities have rightly held the acquisition cost of goodwill of Rs. 25,00,000 is not entitled for depreciation.

20. In result, this appeal filed by the assessee is dismissed.

 

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