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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI ANIL CHATURVEDI & SHRI PARTHA SARATHI CHAUDHURY
आदेश / ORDER
PER ANIL CHATURVEDI, AM :
The captioned appeals preferred by the assessee emanate from separate orders of the Ld. CIT(A), Pune-1, both dated 28.02.2017, for the assessment years 2012-13 and 2013-14.
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Before us, at the outset, ld.AR submitted that though the appeals filed by the assessee are for different assessment years but the facts and issues involved in both the appeals are identical except for the assessment year and the amounts involved and therefore the submissions made by him while arguing one appeal would be equally applicable to the other appeal also and therefore, both the appeals can be heard together. The aforesaid submission of the ld.AR has not been objected to by ld.DR. We therefore, for the sake of convenience proceed to dispose of both the appeals by a consolidated order but however, we proceed with narrating the facts for assessment year 2012-13.
The relevant facts as culled out from the material on record are as under :- The assessee is a company stated to be engaged in the business of manufacturing, trading, import export of chemicals, chemicals products, machinery, etc. The assessee filed its original return of income for A.Y. 2012-13 on 28.11.2012 declaring total loss at Rs.91,06,538/-. The case was taken up for scrutiny and thereafter, assessment was framed u/s 143(3) r.w.s. 92CA(4) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) vide order dated 02.03.2016 and the total income was determined at Rs.50,25,660/-. Aggrieved by the order of Assessing Officer, assessee carried the matter before Ld.CIT(A), who vide order dated 28.02.2017 (in appeal No.CIT(A), Pune-1/10115/2016-17) granted partial relief to the assessee. Aggrieved by the order of Ld.CIT(A), the assessee is now in appeal before us and has raised the following grounds :
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The learned CIT(A)-1, Pune erred in law and on facts in confirming the learned AO's decision in making disallowance u/s 36(1)(v) of ITA 1961 amounting to Rs.85,000/- being Gratuity contribution to the unapproved fund, despite the fact that, the application for approval of the said gratuity trust was duly made and pending for adjudication since 3/5/2010. 2. Alternative and without prejudice to the Ground no 1 above, the learned CIT(A)-1, Pune & the learned AO erred in law and on facts in not allowing deduction for the amount of Rs.85,000 paid towards gratuity contribution u/s 37 of Income Tax Act 1961. 3. The learned CIT(A)-1, Pune & the learned AO erred in law and on facts in not treating following assets as eligible intangible assets as defined u/s 32 of Income tax act 1961 and thereby making disallowance of depreciation @ 25% amounting to Rs.1,38,62,500/- Sr No Description of asset Amt. (Rs.) 1 Non compete fees 1,42,00,000 2 Distribution Network rights 4,17,00,000 3 Customer list 4,17,00,000 4. The learned CIT(A)-1, Pune & the learned AO failed to appreciate that the appellant has duly discharged the consideration for these assets referred to in Ground No.3 above, and that the said payee was an Arm's Length party.
The first and second grounds being interconnected are considered together.
During the course of assessment proceedings, the Assessing Officer noticed that the assessee has contributed Rs.85,000/- in Group Gratuity Scheme of LIC and had claimed it as deduction u/s 36(1)(v) of the Act on payment basis. The Assessing Officer noted that the assessee had also filed an application for getting the approval from CIT as per relevant provision of Act much prior to current assessment year, but had not got requisite approval. The Assessing Officer was of the view that in the absence of approval for the requisite scheme, the contribution to the scheme cannot be allowed u/s 36(1)(v) of the Act. He accordingly, denied the claim of deduction of Rs.85,000/-. Aggrieved by the order of Assessing
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Officer, assessee carried the matter before the CIT(A), who upheld the order of Assessing Officer by observing as under:-
“6. I have carefully considered the facts of the case as well as reply of the appellant. In this case, since the fund in question i.e. group gratuity fund was not approved by the concerned Commissioner of Income Tax, though application was made on 3/5/2010. I do not find any merit in the submission of the appellant and the action of the AO is upheld. The appellant may file rectification application before the AO once the approval is received who will rectify the issue as per law. As far as ground No.3 is concerned, the same cannot be accepted as section 37 is residual section in which only those expenditure can be considered which are not covered u/s 30 to 36 of the I.T. Act, 1961. Since there is specific provision 36(1)(v) of the I.T. Act, 1961 in respect of amount in question, provisions of section 37 will not apply. Accordingly, ground No.2 and 3 are dismissed.”
Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
Before us, ld. AR reiterated the submissions made before the Assessing Officer and CIT(A) and further submitted that the assessee has got the approval from the office of Commissioner vide order dated 21.09.2016 and it is w.e.f. 27.03.2012. He pointed to the copy of order which is placed at page 78 of Paper Book. He submitted that since the approval has been granted from 27.03.2012 the Assessing Officer be directed to grant deduction. In the alternate, he submitted that the assessee be allowed the claim of deduction u/s 37 of the Act, for which he placed reliance on the decisions cited by him before the CIT(A). He therefore, submitted that the claim be allowed.
The ld. DR on the other hand supported the orders of Assessing Officer and CIT(A).
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We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to denial of claim of deduction u/s 36(1)(v) of the Act. The claim was basically denied on account of non approval of the scheme by CIT. We find that subsequently the CIT vide order dated 21.09.2016 has granted the approval to the gratuity scheme and it is effective from 27.03.2012, being the date falling in the assessment year. In such a situation we are of the view that the assessee is eligible for deduction. We therefore, direct the Assessing Officer to consider the claim of assessee on merits and allow the same in accordance with law. Thus, the ground Nos.1 and 2 are allowed.
The third ground is with respect to denial of claim of deduction on intangible assets.
During the course of assessment proceedings the Assessing Officer noticed that the assessee had acquired the electroplating business of Chemetall India Pvt. Ltd. vide agreement dated 15.12.2011 for total consideration of Rs.11.80 crores which included intangibles of Rs.11.51 crores (the breakup of intangibles is listed by the Assessing Officer on page 5 of assessment order). He noticed that the assessee had claimed depreciation on such intangibles @ 12.5% (since it was used for less than 180 days) amounting to Rs.1,38,62,500/-. The assessee was asked to justify the claim of depreciation on intangibles, to which the assessee made a detailed submission. It was inter-alia, submitted by the assessee that the intangibles which were in the nature of Non compete fee, Goodwill, Distribution network rights are intangibles, which are eligible for
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depreciation and even otherwise if it is considered to be Goodwill, depreciation on the same is eligible to the assessee. The assessee further submitted that Distribution network rights, Customer list, Non compete fee are nothing but „Any other commercial rights relating to business‟ which are essential for carrying out the acquired business and hence, the same are eligible for depreciation as intangible assets. The submissions of assessee were not found acceptable to the Assessing Officer. The Assessing Officer was of the view that commercial rights which are obtained for effectively carrying on the business and commerce fall under intangible assets, it should be similar nature as to know-how, patents, copyrights, trademarks, etc. He further noted that in the agreement dated 15.12.2011 entered into by the assessee with Chemetall India Pvt. Ltd., Non compete fee, distribution network rights and customer lists were grouped under the heading “Non-Compete Fees” and not under the head intangible assets. He was therefore, of the view that the aforesaid Non compete fee, distribution network rights, customer lists does not fall with the category of intangibles and therefore, not eligible for depreciation. He accordingly, rejected the claim of depreciation of Rs.1,38,62,500/- and added it to the total income of the assessee.
Aggrieved by the order of Assessing Officer, assessee carried the matter before the CIT(A), who upheld the order of Assessing Officer by observing as under:- “10. I have carefully considered the facts of the case as well as reply of the appellant. In this case, it is seen that the appellant has acquired electroplating business of Chemetall India Pvt. Ltd. vide agreement dated 15/12/2011 for total consideration of Rs.11.80 Crores out of which Rs.29 Lacs pertains to tangible assets in respect of which there is no dispute. The
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dispute is regarding depreciation on intangible assets claimed to have been acquired by the appellant vide above agreement. The details of the intangibles are as under: Sr. No. Description of assets Value as per Independent Valuation 1. Non compete fee Rs. 1,42,00,000/- 2. Goodwill Rs. 42,00,000/- 3. Distribution net work right Rs. 4,17,00,000/- 4. Customer list Rs. 4,17,00,000/- Out of the above the AO has allowed depreciation on goodwill. In respect of other intangibles, the claim has been denied by the AO as stated above. Before discussing the issue, it is important to have a look at the agreement itself. This agreement has been made on Rs.100/- stamp paper on 15/12/2011. The agreement is unregistered and there are no witnesses to the agreement. When the Ld. Counsel of the appellant was asked to explain the effect of non-registration of agreement, it was submitted that unlike immovable property where registration is mandatorily required, such agreements are not necessary to be registered. The Ld. Counsel of the appellant may be right in argument that such agreement need not be compulsorily registered but at the same time it raises serious doubt on the enforceability of the various clauses of the agreement and also to what extent the so called rights assigned in the agreement are protected and enforceable in the eyes of law. Just because agreement has been consented by the two parties by way of follow up actions, it cannot be said that the appellant has got enforceable right emanating from the said agreement. 11. It is further seen from the perusal of clause 2 of the agreement which deals with transfer and acquisition of „business assets‟, non-compete fee has not been mentioned and the same has been separately mentioned in clause 12 of the agreement. In any case depreciation is not allowable in respect of non-compete fee as held by Hon. Delhi High Court in the case of Sharp Business Systems vs CIT 27 taxmann.com 50 as discussed by the AO in detail in the assessment order. 12. Coming to the issue of Distribution Network rights and customer list, it must be appreciated that the same is not a commercial right similar to assets described in section 32(1)(ii) of the I.T. Act, 1961. The appellant claims that applying the principles of Ejus Dem Generis, the same can be said to be covered by the nature of commercial right described in Section 32(1)(ii) of the I.T. Act, 1961, In this case, it is seen that the appellant has claimed to have acquired Distribution Network rights and customers list as business, assets. Distribution Network rights are nothing but agreement between the seller and distributor within a certain territory on certain terms and conditions which cannot be considered to be an asset defined in section 32(1)(ii) of the I.T. Act, 1961. Similarly customers list is to just facilitate smooth functioning of business and can in no way be termed as asset in the nature of assets defined in section 32(1)(ii) of the I.T. Act, 1961 for entitlement of depreciation. It is also seen that ratio of intangible to tangible asset is quite high which. only shows that the appellant has tried to allocate the balance amount other
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than tangible assets in the category of intangibles in order to claim depreciation. This can be seen from the fact that there is no bifurcation of amount of Rs.11,51,00,000/- in the agreement dated 15/12/2011 under various heads claimed by the appellant. Therefore, considering the totality of facts, I do not find any merit in the submissions of the appellant and action of the AO in disallowing depreciation of Rs.1,38,62,500/- is upheld. Accordingly, the ground is dismissed.”
Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
Before us, ld. AR reiterated the submissions made before the Assessing Officer and CIT(A) and further submitted that merely because the agreement entered into by the assessee was not registered, the CIT(A) had concluded that it was not a valid agreement. He submitted that mere non-registration of agreement does not cause any damage to the bonafides of the agreement. He further submitted that the agreements entered into by the assessee with Chemetall India Pvt. Ltd. are between two independent and unrelated parties, both the parties have accounted it in the respective books of account and the agreement was genuine and bonafide agreement. With respect to the issue of distribution network rights and customer list, he submitted that the CIT(A) was not justified in upholding the order of Assessing Officer. He submitted that as far as the issue of Non compete fee, the issue is covered in assessee‟s favour by the decision of Hon‟ble Bombay High Court in the case of Pr.CIT Vs. Piramal Glass Limited in Income Tax Appeal No.556 of 2017, order dated 11.06.2019 and the decision of Pune Bench of Tribunal in the case of ACIT Vs. Johnson Matthey Chemicals India Pvt. Ltd., order dated 01.01.2016. With respect to distribution network rights, he submitted that the issue is covered in assessee‟s favour by the decision of Hon‟ble Delhi High Court in
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the case of CIT Vs. MIS Bharti Teletech Ltd. (2015) 233 TAXMAN 238 (Del). With respect to allowability of depreciation on distribution network rights, he relied on the decision of Hon‟ble Delhi High Court in the case of Areva T&D India Ltd. Vs. DCIT (2012) 20 taxmann.com 29 (Del). With respect to allowing of depreciation on customer list, he relied on the decision of Pune Bench of Tribunal in the case of Brembo Brake India (P.) Ltd. Vs. DCIT (2015) 56 taxmann.com 217 (Pune-Trib.). He therefore, submitted that the assessee is eligible for the claim of deduction and the same be allowed to the assessee.
The ld. DR on the other hand supported the orders of Assessing Officer and CIT(A) and submitted that in the case laws relied upon by the ld. AR, facts are distinguishable as in all those cases the value of intangible assets was reflected in the agreement, whereas it was not in the case of assessee. He therefore, submitted that the ratios of the decisions relied upon by the ld. AR are not applicable.
We have heard the rival submissions and perused the material on record. The issue in the present grounds is with respect to allowability of claim of depreciation on intangibles. It is an undisputed fact that the assessee had acquired electroplating business of Chemetall India Pvt. Ltd. vide agreement dated 15.12.2011 for total consideration of Rs.11.80 crores which included Rs.11.51 crores on account of various intangibles, which were valued as per independent valuation. It is Revenue‟s case that intangibles cannot be considered to be intangible assets so as to eligible for depreciation. As far as the issue of allowing Non compete fee is considered,
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we find that the Hon‟ble Bombay High Court in the case of Pr.CIT Vs. Piramal Glass Limited (supra), on an identical issue of Non compete fee before the Hon‟ble High Court and the question of law and its decision are as under: “(a) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in deleting the disallowance of depreciation claim on the non-compete fees paid when it is clear that it does not represent any intangible asset qualified for the depreciation as per Section 32 of the I.T. Act, 1961?” …….. “3. Question No. (a) noted above pertains to the decision of the Tribunal to grant depreciation on the Assessee's payment of non-compete fees. According to the Revenue, this being an intangible asset, no depreciation under Section 32 of the Income Tax Act, 1961 ('the Act' for short) was available. 4. We however notice that similar issue has been considered by the different High Courts and held in favour of the Assessee. A reference can be made to the decision of the Division Bench of the Gujarat High Court in the case of Principal Commissioner of Income Tax v. Ferromatice Milacron India (P.) Limited. It was also the case where the Assessee had incurred expenditure pursuant to the noncompete agreement and claimed depreciation on such asset. While dismissing the Revenue's Appeal against the Judgment of the Tribunal, following observations were made: "We may recall the Assessing Officer does not dispute that the expenditure was capital in nature since by making such expenditure, the assessee had acquired certain enduring benefits. He was, however, of the opinion that to claim depreciation, the assessee must satisfy the requirement of Section 32(1)(ii) of the Act, in which Explanation 3 provides that for the purpose of the said sub-section the expression "assets" would mean ( as per clause (b) ) intangible assets, being known-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature. In the opinion of the Assessing Officer, the non-compete fee would not satisfy this discrimination. Going by his opinion, no matter what the rights acquired by the assessee through such non-compete agreement, the same would never qualify for depreciation in section 32(1)(ii) of the Act as being depreciable intangible asset. This view was plainly opposed to the well settled principles. In case of Techno Shares & Stocks Limited (supra) the Supreme Court held that payment for acquiring membership card of Bombay Stock Exchange was intangible assets on which the depreciation can be claimed. It was observed that the right of such membership included right of nomination as a license which was one of the items which would fall under Section 32(1)(ii). The right to participate in the market had an economic and money value. The expenses incurred by the assessee which satisfied the test of being a license or any other business or commercial right of similar nature In case of Areva T & D India Limited (supra) Division Bench of Delhi High Court had an occasion to
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interpret the meaning of intangible assets in context of section 32(1)(ii) of the Act. It was observed that on perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature" it is seen that intangible assets are not of the same kind and are clearly distinct from one another. The legislature thus did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets which may not be possible to exhaustively enumerate. It was concluded that the assessee who had acquired commercial rights to sell products under the trade name and through the network created by the seller for sale in India were entitled to deprecation. In the present case, Mr.Patel was erstwhile partner of the assessee. The assessee had made payments to him to ward of competence and to protect its existing business. Mr.Patel, in turn, had agreed not to solicit contract or seek business from or to a person whose business relationship is with the assessee. Mr. Patel would not solicit directly or indirectly any employee of the assessee. He would not disclose any confidential information which would include the past and current plan, operation of the existing business, trade secretes lists etc. It can thus be seen that the rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression "or any other business or commercial rights of similar nature" used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation." 5. No question of law in this respect therefore arises.”
We further find that on the issue of Non compete fee, the Co-ordinate Bench of Tribunal in the case of ACIT Vs. Johnson Matthey Chemicals India Pvt. Ltd. (supra) by following the decision of Hon‟ble High Court of Karnataka in the CIT Vs. Ingersoll Rand International Ind. Ltd., 227 Taxman 176 (Kar) has held that non compete fee payment is capital in nature and falls in the category of intangible assets and is eligible for claim of depreciation u/s 32(1)(ii) of the Act. As far as the issue of depreciation on customer list is concerned, we find that the issue is covered in assessee‟s favour by the ratio of decision in the case of Brembo Brake India (P.) Ltd. Vs. DCIT (supra) wherein it was held that when the assessee had acquired customer base, list of material suppliers, process know-how, then
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the said acquisitions were licenses for the assessee to carry on the business and therefore the Tribunal by following the decision of Hon‟ble Delhi High Court in the case of Areva T&D India Ltd. Vs. DCIT (supra) held the assets to be intangible assets being eligible for depreciation u/s 32(1)(ii) of the Act. We further find that the Hon‟ble Delhi High Court in the case of Areva T&D India Ltd. Vs. DCIT (supra) has held that specified intangible assets, viz. business claims, business information, business records, contracts, employees and know-how acquired by assessee under slump sale agreement are in nature of „business or commercial rights of similar nature‟ specified in section 32(1)(ii) of the Act and are accordingly eligible for depreciation under that section. We further find that in the case of CIT Vs. MIS Bharti Teletech Ltd. (supra), where the assessee had paid to the transferor the amount who owned commercial rights towards network and facilities, the Hon‟ble High Court held that it to be „business or commercial rights‟ which were similar to those enumerated as intangible assets which would not have been otherwise available but for the agreement. It therefore, held it to be eligible for depreciation.
Before us, no material has been placed on record by the Revenue to demonstrate that the ratios of aforesaid case laws cannot be applied to the present case. In view of the aforesaid facts, we are of the view that the assessee is eligible for the claim of depreciation and therefore, be allowed and thus, the ground No.3 raised by the assessee is allowed.
In the result, the appeal of assessee is allowed.
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Since the facts and issues raised in other appeal i.e. ITA No.975/PUN/2017 are identical to the facts and issues raised in ITA No.974/PUN/2017, our decision in ITA No.974/PUN/2017 shall apply mutatis mutandis to ITA No.975/PUN/2017.
In the result, both the appeals of assessee are allowed.
Order pronounced on this 17th day of February, 2020.
Sd/- Sd/- PARTHA SARATHI CHAUDHURY ANIL CHATURVEDI JUDICIAL MEMBER ACCOUNTANT MEMBER ऩुणे / Pune; ददनाांक / Dated : 17th February, 2020 GCVSR आदेश की प्रनिलऱपप अग्रेपषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त (अऩीऱ) / The CIT(A), Pune-1 3. आयकर आयुक्त / The Pr.CIT-1, Pune 4. ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, “ए” बेंच, 5. ऩुणे / DR, ITAT, “A” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रतत// True Copy// आदेशानुसार / BY ORDER,
वररष्ठ तनजी सधचव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune