THE DCIT, (OSD), CIRCLE-8,, AHMEDABAD vs. M/S. V. F. ARVIND BRANDS PRIVATE LIMITED, AHMEDABAD

PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue along with a Cross Objection by assessee against the order of the Commissioner of Income Tax (Appeals) – XIV, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-XIV/ACIT Cir.8/264/2010-11 dated 25.04.2013 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated

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30.12.2010 relevant to the Assessment Year (AY) 2008-09 with the following grounds: 1) “The ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs.18,11,46,000/- made in respect of depreciation on intangible assets namely Design and Technical knowhow, vendor & customer net work relationships. 2) a. The Ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance made in respect of depreciation amounting to Rs.117.31 Millions on amount of goodwill of Rs.469 Millions, which was neither claimed in the Return of Income, nor during the course of assessment proceedings. 2) b. The Ld. CIT(A)-XIV, Ahmedabad has erred in law and on facts in set-aside the matter & directing the Assessing Officer to examine the matter regarding claim of depreciation on Goodwill, which is not permitted under provision of Section 251(1)(a) of the Act as amended w.e.f. 01/10/1998. 3) The Ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs.1,21,74,000/- made on account of provision of obsolete inventory without basis of such valuation. 4) On the facts and in the circumstances of the case, the Ld CIT(A)-XIV, Ahmedabad ought to have upheld the order of the AO. 5) It is therefore, prayed that the order of the Ld CIT(A)-XIV, Ahmedabad may be set-a-side and that of the order of the AO be restored.”

2.1 As per the agreement the assessee acquired the business of Arvind Fashion Ltd- a wholly owned subsidiary company of Arvind Mills Ltd as a going concern as slump sale for lump-sum consideration. The business acquired by the assessee from Arvind Fashion Ltd (for short AFL) was consisting of design, procurement, marketing, and management of the distribution of the appellant company for the branded products, in India,

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Srilanka, the Reunion Island, Seychelles, Madagascar, Mauritius, and the Maldives.

2.2 The business was acquired by the assessee for a lump sum consideration of Rs. 1816.53 million which was allocated to various assets taken over at fair value on the acquisition date. The assessee out of the total lump-sum consideration treated a sum of Rs. 1435/- million towards intangible assets. The details of the intangible assets and the value allotted to them are reproduced as under: Sr.No. Particulars of Intangible assets Value 1. Design and technical know-how 403.28 2. Vendor network relationship 320.74 3. Customer network relationship 242.10 4. Goodwill 469.00

2.3 The assessee in respect of intangible assets mention above in serial no. 1, 2 & 3 claimed the depreciation as detailed under:

Sr. No. Intangible Asset Opening WDV Rate Depreciation (In Rs.) of Claimed(In Depreciation 1 Rs.) (%) 1. Design and 30,24,57,000/- 25% 7,56,14,250/- Technical Knowhow 2. Vendor Relationship 24,05,52,000/- 25% 6,01,38,000/- Customer 18,15,75,000/- 25% 4,53,93,750/- 3. Relationship Total 72,45,84,000/- 25% 18,14,46,000/-

However, the AO was not satisfied with the claim of the depreciation of the assessee in respect of the above assets due to the reasons as detailed under:

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� Design and technical know-how: The assessee is not carrying out industrial activity. It has acquired the wholesale business of AFL without acquiring the factory. As such the activity of AFL is of stitching of the textiles which were manufactured by a group concern of the assessee mainly Arvind Mills Ltd. Therefore the case of the assessee does not fall under the Explanation-4 to Section 32 of the income tax Act. As per the AO, know-how is industrial information or technique likely to assist in the manufacturing or processing of goods. As the assessee is not engaged in any manufacturing activity, therefore, it is not entitled to depreciation as claimed by it on the design and technical know-how.

It is a fact on record that the factory of AFL was not transferred to the assessee. As such, AFL under the agreement with the assessee was under obligation to act as a job worker on behalf of the assessee. Therefore the AO was of the view that there was no transfer of any design and technical know- how to the assessee for which there was no need to make any payment to AFL. It was also agreed between the assessee and AFL that in case there is underutilization of the capacity of the assessee then AFL would be free to undertake the activity of garment production on behalf of other parties.

The depreciation is allowed when the capital assets are used for the purpose of the business. In the instant case, there was no utilization of intangible assets as required by the assessee.

2.4 In view of above the AO was of the view that the assessee is not entitled to depreciation on the intangible asset namely design and technical know-how.

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� Vendor and customer relationship The AO observed that the vendor and customer relationship does not fall within the definitions of intangible assets. Therefore he was of the view that the depreciation on the intangible assets namely vendor and customer relationship cannot be allowed.

2.5 In view of above the AO disallowed the depreciation claimed by the assessee on the aforesaid intangible assets amounting to Rs. 18,11,46,000/- and added to the total income of the assessee.

i. AFL has developed industrial techniques after researching the designs and technical know-how over a period of time. These industrial techniques include the following: a) Understanding the value proposition of the brand. b) Brand Psychology/Customer Demographics. c) Process of design forecasing. d) Understanding the fabrics. e) Shirts pattern making. f) Denim pattern making. g) Use of variety of software in design. h) Finishing sampling unit etc. The techniques above will certainly assist to the assessee in the manufacturing and processing of goods. Therefore the case of the assessee is covered in explanation- 4 to section 32 of the Act.

ii. The claim of the depreciation in respect of intangible assets cannot be linked with the industrial undertaking. Therefore the depreciation on the intangible assets cannot be denied merely on the ground that the assessee does not own the industrial undertaking. The word industrial undertaking has a different connotation with respect to different

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industries. It is used in common parlance to refer to a specific industry such as film industry, advertisement industry, garment industry, electrical goods industry and marketing industry, etc. Therefore the term industry is used to refer the different business activities carried out by a different class of people representing some specific activity.

iii. The assessee is getting the garments manufactured not only from the factory owned by AFL, but it is also getting the work done from the outsiders on a job work basis. These outsiders perform the work and carrying out the activity as per the designs and technical know-how of the assessee. Thus it is clear that the technical know-how acquired by the assessee was being used by it. Had these not been acquired by it from AFL then it would not have been getting the job done from the outside parties. The assessee in support of its claim also filed the list of the job workers.

iv. The assessee has acquired the business activity of AFL after making the agreed payment. The payment to AFL was not limited to the business activities, but it also covered the intangible assets acquired by the assessee. Thus the assessee is entitled to depreciation on the cost incurred by it on the purchase of intangible assets along with the business assets acquired from AFL.

v. As regards the vendor network relationship, the assessee submitted that it was paid to AFL for utilizing the network which was build up by AFL over a period of time. These vendors’ have been trained over a period of time by AFL and became capable of generating the quality products as per the specifications of the assessee. The assessee was able to save substantial time in developing the network of such vendors.

vi. There were 87 job workers/ vendors of AFL which were transferred to the assessee. These job workers were in a position to provide the desired services to the assessee in time bound manner without compromising with the quality of the work.

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vii. There was an agreement between the assessee and the AFL whereby the factory of AFL was used by the assessee as a dedicated job worker. This agreement was made for 3 years beginning from 1st September 2006 to 31st August 2009.

viii. The assessee also acquired a network of AFL consisting of 58 fabric supplier and 77 trim suppliers. These suppliers have been empanelled by AFL which was meeting the requirement of fabric and the accessories with quality and in time bound manner.

ix. Similarly, the assessee also acquired the network of advertisement vendors consisting of 232 companies. These vendors were providing advertisement services and promoting the production of the assessee. As such the assessee was able to save substantial time in building such a huge network.

x. As regards the customer network relationship, the assessee submitted that there was a huge network of customers of AFL which was acquired by it. The assessee has acquired the entire multi-brand outlets which were created by AFL over a period of time. In the financial year 2005- 06 these multi-brand outlets contributed 26% of the total sales of AFL. Thus on the acquisition of customer network of the AFL, the assessee was able to achieve desired results in the short period. As such there were 325 multi-brand outlets which were transferred to the assessee.

xi. As regards the exclusive brand outlet and exclusive outlet on purchase the assessee submitted that it has acquired 39 exclusive brand outlet and 51 exclusive outlet on purchase from AFL. In the financial year 2005-06 AFL was able to achieve 20% of the total sale and 16% of the total sale through the network of EOB’s and EOP’s

xii. The customer network of AFL was located in different geographical locations involving huge capital investment with trained marketing staff. The assessee acquired all these networks created by AFL.

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3.1 In view of the above the assessee claimed that it is eligible for the depreciation under section 32 of the Act in respect of intangible assets.

‘’We have heard both the parties and carefully gone through the records. Before us, the learned AR of the assessee reiterated the submissions as we made before the authorities below and strongly supported the impugned order of the learned CITA). The learned DR on the other hand, supported the impugned order of the Assessing Officer. The moot question that is to be decided whether the depreciation claimed on the intangible assets amount to Rs. 12,03,12,500 which relates to these two assets in the names of Brand name "Arvind' and "Marketing and distribution Network" is allowable u/s. 32(1) (ii) of the Income-tax Act, 1961. Going through the said section, it is very much clear thatthis section includes know- how, patents, copyrights, trade marks, licences franchises or any other business or commercial rights of similar nature, being intangible assets. The Revenue is not disputing that the assessee has acquire c these two intangible assets in question under an agreement. The items mentioned in Section 32(1) (ii) are wide enough so as to

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include these types c; intangible assets under consideration. Therefore, in our considered view, the learned CIT(A) has rightly allowed the depreciation claimed by the assessee and as such, it needs no interference."

I find that ITAT, Chennai in the case of ACIT vs. Best & Crompton Engg. Projects Ltd. reported at 46 SOT 116 considered similar question. The head notes from the judgment reported in the above case reads as under:

"Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of - Assessment years 2002-03 to 2005-06 - Assessee- company was subsidiary of 'B' Ltd. which was doing business of Electricals & Projects contracting, like, erection of High Voltage Substations, Transmission Lines, Railway Electrification both in India and outside India - Since there were major problems with manufacturing units of 'B' Ltd. which could affect operations of projects division, 'B' Ltd. transferred its electrical and project contracting division along with its fixed assets, current assets and current liabilities to assessee - Said transfer took place on basis of business valuation report obtained from a Chartered accountant firm, according to which business of Electrical & Projects contracting Division was valued , at Rs. 34.85 crores - Said business value of Rs. 34.85 crores was fixed as I purchase consideration for transfer of Electrical Projects and Contracting f Division - Project consideration included cost of technical proprietary information and value of commercial/pre-qualification right - Assessee claimed depreciation on two items of intangible assets, viz., technical proprietary information and pre-qualification rights under section 32(l)(ii) Assessing Officer disallowed said claim on ground that those intangible assets would partake character of goodwill which was not eligible for depreciation under section 32(1 )(ii) - Assessing Officer also held that entire transaction was paper transactions in order to avail benefit of depreciation - However, on appeal, Commissioner (Appeals) allowed assessee's claim and set aside order of Assessing Officer - Whether pre-qualification rights and technical proprietary information could not be treated as 'goodwill1 - Held, yes - Whether transfer of pre-qualification rights and technical proprietary information by 'B' Ltd. was on account of genuine commercial considerations done, at arms length, based on business valuation report, given by a reputed firm of Chartered Accountants and without which assessee would not have been in a position to carry on business and also to secure further business - Held, yes - Whether transaction could not tantamount to only a paper transaction or sham transaction as there was no such evidence on record - Held, yes -Whether,

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therefore, there was no error in order of Commissioner (Appeals) and same was to be confirmed - Held, yes

Similarly in the case of Areva T & D India Ltd. reported at 345 ITR 421 (Delhi High Court) while considering the claim of depreciation on commercial rights allowed the claim stating as under:

"13. 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, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assetsthat form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz. 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 & Stocks Ltd. ( supra) 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

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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.

In the case of CIT vs. Smifs Securities Ltd. reported at 348 ITR 302 (SCJ allowing the claim of depreciation on goodwill it was held as under:

"Section 32 of the Income-fax Act, 196] - Depreciation - Allowance/Rate of - Assessment year 2003-04 - Whether 'goodwill' is an asset under Explanation 3fbj to section 32(1] - Held, yes - During relevant .assessment year, one Y Ltd. amalgamated with assessee-company - According to assessee, excess consideration paid by it over value of net assets acquired of 'Y' ltd. amounted to goodwill on which depreciation was to be allowed - Authorities below recorded a finding that assets and liabilities of Y Ltd. were transferred to assessee for a consideration; that difference between cost of an asset and amount paid constituted goodwill and that assessee-company in process of amalgamation had acquired a capita! right in form of goodwill because of which market worth of assessee-company stood increased - Accordingly, assessee's claim was allowed -Whether since revenue could not rebut factual findings recorded by authorities below, impugned order passed by them was to be upheld -Held, yes [Para 8] [In favour of assessee]

II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance /Rate of - Whether stock exchange membership card is an asset eligible for depreciation under section 32 - Held, yes [Para 1] [In favour of assessee]" In the case of RFCL the Chandigadh ITAT has while allowing claim for depreciation on intangible considered the following and accepted the claim of assessee:

"ITAT observed that "The perusal of the schedules to BPA comprising of the above said list of Stockiest Agreements, Distribution Agreements, Lease

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Agreements and also Distribution and Marketing Agreements, alongwith list of licenses and Permissions and List of various products, the name license and also the manufacturing know-how etc., along with list of employees are assets, Which are invaluable and instrumental in carrying on the business of Animal Health Care and Diagnostics Business Divisions acquired by the assessee from M/s. Ranbaxy Laboratories Ltd. as per the BPA. The acquisition of the above said items is a bundle of rights acquired by the assessee for which a lump sum price was fixed and no break up in the value of price was determined either by the assessee or by the auditors but the same constituted bundle of rights akin to a license or comparable to a license to carry on the (acquired) business .... The above said assets acquired by the assessee were the "business or commercial rights or license acquired" in order to carry on new business acquired by the assessee including list of employees and also various licenses owned by Ranbaxy Laboratories Ltd."

Thus having regard to the ratio laid down in the above referred decisions, I agree with the appellant that the technical knowhow, design and vendors network relationship and customers network relationship are in the nature of intangible assets envisaged in section 32 and are eligible for depreciation. At this point of time it is brought to my notice that the business was acquired by the appellant in F.Y. 2006-07 i.e., A.Y. 2007-08 wherein sale consideration referred to above was allocated to the intangible assets as discussed hereinabove theappellant had claimed depreciation in its return of income. The AO has disputed the allocation of sale consideration amongst different constituent c; slump sale. The claim of appellant has not been disturbed by the Department, r the circumstances, the appellant has claimed depreciation on carried forward balances of written down value of those assets in the year under consideration i.e. A.Y. 2008-09. Having regard to the rule of consistency as in judicial parlance, I agree with the appellant that having not challenged the claim of the appellant in earlier year, the Department was not justified in not accepting the claim on the written down value of such asset in the present year. The disallowance is not justified on this account too. The ground of appeal is accordingly allowed. !

Being aggrieved by the order of Ld. CIT(A) Revenue is in appeal before us.

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falling within the class of intangible assets. Given this, depreciation has been claimed on design and technical know-how, customer relationship, and vendor network as they represent a business or commercial rights. The ld. AR vehemently supported the order of ld. CIT (A).

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of the opinion that the payment made by the company towards these intangibles gives the company right to use the vendor and customer relationship network of acquired company and such payment falls within the meaning of ‘’any other business or commercial rights as per section 32(1)(ii) of the Income tax Act. We are unable to comment on the allowability or otherwise of the Company’s contention and have relied on the representation made by the company and opinion of the understand as to how the intangible assets were acquired by the assessee.” 7.1 Moreover, we note that the comment mentioned by the statutory auditor is not the deciding factor for the allowability of the claim of the assessee for the depreciation on the intangible assets. The statutory auditor of the company has no authority under the income tax Act to decide the issue whether any particular claim of the assessee is allowable.

8.1 Question No. 1 design and technical know-how do not come within the purview of explanation 4 to section 32 of the Act.

8.2 Before adverting to the specific issue raised by the AO, the question arises whether the explanation given under section supersedes the content of the main section. In this regard, we note that the explanation can not supersede the content of the main section. The explanation is used to elaborate the content of the main section to clarify the ambiguity if any. But it cannot override the main provisions of the section. In this regard, we place our reliance on the order of the Hon’ble Hyderabad Tribunal in case of Prithvi information solution ltd. Vs. ITO reported in 47 taxmann.com 214 wherein it was held as under.

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“20. We have considered the rival contentions, examined the details on record. There is no dispute with reference to the fact that assessee has undertaken on-site work in USA and the receipts and payments are in USA. Since assessee is an Indian company , the net of the amounts after considering the expenditure was remitted to India and was incorporated in the books of accounts. Just because the expenditure was debited to the P & L account in the books of accounts in India, the amounts cannot be considered as payments made from India. It is a fact that amounts are paid abroad and the services are rendered abroad. Those companies who received the amounts have no permanent establishment in India or even the business connection in India. Therefore, the payments made to them abroad can not be brought to tax in India as the jurisdiction of IT Act extends only to territory of India where the payments have been made from India (sic), then it can be verified whether amounts can be brought to tax as per the provisions of I.T Act or whether Double T axation A voidance Agreement (DT AA) can be invoked so as to claim benefit. However, since the amounts are paid outside India to persons outside Indian territory , who does not have any tax liability as far as I.T . Act, 1961 is concerned, the amounts paid abroad cannot be considered as 'sums chargeable' under the provisions of this Act. Even though Explanation-2 clarifies the position that whether or not a non-resident person has a residence or place of business or business connection in India or any other persons in any other manner whatsoever in India, the Explanation cannot override the main provision of section 195 about 'sum chargeable' under the provisions of the Act. Moreover, as defined in section-5, scope of total income no income accrues or arise or deemed to accrue or arise in India on the payments made in USA by branch there. Therefore, the payments made abroad cannot be considered as income chargeable under the provisions of the Act. Extraterritorial jurisdiction cannot be assigned to section 195 by invoking Explanation (2) on the facts of the case. Therefore, we are of the opinion that the action of the A.O. as confirmed by the Ld. CIT(A) is not justified and cannot be supported by provisions of the Act. Therefore, assessee's contentions including additional grounds raised on this issue are allowed.” 8.3 Thus we are of the view that the explanation cannot supersede the contents of the main section. Now let us understand the meaning of know- how, as per our understanding the word know how shall mean technical data, formulae, standards, technical information, specifications, processes, methods, code books, raw materials, as well as all information, knowledge,

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assistance, trade practices and secrets, and improvements thereto, divulged, disclosed, or in any way communicated to the Licensee under this Agreement, unless such information was, at the time of disclosure, or thereafter becomes part of the general knowledge or literature which is generally available for public use from other lawful sources. The burden of proving that any information disclosed hereunder is not confidential information shall rest on the licensee. Thus it can be inferred that it is not limited to the industrial undertaking.

8.4 Now coming to the issue on hand, in this connection it is important to refer to the provisions of Section 32 of the Act which reads as under: “Depreciation. 32. (1) In respect of depreciation of— (i) buildings , machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned , wholly or partly, by the assessee and used for the purposes of the business or profession.”

8.5 Similarly it is also important to refer to the Explanation-4 of Section 32 of the Act which reads as under: “Explanation 4:- For the purposes of this sub-section, the expression “know- how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).” 8.6 We note that depreciation on the intangible assets was brought under the statute by the Finance Act 1998 for the purposes as mentioned under: “Depreciation to be allowed on intangible assets under the existing provisions, depreciation is allowable when building, plant, machinery or furniture is used by the assessee for the purposes of his business or profession.

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It is proposed to widen the scope of this section so as to provide that depreciation will also be allowed where intangible assets are owned wholly or partly by the assessee and are used by such assessee for the purposes of his business or profession. Intangible assets, such as know-how, patent rights, copyrights, trade marks, licences, franchises or any other business or commercial rights of the assessee will form a separate block of assets. As and when any capital expenditure is incurred by an assessee on acquiring such intangible assets the amount of such expenditure will be added to the block of intangible assets and depreciation will be claimed on the written down value at the end of the financial year.

As a consequence of this amendment, it is proposed to provide that any expenditure of a capital nature incurred before the 1st April, 1998 on the acquisition of patent rights or copyrights used for the purposes of business shall not qualify for deduction under the said section 35A.It is also proposed to amend sub-section (1) of section 35AB accordingly so as to restrict the provisions of that section to lumpsum payments by the assessee in any previous year relevant to assessment year 1998-99.

These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.”

8.7 From the above it is clear that the assessee was entitled to the depreciation on the intangible assets on the cost incurred by it on its acquisition. There was no differentiation whether it is available to the industrial undertaking or otherwise.

8.8 However we find that the AO has limited the deduction of the depreciation in respect of know-how only concerning the industrial undertaking. More specifically the AO in the instant case concluded that the know-how used concerning industrial undertaking would be eligible for the depreciation. As per the AO industrial undertaking means the factory where the manufacturing activities are carried on by the assessee. We further observe that the assessee in the instant case has not acquired the factory of

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AFL. Accordingly, the AO was of the view that the assessee is not carrying out any industrial activity.

8.9 However, the AO also observed that AFL was also not carrying out any industrial activity on the ground that it was just engaged in the activity of stitching the fabrics which were manufactured by Arvind Mills Ltd. In view of the above, the AO was of the view that the assessee is not eligible for the depreciation on the technical know-how as discussed above.

8.10 However we disagree with the contentions of the AO on the ground that the use of technical know-how is not limited to any industrial undertaking. As such the use of technical know-how is also available even to the business activities where there was no manufacturing activity. In our considered view the AO has taken a narrow meaning of the technical know- how on the basis of explanation 4 to section 32 of the Act.

8.11 The purpose for the depreciation on the intangible assets has been explained in the memorandum of the finance Act to 1998, and there was no such limitation provided for the allowability of the depreciation on technical know-how. Therefore we are not inclined to uphold the finding of the AO that the depreciation on the technical know-how is available only in relation to the industrial undertaking.

The 2nd question framed by the AO was that whether the assessee 9. has acquired any design and technical know-how from AFL.

In this regard, we find that the assessee claimed to have acquired designs and technical know-how from AFL as detailed under:

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“6.1 Design and Technical Know-How (TKH) Design refers to the. visual image that would be executed on a piece of cloth with the required technical know-how. Design &: TKH has been valued together as they are complementary assets and together provide a better logic for the value arrived. The process of design is fairly elaborate and extends from conceptualization of the product to providing the protocol for commercial production and could include the following: 1. Understanding the value proposition of the brand 2. Brand psychology/Customer Demographics 3. Understanding the competition brands from design perspective - Market assessment 4. Process of design forecasting 5. Conceptualization (from past seasons translation of Concept to design) 6. Brand wise trend Forecasting Exercise: (10 main concepts that can be (spotted in current ranges) 7. Understanding the Fabrics: Woven, Denim, Knitwear 8. Understanding the design perspective in selection 9. Process of design presentation and dockets 10. Use of variety of software in design 11. Process of conversion of design into actual sample 12. Shirts -pattern making 13. Denim-pattern making 14. Conversion of design .in terms of washes-washing unit 15. Finishing-sampling unit.”

9.1 From the above we note that the assessee has never claimed to have acquired any designs from AFL. Rather we find that as per the agreement between the assessee and AFL that the assessee shall provide the design to AFL. The relevant extract of the agreement is reproduced as under: “6.1 VFABPL shall provide the designs, raw materials, trims and all other components for manufacturing the Products (It being understood that AFL will provide all items needed for the manufacturing process, including cutting, sewing laundering and finishing) as per the Orders at its own cost” 9.2 Moreover the question as discussed above was framed by the AO himself which was also answered by him. But the AO has not pointed out any

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defect in the submission made by the assessee during assessment proceedings as discussed above.

9.3 We also note that the pattern of design keeps on changing very rapidly in the garment industry and there cannot be any permanent designs which will prevail in the market beyond the particular point of time. As such we are of the view that there cannot be any fixed pattern of any design for any particular class of the people. Accordingly, we are not impressed with the finding of the AO that there was no design and technical know-how acquired by the assessee.

The 3rd question framed by the AO was that whether the assessee 10. has used technical know-how acquired from AFL.

In this regard, we find that the assessee has acquired the factory of AFL on contract wherein it was agreed that the AFL should give priority to the work of the assessee assigned to it which will be executed under its supervision. The relevant clauses of the agreement are reproduced as under: AGREEMENT TO MANUFACTURE PRODUCTS This Agreement is entered into on the 1st day of September, 2006 By and Between 1. Arvind Fashions Limited, a company incorporated under the laws of India having its registered office at The Arvind Mills Naroda Road, Railwaypura Post Ahmedabad 380 025 India hereinafter referred sto as “AFL’’ (which term means and includes its successors and assigns) and 2. VF Arvind Brands Pvt. Ltd. a company incorporated under the laws of India and having its registered office at Arvind Mills Premises,

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Naroda Road, Ahmedabad 380025 hereinafter referred to as ‘’VFABPL’’ (which means and includes its successors and assigns).

Whereas 1. AFL is in the business of manufacturing and marketing apparel in India and other countries and for this purpose has a manufacturing set up consisting of land, building and machinery more fully decribed in Annexure 1 attached hereto. 2. VFABPL is a joint venture company involved in the marketing of apparel in India and other countries and requires a committed manufacturing facility for the purpose of manufacturing its products. 3. VFABPL now desires to appoint AFL to manufacture products for VFABPL using its Factory for this purpose and AFL is agreeable to accept such appointment and give first priority to orders placed by VEABPL on the following terms and conditions.

Now this agreement records as follows 1. Definitions 1.1 “Effective Date” means close of business August 31, 2006, the date on which this Agreement comes into full force and effect. 1.2 “Factory” means the composite operational manufacturing unit, including without limitation, the laundry, hand finishing, sand blasting and effluent treatment plant, of AFL which consists of the land, building, machinery and people including workers situated at No.12, 4th Cross, Bommasandra Industrial Area, Hosur Road, Bangalore 560 099 more fully described in annexure 1 to this Agreement. 1.3 “Trademarks” shall mean the various trademarks licensed to VFABPL which are required to be put into the products. 1.4 “Products” means the various products ordered to be manufactured by VFABPL at the Factory by AFL. 1.5 “Orders” means the orders for manufacturing raised by VFABPL from time to time which are duly accepted by AFL. 1.6 “Investment” means Rs.147.15 million which amount has been agreed by the parties to be the market value as specified in Annexure 1 of all machinery, land and building, and other assets of the Factory. The Investment shall be increased by any amount of additional capital expenditure made by AFL in the factory at the behest of VFABPL in accordance with Clause 7.6.

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This Agreement shall be in full force from the Effective Date for a period of 3 years unless terminated in writing by either party as provided for herein

10.1 From the above agreement it is transpired that AFL possessed the rich experience in the field of stitching of the garments. As a result of the agreement as discussed above the factory of AFL was working exclusively for the assessee. Thus it is implied that the assessee will use all the benefits held by the factory of AFL. Thus we are of the view that the technical know-how acquired by the assessee from AFL was used for its business activity.

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10.2 Besides the above we note that the assessee has also given works on a contract basis to the outside job workers who were working exclusively for the assessee. These job workers were performing the work for the assessee in the manner in which the factory of AFL was doing the work for the assessee. Therefore it is inferred that the procedures taken by the assessee from AFL were used for the work assigned to such outside job workers. The list of such jobs worker is placed on page 195 of the paper book. Therefore we are of the view that the design and technical know-how acquired by the assessee from AFL were used for its business activities. The list of the job worker is reproduced as under: Details of Job-workers:

Job worker Name Job Work % Charges share 1. Arvind Fashions Ltd – Factory 67% 145,037,091 2. Divinitee Genesis Apparel Pvt. Ltd. 3% 7,067,728 3. Trinity Apparels 3% 5,550,448 4. S R Fashion 2% 4,534,597 5. Devki Designs 2% 4,060,842 6. Silk Fashion Export 2% 3,996,205 7. Sree Shilpa Apparels 2% 3,619,944 8. Shoha Designs Pvt. Ltd. 2% 3,517,318 9. Sri Vinayaka Apparels 1% 3,143,776 10. Narayan Apparels Pvt. Ltd. 1% 3,013,344 11. White Horse Fashions 1% 2,967,453 12. Prathiba Fashions 1% 2,371,271

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� Vendor and customer relationship

10.3 In this regard we note that the assessee has acquired a lot of vendors and customers which were generated by AFL over a long period of time. However, the assessee has acquired such relationship with the vendor and customer of AFL instantly on the acquisition of the business of AFL. Accordingly, the assessee has paid a certain sum of money to AFL for the acquisition of such relationships. We find important to refer the details of the vendor and customer relationship acquired by the assessee which are reproduced under: “6.2 Vendor relationships Vendor relationships refer to the relationship with the existing set of v valuation. The key vendors considered for the purpose of valuation are. 6.2.1 Job Workers network I Job workers network is an integral component of garments business. They provide the service of making garments usually based on the design provided by the customers and are compensated on a per garment basis. Of all the

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vendors, Job workers are of high importance as described in the subsequent paragraphs.

Vendor No of Vendors (as transferred) Job workers 87

6.2.2 Fabric & trims suppliers:

They constitute the raw material suppliers that would include fabric and accessories and are usually empanelled based on the nature of requirement, quality parameters and timeliness of usual delivery.

Vendor No’s of Vendors (as transferred) Fabrics 58 Rims 77

6.2.3 Advertisement Vendors: Provide the service of advertising and promoting the products.

Vendor No's of Vendors (as transferred) Advertisement 232

6.2.4 Of the above vendors, job workers hold a prominent position due to the nature of their involvement. In, many instances job-workers are dedicated to the parent company and conduct no other business. Hence their business, process, key people are aligned with the requirements of the parent company. While creating a pool of such contract manufacturers, the parent company invests a significant amount of time not just in selection and trials (as would be applicable for any group of vendors) but also in training, quality control, advise on technology, management, etc. In a business such as this, job workers are integral to the business of the parent company. Typically, the value attributable to such a group of vendors is higher, as it would involve significant investment of people and cost to induct and cultivate such a vendor group.

It is understood that the factory at AFL would principally be a vendor to VFABL. In the event of under-utilization of the capacities -by VFABL, AFL is free to undertake garment production on behalf of 3rd parties. We have considered AFL's factory as a job worker, and the value addition made by this factory is included in the total value of the job workers.

6.2.5 Other vendor groups such as supplier of Fabrics & Trims axe also of bene6t to the parent company providing minor price concessions or ensuring

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delivery on time and of required quality. However die extent of involvement, influence and control of the parent company is fairly limited. These are principally product or commodity suppliers not exclusive to AFL, abundantly available in the market and have low switching cost.

6.2.6 Other vendors' viz. Capital goods, traded goods & others are not considered as they can be easily established and are not specific to the business.

6.3 Customer contracts and relationships Customer contracts refer to the sales contract with the existing customers as on date of valuation and customer relationships refer to the expected revenue stream generation from the existing customers that are not contracted. The key customer relationships considered for valuation are:

6.3.1 Multi-Brand Outlet (MBO): MBO's are third party owned outlets and forms a major part of the retail segment in the unorganized market. It showcases sales products of different brands. MBO's are one of the main channels of sales of VFABL because of their presence on hi-street. For the year 2005-06, MBO's contributed 26% of the total sales to AFL.

The sales transactions •with MBO's were carried out directly by VFABPL until recently, when the company decided to transact through die distributors. Today VFABPL has 18 distributors who manage the network of the entire MBO system.

Sales Channel No. of stores % contribution to sales MBO's 325 26%

(For the year 2005-05)

6.3.2 Exclusive Brand Outlets (EBOs): EBO's are shops or outlets, whether leased or owned, that are created, run and operated, by AFL. EBO's are retail stores that exclusively sell products of VFABPL. It may be pertinent to mention that these EBOs were not transferred as part of business, but would act as franchisees of VFABPL in die future. Sales Channel No. of stores % contribution to sales EBO's 39 20%

(For the year 2005-06)

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6.3.3 Exclusive Outlet on Purchase (EOF): EOP's are franchisee's belonging to AFL that has been transferred as part of the business. These franchisees are exclusive to VFABL products & brands. Sales Channel No. of stores % contribution to sales EOP's 51 16%

(For the year 2005-06)

6.3.4 Key Accounts (KA): KA is a larger version of an MBO and form a major part in the retail segment of the organized market. Typically these represent the large format retail chains thathave grown significantly in the recent past. Following the current trend of rising incomes and increased urbanization, KA are a significant sales channel for all branded products.

Sales Channel No. of stores % Contribution to sales Key Accounts 60 20%

(For the year 2005-06)

6.3.5 Other sales channels viz. Third Party Outlet (TPO), Institutional Sales, and Exports are not considered for the current exercise as the benefits realized are limited and effort and time required for aggregation is minimal.”

10.4 Thus from the above it is clear that the assessee has made the payment to AFL for the intangible assets which were created by the AFL over a period of time. Therefore we are of the view that the consideration paid by the assessee is representing the benefits which it is going to use for its business purposes. We also note that in the similar facts and circumstances the Hon’ble Delhi High Court in the case of Areva T & D India Ltd. DCIT reported in 345 ITR 421 after observing the facts has held as under: Facts as observed (iv) The business of the transferor was acquired by the assessee Company for a total sale consideration of Rs.44.7 Crores. On bifurcation, it is revealed that the tangible assets were transferred for a net value of Rs. 28.11 Crores.

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(v) The excess amount of Rs. 16,58,76,000/- was claimed as payment made by the assessee Company for acquisition of various business and commercial rights categorized under the separate head, namely, "goodwill" in the books of account of the assessee. These business and commercial rights comprised of the following: Business claims; business information; business records; contracts; skilled employees; knowhow. (vi) The assessee Company while filing its return for the relevant assessment year 2005-06 claimed depreciation under Section 32(1)(ii) of the Act with respect to the aforesaid amount of Rs. 16,58,76,000/- as being a price paid for acquisition of above mentioned intangible assets. (vii) The Assessing Officer(AO) while completing the assessment under Section 143(3) of the Act disallowed the depreciation on 'goodwill' as claimed in the return vide order dated 28th December, 2007. The AO disallowed the claim of the assessee Company on two grounds, namely, (a) depreciation under Section 32(2)(ii) is not available on goodwill; (b) the assessee Company was unable to demonstrate that the amount of Rs. 16,58,76,000/- shown as goodwill in the books of accounts was in fact a payment made towards acquiring of "certain business and commercial rights" and therefore eligible for depreciation in tax as per Section 32(1)(ii) of the Act.

Judgment

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treated as conclusive and true nature of transaction has to be determined with reference to law. The learned CIT(A) in the impugned order examined the issue with reference to agreement and found that payment was made for acquisition of commercial rights. On facts and circumstances of the case, we do not find any error in the approach of the learned CIT(A). His action is hereby confirmed." 17. In view of the foregoing discussion, it is seen that the assessee in the present appeals had not claimed depreciation on 'goodwill' but on the commercial rights acquired to sell products under the trade name and through the network created by the seller for sale in India. It is further observed that the AO was not correct in holding that payment was made for acquisition of 'goodwill'. Payment had, in fact, been made for acquisition of commercial rights on which depreciation is permissible. In the circumstances, these appeals are dismissed in favour of the assessee and against the Revenue.”

10.5 We also find support from the order of this Tribunal in the case of ACIT Vs. Arvind Brands Ltd. in ITA No. 3080/Ahd/2010 wherein it was held as under: “6. We have heard both the parties and carefully gone through the records. Before us, the learned AR of the assessee reiterated the submissions as were made before the authorities below and strongly supported the impugned order of the learned CIT(A). The learned DR, on the other hand, ITA No.3080/Ahd/2010 ITO vs. Arvind Brands Ltd. Asst.Year - 2005- 06 supported the impugned order of the Assessing Officer. The moot question that is to be decided whether the depreciation claimed on the intangible assets amounting to Rs.12,03,12,500 which relates to these two assets in the names of Brand name "Arvind" and "Marketing and distribution Network is allowable u/s.32(1)(ii) of the Income-tax Act, 1961. Going through the said section, it is very much clear that this section includes know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets. The Revenue is not disputing that the assessee has acquired these two intangible assets in question under an agreement. The items mentioned in Section 32(1)(ii) are wide enough so as to include these types of intangible assets under consideration. Therefore, in our considered view, the learned CIT(A) has rightly allowed the depreciation claimed by the assessee and as such, it needs no interference.”

10.6 In addition to the above, we note that there is no dispute with regard to the acquisition of AFL by the assessee company as discussed above.

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Accordingly, the consideration was paid by the assessee to AFL which has also not been disputed by the authorities below. Thus it is apparent that the assessee has incurred expenditures in the connection of its business. It is settled law that the expenses incurred by the assessee for the purpose of the business are eligible for deduction under different provisions of the Act. These deductions have been specified under sections 30 to 38 of the income tax Act. For example, if the assessee acquires any capital assets, then it is eligible for a deduction of the depreciation under section 32 of the Act. Similarly, the assessee is eligible for deduction for repair and maintenance under section 30 of the Act.

10.7 We also note that in some cases even the deferred revenue expenditures have been allowed throughout the useful life of the rights acquired by the assessee. In this regard, we find support and guidance from the judgment of the Hon’ble Supreme Court in the case of Taparia Tools Ltd. Vs. JCIT reported in 372 ITR 605 wherein it was held as under: “17. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period. 18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures. 19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in

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the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co.Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC). 20. At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. 21. In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs. 2,72,25,000 and Rs. 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs.”

10.8 In view of the above we are of the view that the expenditures incurred by the assessee have to be allowed as a deduction in one or the other way.

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also not disputed by the AO. Therefore in our considered view, it is an established fact that the assessee has incurred the cost which has not been disputed. The entire transactions as discussed above are based on the agreements between the assessee and AFL which are placed on pages 196 to 202 of the paper book.

11.1 Similarly there is a valuation report allocating the purchase consideration paid by the assessee to AFL which has not been disputed by the AO. The copy of the valuation report is placed on pages 159 to 194 of the paper book.

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was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding. 7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee.

12.1 Thus in our considered view there could not have been any dispute regarding the claim of depreciation on the goodwill as discussed above. Therefore in our considered view, the expenses incurred by the assessee in connection with the business cannot be disallowed merely on the ground that these have been claimed under different nomenclatural. Thus we hold that the expenses have been incurred for the business then the deduction has to be allowed to the assessee under the provisions of the Act.

12.2 We also note that the assessee has claimed depreciation on the same intangible assets in the immediately preceding year in its income tax return which was processed under section 143(1) of the Act. Thus it is clear that there was written down value of these intangible assets which were brought forward in the year under consideration. Thus in our considered view the opening written down value in the year cannot be disputed. In this regard we

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find support and guidance from the judgment of Hon’ble High Court of Bombay in case of HSBC asset management India Pvt. Ltd. reported in 47 taxmann.com 286 wherein it was held as under: “Having perused this Appeal Memo including the impugned orders, we are of the opinion that the Delhi High Court judgment has been delivered on 5th November 2012 and the impugned order was passed on 15th June 2011. The Tribunal has essentially based its conclusion on the consistent stand of the Assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-2004. The Assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head "intangible assets". The Assessing Officer allowed the claim for that assessment year by an order under Section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under Section 143(3) for the assessment year 2003- 2004 continues to operate and no proceedings under the Act were initiated to disturb the same.”

12.3 We also note that the Ld. DR have not brought anything on records suggesting that any action against the assessee was taken under section 147 of the Act on account of escapement of income.

12.4 In view of above there remains no ambiguity that the assessee is eligible for the depreciation in respect of the intangible assets as discussed above. Accordingly, we do not find any reason to interfere in the order of Ld. CIT(A).

12.5. Thus the ground of appeal of the Revenue is dismissed.

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However the Ld. CIT(A) after considering the submission of the assessee restored the issue to the file of AO for examining the claim of the assessee in the light of the Hon’ble Supreme Court judgment as discussed above. The relevant extract of the order of Ld. CIT(A) is extracted of under: “I have considered the above referred contentions of the appellant. It is seen that the claim for depreciation on the amount of goodwill was not made before the A.O or in the return of income. The claim has been raised for the first time in the grounds of appeal. Hence the A.O has not been given an opportunity to examine this claim. I have gone through the ratio laid down in the case of CIT vs. Smifs Securities Ltd. reported at 348 ITR 302[SC]. The fact remains that any subordinate judicial authority has to follow the ratio laid down by the superior judicial authority. The claim now made by

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appellant is supported by recent decision of Hon’ble Supreme Court, therefore, the A.O is directed to consider this claim in the light of the decision of Apex Court referred to above and pass a speaking order. The order of appeal is, therefore allowed.”

Being aggrieved by the order of Ld. CIT(A) both revenue and assessee are in appeal before us.

Both the parties before us relied on the order of authorities below as favorable to them.

16.1 Now the issue before us arises whether the assessee can claim the deduction before the Ld. CIT(A) which was not claimed in the income tax

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return as well as before the AO. In this regard, we note that the issue of depreciation on goodwill was subject to litigation at various courts. Therefore the same was not claimed by the assessee in the income tax return. However at the time of hearing before the Ld. CIT(A) the Hon’ble Supreme Court has given the ruling that the depreciation on goodwill is allowed. Therefore the deduction was claimed. The scheme of the income tax Act requires that the assessee is liable to pay tax on the income which is chargeable to tax. Similarly, the assessee is entitled to the deductions which are eligible under the provisions of the Act. The Hon’ble Supreme Court has settled the issue on the issue of depreciation on the goodwill beyond doubt that the assessee’s claim of the depreciation on goodwill is rightful claim which has to be allowed to the assessee. In this regard, we find support and guidance from the judgment of Hon’ble Supreme Court in the case of Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688 wherein it was held as under: “The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the appellate authority in entertaining an additional ground in appeal. In the absense of any statutory provision, the general principle relating to the amplitude of appellate authority's power being co-terminus with that of the initial authority should normally be applicable. If the tax liability of the assessee is admitted and if the ITO is afforded opportunity of hearing by the appellate authority in allowing the assessee's claim for deduction on the settled view of law, there appears to be no good reason to curtail the powers of the appellate authority under section 251(1)(a). Even otherwise an appellate authority while hearing appeal against the order of subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appeared to be no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. There may be several factors justifying raising of such new plea in appeal, and each case has to be considered on its own facts. If the AAC is

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satisfied he would be acting within his jurisdiction in considering the question so raised in all its aspects. Of course, while permitting the assessee to raise an additional ground, the AAC should exercise his discretion in accordance with law and reason. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The satisfaction of the AAC depends upon the facts and circumstances of each case and no rigid principles or any hard and fast rule can be laid down for this purpose.

In the present case, the assessee did not claim any deduction of its liability to pay purchase tax under the provisions of the Bengal Raw Jute Taxation Act, 1941, as the assessee entertained a belief that it was not liable to pay purchase tax under the aforesaid Act. But later on it was assessed to purchase tax and the assessee disputed the demand and filed an appeal before the appellate authority and obtained stay order. The assessee thereafter claimed deduction for the said amount towards his liability to pay purchase tax as deduction for the assessment year under consideration. The assessee had not actually paid the purchase tax as he had obtained stay from the appellate authority. Nonetheless its liability to pay tax existed and it was entitled to the said deduction.

Thus, the High Court and the Tribunal both committed error in refusing to state the case or making a reference. The High Court should be directed to call for the statement of case from the Tribunal and thereupon decide the matter afresh, but this procedure would be time consuming. Since, the view taken by the Tribunal was not sustainable in law, it was to be set aside and the matter was to be remitted to the Tribunal to consider the merit of the deduction permitted by the AAC.” 16.2 In view of the above we hold that claim made by the assessee 1st time before the Ld. CIT(A) was rightful claim and within the provisions of law.

The 2nd controversy arises whether the depreciation is eligible for 17. deduction on the goodwill acquired by the assessee. In this regard we note that the Hon’ble Supreme Court has settled the issue of depreciation on goodwill in the case discussed above. The relevant judgment of the Supreme Court is extracted below: “4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises

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or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding. 7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee.”

17.1 In view of above we hold that the assessee is entitled for the claim of depreciation on the goodwill. Therefore we allow the claim of the assessee raised in its C0. Accordingly we dismissed the ground of appeal raised by the Revenue.

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However, the assessing officer disagreed with the submission of the assessee on the following reasons: i. There was no valuation report filed by the assessee suggesting that the market rate of inventory has gone down below the cost price. Therefore the AO was of the view that the provision for inventory has been made on estimated basis. ii. It was the 2nd year of operation of the assessee business. Therefore it was not possible to create the provisions immediately in the 2nd year for the inventory as discussed above. iii. The provision created by the assessee was representing the unascertained liabilities of the assessee.

19.1 In view of above the AO disallowed the same and added back to the total income of the assessee.

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20.1 The inventory was shown at the market price by creating the provisions in the books of accounts.

20.2 The Ld. CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under: “I have carefully considered the assessment order and the submission made by the appellant. The disallowance is mainly made on the ground that it is a contingent liability. However, it is noticed from the details furnished by the appellant that the appellant has made valuation of inventories and made the provision on a systematic basis. Considering that the finished goods are representing very old stock i.e. 3 to 4 seasons for which the appellant has made provision for reduction in the value. Similarly in respect of raw materials namely fabrics also the non-moving and sale moving material are provided for reduction in value. Thus it is a systematic way of valuing inventory for which details are furnished. As such it is not correct to say that it is contingent liability provided by the appellant. The appellant's claim is supported by the Supreme Court decision in the case of Hindustan Zinc Ltd. (supra). The CIT(A)-VIII, Ahmedabad In the case Hitachi Home and Life Solution India Ltd. for A.Y. 2007-08 vide appellate order dated 23-6-201 is on similar issue and has been seen. Apart from this it is also seen that the appellant had taken over the business of Arvind Fashions Ltd. in the last year and that it consists of stock acquired from them. Therefore, it is not correct for the A.O. to observe that this being second year of operation company was to be questioned about provisions made for diminution in value of inventory. In view of facts of the case and Supreme Court decision in the case of Hindustan Zink Ltd., the claim of appellant is reasonable. A.O. is directed to allow the deduction accordingly. This ground of appeal is accordingly allowed.”

Being aggrieved by the order of Ld. CIT(A) Revenue is in appeal before us.

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such obsolete stock. Such provision was actually written off in the books of accounts. The learned AR vehemently supported the order of learned CIT(A).

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-Others 15,202 4,510 Contract Labour Charges 12,996 5,804 Legal and Professional Charges [Schedule 19, Note 11] 24,360 8,068 Communication* 13,429 4,542 Travelling and Conveyance* 54,069 21,554 Commission on Sales 12,215 10,133 Advertisement and Sales Promotion 225,130 116,847 Freight 30,043 15,672 Royalty 77,177 42,937 Provision for Doubtful Deposits 18,261 15,214 Provision for Obsolete Inventory 12,174 1,700 Provision others [Schedule 19, Note 20] 10,179 58,756 Exchange Loss [Net] 1,809 1,789 Miscellaneous* 33,155 15,338 1,096,888 509,227

23.1 We also note that such provision was not shown as liability in the balance sheet. Thus there remains no doubt that the provision have actually been written off by the assessee in its books of accounts. Thus the provision is not representing the unascertained liability of the assessee as alleged by the AO. We also note that the assessee in its financial statement has reduced the provision from the inventory shown in its financial statement. The relevant extract of the inventory shown in the financial statement by the assessee stands as under:

SCHEDULE 7 INVENTORIES [Schedule 19, Note 1(v)] Raw 95,619 78,736 Materials, Packing Materials and Accessories [Including in-transit: Rs.7,340 (2007: Rs.2,054] Work-in-Process 23,468 19,191 Finished Goods 45,773 155,589 Traded Items 316,918 105,804 481,778 359,320 13,874 1,700 Less: Provision for Obsolescence 4,67,904 357,620

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23.2 Once the provision has been written off by the assessee in its books of accounts than in our considered view there was no need to examine the valuation report.

23.3 In view of the above we are not impressed with the finding of Ld. AO. Hence we do not find any reason to interfere in the order of Ld. CIT(A) and direct the AO to delete the addition made by him. Thus the ground of appeal of the Revenue is dismissed.

23.4 Hence the appeal of Revenue is dismissed.

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The 2nd issue raised by the assessee is that the Ld. CIT(A) erred 27. in confirming the disallowance made by the AO in respect of registration charges of Rs. 3,19,476/- in respect of lease deed.

29.1 The Ld. CIT-A after considering the submission of the assessee confirmed the addition made by the AO by observing as under: “I have considered the assessment order and the above contentions. The registration charges though relate to property, the same are for registration of lease deed. However, the same having relation with the property acquired by the appellant on lease, the assessee is entitled to depreciation. Therefore disallowance is confirmed and the ground of appeal is dismissed.”

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Being aggrieved by the order of Ld. CIT(A) assessee is in CO before us.

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Order pronounced in the Court on 01/01/2019 at Ahmedabad.

Sd/- Sd/- (WASEEM AHMED) (MAHAVIR PRASAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 01/01/2019 Priti Yadav, Sr. PS

आदेश क� ��त�ल�प �े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-XIV, Ahmedabad. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, True Copy उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation : 03-12-2018. 2. Date on which the typed draft is placed before the Dictating Member 26.12.2018. 3. Date on which the approved draft comes to the Sr.P.S./P.S. 27.12.2018 4. Date on which the fair order is placed before the Dictating Member for pronouncement………….. 5. Date on which the fair order comes back to the Sr.P.S./P.S……….. 6. Date on which the file goes to the Bench Clerk……… 7. Date on which the file goes to the Head Clerk… 8. The date on which the file goes to the Assistant Registrar for signature on the order………… 9. Date of Despatch of the Order………………