C I T JAIPUR-II JAIPUR vs. M/S JAI DRINKS PVT LTD

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. (1) D.B. Income Tax Appeal No. 156/2016 (2) D.B. Income Tax Appeal No. 73/2012 (3) D.B. Income Tax Appeal No. 74/2012 (4) D.B. Income Tax Appeal No. 76/2012 (5) D.B. Income Tax Appeal No. 77/2012 (6)D.B. Income Tax Appeal No. 78/2012 (7)D.B. Income Tax Appeal No. 82/2012 (8)D.B. Income Tax Appeal No. 157/2016 Commissioner of Income Tax, Jaipur ....Appellant Vs

M/s Jai Drinks Pvt. Ltd., Jaipur

....Respondent DATE OF JUDGMENT ::: 07.09.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE BANWARI LAL SHARMA Mr. R.B. Mathur with Mr. Kushal Dutt Mathur, for the appellant. Mr. N.M. Ranka Sr. counsel with Mr. N.K. Jain, for the respondent. *****

2 has declared gross profit of Rs. 106119869/- on total turnover of Rs. 58,48,40,008/- thereby giving a GP rate of 18.15% as against sales of Rs. 58,41,57,217/- and gross profit of Rs. 10,61,19,869/- i.e. 18.17 in the A.Y. 2007-08. The assessee has also shown income from “other sources” being profit on sale of fixed assets. During the completion of assessment, the Assessing Officer made dis-allowance of Rs. 9343872/- claimed by the assessee on account of depreciation on license and franchisee right (intangible assets). The assessee preferred appeal before the CIT(A). The CIT(A) allowed the appeal filed by the assessee and deleted the addition made by the Assessing Officer. The revenue preferred appeal before ITAT. The ITAT has upheld the decision of the CIT(A) and dismissed

the appeal of the department relying on its own decision in assessee's case in A.Y. 2001-02 to 2007-08. (3) Deprecation for the relevant assessment years make a charge for these appeals between the same party for the relevant years 2001-02, 2003-04, 2005-06, 2007-08, 2008-09 and 2009-10. (3.1) Learned Counsel for the appellant has framed following questions :- “1. Whether on the facts and in circumstances of the case, the ITAT was justified in law in deleting the disallowance of Rs. 9343872/- made by the Assessing Officer on account of depreciation claim on intangible assets.

4 subject to the seller arranging in favour of the assessee company by Pepsi Food Ltd. of the license and franchise rights to use the trademarks of Pepsi brand of the soft drinks. In view of these intentions an agreement was entered in between Pepsico India Holding Ltd. (PIH) and the assessee on 10.8.2000 in which PIH had agreed to nominate the assessee to acquire Delhi business from Dhillon Kool Drinks & Beverages Ltd. (DKD) and the formal authorizations from PFL and PSI to undertake and conduct Delhi business was also to be obtained from the respective parties. In this background a letter of intent was issued by Pepsi Food Ltd. to the assessee company on 26.5.2000 i.e. the date on which business transfer agreement was executed between the assessee and M/s. DKD, and thereafter the assessee company has stepped into the shoes of seller and commenced the business of manufacturing and distributionof soft drinks brands owned by PFL. It is further noted that M/s. DKD was in bad shape and they had to pay an amount of Rs. 20 crores to M/s. Pepsico India Holding Ltd. And, therefore, they were interested in selling their Delhi business along with rights, interest, privileges, assets and liabilities in the National Capital Territory of Delhi for which the assessee company offered to purchase the said business. Since there was a liability of more than Rs. 20 crores, in our considered view, there cannot be any good will and, therefore, AO's presumption that they had purchased good will and not the rights, interest, privileges, assets and liabilities etc. from M/s. DKD. The Id. CIT (A) has examined this aspect thoroughly and then only held that the assessee had acquired license, rights, interest, privileges etc. which are intangible assets in view of provisions of section 32(1)(ii) of the Act and held that assessee is entitled for depreciation. This finding of Id. CIT (A) remained uncontroverted. However, the Id. CIT D/R has argued that it was a good will and the AO was right in denying the depreciation being purchase of good will by the assessee. The Id. CIT D/R has stated that the decision in case of Hindustan Coca Cola (supra) is not applicable as facts of the present case as in this case the proceedings under Section 263 were initiated. We have gone through this order of the Tribunal in case of Hindustan Coca Cola which has been approved by Hon'ble Delhi High Court also 5 and found that though the appeal before Tribunal was against order under section 263, but Tribunal has decided the issue on merits also by which it was held that on good will, the depreciation is allowable and the AO was correct in allowing the depreciation. The Id. D/R has also placed reliance in case of Borkar Packaging (P) Ltd, 131 IIJ 99 (Panaji), in case of Bharatbhai J. Vyas, 279 ITR 41 (AT Portion) and in case of R.G. Keswani, 308 ITR 271 (AT). No doubt, in these cases various benches of the Tribunal has held that the word “good will” is not provided in the provisions of Section 32(1)(ii) by the Legislatures while mentioning various intangible other assets. Therefore, depreciation is not allowable.” (6) However, we find that in case of B. Raveendran Pillai, 237 CTR 80 (Ker.), the Hon'ble Kerela High Court has held that even on good will the depreciation is allowable. There are different views of the Benches of the Tribunal but there is no decision of any High Court that depreciation on good will cannot be allowed whereas there is a decision of Hon'ble Kerela High Court in favour of the assessee i.e. in case of B. Raveendran Pillai (supra) wherein it is held that depreciation is allowable on good will. The Id. A/R has also informed that the decision of the Tribunal in case of Hindustan Coca Cola has been affirmed by the Hon'ble Delhi High Court. Therefore, in view of the decision of Hon'ble High Court, the depreciation has to be allowed on good will also. However, we are not inclined to go into detail whether depreciation on good will is allowable or not but the fact remains that the assessee has not purchased any good will but has purchased license, interest, privilege, franchise etc. from 6 M/s. DKD which are undisputedly covered by Section 32(1) (ii) and, therefore, the depreciation is allowable and the Id. CIT (A) has allowed the depreciation is allowable and the Id. CIT (A) has allowed the depreciation on these intangible assets, and we have no hesitation in confirming the order of Id. CIT (A) on this aspect. Accordingly we confirm the order of Id. CIT (A). (7) In Commissioner of Income-Tax Vs. Simfs Securities Ltd. [2012] 348 ITR 302 (SC), it has been held as under:- “that it was settled that the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure. The con- current findings of fact recorded by the authorities indicated that the assessee was entitled to claim deduction in the course of business under section 36(1) (vii) of the Act.” (8) In Techno Shares and Stocks Ltd. Vs Commissioner of Income Tax [2010] 327 ITR 323 (SC), it has been held as under- “reversing the decision of the High Court, on a consideration of the BSE rules, that the right of membership was a 7 “business or commercial right” and could be said to be owned by the assessee and used for business purposes in terms of section 32(1)(ii). The right of membership, which included the right of nomination, was “licence” or “akin to a licence” which was one of the items which fell in section 32(1)(ii). The right to participate in the market had an economic and money value. It was an expense incurred by the assessee which satisfied the test of being a “licence” or “any other business or commercial right of similar nature” in terms of section 32 (1)(ii).” (9) In Commissioner of Income-Tax Vs. Hindustan Coco Cola Beverages P. Ltd. [2011] 331 ITR 192 (Delhi), it has been held as under- “that it was clear from the order passed by the Tribunal, that the depreciation was claimed on goodwill by the assessee on account of payment made for the marketing and trading reputation, trade style and name, marketing and distribution, territorial know-how , including information or consumption patterns and habits of consumers in the territory and the difference between the 8 consideration paid for business and value of tangible assets. The Tribunal had treated it to be valuable commercial asset similar to other intangibles mentioned in the definition of the block of assets and, hence, eligible to depreciation. It had also been noted by the Tribunal that these facts were stated by the assessee in the audit report and the Assessing Officer had examined the audit report and also made queries and accepted the explanation preferred by the assessee. The acceptance of the claim of the assessee by the Assessing Officer would come in the compartment of taking a plausible view inasmuch as basically

intangible

assets

were identifiable non-monetary assets that could not be seen or touched or physical measures which were created through time and/or effort and that were identifiable as a separate asset. They could be in the form of copyrights, patents, trademarks, goodwill, trade secrets, customer lists, marketing rights, franchises, etc. Which either arise on acquisition or were internally generated. Goodwill conveys a positive reputation built by a person/company/business concern over a period of time. The Tribunal was Justified in holding that if two were possible and when the Assessing Officer had accepted one view

9 which was a plausible one, it was not appropriate on the part of the Commissioner to exercise his power under section 263 solely on the ground that in the books of account it was mentioned as goodwill and nothing else.” (10) In Commissioner of Income Tax Vs. RFCL Ltd. [2015] 277 CTR Reports, it has been held as under- “Goodwill as also list of stockist agreements, distribution agreements, lease agreements and also distribution and marketing agreements, along with 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 intangible

assets,

entitled

to depreciation. Commissioner Or Income-Tax Vs. Jai Parabolice Spring Ltd. [2012] 345 ITR 421 (Delhi) it has been held as under- that in the case of the assessee, intangible assets, viz., business claims, business information, business records, contracts, skilled employees and know- how were all assets, which were invaluable and resulted in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The intangible assets were,

10 therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the business rights along with the tangible assets, the assessee got an up and running business. The specified intangible assets acquired under the slump sale agreement were in the nature of “business or commercial rights of similar nature” specified in section 32(1) (ii) of the Act were accordingly eligible for depreciation under that section”. (11) In view of the concurrent finding arrived at by the Tribunal and the CIT (Appeals) while considering the matter between the parties, we have considered the agreement dated 26.08.2000 and correspondence which has been entered between the parties and we have also considered the letter of Pepsico Food Private Ltd. dated 29.03.3004 which was valid upto 30.09.2004 taking into account the decision in case of Delhi High Court Bench in Commissioner of Income-Tax Vs Hindustan Coco Cola Beverages P. Ltd. wherein it has been considered that assessee is entitled for deprication. We have also considered the other facts. The same view was taken into account and again reconsidered in paragraph 8 and 8.1. 11 (12)In our considered view, the view took by the Tribunal is required to be accepted and no substantial question of law does arise and these appeals deserve to be dismissed. The same are dismissed. (13) A copy of same be placed in all the connected files. (Banwari Lal Sharma), J. (K.S. Jhaveri), J. Charu/- Item No. 8-14.