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Income Tax Appellate Tribunal, “A’’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SHRI PAVAN KUMAR GADALE
All these cross appeals are directed against the orders passed by ld CIT(A)-3 Bangalore and they relates to the asst. years 2001-02, 2002-03, 2004-05 and 2005-06. All these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
2. In the appeals filed by the assessee, the decision of ld CIT(A) in confirming the disallowance of depreciation claimed on goodwill is being challenged. The Revenue is aggrieved by the decision ld CIT(A) in granting depreciation on non-compete fee.
3. The facts relating to the above said issues are stated in brief. A company by name Spencer & Company Ltd., had promoted a retail business under the name ‘Food World’. The assessee company has purchased the retail business referred above as a going concern for a consideration of Rs.18.50 crores. The net book value of tangible asset was determined at Rs. 2.18 crores and hence the difference amount of Rs.16.32 crores was treated as goodwill by the assessee. It is pertinent to note that the above said sum of Rs.16.32 crores consisted of non-compete fee of Rs.5 crores. The assessee claimed depreciation on the goodwill amount of Rs.16.32 croers in asst. year 2000-01 @ 25%.
4. During the years under consideration, the assessee continued to claim depreciation @ 25% on the opening WDV every year. In AY 2001- 02, the opening WDV was Rs.12.24 crores. The AO disallowed the same
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 3 of 10 by holding that depreciation is not allowable on goodwill. Before the AO, the assessee took an alternative plea that the entire amount of Rs.16.32 crores was not related to goodwill and it also included sale consideration paid towards purchase of trade name. It was also submitted that M/s Spencer & Co. Ltd., was making huge losses in the preceding years and hence no amount can be attributed towards goodwill. The AO did not accept the contentions of the assessee by holding that the alternative contention of the assessee was on account of change in stand and the same is an afterthought. Accordingly he disallowed the depreciation claimed by the assessee on good will in all the years under consideration.
5. The ld CIT(A) noticed that the assessee itself has submitted that no amount could be attributed towards Goodwill. Accordingly he, in principle, held the disallowance of depreciation on goodwill is justified. The ld CIT(A) examined the agreement entered by the assessee with M/s Spencer and Company Ltd., and noticed that the assessee had paid a sum of Rs.5 crores as non-compete fee and the same was treated by the assessee as goodwill. The ld CIT(A) noticed that the Hon’ble Karnataka High Court has allowed depreciation on non competent fee in the case of CIT Vs. Ingersoll Rand International Ltd., (2014) 48 taxmann.com 349. Accordingly the ld CIT(A) directed the AO to allow depreciation on non-compete fee of 5.00 crores in all the years under consideration. Accordingly he confirmed disallowance of depreciation on the remaining amount of goodwill in all the years under consideration.
6. Aggrieved by the order passed by the ld CIT(A) in all the years under consideration both the parties have filed appeals before us.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 4 of 10
7. We shall first take up appeal filed by the Revenue wherein the Revenue is contesting the decision of ld CIT(A) in allowing depreciation on non-compete fee.
8. The ld DR submitted that the Hon’ble High Court of Delhi in the case of Sharp Business Systems Vs. CIT (2012) 27 taxmann.com 50 has held that non-compete fee does not qualify for depreciation u/s 32 of the Income-tax Act 1961 (‘the Act’). On the contrary the ld AR submitted that the ld CIT(A) has followed binding decision rendered by jurisdictional high court in the case of Ingersoll Rand International Ltd., (Supra) and hence the order passed by the ld CIT(A) on this issue does not call for interference.
9. We heard the parties on this issue and perused the record. We noticed that the ld CIT(A) has allowed depreciation on non-compete fee with the following observations.
“5.8 As regards the balance amount of Rs 5 crores, paid as non-compete tee, the appellant has relied upon the decision of jurisdictional Karnataka Court in the case of Commissioner 0/income-tax, Bangalore v. Ingersoll Rand International Ind. Ltd[20141 48 taxnui,ui.com 349 (Karnataka,). A perusal of this decision shows that the same is directly on the issue. The relevant part of the decision is reproduced as follows: "8 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..... Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset’. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of ‘similar nature’ has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl. (b) of ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 5 of 10 Expln.
3. Here the doctrine of ejusdem generis would come into operation and therefore the non- compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently, the depreciation provided under See. 32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held.
9. Therefore we do not see any infirmity in the impugned order which calls for interference. Accordingly the substantial question of' law is answered in favour of the assessee and against the Revenue.” 5.9 So in view of the binding decision of the High Court, the AO is directed to allow depreciation on the non- compete fee of Rs 5 crore (Purchase price in FY 1999- 2000). Considering above, the ground of appeal of the appellant is partly allowed.”
10. We noticed that the ld CIT(A) has followed the binding decision rendered by the Hon’ble jurisdictional High Court in the case of Ingersoll Rand International Ltd., (Supra). Even though the Hon’ble Delhi High Court has taken a different view, yet the decision rendered by the jurisdictional High Court in binding on all the persons falling within its jurisdiction. In view of the same, we do not find any reason to interfere with the orders passed by the ld CIT(A) on this issue in all the years under consideration.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 6 of 10
11. We shall now take up the appeals filed by the assessee, wherein the assessee is contesting disallowance of depreciation claimed on Goodwill amount.
12. We heard the parties on this issue and perused the record. There is no dispute with regard to the fact that the assessee has paid consideration of Rs.18.50 crores for purchase of “Food World division” as going concern. There is also no dispute that the net book value of tangible assets was Rs.2.18 cores and hence the remaining amount of Rs.16.32 crores was paid by the assessee towards intangible assets. Out of the above a sum of Rs.5 crores has been identified by the ld CIT(A) as non-compete fee and the same leaves a balance of Rs.11.32 crores, which is contended as relating to Goodwill.
13. Before the AO, the assessee has submitted that the entire amount of Rs.16.32 crores represented goodwill and trade name rights. There is no dispute that the assessee has treated the entire amount of Rs.16.32 crores as Good will in the books of account. We noticed that the assessee has taken an alternative stand before the AO that the major portion of amount represented payment made for trade name. We notice that the alternative stand was taken by the assessee, since the AO held that the Good will is not eligible for depreciation. The Ld CIT(A) has confirmed the disallowance only for the reason that the assessee itself has stated that there was no element of Goodwill, since the seller had incurred losses in the earlier years.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 7 of 10
14. The issue relating to eligibility to claim depreciation on Good will has since been settled by Hon’ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd., (2012) 24 taxmann.com 222. Hence the assessee is eligible to claim depreciation on the amount paid for Goodwill. We notice that the following observations made by Hon’ble Apex Court in the above said case explains the nature of Goodwill; how it is quantified and the relevance of Goodwill:-
“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.”
15. A perusal of the above said observations made by the Hon’ble Supreme Court would show that the difference between the cost of an asset and the amount paid for acquiring the same constituted goodwill. In commercial parlance also, the amount paid over and above the value of tangible and intangible rights is considered as goodwill. There is also no dispute with regard to the fact that the assessee has treated the difference
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 8 of 10 amount as goodwill only in its books of account. Hence, in our view, merely because the assessee has taken a different stand before the AO to the effect that the difference/excess amount paid by it represented payment made for trademark/trade name would not change the character of payment made by the assessee. In the case, the alternative contention raised before the AO would not, in our view, disentitle the assessee to claim depreciation on the amount, which is otherwise could be considered as goodwill in its hand.
16. The Hon’ble Supreme Court in the case of Smifs Securities Ltd., (Supra) has held that the goodwill also fall under the expression ‘any other business or commercial right of similar nature used in sec. 32 of the Act’. In paragraph 5 of its order, the Hon’ble Supreme Court has observed in clear terms that goodwill is an asset under explanation 3(b) to sec. 32(1) of the Act.
17. In view of the above decision we are of the opinion that the tax authorities are not justified in denying the depreciation claimed by the assessee on the amount of goodwill.
18. We have noticed that the ld CIT(A) has allowed depreciation on non- compete fee of Rs.5 crores and the same would leave a balance of Rs.11.32 cores as relatable to goodwill amount. In view of the foregoing discussions, we set aside the order passed by the ld CIT(A) on this issue and direct the AO to allow depreciation on the opening WDV value of goodwill amount in respective years.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 9 of 10
19. In the result, all the appeals of the assessee are allowed and all the appeals of the Revenue are dismissed.
Order pronounced in the Open Court on 15th May, 2019.
Sd/- Sd/- (Pavan Kumar Gadale) (B.R Baskaran) Judicial Member Accountant Member Bangalore, Dated, 15th May, 2019. / vms / Copy to:
1. 1. The Applicant 2. The Respondent 3 . The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore.
6. Guard file By order Asst. Registrar, ITAT, Bangalore.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 10 of 10
Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..
IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER
Assessment year : 2001-02, 2002-03, 2004-05 & 2005-06 The Dy. Commissioner of Income-tax, Vs. M/s Foodworld Supermarkets Ltd., Circle-3(1)(1), 740, Eswari Industrial Estate, Bangalore. Gate-2, Hulimavu, Bannerghatta Raod, Bangalore-560 076. PAN – AAACF 4045 K.
APPELLANT RESPONDENT
Assessment year : 2001-02, 2002-03, 2004-05 & 2005-06 M/s Foodworld Supermarkets Ltd., Vs. The Dy. Commissioner of Income-tax, 740, Eswari Industrial Estate, Circle-3(1)(1), Gate-2, Hulimavu, Bannerghatta Raod, Bangalore. Bangalore-560 076.
PAN – AAACF 4045 K. . APPELLANT RESPONDENT Revenue by : Smt. Swapna Das, JCIT Assessee by : Shri Padamchand Khincha, C.A
Date of hearing : 09.05.2019 Date of Pronouncement : 15.05.2019
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 2 of 10
O R D E R
PER BENCH:-
All these cross appeals are directed against the orders passed by ld CIT(A)-3 Bangalore and they relates to the asst. years 2001-02, 2002-03, 2004-05 and 2005-06. All these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
In the appeals filed by the assessee, the decision of ld CIT(A) in confirming the disallowance of depreciation claimed on goodwill is being challenged. The Revenue is aggrieved by the decision ld CIT(A) in granting depreciation on non-compete fee.
3. The facts relating to the above said issues are stated in brief. A company by name Spencer & Company Ltd., had promoted a retail business under the name ‘Food World’. The assessee company has purchased the retail business referred above as a going concern for a consideration of Rs.18.50 crores. The net book value of tangible asset was determined at Rs. 2.18 crores and hence the difference amount of Rs.16.32 crores was treated as goodwill by the assessee. It is pertinent to note that the above said sum of Rs.16.32 crores consisted of non-compete fee of Rs.5 crores. The assessee claimed depreciation on the goodwill amount of Rs.16.32 croers in asst. year 2000-01 @ 25%.
During the years under consideration, the assessee continued to claim depreciation @ 25% on the opening WDV every year. In AY 2001- 02, the opening WDV was Rs.12.24 crores. The AO disallowed the same
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 3 of 10 by holding that depreciation is not allowable on goodwill. Before the AO, the assessee took an alternative plea that the entire amount of Rs.16.32 crores was not related to goodwill and it also included sale consideration paid towards purchase of trade name. It was also submitted that M/s Spencer & Co. Ltd., was making huge losses in the preceding years and hence no amount can be attributed towards goodwill. The AO did not accept the contentions of the assessee by holding that the alternative contention of the assessee was on account of change in stand and the same is an afterthought. Accordingly he disallowed the depreciation claimed by the assessee on good will in all the years under consideration.
The ld CIT(A) noticed that the assessee itself has submitted that no amount could be attributed towards Goodwill. Accordingly he, in principle, held the disallowance of depreciation on goodwill is justified. The ld CIT(A) examined the agreement entered by the assessee with M/s Spencer and Company Ltd., and noticed that the assessee had paid a sum of Rs.5 crores as non-compete fee and the same was treated by the assessee as goodwill. The ld CIT(A) noticed that the Hon’ble Karnataka High Court has allowed depreciation on non competent fee in the case of CIT Vs. Ingersoll Rand International Ltd., (2014) 48 taxmann.com 349. Accordingly the ld CIT(A) directed the AO to allow depreciation on non-compete fee of 5.00 crores in all the years under consideration. Accordingly he confirmed disallowance of depreciation on the remaining amount of goodwill in all the years under consideration.
Aggrieved by the order passed by the ld CIT(A) in all the years under consideration both the parties have filed appeals before us.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 4 of 10
We shall first take up appeal filed by the Revenue wherein the Revenue is contesting the decision of ld CIT(A) in allowing depreciation on non-compete fee.
The ld DR submitted that the Hon’ble High Court of Delhi in the case of Sharp Business Systems Vs. CIT (2012) 27 taxmann.com 50 has held that non-compete fee does not qualify for depreciation u/s 32 of the Income-tax Act 1961 (‘the Act’). On the contrary the ld AR submitted that the ld CIT(A) has followed binding decision rendered by jurisdictional high court in the case of Ingersoll Rand International Ltd., (Supra) and hence the order passed by the ld CIT(A) on this issue does not call for interference.
9. We heard the parties on this issue and perused the record. We noticed that the ld CIT(A) has allowed depreciation on non-compete fee with the following observations.
“5.8 As regards the balance amount of Rs 5 crores, paid as non-compete tee, the appellant has relied upon the decision of jurisdictional Karnataka Court in the case of Commissioner 0/income-tax, Bangalore v. Ingersoll Rand International Ind. Ltd[20141 48 taxnui,ui.com 349 (Karnataka,). A perusal of this decision shows that the same is directly on the issue. The relevant part of the decision is reproduced as follows: "8 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..... Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset’. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of ‘similar nature’ has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl. (b) of ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 5 of 10 Expln.
Here the doctrine of ejusdem generis would come into operation and therefore the non- compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently, the depreciation provided under See. 32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held.
Therefore we do not see any infirmity in the impugned order which calls for interference. Accordingly the substantial question of' law is answered in favour of the assessee and against the Revenue.” 5.9 So in view of the binding decision of the High Court, the AO is directed to allow depreciation on the non- compete fee of Rs 5 crore (Purchase price in FY 1999- 2000). Considering above, the ground of appeal of the appellant is partly allowed.”
10. We noticed that the ld CIT(A) has followed the binding decision rendered by the Hon’ble jurisdictional High Court in the case of Ingersoll Rand International Ltd., (Supra). Even though the Hon’ble Delhi High Court has taken a different view, yet the decision rendered by the jurisdictional High Court in binding on all the persons falling within its jurisdiction. In view of the same, we do not find any reason to interfere with the orders passed by the ld CIT(A) on this issue in all the years under consideration.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 6 of 10
We shall now take up the appeals filed by the assessee, wherein the assessee is contesting disallowance of depreciation claimed on Goodwill amount.
We heard the parties on this issue and perused the record. There is no dispute with regard to the fact that the assessee has paid consideration of Rs.18.50 crores for purchase of “Food World division” as going concern. There is also no dispute that the net book value of tangible assets was Rs.2.18 cores and hence the remaining amount of Rs.16.32 crores was paid by the assessee towards intangible assets. Out of the above a sum of Rs.5 crores has been identified by the ld CIT(A) as non-compete fee and the same leaves a balance of Rs.11.32 crores, which is contended as relating to Goodwill.
Before the AO, the assessee has submitted that the entire amount of Rs.16.32 crores represented goodwill and trade name rights. There is no dispute that the assessee has treated the entire amount of Rs.16.32 crores as Good will in the books of account. We noticed that the assessee has taken an alternative stand before the AO that the major portion of amount represented payment made for trade name. We notice that the alternative stand was taken by the assessee, since the AO held that the Good will is not eligible for depreciation. The Ld CIT(A) has confirmed the disallowance only for the reason that the assessee itself has stated that there was no element of Goodwill, since the seller had incurred losses in the earlier years.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 7 of 10
The issue relating to eligibility to claim depreciation on Good will has since been settled by Hon’ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd., (2012) 24 taxmann.com 222. Hence the assessee is eligible to claim depreciation on the amount paid for Goodwill. We notice that the following observations made by Hon’ble Apex Court in the above said case explains the nature of Goodwill; how it is quantified and the relevance of Goodwill:-
“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.”
A perusal of the above said observations made by the Hon’ble Supreme Court would show that the difference between the cost of an asset and the amount paid for acquiring the same constituted goodwill. In commercial parlance also, the amount paid over and above the value of tangible and intangible rights is considered as goodwill. There is also no dispute with regard to the fact that the assessee has treated the difference
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 8 of 10 amount as goodwill only in its books of account. Hence, in our view, merely because the assessee has taken a different stand before the AO to the effect that the difference/excess amount paid by it represented payment made for trademark/trade name would not change the character of payment made by the assessee. In the case, the alternative contention raised before the AO would not, in our view, disentitle the assessee to claim depreciation on the amount, which is otherwise could be considered as goodwill in its hand.
The Hon’ble Supreme Court in the case of Smifs Securities Ltd., (Supra) has held that the goodwill also fall under the expression ‘any other business or commercial right of similar nature used in sec. 32 of the Act’. In paragraph 5 of its order, the Hon’ble Supreme Court has observed in clear terms that goodwill is an asset under explanation 3(b) to sec. 32(1) of the Act.
In view of the above decision we are of the opinion that the tax authorities are not justified in denying the depreciation claimed by the assessee on the amount of goodwill.
We have noticed that the ld CIT(A) has allowed depreciation on non- compete fee of Rs.5 crores and the same would leave a balance of Rs.11.32 cores as relatable to goodwill amount. In view of the foregoing discussions, we set aside the order passed by the ld CIT(A) on this issue and direct the AO to allow depreciation on the opening WDV value of goodwill amount in respective years.
ITA Nos.2071, 2072, 2074 & 2075/Bang/2017 2552, 2553 & 2554/Bang/2017 Page 9 of 10
In the result, all the appeals of the assessee are allowed and all the appeals of the Revenue are dismissed.
Order pronounced in the Open Court on 15th May, 2019.