C.L.C. & SONS PVT. LTD. vs. ACIT, CIRCLE-3(1),

The assessee has now moved a fresh application requesting for the disposal of its appeal. This is how, the Special Bench has been re- constituted by the Hon’ble President to decide the question already formulated by the predecessor combination of the Special Bench.

The factual panorama is that the assessee company was incorporated on 21.08.1997 with the original subscribers of shares viz., Shri Mukund Chaudhary, Shri Kapil Chaudhary and Shri Ajay Kumar Chaudhary. The assessee company took over all the assets and liabilities of M/s CLC & Sons, a partnership firm with effect from 01.04.2000. An agreement for transfer of all the assets and liabilities was signed between the assessee company and CLC & Sons on 11.02.2000. As per clause 2 of the said Agreement, all the assets in the books of the partnership firm were taken over by the assessee company at book value of Rs. 1,20,54,320/-. In addition, goodwill of the partnership firm was valued at Rs.10 crore, which was also transferred to the assessee company. In all, the assessee agreed to issue shares to the partners of the firm worth Rs.11,20,54,320/- (Rs.10 crore towards goodwill and Rs.1.20 crore towards capital of the partners as on 31.03.2000). During the course of assessment proceedings, the AO noticed that CLC & Sons had five partners on 31.03.2000, namely, Shri Ajay Kumar Chaudhary, Shri Mukund Chaudhary, Shri Kapil Chaudhary, 3 Smt. Romila Chaudhary and Smt. Ritu Chaudhary. On taking over the partnership firm, the first three partners of the firm were appointed as directors of the assessee company. On being called upon to explain the basis of valuation of goodwill of the partnership firm, the assessee company furnished a Valuation report dated 25.01.2000, computing the amount of goodwill on the basis of six years’ purchase of super profits. Such calculation of goodwill has been set out on page 7 of the assessment order.

Before espousing the question posed before the Special Bench, it is apposite to note that the AO made other additions/disallowances in the assessment order, which have also been assailed before the Tribunal.

We have heard the rival submissions and perused the relevant material on record. It is vivid from the discussion made supra that qua the issue of depreciation on goodwill, the authorities below have divided it into two broader compartments by holding that i) no depreciation can be legally allowed on the amount of genuine goodwill in terms of section 32 of the Act; and ii) when a firm is succeeded by a company and all its net assets further the valuation of goodwill done by the assessee in the instant case is fallacious.

Insofar as the legal question of depreciation on genuine goodwill, being the first broader aspect, is concerned, the controversy can be better appreciated on the touchstone of the prescription of section 32, whose relevant part is extracted as under : -

It is overt from the command of clause (ii) of section 32(1) of the Act that depreciation is permissible in respect of intangible assets listed herein, acquired on or after 01.04.1998. This clause contains certain specified and unspecified species of intangible assets. Whereas the specified intangible assets enshrined in the provision include know-how, patent and copyrights 7 etc., the unspecified intangible assets have been described with the expression ‘or any other business or commercial rights of similar nature.’ It is nobody’s case that goodwill is a specified intangible asset. The assessee has sought to cover `goodwill’ within the expression deployed to define unspecified intangible assets. Au contraire, the A.O. has canvassed a view that the expression used in the provision for defining unspecified intangible assets cannot embrace something which is inextricably linked with the business of the assessee. He bolstered his point of view by noting that the specified assets in the provision are such which are detachable from the business of the assessee and transferrable individually and separately. In this light, he held that the expression ‘or any other business or commercial rights of similar nature’ would include only such assets which are transferrable distinctly. Goodwill of a business, being, an intangible asset which cannot be transferred separately de hors the transfer of business, was, ergo, held to be not includible in the expression used in the provision to explain the unspecified intangible assets. In our considered opinion, this issue is no more res integra in view of the judgment of the Hon'ble Summit court in CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) in which it has been held: “that goodwill will fall under the expression ‘or any other business or commercial rights of similar nature’” and, hence, qualifies for depreciation u/s 32(1) of the Act. We, therefore, answer the legal issue raised in the question before the Special bench in affirmative by holding, in principle, that depreciation is available on genuine goodwill.

It has been noted above that the A.O. has classified discussion on the issue of depreciation on goodwill in two broader limbs. Firstly, he held that no depreciation can be granted on genuine goodwill in terms of section 32(1) of the Act, which opinion stands overturned hereinabove. Secondly, he held that in the facts and circumstances of the instant case, a firm has been succeeded by a company and net assets of the firm have vested in the company, and consequently there is no transfer of goodwill in real sense and further the valuation of goodwill done by the assessee in the instant case was erroneous. Both the sides candidly accepted that the second broader limb involved in the instant appeal does not precisely emanate from the substance of the question referred to the Special bench. It was urged that the same may be returned to the Division Bench for disposal along with the other grounds raised