DCIT RG 10(3), MUMBAI v. TOYO ENGINEERING INDIA LTD, MUMBAI

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"1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) has erred in directing the AO to grant depreciation on goodwill without appreciating that depreciation is not allowable u/s 36(1)(ii) of the Act, since goodwill is not an intangible asset in the nature of know-how, a patents, copyright, trademark, licenses, franchises or any other business or commercial right of similar nature falling within the meaning of section 32(1)(ii) of the Act."

3. The only issue involved in this ground relates to the allowability of depreciation on goodwill. On this issue, the Hon"ble High Court delivered its decision vide Income Tax Appeal (L) No.1330 of 2012, dated 30^thOctober, 2012 and the same reads as under:

"1. Whether the Income Tax Appellate Tribunal was justified in disallowing the depreciation on goodwill under section 32(1)(ii) of the Income Tax Act, 1961 is the basic question raised in this appeal.

2. The Apex Court in the case of Commissioner of Income Tax vs. Smifs Securities Limited reported in 348 ITR 302 (SC) has held that the depreciation would be allowable on goodwill. In this view of the matter, the impugned order of the Income Tax Appellate Tribunal is quashed and set aside and the matter is restored to the file of the Income Tax Appellate Tribunal for fresh decision on merits and in accordance with law.

3. The appeal is accordingly disposed of in above terms with no order of costs."

4. Before us, as per the Ld Counsel, since the Hon"ble High Court has quashed the finding of the Tribunal on this issue and directed the Tribunal to decide the same in the light of the ratio of the Apex Court judgment in the case of Smifs Securities Limited [348 ITR 302 (SC)], the claim of the assessee is required to be allowed in full. Further, elaborating on the direction of the Hon"ble High Court relating to the

"fresh decision on merits and in accordance with law", on the issue of the very nature of the „goodwill", Ld Counsel for the assessee mentioned that there is no dispute on the nature of goodwill as decided by the Hon"ble High Court while approving the scheme of amalgamation. In this regard, Ld Counsel brought our attention to the order of the Hon"ble High Court in the matter of Scheme of Amalgamation of Casablancas Gannon Engineering Limited with Toyo Engineering India Limited and read out the following relevant portion from page 97 of the paper book which reads as under:

"……….AND THIS COURT DOTH FURTHER ORDER that on and from the Effective Date, as defined in the scheme, the assets and liabilities appearing in the books of Transferor Company as on the Appointed Date shall become and be shown as assets and liabilities of the Transferee Company at the same values as they appeared in the books of the Transferor Company and that the difference, if any, between the values of the assets and liabilities taken over from the Transferor Company shall be

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transferred to the goodwill of the Transferee Company AND THIS COURT DOTH

FURTHER ORDER that the Petitioner Company do within thirty days after the date of the …………"

5. What is claimed under the head "goodwill" is based on the figures appeared in the books of the Transferee Company. Therefore, there is no dispute about the quantum as well as the nature of the goodwill. Further, Ld Counsel also relied on the judgment of the jurisdictional High Court in the case of Sadanand S. Varde & Ors. Vs. State of Maharashtra & Ors [2001] 247 ITR 609 (Bom) and demonstrated that it is a statutory now that the AO should rely on the book values only and should not consider the market values of the assets in question. In this regard, Ld Counsel read out the following from page 23 of the said judgment. "………The court has discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But once the scheme is scrutinized by the company Court and sanctioned by an order made by it under section 391 of the Companies Act, it ceases to retain the character of contract and operates by force of the statute……" . For the above, the Hon"ble High Court relied on the judgment of the Hon"ble Supreme Court in the case of J.K. (Bombay) Pvt. Ltd vs. New Kaiser-I-Hind Spinning & Weaving Co. Ltd (1970) 40 Comp Cas 689. Thus, it is the argument of the Ld Counsel that by virtue of the judgment of the Hon"ble Bombay High Court in the context of amalgamation, the difference should be considered as "goodwill" and the same has to computed based on the book values only. Coming to the issue of granting of depreciation u/s 32(1)(ii) in respect of the intangible asset (goodwill), it is a settled law in view of the Apex Court judgment in the case of Smifs Securities Limited (supra) that the same is a depreciable asset.

6. On the other hand, Ld DR relied on the order of the AO. Further, he mentioned that the issue may be remanded to the file of the AO for deciding the issue on merits.

7. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited judgments of the higher judiciary. On considering the relevance and importance of the said judgments, we have extracted the relevant portions in the above mentioned paras of this order. It is now binding on us that the difference, if any, between the book value of the assets and the liabilities, should be

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transferred to goodwill account of the assessee. Therefore, considering the judgment of the Bombay High Court, neither the nature of the goodwill nor the quantity of the goodwill can be now disputed. In any case, it is not the case of the Assessing Officer that there are any differences in quantity of the goodwill. It is also a decided issue in view of the Apex Court judgment in the case of Smifs Securities Limited (supra) that the goodwill is now eligible for depreciation. Relevant portion from the said Supreme Court judgment reads as under:

"Taxpayer had acquired a capital asset in the form of „goodwill" pursuant to amalgamation. Further, the SC in a brief order observed that "the words „any other business or commercial rights of similar nature" in clause (b) of Explanation 3 to section 32 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 (b). In the circumstances, we are of the view that „Goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act".

8. Considering the above settled position, the issue of allowability of depreciation on goodwill should be decided in favour of the assessee. As such, Revenue has not bought any contrary material to suggest that the claim of depreciation on goodwill is not genuine and the same is not eligible for depreciation. Accordingly ground no.1 raised by the Revenue is dismissed. Ground nos. 2, 3a, 3b and 4 need no specific adjudication as they were already adjudicated and decided by the Tribunal in the first round vide its order dated 25^thMay, 2012 (supra).

9. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 13^thOctober, 2014. Sd/- Sd/-

(VIVEK VARMA) (D. KARUNAKARA RAO)

JUDICIAL MEMBER ACCOUNTANT MEMBER

भुुंफई Mumbai; ददनाुंक 13.10.2014 व.नन.स./ OKK , Sr. PS

आदेश की प्रतिलऱपि अगे्रपिि/Copy of the Order forwarded to :

1. अऩीराथी / The Appellant

2. प्रत्मथी / The Respondent.

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3. आमकय आमुक्त(अऩीर) / The CIT(A)-

4. आमकय आमक्ु त / CIT

5. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंुफई / DR, ITAT, Mumbai

6. गार् ड पाईर / Guard file. सत्मावऩत प्रनत //True Copy//

आदेशानुसार/ BY ORDER,

उि/सहायक िजं ीकार (Dy./Asstt. Registrar)

आयकर अिीऱीय अधिकरण, भुुंफई / ITAT, Mumbai