Income Tax Appellate Tribunal - Chandigarh
Rfcl Limited, New Delhi vs Assessee on 12 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'B', CHANDIGARH
BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA Nos. 293 & 294/Chd/2012
(Assessment Years : 2007-08 & 2008-09)
RFCL Limited, Vs. The D.C.I.T.,
New Delhi. Circle Parwanoo.
PAN: AABCR7314N
(Appellant) (Respondent)
Appellant by : S/Shri Sriram Seshadri &
Raghunath Rao
Respondent by : Shri Akhilesh Gupta, DR
for Shri Manjeet Singh, DR
Date of hearing : 12.02.2013
Date of Pronouncement : 02.04.2013
ORDER
PER SUSHMA CHOWLA, J.M, :
These two appeals filed by the same assessee are against separate orders of the Commissioner of Income-tax (Appeals), Shimla dated 2 8 . 1 2 . 2 0 1 1 a n d 1 2 . 1 2 . 2 0 1 1 r e l a t i n g t o a s s e s s m e n t ye a r s 2 0 0 7 - 0 8 a n d 2008-09 against the order passed u/s 143(3) of the Income Tax Act, 1961 (in short 'the Act').
2. The grounds of appeal raised by the assessee in ITA No.293/Chd/2012 read as under:
1) That the order passed by the Hon'ble Commissioner of Income-tax(Appeals)I"CIT(A)"] under section 250 of the Act is contrary to the provisions of the law.
2) That the Hon'ble CIT(A) erred in upholding the order of
the learned Assessing Officer in making an addition of
Rs.27,871,700 on account of disallowance of
depreciation claimed on intangible assets recorded as
Goodwill in the books of accounts;
3) That the Hon'ble CIT(A) erred in law and on facts by
2
disregarding the contention of the
Appellant that the Goodwill recorded in the books
represents intangible assets eligible for
depreciation under section 32(1 )(ii), although the same was recorded as Goodwill in the books of accounts;
4) That the Hon'ble CIT(A) erred in law and on facts by holding that depreciation on 'Goodwill' is not allowable since the same does not find a mention in the words used in section 32(1 )(ii) of the Act, although the Appellant has submitted that the amount recorded as 'Goodwill' in fact represents amount paid towards intangible assets eligible for depreciation;
5) That the Hon'ble CIT(A) erred in law and on facts by granting restrictive meaning to section 32(1 )(ii) of the Act;
3. The assessee in ITA No.294/Chd/2012 has raised the following grounds of appeal:
1) That the order passed by the Hon'ble Commissioner of Income-tax (Appeals) ["CIT(A)"] under section 250 of the Act is contrary to the provisions of the law.
2) That the Hon'ble CIT(A) erred in upholding the order of the learned Assessing Officer (" AO" ) in making an addition of Rs33,482,355 on account of disallowance of depreciation claimed on intangible assets recorded as Goodwill in the books of accounts;
a. That the Hon'ble CIT(A) erred in law and on facts by disregarding the contention of the Appellant that the Goodwill recorded in the books represents intangible assets eligible for depreciation under section 32(1 )(ii), although the same was recorded as Goodwill in the books of accounts;
b. That the Hon'ble CIT(A) erred in law and on facts by holding that depreciation on 'Goodwill' is not allowable since the same does not find a mention in the words used in section 32(1 )(ii) of the Act, although the Appellant has submitted that the amount recorded as 'Goodwill' in fact represents amount paid to wards intangible assets eligible for depreciation;
c. That the Hon'ble CIT(A) erred in law and on facts by granting restrictive meaning to section 32(1 )(ii) of the Act;
3. That the Hon'ble CIT(A) has erred in upholding the order of the learned Assessing Officer ("AO") in making an addition of Rs.22,599,964 on account of compensation 3 received towards cancellation of share purchase agreement ("SPA") a. That the Hon'ble CIT(A) erred on facts and in law by not holding the compensation received towards cancellation of the SPA as a capital receipt.
b. That the Hon'ble CIT(A) erred on facts in holding that there was no breach of contract or cancellation of any contract and the compensation received for giving up the rights to purchase the shares by cancellation of the agreement was merely compliance on the part of the parties;
c. That the Hon'ble CIT(A) erred in equating the penalty received under the original SPA with the compensation received on the cancellation of the agreement."
4. Both these appeals by the assessee on similar issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
ITA No.293/Chd/2012 :: Asst. Year 2007-08
5. The brief facts of the case are that the assessee company was engaged in diversified business i.e. diagnostic laboratory solutions, chemical research and veterinary care. During the ye a r under consideration the assessee had filed return of income declaring total income of Rs.8,81,93,276/- on 31.10.2007. The case of the assessee was picked up for scrutiny after issue of notice under section 147/148 of the Act. The reasons for reopening the assessment were that in the computation of income the assessee had claimed depreciation on goodwill, which as per the Assessing Officer was not allowable as goodwill was an intangible asset. The Assessing Officer while reopening the assessment had found support from the judgment of the Hon'ble Bombay High Court in CIT Vs. M/s Techno Shares and Stocks Ltd. decided on 11.9.2009. The extract of the relevant portion of the judgment was reproduced by the Assessing Officer under paras 3 to 5 at 4 pages 2 and 3 of the assessment order. The Assessing Officer consequently issued notice under section 148 of the Act to the assessee. The assessee in reply submitted that the copy of return of income earlier filed by it may be treated as filed under section 148 of the Act. The assessee also raised objection to the reopening of assessment under section 148 of the Act which was disposed off by the Assessing Officer. The Assessing Officer observed that under the amended provisions of section 32 of the Act w.e.f. 1.4.1998 though the assessee was entitled to depreciation on tangible/intangible assets but the same was allowable only on the restricted categories of tangible/intangible assets which were specifically enumerated in the said section. The assessee had claimed depreciation on goodwill which as per the Assessing Officer was not allowable and notice issued under section 148 of the Act was justifiable. During the assessment proceedings the contention of the assessee before the Assessing Officer was that it had entered into business Purchase Agreement(in short referred as 'BPA') with Ranbaxy Laboratories L i m i t e d d u r i n g t h e f i n a n c i a l ye a r 2 0 0 5 - 0 6 a n d h a d p u r c h a s e d t h e e n t i r e A n i m a l H e a l t h C a r e a n d D i a g n o s t i c s B u s i n e s s d i v i s i o n s o f R a n b a x y. As part of the said agreement all the assets, personnel, marketing capabilities, licenses, permits, leases, tenancy rights, contracts and all other rights and powers, etc. related to the Allied Business divisions were transferred by Ranbaxy to assessee at consideration of Rs.62 crores. Out of the total consideration of Rs.62 crores, sum of Rs.49.26 c r o r e s w a s a p p o r t i o n e d t o w a r d s b r a n d s , b u i l d i n g , p l a n t a n d m a c h i n e r y, furniture and fixtures, vehicles and current assets. The balance amount of Rs.12.74 crores mainly representing the value attributable to the intangible assets comprising of licenses, permissions, health registrations, approvals, concessions, manufacturing know-how, specifications, marketing capabilities such as the distribution network 5 comprising of wholesale stockists, information and documents in relation to products etc was recorded as goodwill in the books of account of the assessee. In respect of the said goodwill, depreciation was claimed under section 32(1)(ii) of the Act which as per the assessee was allowable in view of the amended provisions of the Act. Reference was made to various covenants of the agreement and also the list of the intangible assets and their description, which was acquired by the assessee. The Assessing Officer in the order has reproduced submission of the assessee under para 16 at pages 10 to 19 of the assessment order. Reliance was placed on various decisions for allowance of said expenditure. The Assessing Officer noted that the Accountant's report on which the assessee was placing reliance and claiming depreciation reflected that the brands were valued at Rs.1061.76 lacs and other tangible assets were also valued by the Accountant and the balance was included under the head 'goodwill' at Rs.1273.78 lacs. The Assessing Officer vide para 19 thus observed that A perusal of the table shows that the valuer had separately assigned a value to the intangible assets representing specific intellectual property rights in the form of 'brands' and also assigned values to the tangible assets, and the balance 'slump' price, which could not be allocated to any other specific tangible or intangible asset, was given a consolidated value as goodwill acquired by the company. The Assessing Officer vide para 25 enlisted the reasons for non-allowance of claim of depreciation of goodwill acquired at Rs.12.74 crores.
6. Reliance was placed by the Assessing Officer on the restrictive interpretation of section 32(1)(ii) of the Act made by the Hon'ble Bombay High Court and implicitly approved by the Hon'ble Supreme Court in the case of M/s Techno Shares & Stocks [327 ITR 323 (SC)] and 6 it was held that the assessee was not entitled to the claim of depreciation on the aforesaid goodwill. The Assessing Officer also distinguished the facts of other cases on which reliance was placed by the assessee and held the same to be not applicable. In contrast, the Assessing Officer relied upon R.G.Keswani Vs. ACIT (2009) 308 ITR (AT) 271 (Mum), B h a r a t b h a i J . V ya s ( 2 0 0 5 ) 9 7 I T D 2 4 8 ( A h d ) a n d G u r u j i E n t e r t a i n m e n t Network Ltd. (2006) 14 SOT 556 (Del). The next plank of objection of the Assessing Officer was that the goodwill grows or appreciates as evident from the increase in sale figures of the assessee for financial y e a r s 2 0 0 5 - 0 6 t o 2 0 0 8 - 0 9 w h i c h h a d i n c r e a s e d f r o m ye a r t o ye a r . The Assessing Officer vide para 40 thus held as under:
"40. Thus, Goodwill can be described as the intangible name of the business, which gets its advantage in business especially for marketing the products.
This advantage is likely to grow over the years, rather than diminishing. Therefore it is safe to conclude that Goodwill does not fall or fit into the description of an asset that would depreciate with passage of time or with usage. In fact goodwill would usually grow over the years."
7. The Assessing Officer thus held that the assessee was not entitled to the claim of depreciation on goodwill of Rs.12.74 crores resulting in addition of Rs.2,78,71,700/-.
8. The CIT (Appeals) noted from the perusal of BPA that the assessee was a wholly owned subsidiary company of the seller i.e. Ranbaxy. On page 2 at sr.no. C, it is clearly mentioned that the business of Ranbaxy Labs has been sold "as a going concern on a slump sale basis". The term "allied business" has been defined meaning "the animal Health care and Diagnostic business carried on by the seller at India and overseas market and includes the employees employed by the seller in relation thereto". Similarly the term "contract" has been defined in 7 detail in the said BPA. Reference was made to clause 2.2 of the BPA which is reproduced by the CIT (Appeals) at pages 15 and 16 of the appellate order and the CIT (Appeals) observed that though in the BPA attention was paid to minute details while executing BPA but similar attention was not paid to the valuation of each and every item separately i.e. in respect of intangible asset. Reference was also made to the valuation made by the Accountants under paras 57 and 58 wherein the Accountants had allocated slump price of Rs.62 crores to various asset i.e. both the tangible and intangible and it was observed b y the CIT (Appeals) in para 5.9 that A perusal of the above makes it amply clear that the Valuers have strictly followed the norms of apportionment of the slump price as laid down in para 35 and 36 of AS-10 issued by the ICAI.
They have taken all the assets including the fixed assets and the intangible assets at their respective fair market value. "Goodwill" is calculated as the difference between the aggregate slump price and aggregate fair market value of other assets including the fixed assets and intangible assets. According to the CIT (Appeals) the assessee had failed to furnish the break-up of the value assigned by the Accountants to the given components namely e m p l o ye e s , contracts, licenses, approvals etc. in spite of queries raised by the Assessing Officer and in view of the confession of the assessee that no such break-up was available and the assessee having failed to substantiate its claim during the appellate proceedings, the CIT (Appeals) observed that the assessee w a s t r yi n g t o m i s - i n t e r p r e t t h e t e r m ' g o o d w i l l ' . The CIT (Appeals) further held that the Income Tax Act though recognizes the concept of intangible assets and their value to the business and the allowability of depreciation on the same assets which are eligible for depreciation under section 32 of the Act clearly and consciously leaves out goodwill from this list. As per the CIT (Appeals) the provisions of section 32 were 8 restrictive in nature and goodwill being not covered under section 32(1)(ii) of the Act, the assessee was not entitled to the claim of depreciation on the same. The case of the assessee that the goodwill represented employees contracts, licences, agreements, manufacturing, know-how, was rejected by the CIT (Appeals) as even tax Auditors had denied the benefit of depreciation on goodwill booked in the books of account. The CIT (Appeals) vide para 5.23 held the assessee not to be entitled to the claim of depreciation on goodwill because of reasons enumerated. Para 5.23 reads as under:
"5.23 In view of discussion above, it is concluded that, the appellant's claim far depreciation on "goodwill" is not sustainable for the following reasons:-
(1) The term 'goodwill' has neither been defined in the I. T. Act, nor in the BPA. Therefore goodwill has to be understood in its generic denotative form, as per its normally defined meaning. Hence appellant's logic that it stands for other intangible assets does not hold ground.
(2) 'Goodwill' is not a synonym for contracts, licenses, technical know-
how etc. It is a much larger concept, and there are set accounting practices to determine the value or 'goodwill'. (3) The appellant has separately booked the value of the real intangible assets on which depreciation has also duly been availed. (4) 'Goodwill' has been separately mentioned, considered and evaluated in the BPA and the valuation report.
(5) Method of valuation of 'Goodwill' has been discussed in the Valuation Report.
(6) Tax auditors and statutory auditors have also not allowed depreciation on the 'goodwill', while they have allowed depreciation on other intangible assets.
(7) 'Goodwill' simplicitier is not entitled to depreciation as per the provisions of Section 32(ii) and Section 55 (1). It was never the intention of the legislature to allow depreciation on goodwill. (8) Every business and commercial right is not eligible for depreciation within the meaning of Section 32(1 )(ii). It has to be in the nature of intellectual property rights, like trade-marks, patents, franchises, copyrights etc. (9) The words "any other business or commercial rights of similar nature" have to be interpreted ejusdem generis.
9(10) The appellant has not been able to show as to how employees, contracts, licenses etc. are individually valued and incorporated under the head 'goodwill', when all the assets for the purpose of apportionment of slump price have been distinctly identified.
(11) The appellant has not been able to show as to what is the value of 'goodwill ' simpliciter.
(12) It is not the appellant's case that the value of 'goodwill' simpliciter is Nil.
(13) The appellant has not been able to, explain as to what prevented the Valuers and the management from separately booking the value of assets like licenses, approvals etc. despite detailed discussion about the same in the BPA.
(14) The appellant has not been able to establish as to how the Valuers have included the value of other intangible assets under the head goodwill, despite clearly delineating the method of accounting of allocation of slump price.
(15) The appellant has been shifting its stand even regards the so-called intangible assets included in the goodwill."
9. The assessee is in appeal against the order of CIT (Appeals). Both the authorized representatives had elaborately addressed the Bench on the issues raised in the present appeal and the matter thereafter was fixed again for seeking certain clarifications. The learned A.R. for the assessee made elaborate submissions in this regard. Both the authorized representative had filed written submissions which have been taken on record and shall be dealt with by us in the paras hereinbelow.
10. The learned A.R. for the assessee pointed out that the facts of the present case are referred to b y the CIT (Appeals) in para 3.2 at page 8 of the appellate order. The learned A.R. for the assessee referred to BPA entered into between the assessee and M/s Ranbaxy Laboratories Ltd., placed at page 29 to 126 of the Paper Book and referred to the clauses 2.2.1 to 2.4 and stated that the items referred in the clauses were transferred to the assessee for which sale consideration was paid by the assessee. The learned A.R. for the assessee thereafter referred to the Valuation Report of the Chartered Accountant placed at pages 127 to 138 10 of the Paper Book. In the preliminary para 2.1, it has been stated that the role of the valuer was only to work out the fair value of certain brands acquired as part of business division and also the fair basis for apportioning slump price of Rs.62 crores. The learned A.R. for the assessee thereafter referred to the report of the Accountants, under which vide para 7.3 the brands were valued at Rs.10.62 crores and also the valuation of the tangible assets was worked out by the Accountants as per item Nos.1 to 6 and the balance consideration was attributed to the goodwill i.e. Rs.12.73 crores. The learned A.R. for the assessee referred to the chart already filed on record under which it had filed the list of other items taken over by the assessee. The learned A.R. for the assessee pointed out that the Assessing Officer had allowed depreciation on the tangible assets and even on the brand value holding it to be intangible assets but the depreciation on goodwill of Rs.12.73 crores had been denied. Reliance was placed by the learned A.R. for the assessee in CIT Vs. SMIFS Securities Ltd. [348 ITR 302(SC)] and on Areva T and D India Ltd. Vs. DCIT [345 ITR 421 (Del)]. The learned A.R. for the assessee concluded by stating that the assessee had acquired business/commercial rights which were covered under section 32 (1)(ii) of the Act on which depreciation was allowable as per ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) and even if it is treated as goodwill, it will still to be intangible a s s e t q u a l i f yi n g f o r d e p r e c i a t i o n u n d e r s e c t i o n 3 2 o f t h e A c t , a s p e r t h e ratio laid down by the Hon'ble Supreme Court in CIT Vs. SMIFS Securities Ltd. (supra). The learned A.R. for the assessee has submitted written submissions in this regard and the same have been considered.
11. The learned D.R. for the Revenue had also filed written submissions in which firstly reliance was placed on the orders of the 11 authorities below. Further the learned D.R. for the Revenue referred to the reasoning of the Assessing Officer for making aforesaid disallowance which were as under:
4. The Ld. A.O. had made the disallowance on account of the following reasons:
a) The assessee claimed depreciation of Rs. 2,78,71,700/- even though the depreciation on 'goodwill' was denied even by the Assessee's Tax Auditors in the tax audit report attached with the return of income.
b) The Chartered Accountants, in their valuation report had separately assigned a value to the intangible assets, representing specific intellectual property rights in the form of 'Brands'. It was observed that separate value was assigned to the tangible assets and the balance "slump price", which could not be allocated to any other specific tangible or intangible asset, was given a consolidated value as 'goodwill'. Since a separate value has been specifically assigned to the 'intangible assets', it falsified the argument of the assessee that the 'goodwill', in fact, represented the 'intangible assets'.
c) The assessee when asked to elaborate the various components included under the head 'goodwill' and the value assigned by the Valuers to each such component submitted that no such breakup was available and whatever was contained in the valuation report was final.
d) The assessee when asked as to what kind of right or bundle of rights to do business is conferred on the company by virtue of goodwill acquired submitted that "We acquired goodwill from Ranbaxy Lab., by acquiring Animal Health Care and Diagnostics Business from them. This goodwill has generated from the acquisition of business in RFCL business portfolio'.
e) In view of the above, it was concluded by the A.O. that the assessee had failed to establish as to what 'intangible assets' were included in the valuation of the 'goodwill' which could qualify for depreciation. The A.O. finally concluded that it was a business division as a going concern, together with its trade marks, trade names and brands which was acquired by the assessee.
12. The learned D.R. for the Revenue further pointed out that the learned A.R. of the assessee has cited various judicial authorities to support his case, however, with due deference to the same it is submitted that the peculiar facts of the case do not deserve the ratio of the given case laws. Further objections of the learned D.R. for the Revenue were 12 as under:
A) During the course of appellate proceedings, the CIT(A) observed that the assessee submitted a list of intangible assets as part of goodwill which was at variance with the list as submitted before the Ld. A.O. It was observed that the assessee was trying to enlarge or adjust the scope of goodwill without any concrete basis. The Ld. CIT(A) observed that there was no mention of name licence, export registrations etc. before the A.O., while during the course of appellate proceedings, the lease hold rights/tenancy rights, permits, licenses, approval and registrations for carrying on the allied business have not been considered as a part of goodwill.
B) A perusal of the business Purchase Agreement (BPA) between the assessee Ranbaxy Fine Chemicals Ltd. and the Ranbaxy Laboratories Ltd. show that the assessee was a wholly owned subsidiary company of the seller i.e. Ranbaxy Laboratories Ltd. On page 2 at Sr. No. C(of BPA), it is clearly mentioned that the business of Ranbaxy Labs has been sold "as a going concern on a slump sale basis". The term "allied business" has been defined meaning "the animal Health care and Diagnostic business carried on by the seller at India and overseas market and includes the employees employed by the seller in relation thereto". Similarly, the term contract had been defined in detailed in the said BPA. It is pertinent to mention that a reference may be made to paras 2.2, 2.2.1, 2.2.2, 2.2.3 & 2.2.4. A perusal of these paras make it clear that on the payment of the purchase price the assessee was entitled to all the rights, titles and interest of the seller in the allied business. The trade marks alongwith the trade names and the brand names, all licenses, covenants, permissions, health registrations, approvals and concessions, manufacturing knowhow including specifications and test methods etc. have been specifically mentioned as those rights/interests which the assessee was bound to receive as a matter of right on payment of the purchase price. Thus, these rights were inherent in the purchase price and were specifically mentioned in the BPA.
C) Para 2.2.1 puts special focus on the trade marks which are described in Schedule VI and on "goodwill". This para specially mentions that the trade marks are used in connection with the 'goodwill' of the business. Thus it is clear that both the seller as well as the assessee were very clear about the rights, titles and interests which were being transferred/acquired in the said business deal. That is why everything has been separately mentioned in clear and unambiguous terms. So has the goodwill been separately mentioned in the BPA. It has been acknowledged that the trademarks are used in connection with the goodwill of the business. Accordingly the trade marks and the goodwill have been separately valued in the valuation report. Contrasted to this, licences, permissions, manufacturing knowhow etc. have not been mentioned in connection with the goodwill of the business.
D) Further, the BPA in para 5.1 also makes it clear that all the employees of Ranbaxy were to become the employees of the assessee on the same terms and conditions of employment as were offered by the seller to them. In fact the BPA ensures that the terms and conditions of the 13 employment of the erstwhile employees of the seller remain unaffected by way of slump sale of its business. Thus, far from ascribing value to the employees in terms of technical knowhow, the focus of the BPA is on securing their continuation in the employment on already existing terms and conditions.
E) It is further pertinent to mention that the valuers have strictly followed the norms of apportionment of the slump price as laid down in para 35 & 36 of AS-10 issued by the ICAI.
They have given a fair allocation of slump price of Rs. 6200 Lakhs paid/to be paid by RFCL to RLL and specified the same in clause 3.1 of the agreement as under:
Sr.No. Assets Rs. In Lakhs
1. Brands 1061.76
2. Building 126.99
3. Plant and Machinery 397.12
4. Furniture & Fixture 28.71
5. Vehicles 24.24
6. Net Current Assets 3287.40
7. Goodwill 1273.78
Total 6200.00
It is clear from the above that the valuer have taken all the assets including the fixed assets and the intangible assets at their respective fair market value. "Goodwill" is calculated as the difference between the aggregate slump price and aggregate fair market value of other assets including the fixed assets and intangible assets Under the heading "Identification of Assets", the Valuefs have clearly identified the various heads of assets which could be considered as the components of the Business divisions acquired by the assessee, and against which the slump price was required to be apportioned on a fair basis. It is in this process of identification of assets that brands have been specifically mentioned and evaluated. Therefore, there is no scope for any ambiguity, as the slump price has been allocated to all the assets identified in the said business deal and the 'goodwill' has been separately and categorically ascribed the value as per the accepted accounting standard. F) In view of the paras mentioned above the assessee's claim that the residual 'goodwill' contained the various rights, licenses, approvals etc. as enumerated in the table in para 5.1 above is not correct. Moreover, during the course of appellate proceedings, the assessee has only reiterated the submissions made during the course of assessment proceedings without bringing on record anything to substantiate its claim that while ascribing value to 'goodwill', the Valuers had added the value of many other rights, licenses, employees, manufacturing knowhow etc. The Ld.CIT(A) has rightly concluded that this goes on to show that the assessee is just trying to misrepresent by including in the term 'goodwill' every possible thing/right referred to in the BPA.
14G) It may be pointed out that even the Tax Auditor of the assessee have denied the benefit of depreciation on 'goodwill' booked in the books of accounts. Although the assessee is dismissive of the opinion expressed by its Tax Auditors duly appointed by the Board of Assessee's Company, the assessee has failed to explain as to what is the pro-rata allocation of the value of the above mentioned intangible assets in the value of 'goodwill' with reference to the commercial or other rights derived by the assessee from the acquisition of the said assets. The assessee's argument simply means that the value of 'goodwill' simplicitor is NIL in the BPA and the valuation report. The Ld. CIT(A) has rightly concluded that the assessee has chosen to name all these intangible assets as 'goodwill' without elaborating which identifiable asset acquired was for what value and what method of valuation was adopted to arrive at that particular value.
H) It may be mentioned here that depreciation on specific intangible assets in the form of IPRs has been claimed and allowed by the Tax Auditors of the assessee simply because as per the BPA and the Valuers' report, the said 'intangible assets' denote the total value of the specific 'intangible assets' in the form of trade-marks/brands acquired by the assessee in the given business deal which were identified for separate evaluation. The BPA also makes it clear that the said intangible assets are used in connection with the goodwill of the business. This clearly means there were no other assets acknowledged in connection with the goodwill. It is thus obvious that by making a claim for depreciation on 'goodwill' while treating it to be a synonym for other 'intangible assets', the assessee is trying to take double benefit of depreciation as it has already availed of the depreciation on the real 'intangible assets' shown in the balance sheet.
13. We have heard the rival contentions and perused the record. The assessee company during the financial ye a r 2005-06 entered into Business Purchase Agreement with Ranbaxy Laboratories Ltd. for purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbax y Laboratories Ltd., both in India and overseas m a r k e t i n a d d i t i o n t o t h e e m p l o ye e s e m p l o ye d b y t h e s a i d c o m p a n y. T h e copy of BPA is placed at pages 29 to 126 of the Paper Book and in the preamble it is mentioned that;
"A. The Seller is engaged in business activities pertaining to pharmaceuticals, including inter alia, Animal Health Care and Diagnostics business.
15B. The Purchaser is a wholly owned subsidiary of the Seller.
C. The Seller is desirous of transferring by sale, and the Purchaser is desirous of acquiring by purchase, the entire Animal Health Care and Dignostics business divisions, excluding the Excluded Liabilities and Dade Behring Business, to the Purchaser, as a going concern on a slump sale basis("Transaction").
14. The parties thereto intended that;
2. TRANSFER OF ALLIED BUSINESS.
"2.1 The Purchaser agrees to purchase, acquire and accept from the Seller and the Seller hereby agrees to sell, assign and convey to the Purchaser as a going concern on a slump sale basis, the Allied Business with effect from the Effective Date.
In order to expeditiously achieve Transfer, the Parties shall, on or prior to the Closing Date execute such deeds, deliver and execute delivery or possession, letters or agreements as required to transfer legal title in each of the Allied Business, in compliance with applicable Laws."
15. Clause 2.2 of the BPA is relevant clause of transfer of assets i.e. both the tangible and intangible, which reads as under:
2.2 On the closing date, the seller will, in consideration of receipt of the Purchase Price from the Purchaser sell, transfer, convey, assign and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the seller, all of sellers right, title and interest in the Assets free of all encumbrances (Save and except to the extent specifically disclosed to the Purchaser by the Seller vide the Disclosure Letter) including without limitation, the following:
2.2.1 The trademarks along with the trade names and the brand names owned by or applied for or registered in the name of the seller in relation to the products as described in Schedule 6 together with the goodwill of the business in connection with which the Trademarks are used. For the purposes of transfer of Trademarks, the Seller shall, on or before the Closing date, execute a deed of assignment in favour of the Purchaser, thereby transferring and assigning absolutely to the Purchaser the title to and any and all rights and interests in the trademarks, in the form as set forth in Schedule 7 hereto:
2.2.2 The relevant client portfolio consisting of the detailed list of wholesale stockists and all marketing and promotions information and documents in relation to the products;
2.2.3 All licenses, covenants, permissions, health registrations, approvals and 16 concessions required from any Governmental Authority for carrying on the Allied Business asset out in Schedule 8 hereto 2.2.4 All other relevant information and technology in relation to the Allied Business including without limitation -
a) The manufacturing know-how, in particular the specifications and test methods, manufacturing and packaging instructions, master formulae, validation reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the Products;
b) Any drug safety reports in relation to the products
16. As per clause 3 the total lump-sum consideration for transfer of the allied business to the assessee was agreed upon at Rs.62 crores. As per clause 4 the allied business shall be conducted by the seller and operated for the benefit of the purchaser during the period commencing from the effective date i.e. the date of execution of this agreement to the closing date i.e. the date on which closing occurs i.e. the date on which allied business shall be transferred from the seller to the purchaser, as defined under clause 1.1 of the BPA. A s p e r c l a u s e 5 a l l t h e e m p l o ye e s a s s e t o u t i n S c h e d u l e 2 s h a l l w . e . f . t h e e f f e c t i v e d a t e b e c o m e t h e e m p l o ye e s o f the purchaser i.e. the assessee before us, on the same terms and c o n d i t i o n s o f e m p l o ym e n t a s w e r e o f f e r e d b y t h e s e l l e r . Clause 6 of the BPA enlists the representations, warrants and disclaimers of the seller including licenses, permits other approvals required under law necessary to carry out the manufacturing activities, list of contracts, amounts receivable from other parties etc. Clause 7, on the other hand, enlists the representations and warrantees of the purchaser. Further terms and conditions of BPA deal with various steps to be taken by both the purchaser and seller in order to execute the agreement. The list of intangible assets acquired by the assessee on the acquisition of the Animal Health Care and Diagnostics Business divisions of Ranbaxy were enlisted in Schedules to the BPA which alongwith relevant pages of the Paper Book are as under:
17
S.No. Details of Intangible Assets Paper Book Reference acquired Page Numbers
1. Stockist Agreements 51-75
2. Distribution Agreements 76-79 3. Lease Agreements 81
4. Distribution and Marketing 82 Agreements
5. L i s t o f E m p l o ye e s 83-86 6. List of Licenses and Permissions 126 (Export Registrations)
7. Various Products - Enlarged 108-120 product range and customer base 8. Name License 45
9. Manufacturing know how, specifications and test methods, 36-37 manufacturing and packaging instructions, master formulae, validations reports, stability data, a n a l yt i c a l m e t h o d s a n d a n y o t h e r documents necessary to manufacture, control and release the products
17. The assessee also appointed the Chartered Accountant to provide Valuation Report in order to work out the fair market value of certain brands acquired by the assessee as part of the BPA. As per the Valuation Report the purchase consideration totaling Rs.49.26 crores was allocated to the brands and the tangible assets i.e. cost of building, plant & machinery, furniture and fixtures, vehicles and net current assets. The balance purchase consideration of Rs.12.74 crores was shown under the head 'goodwill'. The case of the assessee was that that the said balance consideration represents the value attributable to the intangible assets detailed in clause 2.2 and also as per the Schedule to the BPA and was recorded as goodwill in the books of account for the year under consideration. The Assessing Officer had allowed the depreciation both on the brands and also on the other tangible assets totaling Rs.49.26 crores. However, the depreciation on goodwill claimed by the assessee was disallowed following the ratio laid down by the Hon'ble Bombay High Court in M/s Techno Shares & Stocks [323 ITR 18 69 Bom)].
18. Before the CIT (Appeals) the decision of the Hon'ble Supreme Court in the case of M/s Techno Shares & Stocks (supra) was also referred to but the CIT (Appeals) rejected the same observing that section 32(1)(ii) of the Act had restrictive application and depreciation was not allowable on the goodwill simpliciter. The second objection of the authorities below in not allowing the depreciation on goodwill was the said non-allowance made b y the tax auditors in the accounts prepared by them.
19. The issue arising before us is whether the assessee is entitled to the claim of depreciation on the said acquisition of intangible assets in line with the acquisition of business of Animal Health Care and Diagnostics Business divisions of Ranbaxy and/or also whether the assessee is entitled to the claim of depreciation on the amount booked under the head goodwill simpliciter.
20. Under the amended provisions of section 32 of the Act w.e.f. 1.4.1999, ambit of depreciation has been enlarged to cover both the tangible and intangible assets. The depreciation on buildings, machinery plant of furniture being tangible assets was being allowed subject to satisfaction of the conditions laid down under section 32 of the Act i.e. the assets should be owned wholly or partly by the assessee and used for the purpose of business or profession of the assessee. The rate of depreciation for such assets was provided in Schedule attached to the Income Tax Act. However, after the amendment by the Finance (No.2) Act, 1998, w.e.f. 1.4.1999 the depreciation is also to be allowed on i n t a n g i b l e a s s e t s i . e . k n o w - h o w , p a t e n t a n d c o p yr i g h t s , t r a d e m a r k s , licences or franchises or any other business or commercial rights of 19 similar nature. The Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) applied the principle of ejusdem generic to interpret the expression "business or commercial rights of similar nature" referred to in section 32(1)(ii) of the Act and held 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. The Hon'ble Court further held that in the circumstances, the nature of business or commercial rights could be of the same genus in which all the aforesaid six assets fall and thus intangible assets i.e. business claims; business information; business records;, contracts; e m p l o ye e s ; a n d k n o w - h o w , w e r e h e l d t o b e a s s e t s w h i c h a r e i n v a l u a b l e and result in carrying on the business of the assessee, without any interruption and are comparable to a licence or akin to a licence which is one of the items falling in section 32(1)(ii) of the Act.
21. The Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) vide para 13 and 14 had held 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 20 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 assets that 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., business 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 and 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 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.
14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section."
22. Similar view has been laid down by the Hon'ble Bombay High Court in CIT-II Vs. M/s Birla Global Asset Finance Co. Ltd., Income Tax Appeal No.6835 of 2010 - date of decision 16.10.2012 and it was held that intangible assets like business and commercial brand equity were goodwill on which depreciation was allowable.
23. The Mumbai Bench of the Tribunal in M/s India Capital Markets P. Ltd. Vs. DCIT, Mumbai in ITA No.2948/Mum/2010 vide order dated 12.12.2012 held as under:
21
"19. The I.T.A.T. Mumbai "G" Bench in the case of DCIT vs. Weizman Forex Ltd. in ITA.No.3571/Mum/2011 observed that the definition of the asset which is a subject matter of the transfer consists of all contract, licenses, franchaise, distribution net work, customer lists, marketing strategies and software and when the intangible asset being commercial/business rights diminished in value or physical wear and tear is not an essential condition for admissibility for depreciation, if the asset is used as a business tool for earning income."
24. The above said ratio was referred to by Mumbai Bench of the Tribunal in M/s In dia Capital Markets P. Ltd. Vs. DCIT (supra) wherein the purchase of clientele business by the assessee from M/s AFC was held to be right which could be used as a tool to carry on the business and the consideration paid for which was held eligible for depreciation.
25. As pointed out in paras hereinabove the assessee in addition to b u i l d i n g , p l a n t & m a c h i n e r y, f u r n i t u r e , f i x t u r e s , v e h i c l e s a n d n e t c u r r e n t assets alongwith brands valued at Rs.49.26 crores had also acquired the under-mentioned assets:
S.No. Details of Intangible Assets Paper Book Reference acquired Page Numbers
1. Stockist Agreements 51-75
2. Distribution Agreements 76-79 3. Lease Agreements 81 4. Distribution and Marketing 82 Agreements
5. L i s t o f E m p l o ye e s 83-86 6. List of Licenses and Permissions 126 (Export Registrations)
7. Various Products - Enlarged 108-120 product range and customer base 8. Name License 45
9. Manufacturing know how, specifications and test methods, 36-37 manufacturing and packaging instructions, master formulae, validations reports, stability data, a n a l yt i c a l m e t h o d s a n d a n y o t h e r documents necessary to manufacture, control and release the products
26. The perusal of the Schedules to BPA comprising of the above said 22 list of Stockist Agreements, Distribution Agreements, Lease Agreements and also Distribution and Marketing Agreements, alongwith List of Licenses and Permissions and List of various Products, the name license a n d a l s o t h e m a n u f a c t u r i n g k n o w - h o w e t c . , a l o n g w i t h L i s t o f e m p l o ye e s a r e a s s e t s , w h i c h a r e i n v a l u a b l e a n d i n s t r u m e n t a l i n c a r r yi n g o n t h e business of Animal Health Care and Diagnostics Business divisions acquired by the assessee from M/s Ranbaxy Laboratories Ltd. as per BPA. The acquisition of the above said items is bundle of rights acquired by the assessee for which 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 licence or comparable to a license to carry on the business of Animal Health Care and Diagnostics Business divisions which was being carried on by the seller i.e. M/s Ranbaxy Laboratories Ltd. The above said assets acquired by the assessee were the "business or commercial rights or licence acquired" in order to carry on new business acquired by the a s s e s s e e i n c l u d i n g l i s t o f e m p l o ye e s a n d a l s o v a r i o u s l i c e n c e s o w n e d b y Ranbaxy Laboratories Ltd. In line with the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra), we are of the view that the consideration of Rs.12.74 crores paid by the assessee was for acquisition of the intangible assets on which the assessee is entitled to the claim of depreciation under section 32(1)(ii) of the Act.
27. The second aspect of the issue is that the assessee had booked the said consideration of Rs.12.62 crores as goodwill in its books of account. In this regard also the assessee is entitled to the claim of depreciation on the goodwill as the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra) held that the goodwill b y itself was an 23 intangible asset under Explanation 3(b) to section 32(1) of the Act and is eligible for deduction. The relevant portion of the ratio laid down by the Hon'ble Supreme Court is as under:
"The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['Act', for short] We quote hereinbelow Explanation 3 to Section 32(1) of the Act:
"Explanation 3 - For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean-la] tangible assets, being buildings, machinery, plant or Furniture;
[b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature."
Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of 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).
In the circumstances, we are of the view that Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act."
28. In view of the ratio laid down by the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra), it is held that the goodwill simpliciter was eligible for depreciation and the assessee having paid consideration of Rs.12.74 crores for acquisition of the said goodwill and having accounted for the same in its books of account as goodwill, was entitled to the claim of depreciation. We accordingly direct the Assessing Officer to allow the claim of the assessee vis-à-vis the claim of depreciation on goodwill of Rs.12.74 crores.
29. The objection of the Assessing Officer in not allowing the said claim as pointed out by the learned D.R. for the Revenue in his written submissions, was that the assessee was enlarging the scope of goodwill without any basis. We find no merit in the above said observation of 24 both the Assessing Officer and the CIT (Appeals) and the pleadings of the learned D.R. for the Revenue in view of the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra). The second plea of the learned D.R. for the Revenue was that the assessee was wholly owned subsidy of the seller company and perusal of paras of the BPA reflects that the payment of the purchase price by the assessee would make it entitle to all rights, titles and interest of the seller in the allied business. We find no merit in the plea of the learned D.R. for the Revenue in this regard. The assessee having paid composite amount for acquisition of complete allied business of Ranbaxy Laboratories Ltd. and auditors having allocated the value to the tangible assets, the brands and balance to goodwill, establish the case of the assessee that it had paid the consideration for acquisition of the enlisted assets i.e. the list of stockists, distribution and marketing agreements, l e a s e a g r e e m e n t s , l i s t o f e m p l o ye e s , v a r i o u s l i c e n c e s a n d m a n u f a c t u r i n g know-how of the allied business and the assessee was entitled to claim of depreciation on value of such assets under section 32(1)(ii) of the Act. The next stand of the learned D.R. for the Revenue that goodwill was covered in the agreement and is described as part of the agreement establishes the case of the assessee that it had contributed part of the consideration for acquisition of the goodwill of the business being run by the seller and once such contribution has been so made, the assessee is entitled to the claim of depreciation on such goodwill as held by the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra). Similarly other arguments raised by the learned D.R. for the Revenue that residual concession, various rights, licences, approvals, etc. was not correct, does not stand in view of our decision in paras hereinabove in turn following the ratio laid down by the Hon'ble Delhi in Areva T and D India Ltd. Vs. DCIT (supra).
25
30. The last objection of the authorities below and learned D.R. for the Revenue was that the Tax Auditors had denied benefit of depreciation on goodwill booked in the Balance Sheet. It is an established rule that the treatment of an entry in the books of account does not establish its allowability in the hands of the assessee. It is the nature of the expenditure which determines allowability of the expenditure in the hands of the assessee. The opinion of the auditors is not determinative of the correct position of law and while allowing the claim in the hands of the assessee, the authorities have to independently examine its allowability under the provisions of the Act and also as per the relevant judicial precedents. In view thereof, we direct the Assessing Officer to allow the claim of the assessee vis-à-vis depreciation with regard to claim of depreciation on intangible assets booked as goodwill in the books of account valued at Rs.12.74 crores. The grounds of appeal raised by the assessee in ITA No.293/Chd/2012 are thus allowed. ITA No.294/Chd/2012:: Asst. Year
30. The facts of the case in ITA No.294/Chd/2012 are similar to the facts in ITA No.293/Chd/2012. T h e a s s e s s e e d u r i n g t h e ye a r u n d e r consideration had claimed depreciation on goodwill represented by various intangible assets amounting to Rs.3,34,82,355/-. The assessee d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n h a d c l a i m e d t h e s a i d d e p r e c i a t i o n o n intangible assets on account of following acquisitions:
a) Purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbaxy Laboratories Limited ("Ranbaxy Acquisition")
b) Purchase of the entire Biomed division of Wipro Limited comprising of Diagnostics, Medical systems and life sciences business ("Wipro Acquisition")
c) Purchase of the entire medical diagnostic business of Godrej Industries Limited ("Godrej Acquisition") 26
32. The assessee has tabulated value of intangible assets under all the above acquisition and corresponding depreciation claimed during the year, in its written submissions and the same are as under:
Particulars F i n a n c i a l ye a r o f Value of Depreciation acquisition Intangible claimed Assets acquired (Amount in Rs) (Rs.in crores) Ranbaxy 2005-06 12.74 33,482,355 Acquisition Wipro 2007-08 3.788 Acquisition Godrej 2007-078 2.486 Acquisition
33. The first item of claim of depreciation was in respect of BPA entered into with M/s Ranbaxy Laboratories Ltd. for purchase of entire A n i m a l H e a l t h C a r e a n d D i a g n o s t i c s B u s i n e s s d i v i s i o n s o f R a n b a x y. W e have dealt with the issue of allowability of depreciation on goodwill booked by the assessee in the preceding year in the paras hereinabove and following our decision in the paras hereinabove, we direct the Assessing Officer to allow the claim in entirety in relation to depreciation on goodwill of acquisition of allied business of Ranbaxy Laboratories Ltd.
34. D u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n t h e a s s e s s e e e n t e r e d i n t o Business Acquisition Agreement (hereinafter referred as 'BAA') with M/s Wipro Ltd. and purchased the entire biomed division of Wipro Ltd.
c o m p r i s i n g o f D i a g n o o s t i c e s , M e d i c a l s ys t e m s a n d l i f e s c i e n c e s b u s i n e s s (hereinafter referred to as "the Allied Business"). Clause 2.2 of the BAA details the assets, rights, titles, etc of M/s Wipro Ltd. that were c o n v e ye d t o t h e a s s e s s e e i n c o n s i d e r a t i o n f o r t h e p u r c h a s e p r i c e a s a going concern on a slump sale basis. The relevant extract of clause 2.2 is as under:
27
"2.2 The Seller shall according to the provisions of this Agreement on the Closing Date, as part of the Specified Business, transfer all rights, title and interest of the Seller in the Specified Business, together with the said Movable Assets, Current Assets, Assumed Liabilities, sake Employees, said Contracts, goodwill, consumables and all other rights and privileges in relation thereto to the Purchaser."
35. The allied business of M/s Wipro Ltd. was purchased by the assessee for a consideration of Rs.13.297 crores. The list of trademarks, c o n t r a c t s a n d l i c e n s e s , e m p l o ye e s , i n s u r a n c e p o l i c i e s e t c t h a t w e r e acquired by the assessee as part of the BAA are detailed in schedules to the BAA, placed at pages 54 to 65 of the Paper Book.
The valuer allocated Rs.13.297 crores to Fixed Assets, Debtors, I n v e n t o r y, Liabilities. The remaining purchase consideration of Rs.3.788 crores, represents the value attributable to the intangible assets detailed in clause 2.2 are tabulated below and the same was recorded as goodwill in the books of account of the assessee:
S.No. Details of Intangible Assets Paper Book Reference acquired Page Numbers 1 Details of trade marks 54 2. List of Contracts 55 3. Details of Licenses 56 4. L i s t o f e m p l o ye e s 58 5. Details of Insurance Policies 65
36. T h e t h i r d a c q u i s i t i o n b y t h e a s s e s s e e d u r i n g t h e ye a r w a s b y w a y o f BAA with M/s Godrej Industries Ltd. The assessee purchased the entire medical diagnostic business of Godrej (hereinafter referred to as "the Allied Business"). As a part of the BAA, all the assets, liabilities, e m p l o ye e s , c o n t r a c t s , c o n s u m a b l e s a n d a l l o t h e r r i g h t s a n d p r i v i l e g e s , etc related to the Allied Business division were transferred by M/s Godrej Industries Ltd. for a consideration of Rs.6 crores. Clause 2.1 of t h e B A A d e t a i l s t h e a s s e t s , r i g h t s , t i t l e s e t c . t h a t w e r e c o n v e ye d t o t h e assessee as a going concern on a slump sale basis. The relevant extract 28 of clause 2.1 reads as under:
"2.1 Subject to the provisions of this Agreement, on the Closing Date, the Seller shall sell,transfer, convey and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the Seller, all rights, title and interest of the Seller in and to the Specified Business, as a going concern on a slump sale basis.
The term 'Specified Business' has been defined in the BAA to mean and include the Current Assets, Transferred Liabilities, Specified Employees, said Contracts, goodwill, consumables and all other rights and privileges in relation to the Medical Diagnostic Business of the Seller
37. The Allied Business was purchased by the assessee for total consideration of Rs. 6 crores. The list of contracts and import licenses, e m p l o ye e s e t c . t h a t w e r e a c q u i r e d a s p a r t o f t h e B A A h a v e b e e n d e t a i l e d in the schedules to the BAA, placed at pages 131 to 133 of the paper book. T h e v a l u e r a l l o c a t e d R s . 3 . 4 5 0 c r o r e s t o D e b t o r s , I n v e n t o r y, Liabilities. The remaining purchase consideration of Rs.2.486 crores, represented the value attributable to the intangible assets detailed in clause 2.2 and tabulated below was recorded as goodwill in the books of account of the assessee:
S.No. Details of Intangible Assets Paper Book Reference acquired Page Numbers 1. List of Contracts 131 2. Details of Import Licenses 132 3. L i s t o f e m p l o ye e s 133
38. The assessee claimed depreciation on the intangible assets acquired under the above said BAA and the same was disallowed by the Assessing Officer and the CIT (Appeals). We find that the facts of acquisition of allied business of M/s Wipro Ltd. and M/s Godrej Industries Ltd. are identical to the facts of acquisition of allied business of Ranbaxy Laboratories Ltd. In line with our decision in ITA No/293/Chd/2012 and the facts being identical our decision in ITA No.293/Chd/2012 would 29 appl y mutatis mutandis to the facts in ITA No.294/Chd/2012. We have already directed the Assessing Officer to allow depreciation on goodwill of allied business of Ranbax y Laboratories Ltd. The ground No.2 raised by the assessee in this regard is thus allowed.
39. The ground No.3 raised by the assessee is against the addition of Rs.2.25 crores on account of compensation received towards cancellation of share purchase agreement.
40. The brief facts as referred to by the learned A.R. for the assessee in the written submissions are as under:
"Ambalal Sarabhai Enterprises Ltd, Mautik Exim Ltd, Haryana Containers Ltd, Mr. Kartikeya V. Sarabhai (referred to as Sellers") and Cadila Healthcare Limited ("Cadila") jointly incorporated a company under the name called Sarabhai Zydus Animal Health Limited ("Zydus") under a shareholder's agreement dated January 29, 2000. Both Sellers and Cadila had 50:50 equity participation in Zydus. Both the shareholders executed an agreement in the year 2000 which refrained either of them from selling their shares to a third party, without first making the offer to the other shareholder. Both the shareholders thus enjoyed the Right of First Refusal ("ROFR").
The Sellers had pledged its 50 percent shares held in Zydus to Cadila and availed loan of Rs. 21,71,68,263 under a facility agreement dated August 11, 2006 and interest payable to Cadila for the period up to March 10, 2007 was Rs 31,000,000. Under the facility agreement, if Sellers failed to repay the loan along with the interest by March 10, 2007, Cadila would take over the shares of Zydus.
Therefore, the sellers approached the Appellant to sell the shares of Zydus for a value of Rs 72.5 Crores. The Appellant entered into a Share Purchase Agreement ("SPA") dated March 10, 2007 (Refer pages 181 - 203 of the paper book) and deposited an amount of Rs 24,81,68,263 with Sellers as Earnest Money Deposit ("EMD"). With the EMD, the sellers repaid the loan taken from Cadila and also executed the blank transfer form for transfer of shares held in Zydus in favour of the Appellant and kept the same with the escrow agent.
Under the terms of SPA, Sellers had to get the consent of Cadila to give up their ROFR to enable the Sellers to sell the shares of Zydus to the Appellant within 5 months from the date of execution of the SPA. If Sellers failed to do so, as per clause 7.6.(Hi) of the SPA (please refer page 194 of the paper book), the SPA stood terminated and the Sellers had to return the EMD along with interest at the rate of 14 percent per annum on EMD on pro-rata basis and also a penalty at the rate either 5 percent of EMD or 25 percent annualized return on EMD on pro rata basis, whichever is higher, as per clause 7.7(i) of the SPA (please refer page no 195 of the paper book).30
Further, the Appellant and the Sellers entered into a Supplemental Agreement to the SPA on the same day March 10, 2007 (please refer page nos. 204 to 209 of the paper book), wherein the Sellers agreed to convince Cadila to sell the balance 50 percent of shares of Zydus held by Cadila to the Appellant. The Supplementary Agreement was entered into by the Appellant to acquire 100 percent equity of Zydus. As a part of the Supplemental Agreement, the Appellant deposited another Rs 15 Crores with the escrow agent. However, on May 10, 2007, (please refer page nos. 210 and 211 of the paper book) the Appellant received a letter from the Sellers stating that Cadila in fact had exercised its rights under ROFR to purchase the shares of Zydus from Sellers. Accordingly, the Sellers requested the Appellant to terminate the SPA and also agreed to repay the EMD of Rs 24,81,68,263 with interest at 14 percent per annum amounting to Rs 5,901,645 (net of taxes) and penalty at the rate of 5 percent of the EMD amounting to Rs 12,408,413. However, the Appellant demanded a compensation for termination of the SPA from the Sellers for a sum of Rs 2,25,91,587 and it was mutually settled between the Sellers and the Appellant through a Supplementary Agreement dated May 22, 2007.
SI. No Particulars of payment Amount
1 Repayment of earnest deposit amount under 248,168,263
the SPA
2 Interest for 63 days 5,996,833
Less: TDS 1,345,689
Net interest payable 4,651,144
3 Payment of penalty as per the SPA 12,408,413
4 Compensation for Termination of SPA 22,591,587
Aggregate amount payable 287,819,407
The learned AO disallowed the claim of compensation as capital receipt and the Hon'ble CIT(A) has upheld the same on the following grounds:
• No compensation was agreed to be paid by Sellers under the SPA; • The compensation was not paid for termination for the agreement but as a compromise and settlement;
• The statutory auditors of the Appellant has treated it as revenue receipt;
The transaction of acquisition of shares of Zydus was in the normal course of its . business; and There was no impact in the profit earning apparatus of the Appellant due to termination of the SPA.
41. The submissions of the learned A.R. for the assessee in this regard were as under:
• At the outset the Appellant submits that the SPA entered into between the Sellers and the Appellant relates to an acquisition of a company and the Appellant is engaged in the business of diagnostic, laboratory solutions, chemical research and veterinary care and was not undertaking the business of trading in shares. Therefore, the acquisition of the business of Zydus would have resulted in a new profit earning apparatus (i.e. new source 31 of income) for the Appellant and cannot be regarded as a normal activity carried on in the normal course of the business of the Appellant. Further, the agreement between the Appellant and the Sellers were not trading contracts for generation of revenue profits, but they were only designed to bring into an apparatus for an income yielding source.
• Your goodselves may note the fact that the compensation paid by the Sellers under mutual settlement for termination of SPA is an undisputed fact and both are unrelated parties. Therefore, the fact that the compensation was not mentioned in the original SPA would not be a relevant factor for determining the nature of the receipt under the Act. It was not the case of the revenue that the parties have camouflaged the interest as compensation for termination of the SPA. In fact, the compensation has been paid in addition to interest and penalty, which were offered to tax.
• In addition, it may be noted that both the learned AO and the Hon'ble CIT(A) have failed to appreciate that the failure on the part of the Sellers to convince Cadila from exercising their ROFR rights and also to sell the balance 50 percent of the shares in Zydus resulted in termination of the SPA. Therefore, the sellers have agreed to pay compensation for not fulfilling their obligation undertaken under the SPA, which resulted in termination of the SPA.
• Since the compensation is on account of termination of an agreement which if honored, would have resulted in an income earning apparatus coming into being. The inability of the Sellers to honor the terms of the agreement led to the termination of the SPA and consequently resulted in sterilization of a profit earning source for the Appellant. Consequently, the Appellant treated the compensation on account of termination of the SPA as a capital receipt. In this connection, the Appellant wishes to rely on the following judicial pronouncements wherein it has been held by various courts that the compensation for sterilization of the profit earning source, not in the ordinary course of business is a capital receipt.
42. The learned A.R. for the assessee placed reliance on the following decisions:
1) CIT Vs. Saurashtra Cement Ltd (2010) [325 ITR 422(SC)]
2) CIT Vs. Kashmiri Mal Vasudev (1059)[39 IT R 150 (P&H)]
3) DCIT Vs. Sak Industries (P) Ltd.(2005)[1SOT 798(ITAT Delhi)]
4) Oberoi Hotel Pvt. Ltd. Vs. CIT [236 IT R 903(SC)]
43. The learned D.R. for the Revenue in the written submissions made the following submissions:
"The ground of appeal No. 3 is in regard to the addition made by the A.O. of Rs. 2.25 crores on account of compensation received towards cancellation of Share Purchase Agreement which has been appropriately upheld by the Ld. CIT(A). Briefly the facts of the issue are that the assessee entered into an agreement with Ambalal Sarabhai Enterprises Limited, Murtik Exim Limited, Haryana Containers Limited and Mr. Kartikeya V. Sarabhai (Collectively called as "VENDORS") for purchase of 50 % stake of the Vendors in the company "Sarabhai Zydus Animal Health Limited", New Delhi. The RFCL and the Vendors had entered into an agreement dated 10.03.07 whereby the vendors, also referred to as sellers were required to sell their 50% stake in the 32 company Sarabhai Zydus Animal Health Limited to RFCL as agreed upon under the SPA agreement.
During the course of assessment proceedings the AO observed from the Escrow and the original SPA and the supplemental agreement that if the transaction entered into between the parties did not materialize than the vendors will repay not only the earnest deposit amount but also the interest there on along with some penalty and compensation for termination of such agreement. Since the vendors realized that they will not be in position to implement the terms and conditions of the agreement as agreed to, they informed the assessee i.e. RFCL about the same and went on to pay the sums of money consisting of Compensation amount, Interest and Penalty totaling Rs.3.96 crores. Out of this Rs.3.96 crores the assessee claimed Rs.2.25 crores as capital receipt being the compensation amount received for the breach or cancellation of the share purchase agreement. This raised the question as to whether it was a revenue receipt that ought to be taxed or is a capital receipt as claimed by the assessee. The assessee claimed it to be a capital receipt on the basis that it was received for a branch of a contract or cancellation of the agreement. From the perusal of both the supplementary agreement and the original SPA it was concluded by the AO that there was no breach of contract or cancellation of any contract as claimed by the assessee. Rather the parties themselves compromised and calculated the amount of consideration to be paid as full and final payment by taking recourse to the supplementary agreement. The AO give specific reasoning for the additions made in this regard.
a) While perusing the detail of compensation received and tabled at page 37 of the assessment order the AO observed that it was neither a breach nor a cancellation, rather it's a compromise or settlement arrangement vide which one party has paid the desired consideration, as shown above, as agreed to between the two parties since they could not work upon the original terms and conditions. And whatever monetary benefits were derived by the company in addition to earnest deposit amount was its income and was rightly credited to the profit and loss account by the statutory auditors and there after rightly commented upon by the tax auditor also.
b) The AO further observed that the target company was also in the similar business is the assessee and by acquiring a 50% stake the assessee would have expanded its business. It was decision taken by the assessee keeping in view the revenue it would generate from it and not as a shareholder buying shares of the company for earning dividend or as capital appreciation.
c) The AO further mentioned in the assessment order that compensation so received for termination of agreement for buying 50 % stake, even the tax auditors in reply to question no.l3(e) of their tax audit report have given their expert opinion that there was no such capital receipt which was credited to profit and loss account.
d) The AO further observed that both the auditors the one who conducted the audit under same statute i.e. the companies act and the others who conducted tax audit had the same opinion with respect to the revenue recognition in respect of compensation received by the company on account of termination of contract. Moreover, the original share purchase agreement made no mention of the compensation for an amount of rs.2.25 Cr to be given to M/s RFCL. This compensation was given only after a supplementary share purchase agreement signed between M/s RFCL and the vendors on May 22, 2007 in this regard.
It is, thus, quite clear that this claim of compensation treating it as a capital receipt is nothing but on after thought to avoid payment of taxes on such income as the effect was given only at the time of filing of the return of income and that too in the computation.
e) The AO reached a firm conclusion that it was a pure business deal arising out of the business necessity of the assessee and hence whatever additional monetary benefits accrued to the assessee were revenue in nature and has no connection whatsoever with capital receipts, since the buying of 50% stake was a business venture only.
f) In fact the AO went to the extent of stating that (Para 51 assessment order) without prejudice to the departmental stand contained in the assessment order even if the receipt so received by the assessee is termed as compensation, still in real sense its true nature shall continue to be of revenue. This was on account of the reason that the receipt was received by the assessee by investing some money with the vendors form whom he was going to acquire the shares. It was against such investment, when the agreement did not 33 mature, that it received interest, penalty and compensation. The assessee by offering the interest and penalty so received against investment of earnest money deposited with the vendors for taxation has himself admitted that the same are revenue in nature.
10. The Ld. CIT(A) has appropriately upheld the findings of the AO while giving specific reasoning for the same (Page 54, Para 6.13 of the Ld.CIT(A) order).
i) The Statutory Auditors as well as the Tax Auditors of the assessee have treated the said receipt as a revenue receipt.
ii) The assessee entered into the agreement with the seller fully knowing that the Other Shareholder could exercise its right of purchase and could thus prevent the successful closure of the agreement.
iii) The assessee made a calculated business move by entering into the agreement,
iv) The terms and conditions of the termination of the agreement were absolute and one sided, completely in favour of the assessee. This situation was exploited by the assessee to the hilt.
v) There was no clause regarding compensation in the original SPA for the obvious reason that the termination was to be due to the operation of an external factor which both the parties to the agreement knew before hand. Hence the compensation negotiated by the assessee prior to exercising its right of termination and setting the seller free for discharging its obligations vis-a-vis the Other Shareholder was clearly in the nature of a windfall.
vi) The assessee has offered part of the receipts pertaining to the termination of the agreement for taxation as revenue receipts.
vii) The agreement had speculative overtones and was with a view to expanding the business further. Its termination accordingly did not cause any harm to the ongoing business of the assessee or to any of its vital capital resources.
viii) The book entries made by the assessee in the books of account were correctly made showing the entire receipts as income.
It is humbly prayed that the order of the Ld.CIT(A) may kindly be confirmed in view of the facts mention the above same may be confirmed while dismissing this ground of appeal raised by the assessee."
44. We have heard the rival contentions and perused the record. The facts relating to the issue are that Ambalal Sarabhai Enterprises Ltd, M a u t i k E x i m L t d , H a r ya n a C o n t a i n e r s L t d , M r . K a r t i k e y a V . S a r a b h a i (referred to as Sellers") and Cadila Healthcare Limited ("Cadila") jointl y i n c o r p o r a t e d a c o m p a n y u n d e r t h e n a m e c a l l e d S a r a b h a i Z yd u s A n i m a l Health Limited ("Zydus") under a shareholder's agreement dated January 29, 2000. B o t h t h e p a r t i e s h a d 5 0 : 5 0 e q u i t y p a r t i c i p a t i o n i n Z yd u s . As per agreement between the two parties, it refrained either of them from selling their shares to a third party without first making the offer to the o t h e r s h a r e h o l d e r . T h e s e l l e r s h a d p l e d g e d i t s s h a r e h o l d i n g s i n Z yd u s t o Cadila and had availed loan of Rs.21.71 crores under the agreement 34 dated 11.8.2006. A s p e r t h e a g r e e m e n t , i n t e r e s t p a ya b l e f o r t h e p e r i o d up to 10.3.2007 was Rs.3.10 crores. As per the terms of the agreement if the sellers failed to pay loan alongwith interest to Cadila by 10.3.2007, t h e s h a r e s o f t h e s e l l e r s i n Z yd u s w e r e t o b e t a k e n o v e r b y C a d i l a . The sellers approached the assessee to sell the shares of Zydus for total consideration of Rs.72.5 crores and Share Purchase Agreement dated 10.3.2007 was entered between the parties. The assessee deposited sum of Rs.24.81 crores with the sellers as earnest money from which the sellers repaid the loan taken from Cadila and also executed the blank transfer form in favour of the assessee for transfer of his shareholdings i n Z yd u s a n d t h e s a m e w a s k e p t w i t h t h e e s c r o w a g e n t . The sellers had to get the consent from Cadila for them to give up their right of first refusal within five months from the date of execution of the agreement. As per clause 7.6 of the agreement, in case of the failure of the sellers to obtain said permission, the agreement stood terminated and the sellers had to return the earnest money alongwith interest @ 14% per annum on pro-rata basis and also pay penalty as per clause 7.7(i) of the Act. Another supplemental agreement to the Share Purchase Agreement was entered between the assessee and the sellers on 10.3.2007 itself, copy of which is placed at pages 204 to 209 of the Paper Book. Under the said agreement the sellers agreed to convince Cadila to sell its shareholdings o f 5 0 % o f s h a r e s o f Z yd u s t o t h e a s s e s s e e . The objective of the said supplemental agreement was to acquire 100% equity of Zydus and consequently the assessee deposited another Rs.15 crores with the escrow agent.
45. On 10.5.2007 the assessee was intimated by the seller that Cadila h a d e x e r c i s e d i t s r i g h t s t o p u r c h a s e s h a r e s o f Z yd u s a n d t h u s t h e agreement between the parties was terminated and the sellers repaid 35 earnest money of Rs.24.82 crores alongwith interest of 14% per annum and penalty @ 5%. The assessee had offered both the interest and the penalty as part of its income. The supplemental agreement executed between the parties was also terminated and the assessee demanded compensation for termination of the same and compensation of Rs.2.25 crores was awarded to the assessee. The said compensation was claimed as a capital receipt which was brought to tax by the Assessing Officer and CIT (Appeals). The contention of the assessee in this regard was that the agreement entered into by the assessee was for acquisition of the c o m p a n y a n d n o t f o r t r a d i n g i n s h a r e s o f t h e s a i d c o m p a n y. The a c q u i s i t i o n o f t h e b u s i n e s s o f Z yd u s w a s t h e i n t e n t i o n o f t h e a s s e s s e e i n order to start a new profit earning venture i.e. new source of income. The compensation received by the assessee was pursuant to a mutual agreement between the parties under which the sellers had failed to fulfill their obligation in the first instance and hence it was claimed to a capital receipt. On the other hand, the case of the Revenue in this regard was that the original agreement and supplemental agreement itself provide that in case the transaction did not materialize than the vendors will repay not only the earnest deposit amount but also the interest there on along with some penalty and compensation for termination of such agreement. C o n s e q u e n t l y, t h e c o m p e n s a t i o n a m o u n t r e c e i v e d f o r b r e a c h or cancellation of the agreement was held to be a revenue receipt as there was no breach of contract or cancellation of any contract as the parties compromised and calculated the amount to be paid as full and f i n a l p a ym e n t . T h e n e x t o b j e c t i o n o f t h e A s s e s s i n g O f f i c e r w a s t h a t t h e target company was in the same line of business as the assessee and by acquiring the said shares it would have expanded its business. Even the auditors in their Audit Report had given an opinion that there were no capital receipts which was credited to the Profit & Loss Account. The 36 deal between the parties being pure business deal, the additional monetary benefits accruing to the assessee were revenue in nature as the assessee had entered into a business venture for acquisition of 50% stake n the business.
46. The Hon'ble Supreme Court in CIT Vs. Saurashtra Cement Ltd. (supra) had addressed the issue of receipts being capital or revenue and vide Para1 11 to 13 had held as under:
"The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark (1935) 3 I.T.R. (Eng. Cas.) 17. That however, is not to say that the question is one of fact, for, as observed in Davies. (H.M. Inspector of Taxes) v. Shell Company of China Ltd. (1952) 22 I.T.R. (Suppl.) 1 "these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts."
47. The Hon'ble Supreme Court further in Oberoi Hotel Pvt. Ltd. Vs. CIT (supra) had addressed similar issue of acquisition of a hotel, which was being operated, managed and run by the assessee. As per the terms of the agreement the assessee operated the hotel belonging to others for i n i t i a l p e r i o d o f 1 0 ye a r s , a n d t h e r e a f t e r . Further the assessee therein had a right to exercise the option to purchase the hotel in case the hotel desired to transfer the same during the currency of the agreement. However, the assessee was not successful in acquiring the said asset and at the termination of the agreement, compensation was paid to the assessee for giving up its rights. The issue before the Hon'ble Apex Court was whether the said receipt was business receipt of the assessee. The Hon'ble Supreme Court held as under:
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"The question whether the receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This court in the case of Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167, discussed and held that in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 (SC), it was held that ordinarily compensation for loss of an office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. Thereafter the court held that it was difficult to lay down a precise principle of universal application but various workable rules have been evolved for guidance.
Applying the aforesaid test laid down by this court in the present case, in our view, the Tribunal was right in arriving at a conclusion that it was a capital receipt. The reason is that as provided in article XVIII of the first agreement the assessee was having an option or right or lien, if the owner desired to transfer the hotel or lease all or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in September, 1975, between the receiver and the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and/or to operate the property. Further it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is a capital receipt and not a revenue receipt."
48. The Hon'ble Supreme Court relied on the judgment in the case of Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC), wherein the court has held as under (page 270) :
"Whether, a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt : what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction.38
After analysing a number of cases, the court observed that the following satisfactory measure of consistency in the principle is disclosed (page
282):
"Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."
The Hon'ble Supreme Court thus held as under:
"The aforesaid principle is relied upon in the case of Karam Chand Thapar and Bros. [1971] 80 ITR 167 (SC). Considering the aforesaid principles laid down as per article XVIII of the principal agreement, the amount received by the assessee is for the consideration for giving up his right to purchase and/or to operate the property or for getting it on lease before it is transferred or let out to other persons. It is not for settlement of rights under a trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income."
49. In the facts of the present case before us, the assessee had entered into first agreement on 10.3.2007 for acquisition of 50% shares b e l o n g i n g t o t h e s e l l e r s , w h o i n t u r n h a d h yp o t h e c a t e d t h e i r s h a r e s t o Cadila. As per terms of the said agreement in case there was cancellation of the agreement, the assessee was entitled to refund of the earnest money alongwith interest and penalty as stipulated in the terms of the agreement. Admittedly the said agreement between the parties was cancelled. The assessee received amount i.e. on account of refund o f e a r n e s t m o n e y, i n t e r e s t a n d p e n a l t y a n d t h e a s s e s s e e o f f e r e d i n t e r e s t and penalty for tax which is an admitted position. However, the assessee also entered into supplemental agreement with the sellers for purchase of the shareholdings of Cadila in Zydus in order to acquire 100% shareholdings of Zydus. As per the covenant of the supplemental 39 agreement dated 10.3.2007 placed at pages 204 to 209 of the Paper Book, which was agreed upon as under:
1. The Vendors hereby undertake that in the event the Other Shareholder does not exercise its Right of First Refusal, the Vendors shall procure that, within 30 days from the Closing Date, the Other Shareholder shall also sell the shares held by it in the Company, i.e. 2,70,00,000 (Two Crores Seventy Lakhs only}equity shares of face value of Rs.10- each, constituting 50% of the balance issued, subscribed and paid up equity share capital of the Company, to the Purchaser at a price which is at least equal to the to the Purchase Price and if the price is higher then the Purchase Price then at the sole discretion of the Purchaser,
2. It is hereby agreed that in respect of the undertaking given by the Vendors as specified in Para 1 above, contemporaneously with the transfer of the Shares, in the manner specified in Article 7 of the SPA, the Purchaser will make payment of the entire Purchase Price to the Vendors, less the Earnest Deposit Amount and an amount equivalent to Rs. 15,00,00,0007- (Rs. Fifteen Crores Only), which shall be kept in escrow with the Escrow Agent and will be released in the manner specified in Para3(i) and 3(ii) below.
3(i). In the event the Vendors are successful in procuring the Other Shareholder to sell their 2,70,00,000 (Two Crores Seventy Lakhs only) equity shares efface value of Rs. 16- each, constituting 50% of the issued, subscribed and paid up equity share capital of the Company, to the Purchaser, within 5 months from date of execution of this Supplemental Agreement, then the Rs. 7,50,00,000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above will be released to the Vendors by the Escrow Agent upon successful completion of the transfer of such shares owned by the Other Shareholders to the Purchaser.
(ii) In the event the Vendors are not successful in procuring the Other Shareholder to sell their 2,70,00,000 (Two Crores Seventy Lakhs only) equity shares of face value of Rs.10/- each, constituting 50% of the issued, subscribed and paid up equity share capital of the Company, to the Purchaser, within 5 months from date of execution of this Supplemental Agreement, then the Rs. 7,50,00,000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above will be released to the Purchaser by the Escrow Agent immediately at the expiry of the said 30-day period from the Closing Date.
4. It is hereby further agreed that for successful completion of the transaction contemplated under the SPA, the Escrow Agent within 1 day of Closing release to the Purchaser the Rs. 7,50,00.000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above, as success fee payable by the Vendors to the Purchaser. The applicable TDS and any other withholding taxes shall be deducted and deposited by the Escrow Agent on behalf of the Vendors.
40
5. In consideration of the Purchaser depositing the Earnest Money Deposit under the SPA, Ambalal Sarabhai Enterprises Limited (one of the Vendors under the SPA) does hereby agree to simultaneously herewith pledge in favour of the Purchaser (in a form acceptable to the Purchaser), by way of security, 11,00,000 shares of face value of Rs. 10/- held by Ambalal Sarabhai Enterprises Limited in ORG Informatics Limited, a company listed on the Bombay Stock Exchange, which shares, as on the date of this Supplemental Agreement, constitute 6.6% of the issued, subscribed and paid up equity share capital of the said company,
6. All terms and conditions set out in the SPA shall remain unchanged and shall continue to be in force in the manner stipulated thereto.
7. This Supplemental Agreement shall come into effect on the date of execution hereof.
8. This Agreement may be entered into in two or more counterparts each of which, when executed and delivered, shall be an original, but all the counterparts shall together constitute one and the same instrument
50. The conduct of the party reflects that the assessee was exploring t h e p o s s i b i l i t y o f a c q u i r i n g t h e c o n t r o l o f t h e c o m p a n y, Z y d u s a s a g o i n g concern by taking over the shareholding of the company from the two i n d e p e n d e n t s h a r e h o l d e r s o f t h e s a i d c o m p a n y. The assessee in the c o u r s e o f c a r r yi n g o n i t s b u s i n e s s e x p l o r e d t h e p o s s i b i l i t y o f e x p a n d i n g its business and merely because the assessee failed in its venture, does not establish the case of the assessee that it had received the compensation for injury inflicted on any of its capital asset. There is no loss of source of business of the assessee as the intention of the assessee was to venture into a new/allied line of business, which had not started. Thus, the consideration received by way of settlement between the parties was a revenue receipt in the hands of the assessee.
51. The learned A.R. for the assessee placed reliance on the decision of Delhi Bench of the Tribunal in DCIT Vs. Sak Industries (P) Ltd. (supra) wherein it has held as under:
34. On the facts and in the circumstances of the case, enumerated by us in the former paragraphs, we find that the dispute between the parties was settled by turn of events without there being any authoritative adjudication and judicial 41 pronouncement over the respective claims of the parties. In such circumstances, we are of the view that both the learned Assessing Officer as well as the learned CIT(A) erred in their assumptions one way or the other. The Assessing Officer has proceeded on the footing that there was a breach of trust agreement and the assessee received damages while the learned CIT(A) has proceeded on the basis that there was no obligation on Fried Krupp Essen and therefore what the assessee received was neither a compensation nor a damage but a fortuitous receipt which was purely discretionary in nature and not chargeable to tax as income. As we have already pointed out there has not been any authoritative adjudication and therefore the respective position taken by the learned Assessing Officer and the learned CIT(A) have to be treated as mere guesswork. After all, neither the learned Assessing Officer nor the learned CIT(A) had the access to evidence/material the assessee-company on the one hand and Fried Krupp Essen on the other would have relied upon if the matter had gone into a full blown litigation. They also did not have the occasion to hear the arguments of both sides at full length.
35. We are of the view that in a situation like this, it is the terms of Settlement Agreement which should be decisive. It is no doubt true that there was a dispute and both sides took up their respective positions. According to Fried Krupp Essen, there was no change because Krupp Widia GmbH continued to hold Meturit AG as before and Meturit AG continued to hold its shares in Widia (India) Ltd. According to the assessee, it was substance of the matter, which was required to be seen. If Krupp Widia GmbH was to be owned by any other entity, the effect was that the shares of Widia (India) Ltd. would beneficially be transferred to that entity.
Hence with the transfer in the ownership of Krupp Widia GmbH there was, in substance, a transfer in the ownership of "A" series shares of Widia (India) Ltd. as well. This dispute was ultimately amicably settled by Settlement Agreement and the assessee received the sum of DM 10.5 million. We are strengthened in taking this view by the judgment of Hon'ble Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 5941 . In that case there was an agreement of sale, entered into between one Anandji Haridas and the assessee Tata Services Ltd. for certain consideration. Out of the agreed consideration, a sum of Rs. 90,000 had been paid as earnest money. Later on, certain dispute arose between the parties and the matter was settled on Tata Services Ltd. receiving a sum of Rs. 5,90,000 and transferring and assigning its rights under the agreement in favour of a third party M/s. Advani and Batra. On these facts the Hon'ble Bombay High Court in their judgment in Tata Services Ltd.'s case (supra) :
"It is no doubt true that at one stage Anandji Haridas wanted to treat the transaction as cancelled, a position which was not accepted by the assessee. The assessee, however, had throughout been insisting that the agreement of sale is a subsisting agreement and that it would be constrained to file a suit for specific performance of that agreement for sale. What-ever may have been the controversy between Anandji Haridas and the assessee prior to 23rd September, 1963, when the assessee executed the receipt for Rs. 5,90,000, the position on that day was not only that the original agreement of sale between the assessee 42 and Anandji Haridas was to be treated as subsisting but also that the tripartite agreement between the assessee, Anandji Haridas and M/s. Advani and Batra that the money paid by the assessee to Anandji Haridas was to be returned by M/s. Advani and Batra and an additional sum of Rs. 5,00,000 was also to be paid to the assessee by M/s. Advani and Batra was given effect to."
36. Even otherwise it is well-settled legal position that in order to find out whether a receipt is a capital or revenue receipt, one has to see it in the hands of the receiver and in order to find out whether an expenditure is a capital or revenue expenditure, one has to see what it is in the hand of the payer. In the case of CIT v. Kamal Behari Lal Singh [1971] 82 ITR 460, the Hon'ble Supreme Court have stated the legal position in the following words :
"It is now well-settled that, in order to find out whether a receipt is a capital or revenue receipt, one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly out of the capital, and the receiver receives it as income on his part, the entire receipt is taxable in the hands of the receiver. Therefore, the fact that the amount sought to be taxed in these appeals was capital gains in the hands of the company is not a relevant circumstance. What we have to see is what it was in the hands of the assessee."
37. Similar observations have been made in various other judgments, some of which are as mentioned below :
"The principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether the payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the payer and upon other factors related thereto - Anglo Persian Oil Co. (India) Ltd. v. CIT [1933] 1 ITR 129 (Cal.);
If a receipt is capital receipt in hands of recipient, it does not necessarily follow that expenditure is capital expenditure in hand of payer. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors - Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC);
There may easily be cases where, although in the hands of the vendor a particular receipt may be capital receipt, yet qua the purchaser it may be a revenue expenditure - CIT v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545 (Bom.)."
38. A perusal of the Settlement Agreement dated 20th December, 1994, between Fried Krupp Essen, Krupp Widia GmbH, Meturit AG, the assessee-company and the group of persons represented by Mr. Autar Krishna, it is seen that the settlement was of the dispute arising between the assessee-company and Fried Krupp Essen because the assessee-company had alleged that Fried Krupp had breached the Promotion Agreement by the proposed sale by Fried Krupp of all quotas of Krupp Widia (including all of the capital stock/quotas of Meturit). On fried Krupp Essen agreeing to pay to the assessee-company a sum of DM 10.5 million, the assessee-company agreed and consented to the 43 transfer by Fried Krupp Essen, termination of Promotion Agreement of 1963, full and final settlement of all claims, demands, causes of action, arising under or in connection with the Promotion Agreement or in breach thereof. In other words, the assessee-company received DM 10.5 million in satisfaction of its claims against Fried Krupp Essen, Krupp widia GmbH and Meturit AG. We, therefore, hold that whatever may have been the legal position prior to 20th December, 1994, as on 20th December, 1994, the assessee-company received the sum of DM 10.5 million in lieu of surrender of its rights and claims against the parties above-mentioned in terms of Promotion agreement. In substance, the assessee-company gave up its right of first purchase of shares held by Meturit AG in Widia (India) Ltd. on account of perceived/alleged violation or Promotion Agreement in view of the transfer of ownership of Krupp Widia GmbH. In our considered opinion, the taxability or otherwise of DM 10.5 million in the hands of the assessee-company is to be viewed and determined on this basis. We, therefore, hold that the learned CIT(A) erred in arriving at the finding that the money received by the assessee-company was a fortuitous receipt."
52. The Tribunal further held as under:
"42. We have already held with reference to Settlement Agreement dated 20th December, 1994, that whatever may be the conflicting stands of the parties and the legal position prior to 20th December, 1994, the sum of DM 10.5 million received by the assessee, has to be viewed as the amount received in lieu of surrender of his rights and claims against Fried Krupp Essen; Krupp Widia GmbH and Meturit AG. In other words, the amount received by the assessee was in the nature of compensation for loss of the assessee's perceived/alleged rights. It is now well-settled legal position in this regard that if compensation is received for loss/detriment to the amounts of profits, the same would constitute revenue receipt, but if the compensation is received for loss/detriment to profit-making structure, such receipt would not be on the revenue account and constitute capital receipt in the hands of the recipient. In determining whether compensation is a capital or trading receipt, the relevant rule has been formulated by Lord Diplock L., in the following words :
". . . Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income-tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation" - London & Thames Haven Oil Wharves Ltd. v. Inspector of Taxes 70 ITR 460 (CA)
43. In the case of Travancore Rubber & Tea Co. Ltd. (supra), the Hon'ble Supreme Court have held that the logic of the principle is that the assessee's right to recover the compensation is to place the assessee in the same position as if the breach had not taken place. There is plethora of judgments where it has been held that the compensation received for extinction or sterilization, whether total or in part of a profit earning source, must be construed as capital receipt. Reference in this respect is invited to the judgments in Hari Kailash & 44 Co. v. CIT [1952] 22 ITR 195 (All.); CIT v. Manilal Rayaram Mehta [1956] 30 ITR 53 (Bom.); Chunduri Venkata Reddi v. CIT [1959] 35 ITR 87 (AP); Associated Oil Mills Ltd. v. CIT [1960] 40 ITR 118 (Mad.), P.L.M. Firm v. CIT [1968] 68 ITR 856 (Mad.); Bombay Burmah Trading Corpn. Ltd. v. CIT [1971] 81 ITR 777 (Bom.); J.R. Kimtee & Sons v. CIT [1978] 115 ITR 190 (AP); CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 386 1 (SC); CIT v. Barium Chemicals Ltd. [1987] 168 ITR 1642 (AP); and CIT v. Seshasayee Bros. (P.) Ltd. [1999] 239 ITR 4713 (Mad.). For applying this test to the facts of the case before us, we find that the right, the assessee contested all along, was the right to purchase shares held by Meturit AG of Widia (India) Ltd., in the event of the proposed sale of Krupp Widia GmbH from Fried Krupp Essen to an outsider going through. This right was given up by the assessee on receipt of DM 10.5 million. In the case of the assessee before us if the assessee had succeeded to exercise its supposed right to purchase shareholding of Meturit AG in Widia (India) Ltd. that in itself would not have given rise to any income in the hands of the assessee but only created an income earning source in the hands of the assessee. It is important to bear in mind that the assessee was supposed to purchase these shares at the price mutually agreed upon. Hence compensation received by the assessee for surrender of its right cannot be viewed other than compensation received in lieu of a profit making source.
44. In the case of CIT v. Tushar Commercial Co. Ltd. [1998] 230 ITR 918 (Cal.) the Hon'ble High Court have held that right to subscribe to shares is a capital asset in the hands of an assessee other than a dealer in shares. In the case of CIT v. Hiralal Manilal Modi [1981] 131 ITR 421 4 (Guj.), the assessee entered into in 1956 an agreement of sale and paid the earnest money of Rs. 50,000 for purchase of certain plots of land. On the suit for specific performance filed by the assessee, the vendors compromised the matter and agreed to pay certain additional amounts. On these facts, Hon'ble High Court held that the receipt was "not by way of income but by way of damages for the loss of a good bargain which the assessee had to forgo because the vendors were not prepared to execute the deed of conveyance".
On these facts, the Hon'ble High Court held that the Tribunal was justified in not treating it as income of the assessee.
45. In our opinion, the judgment of Hon'ble Supreme Court in the case of Oberoi Hotel (P.) Ltd. v. CIT [1999] 236 ITR 903 squarely applies on the facts of the case of the assessee. In that case Oberoi Hotel Pvt. Ltd. was operating, managing and administering many hotels belonging to others for a fee at several places, such as, Cairo, Colombo, Kathmandu, Singapore, etc. In terms of an agreement dated November 2, 1970, the assessee-company agreed to operate the hotel known as Hotel Oberoi Imperial, Singapore, for which the company was to receive a certain fee called management fee. The agreement was to run for an initial period of ten years and the assessee had the option to ask for renewal of the said agreement for two further periods of ten years each by mutual agreement. In the event of the sale of hotel, the assessee had the first right to purchase. Thereafter on September 14, 1995 a supplementary agreement was executed between the assessee and the receiver who had been appointed for the property. The right to exercise its option of purchasing the hotel in case its owners desired to transfer the same, during the currency of the agreement, was given up by the assessee. 45 It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation, requiring the purchaser thereof to enter into any agreement with Oberoi Hotel Pvt. Ltd., for the purpose of operating and managing the hotel. On the basis of such agreement, the assessee received the amount of Rs. 29,47,500 and claimed that it was a capital receipt. The Assessing Officer rejected the claim but the CIT(A) and the Tribunal upheld it. The High Court arrived at the conclusion that it was a revenue receipt, assessable to income-tax as business income for the assessment year 1979-80. On appeal to the Supreme Court, the decision of the High Court was reversed. After considering the earlier judgments of Supreme Court viz., CIT v. Chari & Chari Ltd. [1965] 57 ITR 400 ; CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148; the Hon'ble Supreme Court applied the earlier judgment of the Court in the case of Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261. The Hon'ble Court also found support from the judgment in the case of Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1971] 80 ITR 167 (SC). Considering the principle elicited from the judgments, the Hon'ble Supreme Court held that the amount received by Oberoi Hotel Pvt. Ltd., was for the consideration for giving up their right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. The Hon'ble Supreme Court held :
"It is not for settlement of rights under a trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income.
In this view of the matter, the order passed by the High Court is set aside and the appeal is allowed. The question is answered in favour of the assessee and against the Revenue by holding that receipt in the hands of the assessee was capital receipt."
45.1 We find the facts of the case of the assessee before us on stronger footing. In the case before us the first right of purchase was acquired by the assessee by way of Promotion Agreement and Articles of Association of Widia (India) Ltd. even before the commencement of business by Widia (India) Ltd. Hence by no stretch of logic the receipt can be viewed as receipt of the business carried on by the assessee."
53. We find the said reliance by the assessee to be misplaced as in the facts before the Delhi Bench of the Tribunal in DCIT Vs. Sak Industries (P) Ltd. (supra), the assessee was part of the shareholding company and the company was in existence since 1965. Later on one of the major shareholder together with its subsidiaries decided to dispose off their ownership and the assessee being the one of the major shareholder opposed the said disposal and as per the negotiation between the parties compensation received by the assessee therein was held to be capital in nature. However, in the facts of the present case as pointed out, there 46 was no loss of source of business income in the hands of the assessee as the assessee was only exploring the possibility of taking over the business of a concern in which it had no interest. The compensation received for failure of such decision being taken in the course of c a r r yi n g o n i t s n o r m a l l i n e o f b u s i n e s s w a s r i g h t l y h e l d t o b e t a x a b l e receipt in the hands of the assessee. We are in conformity with the observations of the CIT (Appeals) in para 6.13 and upholding the order of CIT (Appeals) we dismiss ground No.3 raised by the assessee.
54. In the result, the appeal of the assessee in ITA No.293 is allowed and the appeal in ITA No.294/Chd/2012 is partly allowed.
Order Pronounced in the Open Court on 2nd day of April, 2013.
Sd/- Sd/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 2nd April, 2013 *Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh 47