Delhi High Court
Commissioner Of Income Tax - Iv vs Hindustan Coca Cola Beverages Pvt. Ltd. on 14 January, 2011
Author: Dipak Misra
Bench: Chief Justice, Manmohan
* THE HIGH COURT OF DELHI AT NEW DELHI
Judgment Reserved on: 28th September, 2010
% Judgment Pronounced on: 14th, January, 2011
+ ITA Nos.1391/2010, 1394/2010 & 1396/2010
COMMISSIONER OF INCOME TAX - IV ..... Appellant
Through: Mr.Sanjeev Sabharwal, Adv.
versus
HINDUSTAN COCA COLA
BEVERAGES PVT. LTD. ..... Respondent
Through: Mr. Ajay Vohra and Ms. Kavita Jha,
Advs.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE MANMOHAN
1. Whether reporters of the local papers be allowed to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
DIPAK MISRA, CJ
Regard being had to the similarity of the questions involved in these
three appeals, they were heard analogously and are being disposed of by a
singular order.
2. In this batch of appeals preferred under Section 260A of the Income
Tax Act, 1961 (for brevity „the Act‟), the assail is to the composite order
dated 25.8.2009 in ITA Nos.1884/Del/2006, 2724/Del/07 and 2038/Del/08
pertaining to the assessment years 2001-2002, 2002-03 and 2003-04
respectively passed by the Income Tax Appellate Tribunal (for short `the
ITA Nos.1391,1394 & 1396 of 2010 Page 1 of 23
tribunal‟) by the appellant - revenue raising the following substantial
questions of law:
"(1) Whether learned ITAT erred in holding that exercise of
Revisionary Jurisdiction under Section 263 of the Income
Tax Act, 1961 was invalid?
(2) Whether learned ITAT erred in setting aside the order of
the CIT under Section 263 ignoring the fact that the
goodwill generated in a business cannot be described as
an "asset" so as to be entitled to depreciation under
Section 32 and, therefore the depreciation on goodwill
was not admissible?"
3. To appreciate the questions posed in proper perspective, it is
necessitous to state the relevant facts. For the sake of convenience, the facts
from ITA No.1391/2010 are exposited herein. The respondent - assessee is
a limited company engaged in manufacturing and trading of non-alcoholic
beverages. The assessee filed its return of income on 2.12.2003 declaring
loss for the relevant assessment year under Section 143(3) of the Act and the
assessment was completed and loss was determined at Rs.2,82,90,29,838/-
and the assessing officer had allowed the depreciation on goodwill as
claimed in the return.
4. After the order of assessment was framed, the Commissioner of
Income Tax-IV, New Delhi (in short „Commissioner‟) invoked the
jurisdiction under Section 263 of the Act as he noticed that the depreciation
on goodwill which was accepted by the assessing officer was not an asset so
ITA Nos.1391,1394 & 1396 of 2010 Page 2 of 23
as to entitle the assessee the benefit of depreciation as claimed under Section
32 of the Act and, hence, the order was erroneous and prejudicial to the
interest of the revenue which resulted in escapement of income and,
accordingly, issued notice to the assessee. The assessee filed its reply to the
notice contending, interalia, that the proceeding under Section 263 was not
sustainable inasmuch as the Commissioner has the jurisdiction to set aside
the order of assessment and send the matter for fresh assessment or interfere
with it if he is satisfied that further enquiry is necessary on the foundation
that the order passed by the assessing officer is erroneous and prejudicial to
the interest of the revenue which was not so in the case at hand; that no
material was available on record to enable the Commissioner to exercise the
power under Section 263 of the Act to reach a conclusion that the same
warranted a further enquiry; that the claim put forth by the assessee for
depreciation on the goodwill was on the foundation that it has paid the said
amount to its various bottlers for marketing and trading reputation, trading
style and name, territory know-how and information of territory and that it
included the cost of know-how relating to acquiring business, customer,
database, distribution network, contract and other commercial rights and,
therefore, it was within the purview of Section 32(1)(ii) of the Act; and that
once a plausible view has been taken by the assessing officer, the same did
not warrant any interference in exercise of suo motu jurisdiction under
Section 263 of the Act.
5. The CIT repelled the submissions raised on behalf of the assessee on
the ground that on a scrutiny of the provision of Section 32 of the Act in
ITA Nos.1391,1394 & 1396 of 2010 Page 3 of 23
entirety, it is clear that goodwill is not covered within the meaning of
intangible assets which mean only know-how, patent, copyrights,
trademarks, licences, franchises or any other business or commercial rights
of similar nature. The Commissioner further noted that the assessee
considered goodwill to be a valuable commercial asset similar to other
intangible asset mentioned in the definition of block of assets which was
contrary to Explanation 3 to Section 32 and, hence, the same was not
justified. Being of the said view, the Commissioner set aside the order of
the assessing officer relating to the claim of depreciation on goodwill and
sent the matter for fresh adjudication.
6. Being dissatisfied with the aforesaid order, the assessee preferred
appeals before the tribunal which deliberated upon the contentions raised by
the assessee as well as the revenue and referred to the audit report which
showed the computation of depreciation on goodwill and the answers to the
queries made by the assessing officer. Thereafter, the tribunal addressed
itself to what was termed as goodwill in the books of accounts and noticed
that the same was in the compartment of the definition "any other business
or commercial rights of similar nature (i.e. know-how, patent, copyrights,
trademarks, licences, franchises)". The tribunal further took note of the fact
that the Commissioner had recorded a finding that such a claim is patently
inadmissible and the said finding is solely based on the entry in the books of
accounts. It referred to its earlier decision in Skyline Caterers Pvt. Ltd. v.
ITO, [2008] 116 ITD 348 wherein it has been held by the tribunal that there
is no dispute to the legal proposition that the nomenclature given to the
ITA Nos.1391,1394 & 1396 of 2010 Page 4 of 23
entries in the books of accounts is not relevant for ascertaining the real
nature of the transaction. The said view was expressed on the basis of the
decision rendered by the Apex Court in Kedarnath Jute Mfg. Co. Ltd. v. IT,
[1971] 82 ITR 363 (SC). Thereafter, the tribunal proceeded to ascertain the
true nature of the transaction. The tribunal further noted that the
Commissioner has per se proceeded on the ground that the claim of goodwill
in the books of account is totally inadmissible but such a perception is not
acceptable inasmuch as it is obligatory on the part of the Commissioner to
examine the entire record of proceeding and take into account all the
material facts on record which are of relevance. The tribunal apprised itself
of the fact that payments have been made towards business acquired on
slump price and a part of the price so paid is allocated to the intangible
assets covered under the head „goodwill‟. After so stating, the tribunal
expressed the view thus:
"The allocation of amount paid as a slump price is not in
dispute and the fact that a part of consideration represents
consideration for rights, as detailed in the audit report
notes extracted above, is also not in disputed. The case
of the Commissioner mainly is that depreciation is not
admissible on goodwill but the fact the accounting
treatment of a payment per se cannot govern its treatment
in the income tax proceedings. Even if an amount is
termed as „Goodwill‟ in the books of accounts but it is a
business or commercial rights in the nature of know how,
patent, copyrights, trade marks, licences, franchises, the
claim of depreciation is indeed admissible thereon. It is
not that „goodwill‟ is specifically excluded from the
intangible assets eligible for depreciation, and, therefore,
even if an asset is described as goodwill but it fits in the
description of Section 32(1)(ii), depreciation is to be
granted on the same; the true basis of depreciation
allowance is the character of the asset not it‟s
description."
ITA Nos.1391,1394 & 1396 of 2010 Page 5 of 23
7. Thereafter, the tribunal referred to the decision cited by the revenue in
CIT v. Jagadhari Electric Supply & Industrial Co., [1983] 140 ITR 490
(P&H) and proceeded to hold as follows:
"As held by Hon‟ble Delhi High Court in the case of Gee
Vee Enterprises (99 ITR 375), even an inertia of the
Assessing Officer in examining a claim, when he ought
to have examined the same, does render the assessment
order erroneous. However, as far as situation before us is
concerned, we have noted that the Assessing Officer had
detailed explanation of the claim of depreciation on
goodwill before him, and that the same claim was
allowed in earlier years. There was no change in the
facts of the case nor there was slightest change in the
legal position in this year vis-à-vis the earlier years in
which claim was allowed. As regards Assessing Officer
not commenting upon the legality of the claim, we have
noted that the Assessing Officer examined the
submissions of the same and did comment upon the same
when, and to the extent, he did not agree with the
submissions i.e. on the question of allowing depreciation
on lease hold rights. The fact that there are no elaborate
discussions about a claim of deduction cannot, in the
light of the decision of a coordinate bench in the case of
Khatiza S Omerbhoy Vs. ITO (100 ITD 173), cannot be a
good ground for assuming jurisdiction under section 263.
In these circumstances, in our considered view, from the
fact that the Assessing Officer has not discussed the
claim of depreciation on goodwill in the assessment order
even though the same claim was allowed in the earlier
years and even though the Assessing Officer had before
him detailed explanation in support of legal claim, it
cannot be inferred that the Assessing Officer did not
apply his mind to the matter. His decision to accept the
submission of the assessee may have been incorrect, but
right now that is not the issue before us. The Assessing
Officer decided not to reject the claim, admittedly after
having had an opportunity to peruse the detailed
submissions, and this stand by itself cannot imply that
there was no application of mind. It is well settled in law
that when Assessing Officer takes a possible view of the
matter on merits, his order cannot be subjected to review
merely because other view is possible, as held by the
ITA Nos.1391,1394 & 1396 of 2010 Page 6 of 23
Hon‟ble Supreme Court in the case of CIT Vs. Malabar
Industrial Co. Ltd. (243 ITR 243)."
8. Being of the aforesaid view, the tribunal allowed the appeal and
dislodged the order passed by the Commissioner.
9. We have heard Mr.Sanjeev Sabharwal, learned counsel for the
revenue, and Mr.Ajay Vohra and Ms.Kavita Jha, learned counsel for the
respondents.
10. Before we advert to the justifiability and sustainability of the order
passed by the tribunal, it is appropriate to refer to certain citations relating to
the scope of interference under Section 263 of the Act by the competent
authority.
11. In Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (SC), their
Lordships of the Apex Court, after referring to Section 263 of the Act, have
opined thus:
"A bare reading of this provision makes it clear that the
prerequisite to the exercise of jurisdiction by the
Commissioner suo moto under it, is that the order of the
Income-tax Officer is erroneous in so far as it is
prejudicial to the interests of the revenue. The
Commissioner has to be satisfied of twin conditions,
namely, (i) the order of the Assessing Officer sought to
be revised is erroneous; and (ii) it is prejudicial to the
interests of the Revenue. If one of them is absent - if the
order of the Income-tax Officer is erroneous but is not
prejudicial to the Revenue or if it is not erroneous but is
prejudicial to the Revenue - recourse cannot be had to
section 263(1) of the Act.
There can be no doubt that the provision cannot be
invoked to correct each and every type of mistake or
error committed by the Assessing Officer, it is only when
an order is erroneous that the section will be attracted.
An incorrect assumption of facts or an incorrect
ITA Nos.1391,1394 & 1396 of 2010 Page 7 of 23
application of law will satisfy the requirement of the
order being erroneous. In the same category fall orders
passed without applying the principles of natural justice
or without application of mind.
The phrase "prejudicial to the interests of the Revenue" is
not an expression of art and is not defined in the Act.
Understood in its ordinary meaning it is of wide import
and is not confined to loss of tax. The High Court of
Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain & Anr.
[1957] 31 ITR 872, the High Court of Karnataka in CIT
v. T. Narayana Pai [1975] 98 ITR 422, the High Court of
Bombay in CIT v. Gabriel India Ltd. [1993] 203 ITR 108
and the High Court of Gujarat in CIT v. Smt. Minalben
S. Parikh [1995] 215 ITR 81 treated loss of tax as
prejudicial to the interests of the Revenue."
After so stating, their Lordships proceeded to hold as under:
"The phrase "prejudicial to the interests of the Revenue"
has to be read in conjunction with an erroneous order
passed by the Assessing Officer. Every loss of revenue
as a consequence of an order of the Assessing Officer
cannot be treated as prejudicial to the interests of the
Revenue, for example, when an Income-tax Officer
adopted one of the courses permissible in law and it has
resulted in loss of Revenue; or where two views are
possible and the Income-tax Officer has taken one view
with which the Commissioner does not agree, it cannot
be treated as an erroneous order prejudicial to the
interests of the Revenue, unless the view taken by the
Income-tax Officer is unsustainable in law. It has been
held by this court that where a sum not earned by a
person is assessed as income in his hands on his so
offering, the order passed by the Assessing Officer
accepting the same as such will be erroneous and
prejudicial to the interests of the Revenue. Rampyari
Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt.
Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC)."
12. Be it noted, in Malabar Industrial Co. Ltd. (supra), the Apex Court
has also opined that where two views are possible and the assessing officer
has taken one view with which the Commissioner does not agree, the said
advertence cannot be given the sanction of law as it would not come within
ITA Nos.1391,1394 & 1396 of 2010 Page 8 of 23
the ambit and sweep of an erroneous order prejudicial to the interests of the
revenue. It is obligatory on the part of the revenue to show that the order of
the assessing officer was not in accordance with law.
13. In Gee Vee Enterprises v. Addl. Commissioner of Income-tax, Delhi
and others, [1975] 99 ITR 375 (Delhi), it has been held that:
"These two decisions show that it is not necessary for the
Commissioner to make further inquiries before
cancelling the assessment order of the Income-tax
Officer. The Commissioner can regard the order as
erroneous on the ground that in the circumstances of the
case the Income-tax Officer should have made further
inquires before accepting the statements made by the
assessee in his return.
The reason is obvious. The position and function of the
Income-tax Officer is very different from that of a civil
court. The statements made in a pleading proved by the
minimum amount of evidence may be accepted by a civil
court in the absence of any rebuttal. The civil court is
neutral. It simply gives decision on the basis of the
pleading and evidence which comes before it. The
Income-tax Officer is not only an adjudicator but also an
investigator. He cannot remain passive in the face of a
return which is apparently in order but calls for further
inquiry. It is his duty to ascertain the truth of the facts
stated in the return when the circumstances of the case
are such as to provoke an inquiry. The meaning to be
given to the word "erroneous" in section 263 emerges out
of this context. It is because it is incumbent on the
Income-tax Officer to further investigate the facts stated
in the return when circumstances would make such an
inquiry prudent that the word "erroneous" in Section 263
includes the failure to make such an inquiry. The order
becomes erroneous because such an inquiry has not been
made and not because there is anything wrong with the
order if all the facts stated therein are assumed to be
correct."
[Emphasis added]
14. In CIT v. Gabriel IndiaLtd., [1993] 203 ITR 108 (Bombay), after
referring to Black‟s Law Dictionary for what an "erroneous judgment"
ITA Nos.1391,1394 & 1396 of 2010 Page 9 of 23
means, the Division Bench has opined that the Commissioner cannot initiate
proceedings with a view to starting fishing and roving enquiries in matters or
orders which are already concluded. Such an action is against the well-
accepted policy of law that there must be a point of finality in all legal
proceedings and that stale issues should not be reactivated beyond a
particular stage. It has also been held therein that there must be prima facie
material on record to show that tax which was lawfully exigible has not been
imposed or that by the application of the relevant statute on an incorrect or
incomplete interpretation a lesser tax than what was just has been imposed.
15. In Hari Iron Trading Co. v. Commissioner of Income-Tax, [2003]
263 ITR 437 (P&H), the Division Bench, after referring to Section 263 of
the Act, has held as follows:
"A bare perusal of the aforesaid provision shows that the
Commissioner can exercise powers under sub-section (1)
of section 263 of the Act only after examining "the
record of any proceedings under the Act". The
expression "record" has also been defined in clause (b) of
the Explanation so as to include all records relating to
any proceedings available at the time of examination by
the Commissioner. Thus, it is not only the assessment
order but the entire record which has to be examined
before arriving at a conclusion as to whether the
Assessing Officer had examined any issue or not. The
assessee has no control over the way an assessment order
is drafted. The assessee on its part had produced enough
material on record to show that the matter had been
discussed in detail by the Assessing Officer. The least
that the Tribunal could have done was to refer to the
assessment record to verify the contentions of the
assessee. Instead of doing that, the Tribunal has merely
been swayed by the fact that the Assessing Officer has
not mentioned anything in the assessment order. During
the course of assessment proceedings, the Assessing
Officer examines numerous issues. Generally, the issues
which are accepted do not find mention in the assessment
ITA Nos.1391,1394 & 1396 of 2010 Page 10 of 23
order and only such points are taken note of on which the
assessee‟s explanations are rejected and additions/
disallowances are made. As already observed, we have
examined the records of the case and find that the
Assessing Officer had made full inquiries before
accepting the claim of the assessee qua the amount of
Rs.10 lakhs on account of discrepancy in stock. Not only
this, he has even gone a step further and appended an
office note with the assessment order to explain why the
addition for alleged discrepancy in stock was not being
made. In the absence of any suggestion by the
Commissioner as to how the inquiry was not proper, we
are unable to uphold the action taken by him under
section 263 of the Act."
[Emphasis supplied]
16. In Commissioner of Income-Tax v. Max India Ltd., [2007] 295 ITR
282 (SC), the Apex Court has ruled thus:
"At this sage we may clarify that under paragraph 10 of
the judgment in the case of Malabar Industrial Co. Ltd. v.
CIT [2000] 243 ITR 83 this court has taken the view that
the phrase "prejudicial to the interests of the Revenue"
under section 263 has to be read in conjunction with the
expression "erroneous" order passed by the Assessing
Officer. Every loss of revenue as a consequence of an
order of the Assessing Officer cannot be treated as
prejudicial to the interests of the Revenue. For example,
when an Income-tax Officer adopted one of the courses
permissible in law and it has resulted in loss of revenue;
or where two views are possible and the Income-tax
Officer has taken one view with which the Commissioner
does not agree, it cannot be treated as an erroneous order
prejudicial to the interests of the Revenue, unless the
view taken by the Income-tax Officer is unsustainable in
law. According to the learned Additional Solicitor
General, on an interpretation of the provision of section
80HHC(3) as it then stood the view taken by the
Assessing Officer was unsustainable in law and therefore
the Commissioner was right in invoking section 263 of
the Income-tax Act. In this connection, he has further
submitted that in fact the 2005 amendment which is
clarificatory and retrospective in nature itself indicates
that the view taken by the Assessing Officer at the
relevant time was unsustainable in law. We find no merit
in the said contentions. Firstly, it is not in dispute that
ITA Nos.1391,1394 & 1396 of 2010 Page 11 of 23
when the order of the Commissioner was passed there
were two views on the word "profits" in that section.
The problem with section 80HHC is that it has been
amended eleven times. Different views existed on the
day when the Commissioner passed the above order.
Moreover, the mechanics of the section have become so
complicated over the years that two views were
inherently possible. Therefore, subsequent amendment
in 2005 even though retrospective will not attract the
provision of section 263 particularly when as stated
above we have to take into account the position of law as
it stood on the date when the Commissioner passed the
order dated March 5, 1997, in purported exercise of his
powers under section 263 of the Income-tax Act."
[Underlining is ours]
17. The present factual matrix is to be tested on the anvil of the aforesaid
enunciation of law. As is discernible, during the relevant assessment year,
the respondent - assessee claimed Rs.70,63,93,292/- as depreciation on
goodwill treating the same as an intangible asset and, hence, depreciable
under Section 32(1)(ii) of the Act. The assessee had proferred complete
justification for the claim of depreciation at the time of filing of return. In
the notes to the income-tax return, it has been mentioned as follows:
"Goodwill of the company comprises of (a) payment
made to bottlers at the time of acquisition of their
business and (b) the difference between the consideration
paid for business and the value of tangible assets
determined by a reputed valuer.
The specific payment for goodwill referred to in (a)
above represents the consideration for the marketing and
trading reputation, trading style and name, marketing and
distribution territorial know how and information of the
territory. And the amount referred to in (b) above has
been paid for certain contracts, rights etc. owned by the
seller. In the valuation report these contracts, rights etc.
have not been assigned any value. Therefore, the
difference between the total consideration and the value
of as the tangible assets has been accounted for as
goodwill.
ITA Nos.1391,1394 & 1396 of 2010 Page 12 of 23
Goodwill in the assessee‟s case is in substance similar to
the tangible assets. It includes industrial information
relating to the acquired business like data base of the
territory relating to consumer preferences of different
flavours, season curves, distribution network, population
related statistics etc. These information assist in the
manufacture of the product of the assessee in the sense
that based on this only the assessee plans its
manufacturing schedules. Hence, it is in effect know-
how.
Further, the payment on account of goodwill is similar to
assets like patents, copyrights, trademarks; licences
referred to in the definition of the block of assets in the
sense that the function of all these assets is to restrict
their misuse and to earn maximum profits in the business.
The function of goodwill acquired by the assessee also is
same in view of the fact that it maximizes the profits of
the company. Since, the function of intangibles defined
in the act and the intangible acquired by the assessee is
same, the assets are similar.
Therefore, the assessee‟s goodwill being a valuable
commercial asset similar to other intangibles specified in
the definition of block assets, is eligible to depreciation."
18. A Schedule annexed to the balance sheet as on 31.3.2002 depicting
the breakdown of the claim of depreciation was also filed. Annexure IV to
the Tax Audit Report in Form 3CA was filed alongwith the return of income
quantifying the amount of depreciation admissible under the provisions of
the Act. The assessing officer during the assessment proceedings under
Section 143(3) of the Act vide communication dated 15.9.2003 had raised
specific queries regarding the admissibility of the claim of depreciation on
goodwill. The assessee by letter dated 8.1.2004 had offered justification for
depreciation on goodwill which is as follows:
ITA Nos.1391,1394 & 1396 of 2010 Page 13 of 23
"Goodwill is the consideration paid to various bottlers for
marketing and trading reputation, trading style and name,
marketing and distribution territorial know-how and
information of territory. It includes know-how related to
acquired business, customer data base, distribution net
work, contract and other commercial rights. Intangible
assets like know-how, patent, copyrights, trademark,
licenses, franchisee or any other business or commercial
rights of similar nature acquired after 1.4.1998 are
eligible for depreciation."
19. The assessing officer, after examination of the annual accounts, audit
report in Form 3CA, notes to the return and reply dated 8.1.2004, took the
view that the assessee‟s claim for depreciation on goodwill was allowable
more so considering that similar claim of depreciation had been allowed for
the assessment years 1999-2000 and 2000-2001. The Commissioner, while
exercising the power under Section 263 of the Act, has held that the
assessment order framed under Section 143(3) of the Act was erroneous as
the assessing officer had allowed depreciation though the same had been
wrongly claimed and allowed inasmuch as Explanation 3 to Section 32 of
the Act never regards goodwill as an intangible asset. The tribunal in its
order referred to the audit report wherein the assessee had made the
disclosure about the computation of depreciation on goodwill and addressed
itself whether or not a claim of depreciation on goodwill in the books of
account is final or it is otherwise admissible. In that backdrop, the tribunal
referred to the concept of any other business or commercial rights of similar
nature, i.e., know-how, patent, copyrights, trademarks, licences, franchises
and referred to its decision rendered in Skyline Caterers Pvt. Ltd. (supra)
wherein it had held that nomenclature given to the entries in the books of
ITA Nos.1391,1394 & 1396 of 2010 Page 14 of 23
accounts is not relevant for ascertaining the real nature of the transaction.
To arrive at the said conclusion in the earlier case, the tribunal had placed
reliance on the decision rendered in Kedarnath Jute Mfg. Co. Ltd. (supra).
After so stating, the tribunal opined that it was difficult to accept the view of
the Commissioner that once an amount is described as goodwill in the books
of accounts, depreciation thereon as an intangible asset cannot be admissible
on the same.
20. In this regard, we may refer with profit to the relevant part of Section
32 of the Act which reads as follows:
"Section 32 - Depreciation
(1) [In respect of depreciation of -
(i) buildings, machinery, plant or furniture, being tangible
assets;
(ii) know-how, patents, copyrights, trade marks, licences,
franchises or any other business or commercial rights of
similar nature, being intangible assets acquired on or
after the 1st day of April, 1998, owned, wholly or partly,
by the assessee and used for the purposes of the business
or profession, the following deductions shall be allowed]
[(i) in the case of assets of an undertaking engaged
in generation or generation and distribution of
power, such percentage on the actual cost thereof to
the assessee as may be prescribed;]
(ii) [in the case of any block of assets, such
percentage on the written down value thereof as
may be prescribed:]
[***]
Provided that no deduction shall be allowed under this
clause in respect of -
(a) any motor car manufactured outside India,
where such motor car is acquired by the assessee
ITA Nos.1391,1394 & 1396 of 2010 Page 15 of 23
after the 28th day of February, 1975 [but before the
1st day of April, 2001], unless it is used-
(i) in a business of running it on hire for
tourists; or
(ii) outside India in his business or profession
in another country; and
(b) any machinery or plant if the actual cost thereof
is allowed as a deduction in one or more years
under an agreement entered into by the Central
Government under section 42:]
[Provided further that where an asset referred to in clause
(i) [or clause (ii) or clause (iia)], as the case may be, is
acquired by the assessee during the previous year and is
put to use for the purposes of business or profession for a
period of less than one hundred and eighty days in that
previous year, the deduction under this sub-section in
respect of such asset shall be restricted to fifty per cent of
the amount calculated at the percentage prescribed for an
asset under clause (i) [or clause (ii) or clause (iia)], as the
case may be:]
[Provided also that where an asset being commercial
vehicle is acquired by the assessee on or after the 1st day
of October, 1998, but before the 1st day of April, 1999,
and is put to use before the 1st day of April, 1999, for the
purposes of business or profession, the deduction in
respect of such asset shall be allowed on such percentage
on the written down value thereof as may be prescribed:
Explanation: For the purposes of this proviso, -
(a) the expression "commercial vehicle" means
"heavy goods vehicle", "heavy passenger motor
vehicle", "light motor vehicle", "medium goods
vehicle" and "medium passenger motor vehicle"
but does not include "maxi-cab", "motor-cab",
"tractor" and "road-roller";
(b) the expressions "heavy goods vehicle", "heavy
passenger motor vehicle", "light motor vehicle",
"medium goods vehicle", "medium passenger
motor vehicle", "maxi-cab", "motor-cab", "tractor"
and "road-roller" shall have the meanings
respectively as assigned to them in section 2 of the
Motor Vehicles Act, 1988 (59 of 1988):]
ITA Nos.1391,1394 & 1396 of 2010 Page 16 of 23
[Provided also that in respect of the previous year relevant
to the assessment year commencing on the 1st day of
April, 1991, the deduction in relation to any block of
assets under this clause shall, in the case of a company, be
restricted to seventy-five per cent of the amount
calculated at the percentage, on the written down value of
such assets, prescribed under this Act immediately before
the commencement of the Taxation Laws (Amendment)
Act, 1991:]
[Provided also that the aggregate deduction, in respect of
depreciation of buildings, machinery, plant or furniture,
being tangible assets or know-how, patents, copyrights,
trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible
assets allowable to the predecessor and the successor in
the case of succession referred to in [clause (xiii), clause
(xiiib) and clause (xiv)] of section 47 or section 170 or to
the amalgamating company and the amalgamated
company in the case of amalgamation, or to the demerged
company and the resulting company in the case of
demerger, as the case may be, shall not exceed in any
previous year the deduction calculated at the prescribed
rates as if the succession or the amalgamation or the
demerger, as the case may be, had not taken place, and
such deduction shall be apportioned between the
predecessor and the successor, or the amalgamating
company and the amalgamated company, or the demerged
company and the resulting company, as the case may be,
in the ratio of the number of days for which the assets
were used by them:]
[Explanation 1. Where the business or profession of the
assessee is carried on in a building not owned by him but
in respect of which the assessee holds a lease or other
right of occupancy and any capital expenditure is incurred
by the assessee for the purposes of the business or
profession on the construction of any structure or doing of
any work, in or in relation to, and by way of renovation or
extension of, or improvement to, the building, then, the
provisions of this clause shall apply as if the said structure
of work is a building owned by the assessee.]
[Explanation 2 .- [For the purposes of this sub-section]
"written down value of the block of assets" shall have the
same meaning as in clause (c)* of sub-section (6) of
section 43:]
ITA Nos.1391,1394 & 1396 of 2010 Page 17 of 23
[Explanation 3.- For the purposes of this sub-section, [the
expressions "assets"] shall mean -
(a) tangible assets, being buildings, machinery,
plant or furniture;
(b) intangible assets, being know-how, patents,
copyrights, trade marks, licences, franchises or any
other business or commercial rights of similar
nature.]
[Explanation 4.- For the purposes of this sub-section, the
expression "know-how" means any industrial information
or technique likely to assist in the manufacture or
processing of goods or in the working of a mine, oil-well
or other sources of mineral deposits (including searching
for discovery or testing of deposits for the winning of
access thereto);]
[Explanation 5: For the removal of doubts, it is hereby
declared that the provisions of this sub-section shall apply
whether or not the assessee has claimed the deduction in
respect of depreciation in computing his total income;]"
21. It is worth noting, the scope of Section 32 has been widened by the
Finance (No.2) Act, 1998 whereby depreciation is now allowed on
intangible assets acquired on or after 1st April, 1998. As per Section
32(1)(ii), depreciation is allowable in respect of know-how, patent,
copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature being intangible assets. Scanning the
anatomy of the section, it can safely be stated that the provision allows
depreciation on both tangible and intangible assets and clause (ii), as has
been indicated hereinbefore, enumerates the intangible assets on which
depreciation is allowable. The assets which are included in the definition of
„intangible assets‟ includes, along with other things, any other business or
commercial rights of similar nature. The term „similar‟ has been dealt with
ITA Nos.1391,1394 & 1396 of 2010 Page 18 of 23
by the Apex Court in Nat Steel Equipment Pvt. Ltd. v. Collector of Central
Excise, AIR 1988 SC 631 wherein the Apex Court has opined that the term
„similar‟ means corresponding to or resembling to in many aspects. In this
regard, it would not be out of place to refer to the decision in Commissioner
of Income Tax v. B.C. Srinivasa Setty, [1981] 128 ITR 294 (SC) wherein
the concept of goodwill has been understood in the following terms:
"Goodwill denotes the benefit arising from connection
and reputation. The original definition by Lord Eldon in
Cruttwell v. Lye 1810 17 Ves 335 that goodwill was
nothing more than "the probability that the old customers
would resort to the old places" was expanded by Wood
V.C. in Churton v. Douglas 1859 John 174 to encompass
every positive advantage "that has been acquired by the
old firm in carrying on its business, whether connected
with the premises in which the business was previously
carried on or with the name of the old firm, or with any
other matter carrying with it the benefit of the business".
In Trego v. Hunt 1896 A.C. 7 (HL) Lord Herschell
described goodwill as a connection which tended to
become permanent because of habit or otherwise. The
benefit to the business varies with the nature of the
business and also from one business to another. No
business commenced for the first time possesses goodwill
from the start. It is generated as the business is carried on
and may be augmented with the passage of time. Lawson
in his Introduction to the Law of Property describes it as
property of a highly peculiar kind. In CIT v. Chunilal
Prabhudas & Co. [1970] 76 ITR 566 the Calcutta High
Court reviewed the different approaches to the concept
(pp.577, 578):
"It has been horticulturally and botanically viewed
as „a seed sprouting‟ or an „acorn growing into the
mighty oak of goodwill‟. It has been
geographically described by locality. It has been
historically described by locality. It has been
historically explained as growing and crystallizing
traditions in the business. It has been described in
terms of a magnet as the „attracting force‟. In terms
of comparative dynamics, goodwill has been
described as the „differential return of profit‟.
ITA Nos.1391,1394 & 1396 of 2010 Page 19 of 23
Philosophically it has been held to be intangible.
Though immaterial, it is materially valued.
Physically and psychologically, it is a „habit‟ and
sociologically it is a „custom‟. Biologically, it has
been described by Lord Macnaghten in Trego v.
Hunt [1896] AC 7(HL) as the „sap and life‟ of the
business. Architecturally, it has been described as
the „cement‟ binding together the business and its
assets as a whole and a going and developing
concern."
A variety of elements goes into its making, and its
composition varies in different trades and in different
businesses in the same trade, and while one element may
preponderate in one business, another may dominate in
another business. And yet, because of its intangible
nature, it remains insubstantial in form and nebulous in
character. Those features prompted Lord Macnaghten to
remark in IRC v. Muller & Co.'s Margarine Limited
[1901] A.C. 217(HL) that although goodwill was easy to
describe, it was nonetheless difficult to define. In a
progressing business goodwill tends to show progressive
increase. And in a failing business it may begin to wane.
Its value may fluctuate from one moment to another
depending on changes in the reputation of the business. It
is affected by everything relating to the business, the
personality and business rectitude of the owners, the
nature and character of the business, its name and
reputation, its location, its impact on the contemporary
market, the prevailing socio-economic ecology,
introduction to old customers and agreed absence of
competition. There can be no account in value of the
factors producing it. It is also impossible to predicate the
moment of its birth. It comes silently into the world,
unheralded and unproclaimed and its impact may not be
visibly felt for an undefined period. Imperceptible at birth
it exists enwrapped in a concept, growing or fluctuating
with the numerous imponderables pouring into, and
affecting, the business."
22. Regard being had to the concept of „goodwill‟ and the statutory
scheme, the claim of the assessee and the delineation thereon by the tribunal
are to be scanned and appreciated. The claim of the assessee-respondent, as
ITA Nos.1391,1394 & 1396 of 2010 Page 20 of 23
is discernible, is that the assessing officer had treated the transactions
keeping in view the concept of business or commercial rights of similar
nature and put it in the compartment of intangible assets. To effectively
understand what would constitute an intangible asset, certain aspects, like
the nature of goodwill involved, how the goodwill has been generated, how
it has been valued, agreement under which it has been acquired, what
intangible asset it represents, namely, trademark, right, patent, etc. and
further whether it would come within the clause, namely, „any other business
or commercial rights which are of similar nature‟ are to be borne in mind.
23. On a scrutiny of the order passed by the tribunal, it is clear as crystal
that the depreciation was claimed on goodwill by the assessee on account of
payment made for the marketing and trading reputation, trade style and
name, marketing and distribution, territorial know-how, including
information or consumption patterns and habits of consumers in the territory
and the difference between the consideration paid for business and value of
tangible assets. The tribunal has treated the same to be valuable commercial
asset similar to other intangibles mentioned in the definition of the block of
assets and, hence, eligible to depreciation. It has also been noted by the
tribunal that the said facts were stated by the assessee in the audit report and
the assessing officer had examined the audit report and also made queries
and accepted the explanation proferred by the assessee. The acceptance of
the claim of the assessee by the assessing officer would come in the
compartment of taking a plausible view inasmuch as basically intangible
assets are identifiable non-monetary assets that cannot be seen or touched or
ITA Nos.1391,1394 & 1396 of 2010 Page 21 of 23
physical measures which are created through time and / or effort and that are
identifiable as a separate asset. They can be in the form of copyrights,
patents, trademarks, goodwill, trade secrets, customer lists, marketing rights,
franchises, etc. which either arise on acquisition or are internally generated.
24. It is worth noting that the meaning of business or commercial rights of
similar nature has to be understood in the backdrop of Section 32(1)(ii) of
the Act. Commercial rights are such rights which are obtained for
effectively carrying on the business and commerce, and commerce, as is
understood, is a wider term which encompasses in its fold many a facet.
Studied in this background, any right which is obtained for carrying on the
business with effectiveness is likely to fall or come within the sweep of
meaning of intangible asset. The dictionary clause clearly stipulates that
business or commercial rights should be of similar nature as know-how,
patents, copyrights, trademarks, licences, franchises, etc. and all these assets
which are not manufactured or produced overnight but are brought into
existence by experience and reputation. They gain significance in the
commercial world as they represent a particular benefit or advantage or
reputation built over a certain span of time and the customers associate with
such assets. Goodwill, when appositely understood, does convey a positive
reputation built by a person / company / business concern over a period of
time. Regard being had to the wider expansion of the definition after the
amendment of Section 32 by the Finance Act (2) 1998 and the auditor‟s
report and the explanation offered before the assessing officer, we are of the
considered opinion that the tribunal is justified in holding that if two views
ITA Nos.1391,1394 & 1396 of 2010 Page 22 of 23
were possible and when the assessing officer had accepted one view which
is a plausible one, it was not appropriate on the part of the Commissioner to
exercise his power under Section 263 solely on the ground that in the books
of accounts it was mentioned as „goodwill‟ and nothing else. As has been
held by the Apex Court in Malabar Industrial Co. Ltd. (supra), Max India
Ltd. (supra) and Commissioner of Income-Tax v. Vimgi Investment P. Ltd.
[2007] 290 ITR 505 (Delhi) once a plausible view is taken, it is not open to
the Commissioner to exercise the power under Section 263 of the Act.
25. In view of the aforesaid analysis, we are of the considered opinion
that the order passed by the tribunal is justified in the facts and
circumstances of the case and the questions which have been raised by the
revenue as substantial questions of law really do not arise. Resultantly, the
appeals have to pave the path of dismissal which we direct. There shall be
no order as to costs.
CHIEF JUSTICE
MANMOHAN, J.
JANUARY 14, 2011 dk ITA Nos.1391,1394 & 1396 of 2010 Page 23 of 23