The Commr Of Income Tax Mysore vs M/S Mangalore Ganesha Beedi Works on 23 December, 2010

[Cites 13, Cited by 1]

Karnataka High Court

The Commr Of Income Tax Mysore vs M/S Mangalore Ganesha Beedi Works on 23 December, 2010

Bench: V.G.Sabhahit, B.Manohar

ITA NO.

IN THE I-IIGII COURT OF KARNA'I"AKA AT BANGALORE
DATED THIS TI-IE) 23"' DAY OF DECEMBER. 20 I O ._

PRESENT

THE IIONBLE MR.JUS'I'ICI:'. \f_G.SAI3ISIAIfI~T{1';.II I " if  -5 

AN D

THE HONBLE MR.JUS*r1c1i,E3. ;v1ANOH,AR"*-   7

I.T.A NOS. 69/2001 -C/w V70./.2001   

69/2001

BETWEEN

1.

 V.' MYSQRE.

THE COMMISSIONER O1?._,:'_V..V  A
INCOME--'I'AX._ MYSORE.

NO.55/ 1, SH;Lp;;;S-HRE1: E;U1'LO'I1\::G'{" ~~ 
   '   »

THE DY; gOMN11S'S:iON'E-R024'
INCOMEWTAX, .,[ASS"r}, " 
SPECIAL RANGE:.~ 

.... . APPELLANTS

{'r3_Y'S_R1'  MAR, ADV. ,}

AND 

 .  M/S MANGALORS GANESHA
 A "BE@O14wO'RKS.
 'xr1:<.OR;3 ROAD.



I"-J

MYSORE -- 570 005.
. . . . . .RESPONI_) ENT

[BY SR1 E'./LR. SHAILENDRA, SR1 A SHANKAR «SI
SR1 M. L-AVA. ADVS. }

ITA NOS. 69/01 IS FILED UNDER SEcTIoNI...2.I§5:I.§:ADE" 
THE) INCDIVIE TAX ACT, I961 ARISING OUT  '
I9.10.20o0 IN ITA NOS. 472 & 476/1E_3A.N_Cx/2000" *é§'1v;3'3'/S/9?V'4 
FOR THE ASSESSMENT YEAR 1I995{9I_;s 1:'
"WHETHER, ON THE FACTS AND cI'RctISTANt;_ES»ACrE'V
CASE, THE TRIBUNAL IS c<3RRI«:::_t:=T_% IN i;A,W Sv-I)I'$SM-VISSZING * S'

THE APPEALS PREFERRED BY__1_'TH1E.,_REvENSU'E QN THE
GROUND THAT ALL  ISSSUEtS*~ ] REGARDING
PAYMENT OF INTEREST ARE' CGVEREDIII 'THE ORDER OF
THE SPECIAL BEI\f_CH_DATED' 3?; .O'?..;;QOG'.&_.'ETG.

ITA NO. '7£)A'/_"?._()~'_{_}_M1"_ ' . " 

_. 

 . THE', CGIIIIMISSIONER OF'

 IvNCOIME.:TAX~,_NIYSORE.
N055/'I«,"SIII~I,PASHREE BUILDING.
VIS_VESWAi?.£';NAGAR.

MYSORE. -A 

A , _,   THE DY; "coI\/{MISSION ER OP

 INCQMETAX, {ASST}.
SPECIAL RANGE.
MYSORE. .... ..AI>IJIaLI;ANI*S



iéf:

1,»)

{BY SRI ER INDRA KUMAR. ADV.._)
AND

M/ S MANGALORE GAN ES}--LA
BEEDI VVORKS.

VINOBA ROAD.

MYSORE -- 5'70 005.

[BY SR1 A SI-IANKAR 8: SR} M. LAVA,:~1?&I)V-S'. )

ITA NO. 70/01 IS FILED_rUNDE'R_S'I«:CTIOI4«I<.é)60~A'; O'I9'=_

THE INCOME TAX ACT, 1961 ARI_S'I--NO OU.T'O.Ia'j'v_:ORIjER'VDT.
19.10.2000 IN ITA NO. 97.4/'I;sIAN"C/I998--.._I?OR THE
ASSESSMENT YEAR 199E..~--_§*3_  _"WHETHER, ON
THE FACTS AND CIRCUMSTANCES CASE, THE
TRIBUNAL IS CORRECT IE$:}"f;P;S_SiNz'3Vv'VTHE IMPUGNED
ORDER IN  OS'  __RESPONI)ENT-ASSESSEES

YEAR 19:'9_5~I96 ﬂiV3;i'.V'D:IVRE}CTl%TL'€C: - THE OEPRECIATION TO BE
ALLOWED 'ON THEV1C.AJr>11*AI;ISED VALUE OF TRADE MARK,
COPY RIGHT"UN'DER_ SECTION 35-A OF THE INCOME TAX

. ACT, I901 SAND AI;SOV_1NRESI>ECT OF THE VALUE OF' KNOW-I
"  H{)'.V_UN13E§B SE§C'I'ION 35--AB OF THE ACT, AND ETC.,.

 ~. "'S.TfI~1ES'E;I__.'r;A§$ HAVING BEEN HEARD AND RESERVED.
COMING ON_'1t«i'*.=OR PRONOUNCIEIMENT THIS DAY, SABPIAHIT

-- i ,. , U C. DELI'\7EFs1ED THE FOLLOWING ;~I

.... .. RESI3O;$T:t'?¢5I\éV':S¥.:"V'O:"'  "



: Lt :
JUDGMENT

l'"I'A No. 69/200}. is filed against. the common ofcier passed by the Income Tzix Alnpellaie 'I'ril:)unal dated 19. in .iTA N0s.33'i /Bang/99 for the assessrneni year . No.70/2001 is filed agairisi the same V(;Qi11n101:'1"bml:e'_rb'Cf the u Income Tax Appellate 'l'1'ibuna1 Al Nos.974/Bang/98 for the zissessnxeni yeaf A3995-9G'{'v"l'

2. The material facts leading L1}V)....i(§~i'.h'ese e1;5peal_s in so far as it is necessary for the di"spLa)sal~.ofitliese'two,appeals are as follows:

In 19.39;-.1aie.S.¥€ézghureun'Pi"abh.u"§sl,arted the business of inanufactuiting beedies-.v his brotherwindaw, Sri Madhav Sheneyl a1s'()'jni"ned_ the business as 21 partner and thus--vM/s.lV1;1,nga}bre.'V'Gsnesha Beech Works [for short 1-v:'MG.BW'~}.'V.ff}€ "fi.rn'i, céihie into existence with effect. from the said firm was rec0nstit:ut;ed from time m' --i.ilme'}' "_i_?he'12is1 rer:0n.sl'.il:Li'{.ion of the iimi was evidenced lhy a p--:1__ri.ne1':=1ji}:)A deed cli':.30.06.1982 and acc01'di11g to the " iVfeiye:rnie11t.s' inscie in {he deed. Hie last 1"eC011sii1it,.1l,i0n 01' the ﬁrnl :_'r3e:(_%:sin1}:%keffecrlive i'r<)n1 06.06.1982 s.nc.l a(:eo1'ding to 'the t £3"

:5:

avermems made in the deed. the last 1'ec()r1sE.ii:L1t.i011 of the firm b<3(:a11'1€: effect from 06.06.1982 and acc01'ding to {he part,r1e1'ship, 44116 ﬁrm comprised of the folloxving I8 }3a1?i*11c§fs+_'_5' 5 A' S1.N0.Name of the Pariners <3/oaléiﬁof Sh8df'é' " ~.

O1.

O2.

O3.

O4.

O5.

O6.

., 055$; 3 5' V .09.

B.Raghurama P:"abhu": ' M.Jana.rdhana R210 M.Anancfa Rao 5 M.Vinoda,Rao V M.Pu5sEi.p.a1a'Ehe1 .4.' _ 'w/'o S ubray Be11i§¥i "

I-iéinaiaiﬁéi _ 5 . _ W / 0 4Rag1'1t1.11'-ath.S}"1En0y M. Sy:--,1;"esh 'V

5. "Ix/E&.\/'»i 's*s'1::5_\$vzj11:::wtl1 R210 M , Rai.1_:T1$1I1 211113 R210 ~~ LJ£;ga1r121th Shenoy Vat sale: Shenoy D/0 M.Ja1'1ardhane1 Rae M.Gopi11a1.h Shenoy K}: '-;> ('1 21'-11.50%

--.fv7.65%«-5_:' .4 I 2 . 50% 12.50% 7.550/0 7.55% 2 . 50% 2 . 50°/0 7.55% 2 . 50%

33. Araihi Shenoy 7.55% D/o M.Jz1i'12ird1"1an.=:i Rao

3. Clause {3} of the paiﬁiership deed prtix-fi_cV1ed.V.'tl1s' C1L11'atiOI1 of the fiml. This Ciause reads The duration of the Part'r1ersh._ip"shall five' years in thefirst instance: lQlPlll'v"l_i'y_'ﬂ1t.tléli(1_l agVre-e:'nen't"

the parties hereto may exiertdtliesaid dtn'atior1. tiff during the sitbsist'er1cc?i_Q';'T t.hi.-55Pariinershtp any partners desire to retire par':-hrierslzip he or she can do so._"if_all t,h'e"ot.h.erV pa'rt'ners to the said rei"irernc:2:nt.« :;1i}»1ot:2e'aer. all: partners do not agree gait; the partner in.ten.aing soc months' notice in itrntirtg, of his V or'her._'1i:=1ie.nt'iori to retire and on expir'at'iori.._oj'the the said notice the said V Pasjtlrie-r. shall" to be a Partner and suhjec to ,, , 'Para i1'~'.1 injférajronithat date all his or her liabilities ;.and_ r'*{gVl1t.s a Partner of the firm shall come to an V4; C?laL1s'<é:.(1v8.l of the p21.1'1,2.1ers'nip deed had made specific:

'pi"o.Viei:)1_1s for the maz'1r1.e1' in which the 21fi'21irs of the firm were ij._o~_'t3€%..\1Lfoa;:iI1d up aﬁer its dissolution. 1i, reads as :.mcier: {Lg/"Q;

(.3 "I6. If the Partnership is dissolved, the going concern carried on under the name of the Firm MANGALORE GANESH BEEDI 'WORKS and all thee' trade marks used in course of the said business the said firm and under which the business'.s§fi.liei' -1- Partnership is carried. on shall vest in and hevlongv g the Partner who ojfers and pa;}sAA'Vo'r' .t'tu'o or Partners who jointly offer and pay tilted 'highest' price therefor as a single group at salext_o"t:e thertftzeld as among the Partners shall dvberentitletfi" .t'0"33:'ct. other Partners shall execute. 'cornplete it in favour of the purchasing Partner, or :ai:._his/her or their expense all stich 'trt.§:r:':';,neni:s and applications ot'he_rw__tse' or them for the registrat'ionA:t..his/ their names of all the all such deed, acts and transaetions 'asfh'dredL'incide~:1tal or necessary to the said transfei'*ee or a'-svsigrxbdee Partner or Partners. "

?:1.,1u<'I'S2_'u.8.I"1'J£A.tO xCia'Li's'e 3 of the Partnership Deed, the 'dissolved by efflux of time on 05.06.1987, P Hovretveri agreement among the partners as ,.___4u1'"J'1'§g)Vi¢1€r'd ~.iri*f:1e1t1se (3) itself, the duration was extended for El .A__i'tirt'hVei"'period of six months upto 05.12.1987 and therefore Vgfirms stood dissolved with effect from O6.i2.1E)87. away?

: 8 : Thereafter, the affairs of t.he ﬁrln had to be wound up aftei' its dissoiutioii under Clause 16 of the I?-'art.11ership Deed as referred to above. I-iowevei'. because of the difiereidieey of opinion aniong the eistwhiie partners. the affairs ..ei7.jti1e'e-fi;rrii_ Could not be wound up. 'I"'heref0re. 'two of the I_3ai'f1*!./11e':TA$'~<3i.t' thef fiml filed a petition before this C()L1I"i"llI1'd6'i',. t'11e-;p:*e'Vis:'-saris' of". Part X of the Companies Act. 1956. foreziriclzirig the ~_ of the firm in terms of Section 5831 V.V('4-}{a] thheretgf, Mpdetiiion it was registered as COP.M1988.,<'Ih'At_heVsaid petit'ion"hby order dated 05/05/£1.1988, t-,ti1s.e_'Cau1'ft' ;:'P'?::.m;'1'it:e'd. the group of partners {7} t1a\ziiig--._ c0§ritre1i_ihg.y: Ai1biite_rest"y« to continue t.he business as a1'17Vi.ntVeVrin1-arrarigemeht. till t.he conipietiion of winding ;>roeeediiigs."--~._:'Hn*wever, subsequently by order dated 14.06. ni'odifi.eat:ion of the earlier order framed tithe' tor \J\/11'l'(ViL1'ivI;l,Q',""l.Vﬂ1]3 of the affairs of the firm by selling its 'assets: ha évgoiizg concern.

V dd _ 6. "'<«Purs'uaVa't: to the above order. the AOP--3 deposited the bid '..4u"--Vs1.'m0V1.k1I1t."'(3f:. Rs.92 erores on 17.11.1994 with the official " _!iqLii~c!at0r and as per the order passed by this court. the assets ~.Qf._t1ie firm. as a goirig coricem were to be treated as liavinsz : 10 : the three part,1'1e1's purc.l1ase<fl the going COl1C€I'1'1 and were given riglit. to conlmence the business in the name of the SE1FI1€,'l?l-F>'l'11 MGBW from 18.} 13994 to 31.03.1995. AOP«3 (?()11(Tlt.1.'(:5'lltetft' 'ousiness and assessment. was filed. l--iowever,'3._a .1':-ﬁfisecl assessriient was filed seekiiig for de'di1cl'ioI1gin_..IfAcs'peci-fol Rs.l2,24,700/~« as revenue experiditure'«pertxiissilﬁleéllLi/s, the "1961 Act as the said expe11dit;s.,_ii'e._was."incuyfifecl {vtiolly'l:l'or the purpose of the said Associations."of°I?erso11ls.*-_They also claimed depreciated u/s Income Tax Act. 1961, {for sliofi. V__'t1'1e;"'Act'}.l': t1lai.t§ii:11.gV'. dedtictioii towards acquisition of patent. 1*iglits azidﬂknow how and in the alter11at'.ive dep1l*eciat.i0n of capitalising the value of t.lie.tfade mai'l{;.tflopji*iglJt.t. and technical know how by treating the sahme and machinery and grant _.dep1'eci,.a.}tion'~tlierein,1 The Assessing Officer by order dated irejjeetved the said claim of the assessee and dis'2:llov_.;edetion claimed u/s 374 35A and 35AB oi' the it Act. Being by the same, appeal was filed before the

7..«..Cmf:1n1issioner of Income Tax and the Conimissiorier of th.e wit'If1:e:)ﬁ:1'e*-.fl'axllby order dates} 19.10.2000. allowed the appeal in 'xvi;

: 1.1 :

part, by holding that the assessee is entitled to dedu<:t.ion of legal expenses. I-"towever. upheld the order of t.he Assessing Officer 1'eg21rdi1'1g the depreciation Ll/S 35A and 35A1.E3_ji).t'."t-}4'r~e V. Act. Being aggriexred by the order passed by the Cofn_n1is'siodne1' of Income Tax. AOPWB filed Appeal l'3at_1gf 98 of the Income Tax Appellate Tribunal a11__dlrt/he Rey_e:1"u.e'~ aggrieved by the order passed by t.lalHConlllltssioiiéf '1' ax in allowing the dedVas:'et.ion by llthet order of assessment passed by t.he Appeal No.472/sang/209.0' ztjféé s3/Bang/1997 for the assessatt-ere?' and t;lheVAppe1late Tribunal by order inlptlgned' «:ltllHl9.12.2O02 allowed the appeal filed"«by'--t.b.e' Persons and dismissed the three appeals Lu;/;.1,hc_ R'eyer1'ue. Being aggneved by the :.':'lo'rder ;_t'.he». A. Er1<:on1e"""'Tax Appellate Tribunal in ETA f:o1'--.the assessment year 199596 and ITA l No.S9Q'i'A./};_l/lf3an:;{3/'VQEZfor the assessment: year 1995436' these two appeals arel't_led.

ll < court. by order dated E9. 12.2002 allowed the appeal ..._tn p511't filed by the Re.Ve.1'1t.1e lloleling that the payment. of : la:

Clecluction of Rs.l2.2-4.700/-- 11/5 37 of the? AC1'. la-'as not admissible and tlie Tribmial was not. justified in a1l1c)\vi1'1gj;""i--he same and 1'urth.er held tlmt {he directions iovvards aVgq:uislit.i'c5n of pai,e1'1i rigliis. copy 1'igh1s and lmow how 12/ s of the Act. was also 1101 eLc1.n1issible. fllli. "als0',h<:_ld_Althat 'the Tribunal was also not justified in Ca.pi1.a'ilVisi';1_g'_f t,l1€Y'\falut3 Of .i_'.'l'1~5.:VVV" i:1"aclemark._ Copy right'. and {€Cl1I1iCE1.l_'.l{I10\?V liowby '11'éé;tifig Hie same as plant. and machim;-1.y anqli-'g:1a"11.i Vtl.e:preCi':$1'ti0n..~il101'ein. Being aggrieved. by thé ' .said__ &c:)1~clVérV:_ ;V0f_V this couri, defendant.19.12.2002'. Civil Appeal Nos.757--758/2005;. pr£;j:Q{.ti_e ~;*ai_e_0i"._the«--Hf0.rl'biéméL1pren1e Court of lnclia and ,t.he 1§y~V..§1-c1¢r.{1}§:ec1 28.01.2005 allowed both the éippeals ="il.1e orcler passed in Civil Appea1.N_n.4232}2003..,3-(i9i'iA"""Nos.134 to 140/2000 and El1Z)pf:'£1A.lS) antl"'1'en'1ii.t.ed the mailer back to this court onqt}esii0n"-N0s=.f'3T,V521116 7 and passed the following order in l -1110 alanvé Said'bé1{:Rgr0L1z1d.

"In i~he'g_r:;Ibrezsaid bazrlcgrounci, 11.20 remit the mailer " £10.. Higlli Court'. to consider question Nos. {iii}, {U} and ".._l'{L>fa'.}' qfresh along u.2iil't other mauers C0verea' by 2 : 13 : judgment' in C.A.No.~<1232/2003 eic., disposed of today. "

9. After remand. by order dated 07.04.2008 after héming Sri.E.R.Ir1cira Kumar, learned Senior Advocate a1ppeéi1fiVi1g4'»{o'r the appeiiants and S1'i.A.A.Kulkarni, counsel app6'ai*i11g=.foii iratervenors framed the following subst.-aiitiai.qu.esti0iésof iavis: 0' "1') Whether Rs.1 2,241,700/~ 'VaA§"."'ﬁ'€'él).€{,rI£,'lrQiV expenditure by the AssociaLioi1v-oj'Persi§hsi._'was constituted by the _ pal"lI"Li?!j::S' ' of 'lithe erstwhile firm; ~..MGBl/V; altoiijedxv as permissibie ded'u'etioii of the said Association ofv}.3ers.o:r1sV 37 of the Incoi€:1e§:?§dX Aet, £1901 laid out or eqqzieridedv:'«iuh«oily____ and exclusively for the ;:)'u.rpVOS€_ the said Association of A "I'.l1_:?:0 00 zWhetherlthe lrtssessee was entitled to claim 'larlgédedilteltfioii on the alleged expenditure of of patent n'ghts, copy rights and in terms of Section 35A and 35/{B q,t','t?He Act?

iii} " iVV__A7W'hether the Tribu.n.al had erred in directing it the Assessing Qﬂicer to capitalise the value of trade marks, Copy right and l.(;'{:hI'tl'CCil know V' lijollolwulg how by t"reafl'r1g the same as plant" and mac:h.1'ner_1; and grant. depreciation therein?" H l These. appeals are posted for hearlhg on the substantial questions oi' law.

10. We have heard Srtlndra Ktxnaaié. le§;iI*:1'edllt5e11io'1" do-.ﬁ~n§e.l.:

appearing for t.he revenue and'$1;i.A.R.l<.LEll{k3I'I1l';1'Sl'l§Slf1§1I1l{aI;. counsel appearing for the resporldelrlit-Si.

11. We have given careful vleo.11lsidei";1tl'O§i'l to the contention of the learned cour1se§'.appea1;11'1g and scrutinised "ahs\i§*ef the above said the material of; rfeE:(}rd. lar'1d_ we substa11tivé1l qule'sti~on oliifélawl follows:

(1) &°ei}l In tl1e_rlegaotive:;lA"

{iii} lnl'th_e .affirfnat.iV'e in favour of the revenue and 'tl'1e.'«'lassessee and the finding of the Is liable to be set aside by rest.o1-mg the the first Appellate Authority and the l ,. lK_ASsess.ing Officer.

REASONS S. f - 33 we:

: ES :

12. Substantial question of law (1): The assessee claimed deduction u/s 37 of the 1961. Act by filing 1'eturn;that Rs.12,24»,700/~ was spent towards the fees advocates for protecting the business of the firm an'cl_to.proVtect» l the assets of the firm as a going COI1C6I'l"'1 ans.-. f:he:41'efore'~they are entitled to deduction of the said amouiit of the Income Tax. Act. It is clear the oroyrisions 37 of the income Tax Act that . be eiigitblelifor an allowance under this the following conditions should be_:sa__tisfied_\ _ l l V 3 1} the_.«*cX9ei:i§ii;l:u'1'é_'.;:msti--.inE>t D.€Wg0ve'rned by the and SOVV.

ii} have been laid out wholly . _V an'd"'e>;cIusi'velyuthe purpose of the business of tl1e=.a.sseAsse€3';"" 'V V _ :'--the:.4e2ih:enditL1re must not be personal in nature, ' thei:e_Xf)endit111'e must not be capital in nature.

" A it is well that the burden of proof that particular 'eitperiiditjure has been laid out Wholly and exclusively for the ptirpcase of business is on the assessee as held by the l~ion'ble §'a,§:~= .

5} : 15 : Supreme Court. in the ease of COMMISSIONER OF INCOME TAX, ANDHRA PRADESH vs. IJHANRAJGIRJI NARASINGIRJI (1973 (911113 544). The esseriiiiai i4¢;,:.:_":i5V"- V. out as to whei'.1"1e:r the eXpendit.1i're paid towards i,he4._ed~r.r:oQ.:«ii.eSi* for Cor1dL1et'ing the case on behaif of the 'i'ii:'.1n',ha._s. fetid H' down by the .Hon'bIe Supreme CIo"uVrt:'--._iinr'1 '~Ct-ase"

COMMISSIONER or INcoME~TAX,~ Vs.' 'Bram COTTON SPINNING AND WEAVING .MILLS Lrb~t19ti1 (32) Im 166)as follows: i i ' V ' "The essent,ia'l_"t'esti i.'Ohichh: applied is whether the incurred for the preservation the assessee's business process or proceedings whichinighi; hai}e.ijV'resatitedV~" in the reduction of its income and *prof_its3_ whether the sum was _ acfttally and hor1est:i_i;'incurred. It is weilwsettled that :d,editCt;tbiZity of expenditure incurred in 'V'pros.ecitt.irig'"' Ljivil proceedings to resist. the "eriforeerreijtrio)' a measure, legislative or execi.itive. wuf':ict1v--.frnedr1s restriction on the carrytriﬂ on Of 0» A biisiness or to obtain a deci.arat'i.on that the measure _is"ir1Lsalid. would, if other conditions are satisfied. be Aszadirtissible as a deditction under Section 10 {2} {Xv}. ~--:D€C1l.tClI'biifly ofsueh expendit.ure does not depend on :17}:

the final oiitcome of those proceedings. However wrongheaded, ill advised. undu.ly optimistic or over-- confi.dent" in his convictions the assessee niigh~t:_"-._ appear in the light of the ultimate expenditure in prosecuting a civil. proceeding c'annoi;._ be denied as a permissible d_(_'dLt_C'l'i1°OFl_" ''''it'fgis.l'' ' reasonabty and honestly i.ncurrerd io..pi"orno.i.e.' 't'}1Q_-4,,, interest of the business

14. The I-I01'1'ble Supreme C0i1rt'i.i«..llilIi the oi: SREE MEENAKSHI MILLS LTD V Ct§MMIS$.It)NER oi?' ENCOME TAX, MCADRAS (1967 (63) rm 2o7;i'héjé, '_1mows:

"The dedi.tc'tibiti=t, o'?7ex" end_it'iiref'incurred in proseciiting' ht/.~._ c'i.9=il_V 'depends upon the riature th_e.Vlle_aal proceeding in relation to lltgusiriess and cannot: be a[fect'ed"' t':l1e'.oigtcorI1e of that proceeding. Ho3;ve'uer .lwrong':«l1eaded.. ill advised, unduly o',;:1tin1iAsit'ic'vi- or oiv)er""'con/'ident:' in his conviction the ' ;mi"gh_t appear in the light: of the ultimate ._ctecisioiij.e2qoenditure in starting and prosecuting a civil proCee'di.r1g Qannot: be denied as a permissible deducifimi in computing the taxable income merely it because the proceed.i.ng had jailed, if otherwise the l"'i_lle;cp'eriditi,zre' was laid out for the purpose of the Hlbusiness wholli; and exclusively. that is, reasonably x I. "4 :13: and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from Court to COtLFft._:"'«l_ and incurring expenditure for that purpose is r_r;ot*o.f ground for ctisailowfng the claim."

15. The Contention of the learned co:¥:r1selA4appeari1"1g:

parties has to be considered in the_lightl'of'the V down by Horfble Supreme Court Vto_a'bove land' the Condition requisite that is tofbe the._assesseeVAto claim deduction u/s 37 of the 1961

16. It is the cor1;'te'ritf;jeor1 ofthe --lear11e'd~:.V'co1_1_nfse1 appearing for the reverluefappelliantls?-I that,t'he assessing authority ar1d the Commissioner appellate authority had rightly disal1oylfe--dt this -détitiotton claimed by the assessee 011 they groéeznd ll:'A1.atx'l;l1€' amo__u_r1t of Rs. 12,24,700/v was not towards ee~ndt1etir1g~~._li'ti.gation on behalf of the firm but there were Vpersonals'1ivtiga.tion1=.regarding' the ownership of the going (:.)r1cerr1f1VlGVBW regarding the winding up of the said 'p-}_0geee::;gs"a11d ownership of the assets of the said MGBW a11d the auction Conducted for the sale of assets of the 'amongst the partners of the dissolved firm and therefore "°'~§"::."§% ' 11%:

the said expenses were persons} in 1":a£,.ii1*e and €K('.1_E.1SiV€1y they were not for the purpose of business of the assessee i1ia11L1fa(:mi'e and sake of beedies and the AOP-3 sumifiied business as 21 going concern after the sale was iéQiji'i'i1*i1.ieci_:

their favour from 18.11.1994 £0 31.03.1995 zufid....1;e'i;ii'ii:'i'1fQ1Ii 18.11.1994 to 31.03.1995 is in 1'espe(}.t.4re.fu'.sihe"--1§{1.5ixies;s_9:' conducted by A0113 and pl'iO1'fE{)" thai".i'i9em 0sV1v.7U4;.v'1994:': is 9

17.11.1994 the business was e;"si1vhi1e partners of MGBW and f,hei'ef01'e_"A ii'ii}d.i9n~t; of Assessing Officer which is confirmed AL1tho1'ity is iustiﬁed and the s'aiC1:_findiﬁ_g ciiefndt 3"91_w}}111€1'fe1'€1'1Ce at the hands of the lrieoisie /Xbjselllate .Aiii1101'iiy and the finding of the T ribunéd is deductible is perverse and arbii1'ar_\;- and 1iiib1_e is be setiasside.

--o:t'he1' hand. it is the contention of the learned e0Li~:1se1Vb«af)pVe9.i'ing;".f01' the assessee that. the said amount of .RS.}2,.24,?00/5.VhE1S been claimed as the expendi1u1'e iI1CE.£1'1'€d K :'--\O__P«3V"who were the erstwhile pa1'i.ne1's of MGBW for the L"g){L"iT"[V)i)':-:'€: of p1'oE,ect.ing,_{ the assets of MGBW as 21 going concern .. JV'c'i'I'1'(iV saie of the said assets as 2.1 goirlg e.0ii(:ei*'r1 and 2-1(:quisi'1:i0i1 :20: of the saici property in the hands of the assessee and therefore the order of the Tribtinal is justified and the order lay the Appellate Authority Confirming the order of i.hepf1Ti."il)x;i1ai~ disallowing the deduction is erroneous.

18. It is clear from the order passed by theAssessing"Offi'ele1"'<;;aA that the amount. of Rs.l2,2-4,700,"? was cllebilledp i1';'Vths_ev:t)pifofits it and loss account claiming to be deduetiori.eligihieilti/'Is [1] of the 1961 Act. The amount 'the~.._piflo'I7essional paid to the advocates and it was that the legal fees are in the High Court in eonneetvioijifyvith' 'theftlis'pt1tes'~5alnong the partners. The learneeigAsst::ssii:ig:'l-Clfﬁeeiiiheld that the said dispute was basically ol"--..§lissolt1Lio11 and auction and COI1fiI'II1at;iO1'. of sale Apirl' 'favo'u1' of AOP~3 regarding the sale of ollflll/[Q-I3V»l.;1s a 'g'0'iiig"t:oI1.c:e1'n and it was not wholly and exeltisivelv "fortl1e"'pL1rpose of the business as the assessee _ Vaeqtiiret1'--.o\xrrlei'_shi}.::"of assets of MGBW only from 18.11.1994 aucl prior t<:--..'.tl1at'Vit was not being managed and returns were :7i'i1e_§i' :'m;_n 1.1994 to 31.03.1995 by AOP42 and the1'ef01'e t1':C'asses:éees who are the suc.<:.e.ssful biclders in the auetiori of r.,'%.__.

:2£,:

MGBW only from 18.11.1994 and the return filed frorn 18.1 i. 1994 to 31.03.1995 perteiins to the expenditure iiictzifred arid since the said expenditure is personal expeltétiittire V. regarding the fees paid to the advocate regmdiiig £h€.'().WI1f:,fI"Sl;1if)it of the assets of the erstwhile partr1e1's;'oi:iV£{I-BW whiel1_wei'e sold as a going concern. he upheld -by Assessing Officer. However. in Appellate Tribunal (mrr). V the 'I'r.iij'i'ii«..}_{1'1:li'g.»_i._ci tleez-eieive legal expenditure for defending asessee is revenue in 'deduction as heid by the He-e*'t,§1_e._s.eei_~euie..___eoeit iii: the case of DALMIA JAIN AND .¢0.I§1M1s.5ioNER OF INCOME TAX (1971 (51) 4754) vthe'..ei;3'pellant took over the business is not in disputeldand eS.--pen.dii'.'ure made towards fees to the Vadiiocate isialso--i11ot. in"d'i'sptite and therefore the expenditure [i] of the 1961 Act and accordingly l""-«>.directed__ to e1l]:,iw1i_he claim of the assessee in this regard.

" 13.. is ..£fl('3'-ell' from the scrutiny of the material on record that 'adrnaitte_d'l'y MGBW wliieh was 3 registered partnership firm was on 08.12.1987 and t:hcreai'1.er on the application fiied as :23: by two oi" the erstwhile partners under the Companies Act. winding up proceedings started and this court auctioned the assets of MGBW as a going concern in Vi€VV of clause i64.oVf Partnership Deed of the erstwhile firm that on dissol.1§it.iot:t.l_' _ assets of the firm as going concern should be sold"ortl~y one _ 0' of the erstwhile partners and not to Ot1tSldC1'S, A. floweyer. 'in'=t_he,t, .0 interest. of 150000 employees. reserved price of Rs.;30 value of the assets of the MGBW Cotteerzwiwas ltgred on the basis of the valuation Vinaide by *C_'nat'te1"ed Aeeountant appointed by the court a.r1_c:l._ ibidvvsVu:bvrnVitt'.ed by the assessee/erstwhile' 3 ;isartrie:'s for"RsL'92 "ere.r.e.s was upheld and therefore aritajttrtt;:VA3.yyas:.'d_epostteVd by the assessee and thereafter C)Ait't'iVei'a1 1Jtqt;i§tija1¢'r--~3§ias =iaker1 steps to make payment and fiI1E:1l.lj;.. the assessee'/A0OP«--"3 started business in the name of

18.i.i1.19'9"4["ai1d the return pertains to the period 1'{am"'.1ss.r.1. 31.03.1995 in so far as it relates to it business 1't1n'b.y"Vt;he assessee prior to that year from * l«l..fjv.-'..0li-..,04.1994} to 17.11.1994. it was AOP-12/erstwhile partners 0 4-.oi'--Vl_,\iGE3W who were earryirig on business and were fiiirtg the returns and therefore the burden upon the assessee to prove a "r 5% , : 21+:

that the said expenditure of Rs.i2,24,700/~ has been spent towards the payment of fees payabie to the advocates exclusively and wholly for the pLIl'pOS€ of business of the assessee not personal in nature.

20. It is clear from the material on record~1----th:ajt.Vthough9' assessee was given an opportunity to:=_1'ile.,.separate' '3.CCOt1i1t.so.lo' pertaining to the period from 01..eG4_..199V4_;to i7.,i'i'A.ei..s3a2i, period during which A013-3 was of MGBW and for the period wasvvlearrying on the business of said of the assets of the going concern. oftlie order:.15ass_e{;l:fby this court, the assessee to*.,.:file separate statement of account for the said 04.1994 to 17.11.1994 and from 18.1V1._V199%i°to__V31,Q*3.l'99'59land assessee has only produced tiiie advocateswto whom fees of Rs.12,24,700/- was paid. .tt:n'aterial on record to show that the said fees 9 lV....v.was paidto the'vle:a_d{Iocates for defending the litigation on behalf "--«__oi' the assessee and the said expenditure was incurred solely and exeltisively for the purpose of business of the asessee. It is ciear _fro'm 'lithe material on record that litigation was pending \ : 25 : from 17.12.1984 regarding the assets of the erstwhile MGBW and the sale of assets of the said tlrm which was V¥'()i1I1dr't3p among the erstwhile partners and in View of the ()1'(le1j.__passe§l by this Court. the highest. bid subn'1itt.ecl by ' partiners/AOP~3 in a sun} of Rs.92 ert)r§':s"iv'eio. aCAeept.elé1"lbyVthve High Court and thereafter the Official LiAlt'pV,iieiato1* in' of the direction issued by this assets of the firm in favour elnlab1.e them to start business in the name loilltiiiell'fiifiii} 'aiid "thereafter business was Star'?6lJ'-R31./l_ ll There is no material to shoxﬁwthat ._tl*iat Waspaid to the advocates pertained cajs'e.l_'on_behla1f of the asessee AOP~3 for the periodu from ,_i'af;i.i'."is:94«to 31.03.1995 and in the absence of anylinaterihal A'pi'o'tluced in that behalf and the :.fiiatve1'iari._.oni,j,1'eeord ieeVe'aling that the litigation that was pe-fidii'igt_Wasoiilgf'regarding the dissolution of the assets of the V'-gfirrn amongstthelefstwliile paitners and the sale Conducted as _ 1e~.._Vp4er._i,he direet:i;ons of this court and acquisition of the assets of lhE.l:?t'lCJlF51'eV as a going concern by the assessee/AOP--3 who ' e1*st':While partners as they had s11bn1itt.ed their bid of : 26 : Rs.9.'2. erores to purchase the assets 01' the iirin. it is clear that the assessee has failed to p1'ove that the said expenditure {oG2t.s incurred for the purpose ot'busi.1'1ess and it was not per.s_o'nal'in. nature. The finding of the Assessing Officer as eonlTiVr1n:e.d by ' the Commissioner of Income Tax in the ;i'i1'st.'"appe«al disailtnyirzg the deduction claimed is justified and it is Clear on _--pe'r»t.1sal»oi'..V V' the order passed by the ITAT that. theesbaid on question of fact as to .y\rhet.h'e'i' =ntj1ell""legal expenses of Rs.}.2,24,700/- can be deduclteldtx/l's.V§3' Act has been reversed by the T I'l_b.'t1A'I'"lE;"'ul_ wi§thotit'.:assi'griing' valid reasons for the same. t'i*oin.___t.i*ie rea«s'or;iiig assigned by the Tribunal that. that the said expenditure has been incurred Vtowards.'tlﬁ;e_[lighting of the litigation against. the lirm a1idV__rega1;dirig ~I,l:"1eA"vf{1tv/1'Cfl,lO11 held and acquisition of :.o'v.znersh;:iﬁ.=. AOP-3","~th_enas.sessee had not produced any 1ﬁate1§ial_to.,Vshoxsfuthat. the said expenditure was incurred bet:viieen"___l.x8;"1l 31.03.1995 exclusively for the purpose business,ol'"A.OP~3 and it was not personal in nature. li'~«.._"la'herefore 1nterferi.I1g with the said question of fact without any ba.s'isAiserroiieous and liable to be set aside. Accordiiigly. we 3 AV "< ii Ex;

"M >«.. _.

:2}:

answer the substaritial question of law by holding that the finding of the Tribunal that the assessee is enti.tled__.__to deduction of Rs.12,24,?OO/-- as revenue expenditure u/sj the 1961 Act is liable to be set aside and the orderpassedvlhsilbjr ~ the first Appellate Authority confirm_ing.__the ;'oi'der'_':v the Assessing Officer disallowing the said.' d:e'ciu'cti:en to:"*he'c~:i,c_' restored. Accordingly, we answer'the~.ﬁrst Substantial1qti.esti.on of law in favour of the revenue and again_st..the assessee. ii

21. Substantial question of 'andTh'ese points are Considered together 'si._n(_:e they intercjo_r1ne'e'ted and to avoid repetition. The ""p.artn'ersV.of MGBW had filed return for the 'period"fi'0ifrr ._o"i..;:o'2;-..19-94 to 31.03.1995 and they have filed a reinE._sedVVre'turn'.. " 1;'¢m¥r1ed counsel appearing for the v'.a.ppe11ant;reVenue lsubﬁrnitted that the Appellate Authority had 'disallowed thexhplaim of the assessee towards alleged eXpendl§.§ure' «of.._act;'lu.isitioI1 of patent rights, copy rights and lcriow how tertns of Section 35A and 35AB of the Act and had " 'rejected the alternative prayer for capitalising the value of _trad'eniar'ks, copy right and know now by treating the same as .._piant and machinery and grant dep1'eci.ation thereon. However, x 92$', 3?;/'E' the Iiieome Tax Appellate Tribunal (ITAT) has allowed the appeal filed by the assessee and held that the atsse"-:se--e"'--§;s entitled to capitalise the value of the i1'adema1'k_s',3.eo}§y:ei"igg.l%ivt;_Tl ~ and know how by treatirig the same as ptanf-"ahti-.ii11e1'C:'hi'i'iterj,rV and grant. depreciation thereon and ai_'et:o--i'ciii1gly dileetion for assessment..

22. Learned Counsel 'c1.[)p€E1l'iI"lg__v5,:li"CV!)V1:" the it i:i'[3{VV):€_3.ll:a11VtV}1'f3V€HL1€ submitted that the is'alhriotf.iTe~ntitiledAA "to claim depreciation unciel. ASectiori.._35_A,ah_d 1961 Act as the assessee were entitled to depl-eeiation iihdelg" of the Act and what was soldwvas -'unless goodwill was in the rtature of or COpy right or know how, the value of tl1e"s§iII:(?: ..::o{iE.dl'ii.ot be emitted to depreciation u/s ..~3t5A a_ne, of tlie«.Ae_t:; The learned senior counsel further V"V.siiljm.i_tt,ed that.' lithe order passed by this court on 14.06.1994 aa'd.tlri'e 'fiEi'c'1:'l'~«§i1'Ctt;"}.",-:f)£lSS€d on 21.09.1994 would clearly reveal it that w1_iat_.wa_.sj'..~ sold was goodwilt and the net assets and ..44t,aI,:gible a:i€i:.iiit.a1'igible assets of the firm and the same was Abased"-._Lipc>n the valuation made by the Chai'te1'ed i 1z'E;_1:..a}"

Ed :&"f:

Accountant: after consiclering the objections filed by the assessee for the said \.-'alz.1atio11 inade by the Chairiered Accountant and only on the basis of the valuation rna_d.e_ Chartered A(:eountai'11. and VEi1L1€I'S of the assessee i,r'ea1led=50%' towards know how. 30% towards copy ;righi"and; 2C)"»s'iex_~:ards trade mark which is clearly er1'oneoL1s":;r1'd_if 1he_--»valu~e1tiori..A '' made by the assessee is accepted the will be nil which will be (t()I"if..1"ary§;ii)" oi'd_er this court while auctioning theta ,.The learned counsel further sulV3rnAi:ti--ed r'Vij'b'unal was not justified in gra1j;t'ixig._ Vai.£;-eij:.i'ati_ju__¢" }<;_ifa3}e1:"vﬂ'by_ treating the patent right, trad.emark" fﬁreehnieal _ know how as plant and machinery granﬁng thereon as what was sold was goodwill aridno aniourit been spent by AOP--3 towards ;faéc1m;:s.o'h of paieni. riigvhtgivcopy right and technical know how andthereibi'e._¢1.he"said finding is also erroneous and liable to be ' vset aside.

23: On illC'_V(l1.lE]€1' hand. learned counsel appearing for the aS.S*esseie._usubn'1iti:ed that tlimigli this court fixed the reserved K_':a,.:§{>3 : 3 0:

value. of Rs.3O erores on the basis of the valt1at.io11 made by the Chartered Accountant: appoi.nt.ed by this ctourt. at the timebol' Inaliing the bid for Rs.92 erores by the assessee. the _e.rs'twl1i=le partners of the firm of MGBVV. the valuation ' through the auditor and aeeordiiigg to §'hleii'1"'3Q%& of th'e._*-zalae towards know how, 30% towards copy rVig_:l1t,*--_ai.1d 2(}% '~t.o\vaV17ds;.,VVV" trademark and therefore the to depreciation U/S 35A and patlerrt-..ri.ght and towards value of know :»:eo:,i1tsel further submitted that tl"l¢..v'3_:[:)'iC1_f'1t ffiiidil to be viewed liberally and it __w'o'a.1.4l_d5I:r1et __eo.i,1fir1eds' to btiildiiag, plant. and rr1ac:hi11ery.a_ It begiveii wider meaning to include the design the serve the se:C~:tet<..i'o'rm..:1la and also the trademark which place and"i.mporta11t;=.riﬂe in the matter of beedies and Vth.erei'or»e~§'theudi.rec:tiori isstied by the Tribunal that. the value of 'Co*p$f~--rigi1t. and goodwill should treated as plant ar1d".i3iag:hiiie'ryr,_ £{i}:d"..E1SS€SS€€ is eiitittied to depreciation is l_}:41st,i.£i.ed:__ l11_vs't1.p:port of his eo1'1t.e11tion, he has relied upon the " I'[deei.'sior1s ofthe l--loifble Supreme Court. different. it-Iigh Courts ' aiid also this Court which are as follows:

: 31: 1} In the Case 01' PRAKASH BEEDIES PVT. LTD., VS. COMMISSIONER OF INCOME TAX [1993 (201) ITR 106.3 when-zin the Hc)n"{)Ie Supreme Court reversing the deeislaill-§;.{"..,, the I-{igh Court has held as follows:

"that in the beedi. trade, the brand 'rLa.n1e sign_L'ficanl business value. Tl1e'~,paymerns._lserel" made in consideration Q/'a uallaable ffgfjl"parI:ed'lV'l:;;.il,:nl by the ﬁrm in favour Qf' l,'F'le""leon1par2yl.*-Tf'EaenH assuming that the payrnents zgnerelo the partners, long as the agreernenl._.V:tuhel;'el.;n:ler._'ﬁnelpayments were made was not' "la rnefe' or a mere sereen._,l!ze: payIT':leI1:li$_:COl.l4ld:~b.lf_tQl be z,'fea1'.ed as payments 1-:1'czc4'le5L:_br_c_2'_ directiors asl:f"direc'r"ars and the paymenls n§)l;,'a'll»ll)ér'.l1ln._'seel:ion 40 (C). "

11. haskfurlher hale-~ ' "The genair1er1ess"fO.",_ af' the agreement belweerl. ale a.ss.essee--cl5lnpar1y and the firm is not __Th(:".']':("1Cl'..1.lI1"l'Qf'pClyFIl€I1IjS made on account"

. :qfT_VroyAal£y.<VA.i12Vlerms Qf clause 4 (a) of the said is-..also not disputed. It is also not '(23'_s',V_f)Llt4e(l"ll:i.al:, in lhe beedl trade, the brand name caruriesxlAS££§VI;1§l'iear1l business value. It. is necessary lo 'V keep lhls factual ctoniexl ln TTliI'ld wllile examining '' 'l"l1_.eg1.lesli()r1 at issue. "

233.:

ii) In the case of SCIENTIFIC ENGINEERING HOUSE PVT.

LTD.. VS. COMMISSIONER OF INCOME TAX. ANDHRA PRADESH (1986 (157) ITR 86) wherein the Hoifbie Court has heid as follows:

.-F.' "1*Ield., accepting the claim of the appetian.t__.~;.~,'.- « reading clauses 3 and 6 (a) t,oge;t:her.::"i'i that rendition of documentation servicez "

the main service to be reéidered by the collaborator; V 2 I

(ii) that the various doct'imer1.ts'Wsiiei: d.rat,v'irigs, designs, charts, plans' 'arid other literature included iris.~--doct'tnierit=attori_ the supply 1iJ§lCL"t'-L'xI'i_iC.t':'»':g(;.i'I*-K'bj}__..:fh€ foreign cottaborator,iihiorefflor the tools by using which 'the V' ' manufac't:uring the irisiininieritstwas to"be,. the appellant: and for aequifring .iechriica'i: knowehow through these A a 'ti'ti7v'.p....Si.tiT1 payment was made. This » :V'expen:d'tti.tre'"was incurred. by the appellant as and g by price of the drawings, designs, cIj1oirts,. processing data and other literature.

comprised in "document'ation service" and was E = of a capital nature as a result, whereof a capital of technical lmow~hou,2 in the shape of draivirigs. designs, crharis. plans, processing data and other literature. etc. . comprised in :33: "documentation service" and was of a capital nature as a resuli i.ul'zereQf a capital asset of technical knowvhow in the shape Q/'dI'a.i.i>i.n.gs. desigri.s. charts,' ll plans, processing data and other liieraiure ' acquired by the appellant. V iii} That "plant" was not necessarily Mpconfine-;:'d"'t:o.::'_an*.. apparatus which was used r;rier;l1arLioal.ui.. l' V operations or process or was ernploged " in. mechanical or industrial bLlsi.ness. f3'ui IT! _oibder{_:i.o.. qualify as "planl." the pariicular"i«arlicle "haijie some degree of dLlFCllCl:ilfl.3_}. be applied was: Did the articleilhe;;liln:cl'ionV:d_o_ifdaplanl in the assessee's trading."acl'ir§iI1,l? idol of his trade with ca&rried'xon" hji.s'--V.bus.iness? U the answer was inlhiecyffinn'ai.i'i;e,ii would be a "plant".

iv) In the case 'coMMissIoNs1V§ OF INCOME TAX VS. ELECON ENGINEERING' .C0,,_ LTIL, (1974 (96) ITR 673) wherein the Ho_n"b}e Sup-::e:r1_e -.(__)C>'u'1"i has held as under:

"Kr_row»how' a...pec'uliar kind of asset. It is the ac_c'i.tnE1alaiedfiirld..Q)l7.lcnoIuledge acquired by years of research, experimentation and whole of ii is not in an imfangible ei9eii:i_i'li:iile ii is in the process of being acquired. and pery ho'/len. it takes a physicalforrn as it grows in V is the shape of formulae. drawings. patterns. blue :3'-r:

prints, s_pec>ificai.ioiis and so on. Tlie maierialforrri it takes not onlyfacilii.ai.es _presen:ai.ior'i. collation and ready reference but also makes it. perceptible ar1_c,lf"

visible and easily capable of being transmiiiea'''"'l*o.f;~. " T' others. Books ioli.i(:1'i one consults lo inform L"

mind and thereby uses them in ii eeourse' of loi1e's V' business or profession are expressly ir;-cliuied..u:.it'h-in"

the meaning of the work "plain". Hence; t:here.."zTsAnol' reason to excluclefrom the iuicie.'i':-;zectni.ng._Qf'theIterinl" S objects of similar n.at'ur_e such lcEvraun_'.r'igs. lpat'tem_s. designs. eic.. wliic.h;"«-- like are the emboa'.irnen is of know-how anclv 'selrve. purpose of teaching at lo_ng.__ rarhgelll' ' regard to the legislative l'nl_en.i.f£'ogive.a1u)id.e,n'Leaning'"i:o the word.

"plani:"*; irnaierial l"r'ecord_ .oj'._kriou:~.l1ott: (even assuming that l{=i1ou_.x--hoio'.iiseli7is'~in't'angible) is clearly included within line" ineanirt*j.oj"'*-i_he« 'work "plant" in section

-vaoooc 2:20.:

r,_l_rawings.._.a.nd patterns by tiiemselves did not perfornjillany mechanical operations or processes aridlAon"'».iii.e :V'C-O?'I1m€f1C€m£3f1l of proolttciion of gears and idl_ers*ii tniighi not be necessary to consult them ana' zoiui.r1_g to technological advance they might in V nc--:>uu.rse"' of lime become obsolete. These factors. 'llt()l'.l.3'€l3L"T. could not militate against. their being plant: since they forrned ihe basis of mctni.gj'acitiring the : 35' :

TTlClChiI1.(3f_[} am} they were so to say the basic tools Qf the assesseels trade having a _fairiy enduring quality. The drawings and paiierns were ;3la1'i.:'~._:W_ wi.ih.in the meaning Qf Section 32 and (he 5 » was emailed. to depreciaiion in respect" of iihesefv. L"

assets on the pro raia Cost Of€i'1€.'!'T c;cc;u--:7s3ii.io'_n.

v) In the case of D AND H sEcHER£>1v COMMISSIONER OF INCOME TAX"v--._{iI981 "1132; ..1jéR\ij"',"'t.i§e Madhya Pradesh High C011ri:"hje1s 1"1('?-}'{:i"'ci'-.c':':.: 'Lerider: ii I "Therejbre. the entire li.irnp' stsrfi :payr7._1e»:1/i."' made to the collaborators by the" msessee==,corripc;r1'y" was for the purpose t;i;ti*ri.iz2gV:'-I«héﬁ ﬁlani: Of""I'h€~"ﬂS€SS€€ into existence é5.I'1.d'.-ufOV)l5iL'i?'~.i1 iﬁfj-ii>§j'z'!€iij;g"condition and was to be inclLiCie._d _tirlv.V t'i1e."~aft1,ia{ Cost of plant and rnachirt--ery«. and iﬁi.e.V<iissie's,s'e.;e would be eniitied to deduciiori»._oj' .d.epreciaii0.rI'i' and d.eueEo_pment rebate theg;-fem,"

Av:1»)__V » jig __ti1eA Of COMMISSIONER OF INCOME--'1'AX vs. AND PLASTICS LTD., (2005 (273) ITR 59)'.°whe--reit1".i:11e Madhya Pradesh I--Iigh Court has heid as 'ui'1€1er: .-

"'"':".=::e use of the expression. "acqui'ring" in se(:i.1'on V. ._}35Af3 has to be given (1 liberal. n'i.eam'ng raiher than a ,..31 \f--' "

:36:

strict one. In other words. in order to attract" the rigour of section SSAB it may not be necessary for the assessee to actually become an absolute ou:ne_:». of the knowvhow. But if on payment of consideration. the assessee is able to use the i'<7:-"'._:0M.={ﬁ. how to run his business the requirement 35AB stands satisfied. A iTtere'».14readi.ng "Qf section {2} and {3} of Seci;ion_3_5A i,i)hich deais-".§ioAithA' acquisition of patent' and copjtﬁigiit. Ltt()'l...iid'.,.SLi%t)}50t;tI'"

the aforesaid interpr_et'ationV____ii:'hert~__ it .iise.s__ title expression "where the rigiits .corneVi"ito.V_ah'"end without being subsequently revived}. "iri.:' the applicability of Sectiori ' ' payment namely. whé.gvhe§}'icapiVt'ai o-.r_'"reverute'is"'riot decisive. What is inaieiiai is » iohfjethe~r..i*t;h€-9; payrnent made satisfies the re{;g.itir_:e'meiiti»_jof. Section 35AB or not."

vii) In the c"as__e" or v"Co§MMIss1oNER OF INCOME TAX VS. a;IJARA,ti ocnmpﬁmt :L:r1J_,, (2008 (306 1 [TR 320) wherein the has heid as under:

ai,ies_t'i_oii.:;"that h.as a.risen.for our consideration is iuh__eth_er~ theassessee is entitiea', to depreciation on account';.o_f capitalisation of engineering service fees & xpaigi aforeign company or whether the assessee ' eni.it'led. to a d(3dI,iCf.i01'1 under section 35/U3 Of the Matt. According to the Tribunal, the assessee is 2354':

entitled to depreciation on account ofcapiiatI',;zat.ion of en_qineeri.ng servicefees and it is this conclusion that has been disputed by the Revenue. "

viii) In the case of NIPPON ELECTRONICS (P) ifs. 4_ COMMISSIONER or INCOME TAX, "see "I; is) it " t .

ITR 231) wherein a division bench of foﬁowsz "It is well known in the ug_or'td_qfj_contrnerce that the income of a bLtSiTz€5_t§iT1Ctn«'_VAfS s_ttrpit.is by which the gross receipts from ii'bttstn.ess.A/ieétceed the expenditure t.ncu::r_ed 'labour, «gapitat and managertat_Vs.kittgabn;i attoiher t'_angtbte"and intangible assets the business.

Ordtrzaritg; artgV--£eNp¢2»nditttvre'which is not of capital nature'incurred.__in of business or trade is treated. ..re'venueAAe§eoendit'ure, but so far as the _fD:e<dV %set:s,V"u;'.htch are utilised for the purpose of are concerned, a certain percentage of their =p'o_putarty known as "depreciation". is '' ded1tctedV-Vp_et%1i.odieatly in the course of computation of the Apro:fit'v:nctde by him. Without taking into account x such. d.epree:'ati'or1, it would not be possible to arrive "the true profits. Thai is why the IT Act' has provided for depreciation cttlowanee being allowed under 5.3;? of the Act in respect Q./K builcttngs. = .~: .-és :38: machinery, plant orfurniture owned by the assessee and used. for the purpose of the busin.ess_. st.tlQ}'eci. to certain conditions.

843 {3} of the Act states that "plant" incrlttde_s~. ships. vehicles, books, scientific apparatus L" 3 surgical equipment used. jbr the purpose business. The definition is not an"e;chattstive"one. V As time passes it is not only t,angibleec§sset.s'-.th'at'"u" depreciate but also intangible_assets 'like teclénicall' knowledge that: become obsolete as progress'is'r_naelelll l in scierittfic research.;__ More_o.uer.,__ when lt'e.cllfIicril know-how r1.ecessaryfO_i:V:gi"he --l_9tt.s-i:1es.s' " acquired by incurring expenditure, there list» in denying gtppropria.t_e of its cost while comp:ti:ing5itaxable_ profits be brought; Ltndeijihe h.eading"'Plan_t"'.v...jiertce, the word "plant". when ituis gconstrujfedtilieralig, includes within its meaning sL«:ch'vdes':Tgns and blue--print's also. Where the assessee~compang had. used the it ' drawings, plants and technical data which '"z'.t._acqttired:l}"ot"'ualttable consideration from aforeign.

"t:oi'r'ipangin the course of its business. and the cost, t:'}1erecgf1vi2s not i"reat.ed as revenue expenditure, if no A depreciat;ion was allowed in the case of these iterns, it urottld not: be possible to ascertain in the true "profits of the assessee. The asseseecornpang could Vnot have erected the factory for carrying on the :3'?:

n1arm_I'act't1rir1g process without the expenditure incurred on. the acqi.n'.sitz'on. of these items which could be eompenciiously included in the expression "technical know--l1.ow" necessary for the plLTpO$r;5"'Qf"'L'~.1 . Carrying on the business. Therefore. the des~ignsV'=. L"

and blue--pri.nts constitute "plant"'fTo*r":he& piIrpose-V:o;'' "

allowing depreciation under 8.3.? c)j7__(:l1e_';r'~',<;zl'l'. " ' ix] In the Case of ADDL. ll VS. NIPPON ELECTRONICS ;__(lNDL§t)_.{l5j m*z)_,_, (.1.9'e2,l_(1 34; rm

457), this case has held as 3 l V "Where £115 Pqsihleziﬁ lander a collaborationi_'a§;r;i2eingﬁ.l, la is not for the r'1'ghlHlamahi{ftlcl:.l{;:e'"i;he:'licensed articles, but the _p.aymeAh.l'lIi's \[o:r_l'he:v."aoVtL:al user of the technical know~hoLo._ Cla.la'«.arid'v.i.rif--?)rrV;taI'ion supplied by the foreign _th:e payments would be allowable as sfevenue e;<}:ierlclil'ii.re"

3:}, .A 1211.. §~.,;;1s§;»__,); COMMISSIONER or INCOME TAX vs. VA:,vEs7;;1§1§.}:;;"(1993 (204) ITR 490) wherein the Kerala High Coax': 11215 'observed as under:

test to be applied, according to the T l' 'S1Lg;i.§*errr1e Court, was as to whether the article fulfils fthe _ftn'1crti.or1 of a plant in the trading it """acti1:ity. Was it a tool of his trade with which he : 40 : carried. on his business? The Supreme Court' held. that, if the answer was in the a[fi.rInat.iue. it l.L3Oi.iVIC'l_:"", be a plant. It isfurther observed that the purpose it tendering such. doCumenta.tion service by these d.ocumeni:s was to enable to liiT_CE'r-'.'*':"vf"C.i:;*C.£-' . trading activity of r7'1ar1igjact,iiring microscopes and these d()Cl,iI"I':"t€?t1i',1.i<2_V Ahadi" --. 1(;itaii_:.,,,, function to perform in t'he'"--.[nar1LQ'acture iiofvgihese instruments. It was with ciociirnerits--i'hai.:the assessee was abte coniirienee Vits..rnana_)'a"tL'iring activity. T he su;'5:'.:'n-wﬁ that these documents rea1iy_]ormed the 4. Ejiisiness of Inai1iifact.i.::ri13;g the 5__i.r1stri£r71eri'ts'.fin _._"afites tion. The expend§t.tiir"-_~.._Vifr1eii;'red_'--.1?:y.._the fassessee by way of purchase..V'"pr;ee r-drawings, designs, eic., coiiinpriscedf'do::tirz1e:1tation service" specified in clause Bof was held to be of capital ri_ature"~as" a 'res~.uti~...--{uhereof a capital asset: of ..«.tech1~1icaI V'k'rVz.0tu~ho::u in the shape of drawings, was acquired by the assessee. The ~.:CTo}.irt further held that the capi.tat/ asset ""aeqLiire:d the assessee. the technical know- u°'t1o':;aiinhthe shape of drawings. designs. etc, is a A T depiieciabte asset."

. 211. e have given careful. <:c)nsiderat,ior1 to the comenti.cms of tile learned counsel appez-mag for the pa.1.'tie.s and : 4i : ~ scrutinised the material on record in the light of the principles laid down by the Horfble Supreme Court in above refereed casesffhe material on record would clearly reveal that assessee 4' has claimed deduction in the present case for acqui'sitiengoi'. patent right and copy right u/s 35A and acquisiutjn,oiV:l{nou§'_"e how u/s 351363 of the Act or in {he alteinaéive to, V capitalise the value of the copy -and how and to claim depreciation on said V

25. Section 35A of the tp'1'o_v.i.dd'es for deduction of capital expenditure incurred" and before 01.04.1998 on t_he"ac'.quisitio.;n or copy rights used for the purpo'ses--.oi' the,bu.sin'ess. The deduction for such expenditure would be dlavajrlable in equal installments over a 4__period, V14. years orbverithe period of the unexpired period of Wpateni:rigvht_orx'as reckoned from the previous year in which riglits'..were which ever is less. The ingredients to be iv _proVed"--to c:l.ai1:r'V'deduct.ion u/s 35A are as follows:

A. , ii} there should be expenditure of capital nature, ii "iii: it should have been incurred after 28.02.1966 and before 01.04.1998 and it I W : 42 : iii] it should have been i11(_'.L11'1'€Cl on the acquisition of patent rights or copy rights acquired for the purpose. of business and the eXperidit.t1.1'e, is normally allowed to be wi'it.ten off.

26. It is clear from the contents of Section deduction for requisition of copy 1'ight'and'pa_te.nt _;i4s_Ae'llaiine*d;

is for the assesee to discharge the lb_L1:1"{j1ACéI] ingredients of the same to claim d'e.dnet.io11: The.'V-t§:chVriiVcal"trade it mark and technical know how does wi.thin-Section 35A and if the know how is claii*17ted"E1t'=.i*a; u/ s 355A, the same should be in.:th_e_ firfiii"of*Vdesign--.o1" or right copy right and lsnoiltnhovxllils specifically claimed 11/ s 35AB. if sale. rights fetches a larger sum than the initia4lblc.ost,_the will be chargeable to tax as fcapitalgl gains' provisions of Section 48 shall Section 35AB provides for expenditure of to providing further ingredients. The seet_i'o,n p1'oy.itie:-:'iV'ti1at any lumpsum consideraiioii paid by the payer for acquiring any know how for the pL11'pose of y btisiriess will be allowed as dedticted by spreadiiig it. over six : 533 : years namely the year in. which lunipsum consideraiion is paid and the balance amount: shall be deducted in equal instalments for each of the five immediaiely succeeding previous years. It is only an enabling provision merelyllbee-au,s"e. an expenditure may relaie to know--how. ii. does not "1"f}V€'{-3.._11V.v"l.,'l1E§£"

Section 35AB bars a claim as 1'evenu.-e'"expendii'Li.1fe'§l'when--[ihe~.. payment is not For acquiring a eapitaigasselt and provision which allows capital eXp.eiidiiure' as 21.2(Zl€fCl1Ei"ClLlOI'1 on a "

staggered basis, which was not. e .--i=Ei.e'i'-.ailowable,--veamiot come in the Way of deduction whaicih-was faliMaysV:ii7oLl1'nd admissible as revenue expenditure, p.:'Q\}i'sio11 eannoi be understood as'ai]disab1l4i11g' one, unless there are indications in the language of theseeii_oi'i~._«lA"'Er1«the present ease. the assessee has claimed deldueiiobri LIA./.S VSSA in respect of Copy right. patent and iI1._res2_oec1«o[' knowihow 11/ s 35AB as follows:

55' § wk?

issue / I [em Amount. Remarks 3 . A('ldit1'onai claini of Rs.36.39,743/A IJep1'e<:ia1.ion e}si:3'1e(I E)epreoiatioz'i {38.3},603--1,91.860} on the basis of' V7,§1Ei.i§1 [Revised eorikginal) «tion {Ses1.:agiri' 'Rzi~o's V report) .3551 th'€= --Fr.':__f ' _ R21.n1a§1ai'E'1.SE.iei'ioy*~ _ _i .

{A.¥r--..1.9'95--9.6) cage' 'iaws or Ci.'.3f\fs.v _ Sh,ekg1r'' Qﬁ"-set-- Pr._i11{e1jsA' 1.214 ITR 5'16: Kaitiram, 'sondrani .Vs'.CI'I'

2. Value of copyright u/s 35--A expenditure .. . _ * on acquisition ofpaient Rsfl-,82-'O5,:?62;€;,_ '*Accorcl1rig to right or copyrights. 1/'1'4F*1Aofi__ gassessee Shri MR. Rs. 3 8,18.80[6691--Ra;maoi1a11(ira. Varrier ' i' A 31. also Preethi ;_ _ V Consultants in t.1'1e1'r

---- _ Valuation reports ' " " Have given bifurcation As under [after Sl.No. 4]

3. Vaiue of TradeVn1arks'._ PVs.V8~S,O3.841/-- Based on Ramaeha1'1d1'a : ' 'V AA " ' 1./1.4": of Va1'rier's 8: Pi-eethi ____ 12.32.53.779/-- Consultants Report {Regisiereci Vaiuer} I)?:(1 Ii.'Lz/s« Rs.5,13,55.741/-- Ado-

"    v.  1/6141 oi'30,81.34.448/--
As per vahier As adop%,ed by Simre of
Assessee outgoing
Membor/ parin er
J] _ Kj_:oK&'E'1oxv
ﬁmeiiectuzii
p1'0pert.y]
a / ,.-is



:45:

@ 50% Rs.36,00,00.()00 Rs.35,23.55.000
Rs.30,8I,3-4.448

b} Copyrégms
@ 30% R82} 60,00,000 R321, 14,153-.__OOO
Rs.}.8.48.80,669 a *

C} T1'ademarK   . ,_

@ 20% Rs.14.40.00,000 Rs.__1'~l.09.é1»2j_;00G-.--_T ~- Rs.12,32,53,'7'79 0' Total Rs.72.00,00,000

5. Compensation Rs. 8,37.89.50:;3V slﬁffg notional proﬁt V. .4 ._ . V Paid to the "izelci as"rever1_L1eg Outgoing members 0' Of the A0? out of RS.9,5'7.5'7,007/--

Total deductions Rs.16.07

27. In l;ifmV..I\/I'§C1BW was dissolved on 06.12.198V'.Iian_d thev1*efa-£'T?;je1<s,fihsgl"ofder ofwinding up was passed on 21.11.l994._3;nd the three erstwhile gartners of 4'_.MGBW.«§yho9'~haxre Vlaeqhvlred the assets of the MGBW have filed vA.f.o:7:'t=,he year 199596 and the initial return of income of Rs.4,95._67,570/ -- was first Filed 000011 31510.1__995:"'and the same was revised on 06.02.1997 0' :v'.v4A4's«h"Owi11glosssat Rs] 1.1 1.77.020/--. R éiwgb xx :46:

28. The assessee has made the aclditional claims of deduction stating that there was an iiiadvertem. mistake in filizlg the original return. The original return was filed by earlier AuditorwB.S.Ravikumar 3: Associates. now claimed is stated to be based on valuation re.;§o1::-o.l'e-i::11d_;r V' building, plant and machinery vide :i'3e'sha.gir;'.. R_ao_'ls~ly'alua.iioli'}' report. deIiendant.15.09.l994, also M/s.Preei;hi Consultants.

29. The Assessing Officerjn t;hAis"c'ase that7h'av"ir1g regard to the orders passed by illiis €12.09. 1.994 and 22.12.1994 auctioning the Meow as a going concern and- ﬁxatio.vi"-of lLhe<re'se1've of R530 crores was fixed on the basis ofwihe neii a'ssei:sjao=i"tl1e firm and the goodwill of the _. V. firm no paieri't.._.rigl11..: copy right or know how was acquired a.nC1'«fL:11t1j1ier.wlli'at is purchased by the erstwhile three partners of right, patent. right and goodwill which had V _ already b._een4'acquired by the running MGBW ﬁrm and that goodwill would not attract deduction 1.1/s 35A or SSAB and Eﬂhe coniemiori of the assessee that the entire value of er.)-giy right, patent right and know how should be perniiiied to 3 :45':

be capitalised with benefit of claiming ciepreciation and acco1'd.ingly disallowed the deduciﬂions {hat were claimed and also the alternative contention to trade ihe Value of paterit right, copy right and know how as piant. and Iiizichinery' an'd"ii.o'~ 2 seek depreciation. The first Appellate Authority c:oi1_lTiri1iedi' order of the Assessing Officer. l"Iowever>.""tE'11e.'i'ribL1_nal' negatived the main. prayer of the 1;eg§ar~d,.i1ig'V deductions 1.1 / s 135A and Ho\$;e\rei~,. lithe alternative prayer of periniitirig the alsselssee 'tol'ca--pii.,.alise the value of the copy right, pateriifl righ'i__al'nﬁi and to claim depreciation. It is Clear r1~o%:i"t.h¢, s'cri3.ti113r. Qfihe material on record '1nclud.in'g *t'.'n.e reVised'~assessme1it in which deductions are claiinevd_bly'_ thelas'sessee*asreferred to above that: if the assessee wantsio clainfi \>.11ue~~"or deduction towards the capital

4..expe11d.iti5irei'oi" acefuiri=1i_gH_tl1e patent: right, Copy right or know upon the assessee to prove that he has i'L1lli7ililed- of Section 35A and 35AB as referred to l ecabovei and in 'tli_e7prese11i' case to consider as to whether the said bu.rde1'i is' discharged, it is necessary to bear in mind .,..-ce1jta.ir:i_orders passed by this couri" which wouid indicate that: :48:

what was sold in at1Ct.i011 am()ng the erstwhile pa1't'11e1__'_s of MGBW was the Value of the net assets and g00d\tIi.1tt'~.;'i11d goodwill c01'1stit.uted 93.02% of Rs.28.12 crores a1'1d_ t:0nstit't1ted eniy Rs.6.8 CI'O1'€S. The said Valttat:i01'1.tvas'-béised.us upon the WtIt1at.i011 made by the Chaxtetfed Aee'0't1z5_tVa.1it' was directed to vatue the assets and the1'e;1ft.e}: 0.bj.e.et"i--ot1's'we1:eT .' filed to the said report 01' the Clf12_t1'te're«cEAjiecounttstntr same has been considered by 'Cettrt:

in co.P.No.1/1988 in its o_1-cler dateE1'»vs1_4;vQ6.1991.yyh¢§~ein the division bench of this couithhas (.%:t1ll§ett" 0.1111. the vatuatton made by the Charterecl Aecountzaritith and bgtst-s"»fQhr-.the same and also c0ns§tie1-ed' fiiect by the respondentswout going partn:ez's and ._et"~wi1ieh Rs.3O erores was fixed as the res<":'I¢'-'/fit! P1q9it3¢_V»and'-- i"t..".iSV'.'1:€1€Va11t to cull out the same to t1'r;de1'st.zfr1c't_~-stheAcircuiﬁ's'tai'1c:es under which the Value of the etsstet:5:-:W'11it:vh;'t\x}e;?e"sold in public auctizm (assets of MGBW) ' Vt * Vsbasedt tijjon.thve'].'véii1s1at.ion made by the Chartered Accotmtant Vh"=.__44a.pp0int'eci~. this eotlrt was made. In the light of the filed by respondentis 2 to 7 in the said petition $2..

\w**< : 5} :

0f'Fi.x"cc! A.v.s'r2I_s' Qfﬂzra C0nzpa1z}' amomzr to om.'_\-' ? 16,(_)_'i,673--()2 as n-m'zn'01-200' }m':m-'.

1') 1.mm' cum' [3'z1.iI'd."ng=.s" ?8,6(},(}7(f¥E32

ii) Mrnfm' 't-='m"zz'¢.*l-::».s' _( V0113'. Cam, Motor 3 ~ V Iiicvc'/(.a.s')

iii)" Laﬁ'. Tvlepfzoiw1'z..<r':7iIm're, Tyg)cwr;'Ic2;', Fr0m'<:'ng M00/'zi.v2.0, Tm.'c*,I)hom) _- .- ._ 2 lfrgzzi/in-1m?t.v, Copper V<~a.s"..x'<'!.s' arc'. 0 3 L 3.2 The mcn'ke'{ vm.'m? of the crIJ0w{fIr'.xé(['z.z§30Ls' /'m'._v€ r'3r{0n *(Zc?fcm-;:.a'.ue1rl .9

1)}? us cr.s"f'0/[rm-:s'.' _ i 2') Lama' and Bztifclfrzggj (As [Sf-:':'}"?«'aiA3}_jé='.1't}}':?f/I ) ' ' "? };''65,()0,()()0 0; M0101'Veiziciac(A3;115016Amacﬁuf-c»'?'I?I) .0 _ 3' 11.80, 000 iii Liﬂf, A7'r1'5.['f']2[1fJ7l(? F.Igr;i'r«i1fI.:r"r{, ypc*wr'z'!c?i', [='nm}<fIz 1' J1/ir2c'l1ine§ ('I'i".)."IOI"l(? 5*' I 2 50. 000 ' E(['.t,ripn2c*.an'.s', -.C21.'p[9i£.{_' 1'/'0.-,'.s'0l.s' eerc.

?'1,89,30,00(}

4.} A; per 31.1/cIr':c"c% ;S.f;e€{ cm' 0? 133" [)rec.'m-nlnm', 1987, five c"0mpau._v l'zczc.f an v ' fi'n~=c:;1I£.f9'f}; of ].3',()'2V,V90',8.5_Ti--_'$_5 as nzenrioneci bcefmv. A '<...r.~; " '~K§3R-?,,%W(1f£*'!'%;?:';S'.(II!!! Pac'kz'ng Mc2Ic»n'c:'z/.s' ?' I I ,2 1 .861! 66-86 'rL--; .--._:.s;'«w-$0 «Fin.x1.vr:~.}:'¢rCom-z.s~ (1</ma [)"c>0¢:/.r'c-',s'_) é' 70,20,175-79

0) '~__Fin{§)'z'¢-':0§}00c!.s' ('La..':)0l0::! B(*('(.1'i(.'.\') 5*' 1,04. 22, .?()5--68 cl) Mi.§'(..'253'fctrzewm.' .S"Ir)(':'(--'l'"_\-'1"0.s', 'I'1.4.b{-'.s'rzI1r.I V n 0!/Ic¥'i*t'!cemA.'. 3 660 2(f/"~22 \;I3 02 90 855-55 k 1'? I

-K ,_: ,r \H}}xg 3 §f16,'05,'673«020A_ 0.0 I :52: and ftlrther refe1*1'ed to the value of the 1*aw--n'1ate1'i.a} and c)t:he1' assets avaiiable and has arrived at vahlation of Rs.2,8.58.0I.4I.O.32 ps as foﬁowss:

4.5 Hmzm I/5:' near"/cm" w'.'!m? of mm! a.s'.s'(*I.s: of {law r.'r)r:1:,r.;Jr_{ii;§i ' ~ V' 05126:' I/tam g0uu'*n--'1'II c"u-nmnzr Ia ' 2<'5..'¥8,()1,4!()--.?2 as 1-ram-'rfir2rV::e¢!' V ' T M befrmr.

Fixed Assets ._ ?;-1.89.3eQ.OO'O--OO:'-.___ Finished Goods v '.2 1 .22'.Q0O.~C¥.OV Other inVe1"1t01'ies ?"iV_1,V98,68',V54f3e'87 Advance to Suppliers ? 3,09',9.,3.'458543' Investments b _ '6 5_0._8914§74 Sundry Debtors for sa_3C . i'"'4.73.76.'27.1()456 Other Advances ' f V ~ »f€°'30.77.490~74 Cash and Bank ' 'A " ?>--3;A58';36.519--7O Due from Partners .' . V ' --":1_;1E_3_t4:5.790-02 ' ,_23,:-:.a,'»'o1,41o--32

31. "1'here'aI'tez.' the A.-scourltaltt have examined the books of acco-uht 1*ega1'dirig the iiabﬁities of the assessee as on pei"vv----a«::eounts and it was fOL1I1C1 at which is as follows:

.' 5.7' H/t*'"t}_'2r.zi.5*e (em;-r'ri.'-mu' with the books of cu".-¢'0.'ml3 rim lizéifai/r'!'.-5&5" égfyr/1:9 m.'?'z,I2c.1r-vy em' on 1842-] 987. Tim li('rE)iIiIr'as' (.15 A on I8-v1_2"--]987 as' ,r.;vm'tzcmz.z12't.s' cmmzmr in ' 26,55, 77.389w(}2 ax '' V :';Iri'»-«:1i(2r2ea' bm'm-1:

Advance for Sales ? 24.4e,43o~o9 F01' Su13piie1's 2' 3.46.05. 131~5O :33: For Beedi C0r1traei.o1's 3 7,444.-42.75i~69 For Staff & others 3 2.32.704~76 Liabilities for expenses i' 61. 13.03869 inchiding bonus Other Liabilities i' }._--'i7,5.3'1 Security Deposits ? 52.8r§}H.8--O6-»--(}Q ., Loan Deposits 1' M Income Tax ? 2, 1 349 1 ,?,.~--435%-{}(_3_e. " ' 5.2 While? :nm'a":-zg pI'()1'i.s'frm. off Irzbarrrce :Trz_if}f'0'r: rim' ';>ei'i'un'~.__ 1.07.1987 {'0 18.12.1987 we ha1»=caT.t1'(»<1!m7rimt>g>r2:}Jc112}'Vas 'g'0if~zg '' £'(N'I('£'I'H wit/mu! Ircutirig fhc' ('rm-2p(ii2._)_.° cm' <f1'VLs.3'()Iwc_i mg pE%zfViic>*w pmvision 0fInc'0rnc* tax AC1.

6.1 Herrre {he ner ci.s'_s'c%I.'.'.'_'(2fA'2':'i.(?:'c;t>r71;f7'(i'i?;f§"11$ mi 18.12.87 e.xc'Iu.:lir1g (z;()c)(f1_::-=£!/'V [Il11O?;{'I'iiVJ" in -- 2, O2, 24, 02} -30. it T0taiAsse1s H _ (1-1sperpatm4.5) Less 'E'eta1iiiii%5i}ii;iVes _1i"§"Z6,5fi_,"77',389-()2 (as per para 5.2) NET A'ssE'i1_'s' §;.>;02,24,021-3i:

_ -_l_ __.32. Court ﬁi's.QH riiade an observation that the report was A'~._01:ije€t€:tci te:}3y4A'1*evsp0ndents 2 to 7 in the application averring tliat VV\'z':§.'Vi'_:i,1e net assets was inciudecl and the said V _contef1---i.ion'.wa,s; considered by the Division Bench of this court it "arid the reason for which the reserved price of R330 erores was _' e.iixeC['*af.=é1s arrived are as follows:

% 6,_55»,?_:g;389~0_g "

: (32 :

claim of the Creditors could not have been satisfied as the value of net asset was much less than the value of the liabilities of the firm and therefore takirtg into account the value o.l""'-the goodwill. t.he sale was ordered to be held in the 150000 employees of MGBW in the interest. of tl1e"A«h:éir'?.;:ei9s'of M the firm and also in the interest of tt1e"sti(Te«essift11 _bidders and outgoing partners to avoid any future litigatlorx in the itivattezjf.

36. However, the valuation rnadehy. the report_relvied.."1;tpQniby the assessee i.e., the report SL1_bIVl:1'i11'€d_» byhdthe Chartered Aeeoulitant who was reqt3ested:Lb?g'Jb' 'Vth'ejf2_1ss,essee to make valuatior1,;#thevy"het§re_«sVhlit.:t'h.e gooddwill into know how: copy right 30%,0t;rademark"205/0-~._eﬁ»idV~"tl1e value of the goodwill is shown aisnil. au"'l"here1'iore';~. this valuation is got done by the atse-.ess'ee{'oi,:1-ly for tliejjtirfjose of claiming deduction u/s 35A Act and deduction Claimed does not ' represehtit. the of know how. Copy r'ight. In the facts and _4cir_e11r11st21~?1e'es of this case under which auction was conducted .A__b3Vz0_"'E.hiVs"'eot1rt. as per the order dated 14.06.1991. and also the ____'1"it1al';order dated 22.12.1994 rega1*(iiing dissolution of the firm :63: and therefore the Assessing Officer. the first: Appellate Authority and the Tribu11al have declined to accept the deduction claimed by the assessee for copy right and pateerit right LE/S 35A and know how L1/S SSAB of the Act. V. though the Tribiinal has confirmed the finding Vl,l~ll""S'il."'_F Appellate Tribunal and the Assessing:"Oll"iee1j_ tlisaillowiztsg deduction claimed u/s 35A and "Ae.i:."

'l"1'ibunal has passed further OI'Cl€»l,f!_\ "pe1*n1ltti1ig' lasse'sslse- ﬁrm/A0113 to treat the vame of patent'. right. and know how as plant and machinery ieJfen;a'i:;:e the assessee to seek cleprec1at.iori_:lon th¢'§a;'nl2g an'd:'vt»aceonjlii€1gly has passed the o1"der;_vl cli1'ee'-tiiflgé .4jAs'sessi.:1lgl Officer to show the capitalisation of the copy right, patent right and know how as 1?)/i".~?|,VI1T.=a1'1Ll niretcltiiiery and allowed depreciation on piille cost«.3f:)f'lVtl'1e sanlie' and accordingly allowed the appeal filed by grating the alternative prayer sought for in the revisenjl. rettirn by'-.se_'tt.ing aside the order of the Commissioner l of Tax' aliicltlzthe Assessing Officer in that behalf. ('3

- 3 : 64 :

37. It is clear from the above referred order passed by this Court on l4.06.l991 that what was sold was the value of the goodwill and tangible assests including the pate11t.."'a,1id acquisition of goodwill does not attract dedut:t.ioris--.under'~ provisions of 35A and 35AB or to any dep1*eciatioliill. l regard to the above said facts and cirt:-tii1i's.ian§:es_..oi"theleasel» and in View of the finding that what is lthel'go.o*dVWill"

not copy right, patent right and _how."was'not~.:véil;iie'di and net assets and all tangible assets.---«iiicln'dtiAng traderrialrk was taken into account, it is clea;'llthair__tVhe d.lii'ectio'n_ issued by the Tribunal to treat theA'«/alue:.oi"'theg copy_rigl1t.y:f3altent right and know how as 'plant and direction to allow depreciatiori>on*costof':tIael'sariiei~"and accordingly allowing the appeal filed by the_:lassesse.e granting the alternative prayer :.':'so'ught'vin' the reyised return setting aside the order of Income T App'elriate:V"1'ribuiial is liable to be set aside by restoring the l .v.Vorderl'palssed.lb€jV_ "the Commissioner of Income tax and the _l . g_ Assessing ~~C)i'i7.?cer.

W : 65 :

38. Accordingly. we answer the substantial question of law in favour of the Revenue and against the Assessee and pass the following order:

The appeals are allowed. The order 2 Income Tax Appellate Tribtlnal impugned in dated 19.10.2000 directing th.e asses.f3in'g"'offiC'le1' claim of the assessee in respect of the legai expenses' for defending and protecting thevrL1_lrllii'i.i11g lo.us__i1'1ess"v'aslide and it is held that the assesses' entitled claim deduction under the said hleadi'of"l_eg§al for protecting and running business.__anduthe' olrdei-«.:passed.ll5y the assessing officer and the of:V'i.tVfl1e.appellate authority in that behalf is restored and the di1'ectiuo'1affisstied"by the Tribunal directing the assessee to capita.lise..t.he "valliie of trade marks, copy right and ;,':'ltechnical:' kniowz hoxillvlbylvtreating the same as plant and depreciation therein is set aside.

Sci/5 JUDGE Sd/i;

IZJDGE A " ~ ~ Vim/Act

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Karnataka High Court

The Commr Of Income Tax Mysore vs M/S Mangalore Ganesha Beedi Works on 23 December, 2010

Bench: V.G.Sabhahit, B.Manohar