IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARORA, AM
./I.T.A. No. 3928/Mum/2008
( / Assessment Year: 2003-04)
Video Effects Income Tax Officer-11(1)(4),
B-1, Twinkle Apartment, Room No. 438, 4th Floor,
1st Floor, Flat No.1, Opp. Kamat Club, / Aayakar Bhavan, M. K. Road,
Lkhandwala, Off. Link Road, Vs. Mumbai-400 020
Andheri (W), Mumbai-400 053
. / . /PAN/GIR No. AAAFV 1891 N
( /Appellant) : ( / Respondent)
/ Appellant by : Shri Ketan L. Vajani
/Respondent by : Shri Pawan Kumar Beerla
/ : 27.11.2014
Date of Hearing
/
: 10.12.2014
Date of Pronouncement
/ O R D E R
Per Sanjay Arora, A. M.:
This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-XI, Mumbai (`CIT(A)' for short) dated 28.04.2008, dismissing
the assessee's appeal contesting its assessment vide order dated 28.02.2006 u/s.143(3) of
the Income Tax Act, 1961 (`the Act' hereinafter) for the assessment year (A.Y.) 2003-04.
2. The issue arising in the instant appeal is the maintainability in law of the
assessee's claim for deprecation on `Goodwill'. The same, claimed at Rs.5,41,399/- per
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the return of income, stands now claimed at Rs.6,63,384/- per the additional ground. In-
as-much as, therefore, the additional ground concerns the correct quantification of the
assessee's claim for depreciation, which is the subject matter of appeal, we consider it as
intrinsic to the issue arising in this appeal and, consequently, admit the same.
3. The brief facts of the case are that the assessee is a partnership firm in the business
of supply of equipments for shooting and editing telefilms, etc. with computerized digital
graphics on hire, since 10.04.1995. Two of its partners, holding 20% share each in the
profits (or losses) of the firm, retired there-from during the financial year 2001-02, the
previous year corresponding to the immediately preceding assessment year (i.e., A.Y.
2002-03), and were paid their share of `goodwill' at an aggregate of Rs.26,53,536/-, as
under:
Date of retirement Name of partner Goodwill paid % of share held by him
on date of retiremnet
31.01.2002 Mr. Razak Sheikh 14,03,536/- 20%
30.05.2001 Mr. Ramzan Sheikh 12,50,000/- 20%
The assessee's claim of deprecation on goodwill, as an intangible asset of the firm,
to which account the said sum was capitalized in its books of account, was negated by the
Revenue and, further, confirmed by the Tribunal following its decision in R.G. Keswani
vs. Asst. CIT [2009] 116 ITD 133 (Mum). `Goodwill', it was the constant refrain, is not
an intangible asset within the meaning of Explanation 3(b) to section 32(1)(ii), which
reads as under, following the principle of ejusdem generis:
`Depreciation.
32. (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;
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(ii) in the case of any block of assets, such percentage on the written
down value thereof as may be prescribed
Explanation 3.--For the purposes of this sub-section, the expression
"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.'
The matter has since been clarified by the apex court vide its decision in CIT vs.
Smifs Securities Ltd. [2012] 348 ITR 302 (SC), so that `goodwill' is, following the said
principle, a depreciable asset under Explanation 3(b) to section 32(1). The decision by
the tribunal in its' own case, as well as by the Revenue authorities, per their respective
orders, for the immediately preceding year, would therefore be to no avail. Further, no
depreciation having been admittedly allowed for the immediately preceding year, the
written down value (WDV) of the relevant block of assets, which consists only of
`goodwill' at Rs.26.54 lacs, and not the amount arrived at by reducing there-from the
assessee's claim for depreciation for the said preceding year, i.e., Rs.4,87,943/-, since
disallowed. This is as the WDV is, by definition, to be computed by reducing the
deprecation `actually allowed', which expression stands explained per a host of decisions,
to mean depreciation, as actually allowed as against a notional disallowance. No
deprecation having been allowed for A.Y. 2002-03, the WDV of the relevant block of
assets shall continue to be at Rs.26.54 lacs, resulting in an enhancement in the assessee's
claim vis-à-vis as made per its return, i.e., by deducting depreciation claimed for the said
preceding year. This sums up the assessee's case as made before us.
4. We have heard the parties, and perused the material on record.
The assessee's case is principally legal. Though claimed to be covered in its
favour by the decision by the apex court in Smifs Securities Ltd. (supra), the same,
notwithstanding the applicability of the said decision, in-as-much as it settles the issue of
`goodwill' being an intangible asset u/s.32(1)(ii) r/w Explanation 3(b) thereto, fails. The
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reason for the same, even as observed during hearing, is that no `goodwill' has been
actually acquired by the firm on the payment of the impugned sum/s. The relevant
clauses, identically worded for both the retirement deeds, i.e., dated 30.05.2001 and
31.01.2002 (PB pgs.33-36, 37-40), i.e., except for the amount involved and its payment
details, read as under (PB pgs.33 to 36):
`1. That the retiring party Mr. Ramzan Shaikh will retire from the business of
partnership with effect from 30th May, 2001 and the continuing parties shall pay to
the retiring partner as the purchase money for his share and interest in the
partnership and the capital effects and goodwill thereof a sum of Rupees
12,50,000/- (Rupees Twelve Lakhs Fifty Thousand Only) (*).
2. That the said purchase money of Rs.12,50,000/- shall be paid to the retiring
party as under of this agreement vide cheques no....... dated ....... amount of
Rs.2,50,000/-, Rs.3,00,000/-, Rs.3,00,000/- and Rs.4,00,000/- respectively all
cheques are in Bank of Rajasthan. The retiring party shall accept payment in full
discharge and satisfaction of his rights and interest in the said partnership
business.
3. That all the assets (including goodwill, tenancy rights, permit licence) and
liabilities of the partnership shall be taken over by the continuing parties and
retiring party will not have any claim against the firm.
4. That the continuing parties shall pay all debts and liabilities (including
Income Tax Liabilities) of the partnership and shall indemnify the retiring partner
against the same and all actions, proceedings, costs, claims demands in respect
thereof.
5. The continuing parties shall be at liberty to use the name of the firm.'
[(*) Rs.11,00,000/- in case of Mr. Razak Sheikh]
Firstly, therefore, there is nothing on record to show that the sums stated in the
retirement deeds are paid over and above the balance outstanding in the capital (or the
current) account of the retiring partners. True, in that case the payments, to that extent,
would get debited to their respective accounts, and not to the `goodwill' account, as
stated by the ld. Authorized Representative (AR), the assessee's counsel, during hearing,
upon being so queried, but this would need to be demonstrated, as the retirement deeds
clearly specify only these sums to be paid to the retiring partner/s toward the purchase of
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their share in the partnership and all capital effects. The book value of a partner's capital
account only represents his share in the partnership, including undefined share in its
assets. As such, the payments agreed to be paid to the retiring partners include that due on
account of their capital as outstanding in the firms' books of account. So, however, this
aspect only involves the quantum or the amount which could be considered as paid
toward `goodwill' and, accordingly, verifiable with reference to the assessee's books by
the Assessing Officer (A.O.), where and if we were to accept its claim in principle. In
fact, the payment to Mr. Razak Sheikh under the retirement deed is only Rs.11 lacs, so
that the nature of the additional payment to him (Rs.3.04 lacs) would have to be
ascertained in-as-much as the accounting entries cannot be treated as conclusive. Then,
again, the question is as to the basis of the said accounting treatment?
Be that as it may, what has been paid is not by the firm per se, but by the
continuing partners, toward the purchase of the share of the retiring partners in the
assets of the firm nothing more and nothing less. The said payment shall not by itself
create a capital asset in the hands of the firm. Goodwill, tenancy rights and permit
licence, already exist with the firm prior to the retirement/s, and continues therewith, post
it, as do all other assets, in-as-much as the business survives the retirement/s, which is
thus on a going concern basis. That is, there is no accretion to the asset base of the
assessee-firm. What all has been done by and through the said payment to the retiring
partners - which could be financed by either borrowing capital or introducing funds by
the continuing partners, is that they have thereby ensured that there is no depletion in the
capital base of the firm. The share in the assets, albeit undefined, which prior to the
retirement/s vested in five partners, does with three continuing partners subsequent to the
second retirement. Rather, as apparent from the balance-sheet for the year ending
31.03.2003 (PB pgs.4-17), another partner holding 12.5% share (in the profit and loss of
the firm) retired during that year, leaving only two partners, i.e., Vinod S. Choudhary and
Naresh S. Choudhary, with 50% share each as on 31.03.2003. No change in the goodwill
account is observed for that year, so that apparently no payment, strangely, was made to
the third retiring partner, i.e., Sireh Kanwar Bafna.
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Continuing further, the only difference between these intangible assets, i.e.,
goodwill, tenancy rights and permit licence, and the other assets of the firm, is that while
the latter are accounted, the former are not. This is for the reason that these are self
generated and no cost has been incurred by the firm for their acquisition. The payment to
the erstwhile partners would not imply acquisition of these assets, but is in fact toward
the share of the retiring partners in the existing assets. And this is precisely what the
retirement deed/s, per clauses (1) to (5), explicitly state. We may explain this by an
example. An asset, say, land and building, outstands in the firm's books at Rs.10 lacs. Its
market value on the date of retirement is Rs.60 lacs. The share of the retiring partners in
the unrealized value, holding 40% share therein, would thus work to Rs.20 lacs, which is
paid by the continuing partners. Debit of this sum to the relevant asset account would not
increase the cost of the land and building in the hands of the firm to Rs.30 lacs, i.e., the
amount at which the said account would thus get reflected in its books. The additional
sum being invested by the continuing partners, so that it increases their capital
contribution in the firm, accountancy would suggest a credit to their respective capital
accounts in the ratio in which they pay, or agree to bear the additional payment. As
regards the firm, which is under the Act, a person separate and distinct from its partners
for the time being, it continues to be the owner of the assets both prior and subsequent to
the retirement/s or payment/s, so that all that has altered is the value of the asset in its
books. In fact, the proper accounting (subject of course to the partnership deed specifying
any differently in the matter) would be to recognize the full value of the asset in the
accounts, crediting each partner to the extent of his share therein. In the context of
`goodwill', a self generated asset, which therefore does not appear on the firms' books, it
would translate into reflecting the same in its accounts at its full value, at Rs.60 lacs
(say). Each of the partners immediately before retirement would stand to be credited to
the extent of his share therein. It is this share for and toward which the payment is being
made by the firm, implying the continuing partners of the firm. So done, which represents
the correct accounting treatment, it would make it inconsequential as to, firstly, when the
payment to the retiring partners (say, at Rs.24 lacs) is made and, two, how is the same
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financed. In this context, we observe that the second retiring partner, Mr. Razak Sheikh,
is paid, apart from Rs.11 lacs in cash/cheque, in kind, by way of takeover of four debtors,
aggregating in value to Rs.79,310/-. The firm follows cash method of accounting, so that
it recognizes revenue only on receipt basis. There is, accordingly, no question of any
trade debtor standing in its books. The takeover of the debtor accounts however implies
that the amount in respect thereof stands crystallized and taken into account, i.e., for the
purpose of settlement of the retiring partner's share, at the values stated. The same, as far
as the firm is concerned, have been realized at the said amount/s, which therefore ought
also to have been accounted for; crediting, firstly, the revenue account by debiting the
account of the respective debtors, and then crediting them with corresponding debit/s to
the retiring partner taking over or purchasing the same.
Coming back to our discussion in the matter, the ld. AR upon being questioned
likewise during hearing, would explain as to why the firm has rightly considered the
payment to the erstwhile partners as resulting in the firm acquiring `goodwill'. There
was, firstly, no dispute between the parties on this, the sole ground on which depreciation
was disallowed by the Revenue, which found the tribunal's `acceptance', is of goodwill
being not a qualifying asset under Explanation 3(b) to section 32(1)(ii). The retiring
partners, he continued, could start their own venture, greatly impeding the firm's, whose
name carries a brand value in the trade, built over time, prospects/business. It is to
restrain them from so doing that the payment, by purchasing their share in the intangible
assets of the firm, had been made. On being pointed out that the (retirement) agreement
does not restrain the outgoing partner's from carrying trade, he would state that they have
in fact not. The argument or explanation does not carry the assessee's case any further;
what being explained is the rationale of the payment, which is neither doubted or in
dispute. The retiring partner/s having a share in the firm's assets, including intangible
assets, was paid toward the same. This would enable the firm to function as a business
unit/enterprise just as it did prior to the retirement/s. All that, therefore, is lost thereto is,
of course, the human resource represented by or in the form of the two retiring partners.
Had they also partook a part of the firm's assets along with, it would have meant that the
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retirement/s is accompanied by a depletion of or an impairment in its capital structure or
it's profit making apparatus to that extent. As such, all that the payment signifies is that
the firm has been able to retain its' operational capability consequent to the retirement/s.
There is no purchase or acquisition of any asset, tangible or intangible. Rather, to the
extent goodwill of the firm is attached to the partners, representing its human and thus
most vital, resource, a part of the goodwill of the firm stands definitely eroded.
As regards the retention of the operational capability, to what extent it materializes
is something that lies in the womb of future, and would surely depend upon if the retiring
partners actually worked in the relevant trade after retirement, as also the area of their
operations. Further, one of the two partners also taking over some debtor accounts would
rather suggest of their continuing, or intending to continue to work. There is, in fact, as
stated earlier, no restrain placed upon them in the matter. Be that as it may, that is
something that would not detain us in this matter in-as-much as this neither flows from
the retirement deed nor is contended by either party; we having explained the nature of
the payment to be an attempt to ensure, as far as possible, the maintenance of the
functional capacity of the firm, i.e., post retirement, by the continuing partners, who have
an identity separate from the firm. No `goodwill' or any other tangible or intangible asset,
thus, stands acquired by the firm consequent to the payment to the retiring partners in
pursuance of the retiring deed/s. Rather, the second retiring partner, having along with the
other continuing partners, acquired share (20%) in the goodwill of the firm of the first
retiring partner, the payment to him subsequently includes his share in the said share, so
that there is in fact to that extent a double payment, i.e., vis-à-vis the total share in the
firms' assets of the two partners. Considering, however, the transaction in right
perspective, i.e., as one between the partners inter se, would resolve such issues, which
arise only on misconstruing the transactions as one of purchase/acquisition of goodwill
by the assessee-firm.
With regard to the contention of this aspect being not in dispute, the same is again
misconceived. Neither the view of the assessee nor of the Revenue is binding on the
appellate court or tribunal. It is the correct legal position that is relevant and not the view
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that the parties may take of their rights in the matter (refer: CIT vs. C. Parakh & Co.
(India) Ltd. [1956] 29 ITR 661 (SC); and Kedarnath Jute Mfg. Co. Ltd. vs. CIT [1971] 82
ITR 363 (SC)). Reference in this context may also be made to the decision by
Ahmedabad Electricity Co. Ltd. vs. CIT [1993] 199 ITR 351 (Bom)(FB). Further, the
tribunal for A.Y. 2002-03 did not either examine this transaction or issue any finding in
the matter. The assessee's counsel, conceding to the issue being covered against it by the
decision by the tribunal, it foreclosed the matter, stating so. Reference in this regard is
made to para 3 of the tribunals' order for A.Y. 2002-03 (in ITA No.7435/Mum/2005
dated 28.10.2009), which reads as under:
`3. It was submitted by the ld. counsel of the assessee that this issue
may be decided against the assessee in light of the decision of the Tribunal
in the case of R G Keswani reported in 116 ITD 133 (Mum). Therefore, we
decide this issue against the assessee.'
5. The assessee's ground no. 1 is, in view of the foregoing, dismissed.
6. We, next, take up the assessee's additional ground. We having already found that
no goodwill stands acquired by the assessee firm upon the impugned payment/s, the
question of the extent of the depreciation thereon does not arise for consideration. So,
however, our order being appealable and, accordingly, subject to modification, we may
dwell, albeit briefly, on this aspect of the matter as well.
7. We have heard the parties, and perused the material on record.
Firstly, as stated here-in-before, the nature of the additional payment of
Rs.3,03,536/- to the second retiring partner not arising out of his retirement deed, would
have to be examined/determined. On merits, we again find the assessee's claim as not
tenable. Without doubt, no depreciation, as is apparent, has been allowed on goodwill,
and it is only the depreciation as actually allowed that would be eligible for being
deducted in computing the WDV of the relevant block of assets (refer: Madeva Upendra
Sinai vs. Union of India [1975] 98 ITR 209 (SC)). At the same time, however,
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Explanation 5 below section 32(1)(ii), reading as under, inserted by Finance Act, 2001
w.e.f. 01.04.2002, cannot be lost sight of:
`Depreciation.
32. (1) In respect of depreciation of--
( i) ............
(ii) .............
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.'
The same, in effect, states that depreciation allowance qua any depreciable asset
would have to be necessarily allowed while computing the total income for any year. The
assessee's claim stands denied by the Revenue. We have confirmed the same, for a
different reason though, disputing not the eligibility to depreciation per se, but on the
factual aspect of acquisition of the goodwill at a cost. This finding shall relate back to the
date of transaction/s, i.e., 30.05.2001 and 31.01.2002. On the legal aspect, the assessee's
claim for depreciation would stand covered by the decision by the apex court in Smifs
Securities Ltd. (supra), which shall again relate back in time, i.e., to the year since which
the substituted s.32, providing for depreciation on intangible assets, came into effect, i.e.,
01.04.1999. That is, the same shall apply equally for A.Y. 2002-03, i.e., as to the current
year. Even otherwise, each year is an independent unit of assessment, and therefore the
claim for one year cannot be allowed to prejudice or influence that for another. The non-
claim or not pressing of its claim for depreciation by the assessee has been specifically
removed by law as a ground for not giving effect to the provision of depreciation. The
factual finding with regard to the nature of the transaction crystallizes on its occurring,
while the decision by the apex court settling the law in the matter would also relate back
to the date of the extant law. Such a course is even otherwise incumbent on the A.O. in
view of the Board Circular No. 68 dated 17.11.1971, clarifying of a position inconsistent
with a subsequent decision by the apex court to be a mistake rectifiable u/s.154, i.e., were
the assessee to move him in time. Further, this would equally apply to the order by the
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tribunal (i.e., for A.Y. 2002-03) in-as-much as it would also be said to bear the same
mistake. That the assessee conceded to the said position, even otherwise not material
from the standpoint of law (refer: C. Parakh & Co. (India) Ltd. (supra)), stands
specifically removed by law as a consideration qua the claim for depreciation. The A.O.
in our view is thus obliged in law to allow depreciation for A.Y. 2002-03 while giving
effect to our order, read with the order of the hon'ble court, if any, modifying it, with
which it will stand to merge. Accordingly, the assessee, in the event of our view of it
having not acquired `goodwill', or any other depreciable asset for that matter, thus, i.e.,
upon payment of the impugned sums to the retiring partners, gets reversed to any extent,
so that the assessee's claim becomes valid (to that extent), the same shall have to be
allowed. The assessee shall, therefore, upon a favorable verdict by the hon'ble high
court, be (actually) allowed depreciation both for the current year as well as for the
immediately preceding year in accordance with law. This is more so as the two amounts
are interrelated. We, therefore, without prejudice to our decision that the assessee's claim
for depreciation is not valid, hold that the same shall in any case be restricted to the claim
as preferred per the original return. The assessee's claim for additional depreciation, on
the basis of having not been allowed deprecation for A.Y. 2002-03, is accordingly
rejected; that for the said year standing to be allowed, to it. We decide accordingly.
8. In the result, the assessee's appeal is dismissed.
Order pronounced in the open court on December 10, 2014
Sd/- Sd/-
(Joginder Singh) (Sanjay Arora)
/ Judicial Member / Accountant Member
Mumbai; Dated : 10.12.2014
. ../Roshani, Sr. PS
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/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent
3. () / The CIT(A)
4. / CIT - concerned
5. , , / DR, ITAT, Mumbai
6. / Guard File
/ BY ORDER,
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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