Commissioner Of Income Tax, Chennai v. M/S.india Cements Ltd. Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 18-07-2011 THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANANDTHE HONOURABLE MR.JUSTICE M.JAICHANDREN Tax Case (Appeal) No.989 of 2004 Commissioner of Income Tax, Chennai. .. Appellant/Appellant VersusM/s.India Cements Ltd.Chennai... Respondent/Respondent Prayer: Appeal filed under section 260 A of the Income Tax Act,1961 against the order of the Income Tax Appellate Tribunal "C"Bench, dated 31.12.2002, made in I.T.A No.1890/Mds/96 against theorder of the Commissioner of Income Tax (Appeals) Madras 34 dated25.6.1996 and made in IT.Appeal No.10/94-95 against the order ofthe Deputy Commissioner of Income Tax, Special Range II, Madras34, dated 24.3.1994 and made in PAN/GIR.No.47-066-CQ-2988. For Appellant:Mr.Arun Kurein Joseph for Mr. K. Subramaniam, Sr Standing Counsel for ITFor Respondent: Mr.P.J.RishkeshJUDGMENT (Judgment of the Court was made by CHITRA VENKATARAMAN,J.) The Revenue is on appeal raising the following questions oflaw: "1. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that the companypurchased by the assessee had no goodwill as it was aloss making company? 2. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that there is nogoodwill attributable, as the manufacture of cement inthe newly acquired company would involve problems?3. Whether in the facts and circumstances of thecase, the Tribunal had considered all the parametersthat are necessary for the valuation of the goodwill ofthe purchased company?"https://hcservices.ecourts.gov.in/hcservices/ 2. The assessment year under consideration is 1991-1992.During the relevant previous year relating to the assessment year1991-1992, the assessee herein acquired the cement plant fromM/s.Coromandel Fertilizers Limited, for a consideration ofRs.105.30 crores. The Assessing Officer viewed that 10% of thesaid purchase price represented goodwill and on that basis he didnot allow the depreciation on Rs.10.53 crores. The AssessingOfficer has further pointed that though "Coromandel Cement" wassuffering severe losses, the assessee purchasing the said plant,had the benefit of using the trade name of M/s.CoromandelFertilizers Limited. Thus the Assessing Officer held that the costof the goodwill at 10% of the total cost would have to beestimated. Aggrieved by the same, the assessee went on appealbefore the Commissioner of Income Tax Appeals. 3. The First Appellate Authority pointed out that admittedlythe assessee acquired the brand name, namely, "Coromandel Cement",along with the other assets. Yet in the assessment of theTransferee Company no value was assigned to the goodwill and theentire sale consideration was reduced from the value of block ofassets. It was also pointed out that even though the TransferorCompany was established five years prior to the date of sale,throughout it was a loss making unit and the Transferor Companyhad no goodwill at all except the trade name that the companypossessed for the cement marketed as "Coromandel cement. TheCommissioner of Income Tax pointed out that the addition under thehead of goodwill was really without any basis and hence, the samehad to be deleted. 4. Aggrieved by the same, the Revenue went on appeal to theIncome Tax Appellate Tribunal. Referring to the findings of theCommissioner of Income Tax Appeals and on going through therecords the Tribunal pointed out that the purchase of the cementunit from M/s.Coromandel Fertilizers Limited did not automaticallygenerate any income to the assessee. It had to expend further toacquire the mining rights for lime from the Government apart fromrestructuring the manufacturing plants for manufacturingoperations. 4. Aggrieved by the same, the Revenue went on appeal to theIncome Tax Appellate Tribunal. Referring to the findings of theCommissioner of Income Tax Appeals and on going through therecords the Tribunal pointed out that the purchase of the cementunit from M/s.Coromandel Fertilizers Limited did not automaticallygenerate any income to the assessee. It had to expend further toacquire the mining rights for lime from the Government apart fromrestructuring the manufacturing plants for manufacturingoperations. 5. Going by the financial loss suffered by the company, theTribunal held that there was no goodwill left for any valuation atthe hands of the assessee. The Tribunal further pointed out thatthere was shortage of electricity which seriously affected theproduction of the transferor and right from the start it was aloss making company. Thus, going through the materials theTribunal came to the conclusion that the question of valuinggoodwill at 10% of the total consideration did not arise. 6. Considering the nature of the problems affecting thetransferoror at the time of sale, the Tribunal thus came to theconclusion that the order of the officer treating 10% of thepurchase price as referrable to goodwill deserved to be set aside.https://hcservices.ecourts.gov.in/hcservices/ Going by the findings of the Tribunal made on the basis of thematerials, we do not find that there exists any ground to acceptthe plea of the Revenue. It is a matter of record that the companywas a loss making company from the first year and except for atrade name in its possession, which was also not a popular name orwas in existence, the company had no asset at all to quote.Considering the precarious financial position too, no value wastaken towards goodwill and the entire consideration was reducedfrom the value of the block of assets. Learned counsel for thepetitioner pointed out specific provision Section 55(2)(a) toinclude goodwill of a business or a trade mark in the cost ofacquisition and hence, pleaded for setting aside the order of theTribunal. 7. A reading of the order of the Tribunal and the Commissionerof Income Tax (Appeals) show that the assessee purchased lossmaking cement plant from M/s. Coramandel Fertilizers Limited, fora sale consideration of Rs.105.30 crores. Evidently, the cementplant purchased was making loss eversince its commencement of thebusiness, hence, no value was assigned in respect of the brandname as well as for goodwill. The Commissioner of Income Tax(Appeals) pointed out that the assessee company acquired the brandname along with the other assets. However, as regards goodwill, novalue was assigned. Considering the huge loss suffered by thetransferor company, the entire consideration was reduced from thevalue of block of assets. The Tribunal also pointed out that theassessee company got permission from the Central Government formining rights and executed supplementary lease deed to theGovernment for extracting lime stone. Thus, on totality of thefacts and circumstances, the authorities below held that theAssessing Officer was not justified in assigning the value towardsthe goodwill which was not there at all as a matter of fact. Theauthorities below pointed out that the finding of the AssessingOfficer as without any basis and hence, the Officer was notjustified in deducting 10% towards the estimated value on goodwillfrom the total purchase consideration for the purpose of grant ofdepreciation allowance to the assessee. 8. Going by the factual finding, in the absence of anymaterials placed to substantiate the contention of the Revenuethat goodwill at 10% of the sale consideration only representedgoodwill as item which was not shown to exist, we have nohesitation in confirming the finding of the Tribunal, therebydismissing the tax case. The Tax Case Appeal is dismissed. Nocosts. csh Sd/-Deputy Registrar //True Copy// Sub Asst. Registrar To 8. Going by the factual finding, in the absence of anymaterials placed to substantiate the contention of the Revenuethat goodwill at 10% of the sale consideration only representedgoodwill as item which was not shown to exist, we have nohesitation in confirming the finding of the Tribunal, therebydismissing the tax case. The Tax Case Appeal is dismissed. Nocosts. csh Sd/-Deputy Registrar //True Copy// Sub Asst. Registrar To 1.The Assistant Registrar, Income Tax Appellate Tribunal,"C" Bench,III Floor, Rajaji Bhavan,Besant Nagar, Chennai-90. 2.The Commissioner of Income Tax (Appeals),Chennai 34. 3.The Deputy Commissioner of Income TaxSpecial Range II, Madras-34. 4.The Commisioner of Income Tax, Chennai.+ 1 cc to Mr. P.J. Rishikesh, Advocate SR No.42760+ 1 cc to Mr. K. Subramaniam, Advocate SR No.42785UG(CO)SR/13.9.2011 Tax Case (Appeal) No.989 of 2004