Ita/905/2010 Of Commissioner Of Income Tax v. Daikin Shri Ram Aircon Pvt Ltd

Signature Not Verified $~16 and 17 CORAM:HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMEET PRITAM SINGH ARORA, J (ORAL): ITA 905/2010ITA 130/2013 1.Present appeals have been filed by the Appellant, Revenue, underSection 260A of the Income Tax Act, 1961 (‘the Act’) to set aside theimpugned order dated 24[th]October, 2008, passed by the Income TaxAppellate Tribunal (‘ITAT’) in ITA No. 1571/Del/2005 for the AssessmentYear (‘AY’) 2001-02 and impugned order dated 23[rd]December, 2011, inITA No. 1404/Del/2010 for the AY 2002-03 respectively. 2.On 23[rd]July, 2010, ITA No. 905/2010 was admitted and the followingsubstantial question of law was framed : “(1) Whether the ITAT was correct in law in deleting the additionsmade by the Assessing Officer amounting to Rs.50 lacs on accountof depreciation on goodwill and Rs. 2,73,25,000/- on depreciationof patents and trademark?” 3.On 13[th]March, 2013, ITA No. 130/2013 was admitted and thefollowing substantial question of law was framed : “(1) Whether the Income Tax Appellate Tribunal was correct inlaw in deleting the addition made by the Assessing Officer onaccount of depreciation of goodwill and on depreciation of patentsand trademark?” 4.The facts giving rise to the present appeals are that the Assessee was engaged in the business of manufacturing and trading of air conditioners andwater coolers. On 01[st]May, 2000, the Respondent, Assessee, entered into aBusinessPurchaseAgreement(the‘agreement’)withM/sUshaInternational Ltd. (‘UIL’) for the purchase of marketing and business rightsfor a period of twenty years, including the establishment, as well as the setup for marketing the products of air conditioners and water coolers, alongwith the benefit of current orders for supply of the air conditioners and theemployees of UIL. In consideration for the transfer of the said marketingand business rights, goodwill and on the condition of non-competition, aconsideration of Rs. 2,00,00,000 was paid by the Assessee to UIL. Thisamount was capitalised in the books of accounts of the Assessee under thehead ‘goodwill’ in the schedule of its fixed assets. The Assessee claimeddepreciation of Rs. 50,00,000 as per Section 32 of the Act, at the rate of 25%as prescribed in the schedule of rates in respect of intangible assets, for theAY 2001-02 by the Assessee. Depreciation of Rs. 3,75,00,000/- was claimedon this account for AY 2002-03. 5.The Assessee also seperately purchased the manufacturing business ofM/s SIEL Aircon Ltd. (‘SAL’) vide an agreement dated 08[th]August, 2000,which included intellectual property rights such as brand name, logo, patentsand trademarks (IP rights) for a sum of Rs. 10,93,00,000/-. The Assessee forAY 2001-02 claimed depreciation of Rs. 2,73,25,000/- at the rate of 25% asprescribed in this schedule of rates in respect of intangible assets.Depreciation of Rs. 2,04,93,750/- was claimed on this account for the AY2002-03. 6.The Assessing Officer (‘AO’) rejected the aforesaid claim fordepreciation on account of purchase of business rights under the agreement dated 1[st]May, 2000 on the ground that ‘goodwill’ is not covered under thedefinition of intangible assets under the provisions of the Act. TheCommissioner of Income Tax (Appeals) [‘CIT(A)’] after considering theterms of the agreement dated 01[st]May 2000 and the nature of exclusivebusiness rights purchased by the Assessee held that the said rights arevaluable and therefore, the consideration paid by the Assessee to UIL iscapital in nature and the same is entitled to be nomenclatured as ‘goodwill’.The CIT(A) further held that the nature of these exclusive rights are akin tolicense and within the meaning of an ‘intangible asset’ and therefore, theAssessee is entitled to claim depreciation on the said amount in accordancewith the provisions of the Act and the schedule of rates as prescribed. dated 1[st]May, 2000 on the ground that ‘goodwill’ is not covered under thedefinition of intangible assets under the provisions of the Act. TheCommissioner of Income Tax (Appeals) [‘CIT(A)’] after considering theterms of the agreement dated 01[st]May 2000 and the nature of exclusivebusiness rights purchased by the Assessee held that the said rights arevaluable and therefore, the consideration paid by the Assessee to UIL iscapital in nature and the same is entitled to be nomenclatured as ‘goodwill’.The CIT(A) further held that the nature of these exclusive rights are akin tolicense and within the meaning of an ‘intangible asset’ and therefore, theAssessee is entitled to claim depreciation on the said amount in accordancewith the provisions of the Act and the schedule of rates as prescribed. 7.The AO also disallowed the depreciation of Rs. 2,73,25,000/- claimedby the Assessee on account of purchase of IP rights from SAL only for thereason that the said rights had not been transferred or registered in the nameof the Assessee, as recorded by the auditor in Note no. 6 of the auditedaccounts. The AO held that since trademarks are registered under theTrademarks Act, 1999, in the absence of such a registration, the Assessee isnot entitled to claim depreciation on these IP rights. 8.The CIT(A), after perusing the terms of the agreement executedbetween the Assessee and SAL held that upon payment of consideration forthe IP rights, the Assessee had become legally entitled to use the trademarks,brand name and the logos for marketing its products. The CIT(A) has alsoreturned a finding that the facts brought on record evidence that theAssessee had in fact after acquistion of the said rights carried on businessusing the said brand name, logos and trademark. The CIT(A) relying uponthe judgment of the Supreme Court in the case of Mysore Minerals vs. Commissioner of Income Tax, [1999] 239 ITR 775 and Dalmia Cement(Bharat) Ltd. vs.Commissioner of Income Tax, Delhi, [2001] 247 ITR267 concluded that the Assessee had become the owner of the IP rights byvirtue of the said agreement dated 8[th]August, 2000 and the absence of theregistration of the trademarks and other IP rights in the name of the Assesseewould not affect its rights to claim depreciation. The CIT(A) directed theAO to allow the Assessee to claim depreciation at the rate of 25%. 9.In the appeal filed by Revenue against the aforesaid findings of theCIT(A), the ITAT after perusing the terms of the agreement dated 1[st]May,2000, modified the order of the CIT(A) and held that the Assessee is entitledto claim depreciation on account of the aforesaid purchase of exclusivebusiness rights from UIL to the extent of Rs. 1,73,00,000/- and it disallowedthe claim of depreciation on goodwill with respect to the amount ofRs.27,00,000/-. The relevant finding of the ITAT with respect to theagrrement with UIL reads as under:- “7. We have considered the rival submissions. A perusal ofthe consideration paid as extracted above clearly shows that inregard to the purchase of the business rights, the purchase pricehas got 3 components, first for the exclusive business rights for anamount of Rs.1,73,00,000/- and the second for Rs.27,00,000/- andthe third towards the amount of transferable deposits. A perusal ofthe business purchase agreement also clearly shows that UIL asagreed to sell to the assessee and the assessee agreed to purchasethe business and the goodwill and the other assets thereof. Aperusal of the consideration also clearly shows that the agreementis for selling 3 items, first one being the business, second goodwilland third other assets. The purchase consideration also shows thecomputation of such 3 items being the exclusive business rights fora consideration of Rs.1,73,00,000/-, 27,00,000/- without anyspecifications and I the transferable deposits which would have to be considered as other assets. This being so, as the amount ofRs.27,00,000/- as shown in the purchase price has not been shownto be in relation to either exclusive business rights or fortransferable deposits. The same would have to be treated as beingtowards “goodwill”. This being so, we are of the view that theamount of Rs.27,00,000/- as paid by the assessee would have to betreated as goodwill. In regard to the balance of 1.73 Crores, it isfor the exclusive business rights. A perusal of the provisions ofsection 32 (1) (ii) clearly specifies the term intangible assets.Goodwill is conspicuous by its absence. Goodwill is also not aright. The Finance (No.2) Act of 1998 w.e.f. 1.4.1999 hasbroadened the definition of assets so as to include intangible assetfor the purpose of depreciation under section 32 (1). The definitionof the intangible asset as given in section 32 (1) (ii) identifiesvarious intangible assets as also business or commercial rightssimilar to the rights which have been treated as intangible assets inthe said provision. What is evident from the said provision is thatwhat is being permitted, as an intangible asset to be depreciated isto be rights. It is only such rights, which can be used to run thebusiness. It is only such rights the use of which generate incomethat have been specified in the provisions of section 32(1)(i) asdepreciable intangible assets. This being so, goodwill cannot besaid to be a right which can be used as a tool to generate business.In these circumstances, we are of the view that the ld. CIT(A) wasright in holding that the assessee was entitled to the depreciation inregard to the purchase of the exclusive business rights to the extentof Rs.1,73,00,000/- and directing the AO to grant depreciation onthe same. In regard to the amount of Rs.27,00,000/- as paid by theassessee, as it has not been shown that this amount had been paidfor any specific rights, the same would have to be treated asgoodwill and the depreciation on the same cannot be granted. Inthe circumstances, the findings of the ld. CIT(A) on this issue ismodified to the extent that the AO is directed to grant the-depreciation on the consideration of Rs.1,73,00,000/ paid to UIL.For the purchase of exclusive business rights which are to betreated as intangible assets. The action of the AO in disallowing thedepreciation on the goodwill to the extent of Rs.27,00,000/- isconfirmed. This amount cannot be also allowed as a business expenditure as the same has not been claimed by the assessee assuch in its return or before the assessing authority nor before theCIT(A)s and the assessee has not been able to demonstrate beforeus as to the business expediency or provision under which the claimis being made.” (Emphasis supplied) 10.Similarly, the ITAT also concurred with the finding of the CIT(A) andheld that with respect to the agreement dated 8[th]August, 2000 with SAL, theAssessee had acquired ownership of the IP rights on payment of valuableconsideration and it was therefore, an intangible asset as per Section32(1)(ii) of the Act on which the Assessee was entitled to claimdepreciation. The relevant finding of the ITAT reads as under:- expenditure as the same has not been claimed by the assessee assuch in its return or before the assessing authority nor before theCIT(A)s and the assessee has not been able to demonstrate beforeus as to the business expediency or provision under which the claimis being made.” (Emphasis supplied) 10.Similarly, the ITAT also concurred with the finding of the CIT(A) andheld that with respect to the agreement dated 8[th]August, 2000 with SAL, theAssessee had acquired ownership of the IP rights on payment of valuableconsideration and it was therefore, an intangible asset as per Section32(1)(ii) of the Act on which the Assessee was entitled to claimdepreciation. The relevant finding of the ITAT reads as under:- “10. We have considered the rival submissions. A perusal of thepurchase price consideration as per the business purchaseagreement entered into between the assessee and SAL shows thatthe consideration has been paid for the intellectual property rights.Intellectual property rights are immovable asset. It is also anintangible asset as per the provisions of section 32 (1) (ii) of theAct. It is also undisputed that the assessee has used the intellectualproperty rights in its business and there has been no claim againstthe assessee for the use of the said trademarks. In fact as per theagreement in clause 8.1(a)(i) it has been specifically agreed that oncompletion duly executed instruments of transfer, assignment etc.as the assessee may reasonably be required to complete thetransfer, assignments and conveyance of the asset in accordancewith the provisions of this agreement shall be delivered to theassessee at a place nominated by the assessee. This clearly showsthat once the completion of the agreement is done by payment of theconsideration as on the completion date specified in the agreementthe assessee would be in possession of the duly executedinstruments of transfer, assignment and Conveyances of the assetsas specified in the agreement which are basically the intellectualproperty rights and the fixed assets.This being so, as also the principles as laid down by the Hon'ble Supreme Court in the caseof Mysore Minerals Ltd. referred to supra and reaffirmed thedecision of Dalmia Cements, it would have to be held that theassessee was the owner of the property and the assessee havingused the same in its business was entitled to depreciation on thesame. In the circumstances, the finding of the ld. CIT(A) on thisissue stands confirmed.” (Emphasis supplied) 11.Learned Senior Counsel for the Respondent has relied upon thejudgments of Apex Court in Mysore Minerals Ltd. (supra) and DalmiaCements (supra), to contend that registration is not a condition precedent, inorder to claim depreciation under Section 32 of the Act. The ITAT andCIT(A) also take note of the said judgments. The ratio in Mysore Minerals(supra) reads as follows:- “18. An overall view of the aforesaid authorities shows that thevery concept the depreciation suggests that the tax benefit onaccount of depreciation legitimately belongs to one who hasinvested in the capital asset, is utilising the capital asset andthereby losing gradually investment caused by wear and tear, andwould need to replace the same by having lost its value fully over aperiod of time. 19. It is well settled that there cannot be two owners of the propertysimultaneously and in the same sense of the term. The intention ofthe legislature in enacting Section 32 of the Act would be bestfulfilled by allowing deduction in respect of depreciation to theperson in whom for the time being vests the dominion over thebuilding and who is entitled to use it in his own right and is usingthe same for the purposes of his business or profession. Assigningany different meaning would not subserve the legislative intent…” In our considered view, the ITAT and the CIT(A) has rightly placedreliance on the ratio in Mysore Minerals (supra) which was subsequentlyfollowed in Dalmia Cements (supra). 19. It is well settled that there cannot be two owners of the propertysimultaneously and in the same sense of the term. The intention ofthe legislature in enacting Section 32 of the Act would be bestfulfilled by allowing deduction in respect of depreciation to theperson in whom for the time being vests the dominion over thebuilding and who is entitled to use it in his own right and is usingthe same for the purposes of his business or profession. Assigningany different meaning would not subserve the legislative intent…” In our considered view, the ITAT and the CIT(A) has rightly placedreliance on the ratio in Mysore Minerals (supra) which was subsequentlyfollowed in Dalmia Cements (supra). 12.In the present appeals, during the course of arguments, the learnedcounsel for the Appellant, Revenue, has only contended that the payment ofthe consideration by the Assessee to SAL is not recorded in the agreementdated 08[th]August, 2000. In reply, the learned Senior Counsel for theRespondent, Assessee, has drawn our attention to the order of the CIT(A)which categorically records at paragraph No.6 that SAL was a sick companyregistered with BIFR and with the approval of BIFR, the Assessee enteredinto an agreement with SAL for the purchase of IP rights for valuableconsideration. He states that the consideration of Rs. 10.93 crores was paidby the Assessee to SAL for the purchase of the intellectual property rightsunder supervision of BIFR. He states that there is no dispute raised on thisissue before the appellate authorities with respect to the payment ofconsideration by the Assessee to SAL. 13.The learned Senior Counsel has further drawn our attention to the factthat in the subsequent AYs 2003-04 and 2004-05, the claim of depreciationfor goodwill on exclusive rights acquired from UIL and IP acquired fromSAL has been similarly upheld by the ITAT and the said orders haveattained finality, as no appeal has been filed by the Department against thesaid orders. He states that on this count as well the present appeals are notmaintainable on the principles of consistency. 14.In these appeals as well the learned Senior Standing Counsel of theRevenue has not disputed the findings of the CIT(A) and the ITAT withrespect to the acquisition of exclusive business rights by the Assessee fromUIL and transfer of IP rights from SAL. The Revenue does not dispute thatthe said business is being carried out by the Assesee and the trademarks andlogos are being used by the Assessee. The findings of the appellate authorities that the aforesaid rights constitutes IPR is not disputed by theRevenue and the only contention raised is as regards non-registration of thetrademarks in the name of the Assessee, however, the said issue is no longerres integra as in light of the judgments relied upon by the appellateauthorities. The Revenue has not brought to our attention any provision oflaw, which disentitles the Asessee from asserting ownership in a trademarkin the absence of registration of the assignment under the Trademark Act,1999. 15.We are of the considered view that there is no infirmity in the findingreturned by the appellate authorities that the business rights acquired by theAssesseeunderits agreementwith UILforvaluable considerationconstitutes an intangible asset within the meaning of Section 32(1)(ii) of theAct. The learned counsel for the Revenue has not disputed the exclusivenature of rights, payment of consideration and the same being of an enduringnature, since it span for 20 years. In these facts, the capitalisation of the saidbusiness rights as an intangible asset has been correctly upheld by theappellate authorities. Therefore, the Assessee was entitled to claimdepreciation. 15.We are of the considered view that there is no infirmity in the findingreturned by the appellate authorities that the business rights acquired by theAssesseeunderits agreementwith UILforvaluable considerationconstitutes an intangible asset within the meaning of Section 32(1)(ii) of theAct. The learned counsel for the Revenue has not disputed the exclusivenature of rights, payment of consideration and the same being of an enduringnature, since it span for 20 years. In these facts, the capitalisation of the saidbusiness rights as an intangible asset has been correctly upheld by theappellate authorities. Therefore, the Assessee was entitled to claimdepreciation. 16.Similarly, with respect to the acquisition of IP rights from SAL, thelearned counsel for Revenue does not dispute the nature of the rightsacquired and the limited contention raised is with respect to confirmation ofthe payment of consideration recorded in the agreement. The said contentionraised by Revenue is firstly a question of fact, which objection is not borneout from the record and secondly, learned Senior Counsel for the Assesseehas stated that the said agreement was executed under the aegis of BIFR,since SAL was a sick company and there was no doubt raised by Revenue with respect to the payment of consideration. The ownership of the IP rightsof the Assessee stands proved on record, its use by the Assessee is also notdisputed and therefore the appellate authorities have rightly held that theAssessee is entitled to claim deprecation under Section 32(1)(ii) of the Acton the said IP rights. 17.The facts as well as the law were properly and correctly assessed bythe CIT(A) and the ITAT. We, therefore, answer the question of law framedin these appeals against the Revenue and in favour of the Assessee. We seeno merits in the appeals and accordingly, the present appeals are dismissed. MANMEET PRITAM SINGH ARORA, J OCTOBER 17, 2022/msh/kv/j MANMOHAN, J