Itxa/743/2012 Of Taj Sats Air Catering Ltd v. The Commissioner Of Income Tax -2

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.743 OF 2012 Taj Sats Air Catering LimitedV/s. The Commissioner of Income Tax-2, Mumbai ....Appellant ....Respondent Mr.Prakash Shah with Mr.Jas Sanghavi i/b PDS Legal for the Appellant. Mr.P.C. Chhotaray for the Respondent. CORAM : S.J. VAZIFDAR AND M.S. SANKLECHA, JJ.DATE : 5TH SEPTEMBER, 2012. P.C. :- 1.This is an appeal under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal dated 20.1.2012 in ITA No.8500/Mum/2010 pertaining to the assessment year 2006-2007. 2.The appeal is admitted on the following substantial question of law :- “(a)Whether the Hon'ble Appellate Tribunal is right in holding that depreciation is not allowable under section 32(1)(ii) of the Act on various “intangible assets” classified as “goodwill” on consolidated basis ? “ Questions (b) to (f) in paragraph 35 of the appeal are only facets of the above question of law and are covered by the same. Mr.Shah, the learned counsel appearing on behalf of the appellant states that the appellant, without prejudice to its rights and contentions, does not press the issue raised in question (g) in view of the fact that the tax incidence in respect thereof is minimal. For this reason alone, the issue sought to be raised in paragraph 35(g) is not pressed. 3.On 1.10.2001, the assessee purchased the catering business on slump sale basis for Rs.206.40 crores from Indian Hotels Company Limited. The purchase include tangible and intangible assets. Various assets of the value of Rs.135.40 crores out of the total purchase of Rs.206.40 crores were identified. The assessee obtained a valuation report of Ernst & Young to apportion the consideration. Rs.71 crores was apportioned towards goodwill and balance Rs.135 crores was apportioned towards various other assets. The assessee itself showed the value of goodwill at Rs.73,74,49,343/- in its balance-sheet for the year ending 31.3.2003. Accordingly for the AY 2003-2004, the assessee claimed depreciation on goodwill at Rs.18,43,62,335/- (25%). The Assessing Officer disallowed the claim on the ground that depreciation was not allowable on goodwill. The CIT (A) confirmed the order.4.Before the Tribunal, the assessee produced another itxa743-12 valuation report from Ernst & Young which gave a further break-up of Rs.71 crores. According to the report, the said sum included the value of intangible assets other than goodwill amounting to Rs.49.60 crores. The assessee thus revalued goodwill at Rs.21.40 crores. The Tribunal held as under in respect of AY 2003-2004 :- itxa743-12 valuation report from Ernst & Young which gave a further break-up of Rs.71 crores. According to the report, the said sum included the value of intangible assets other than goodwill amounting to Rs.49.60 crores. The assessee thus revalued goodwill at Rs.21.40 crores. The Tribunal held as under in respect of AY 2003-2004 :- “5.After hearing rival contentions, we find that the additional evidence in question has to be admitted as this evidence is necessary to adjudicate the claim that there are a number of intangible assets along with goodwill and only goodwill would not be eligible for depreciation. This evidence in our humble opinion goes into the root of the matter. From the assessment order it can be clearly seen that the assessing officer had noticed from the recitals in the business transfer agreement, that intellectual properties which are listed out in Article 1, sub clause b, have been transferred along with other movable and immovable assets. Even in article 2, Sub clauses b, and e, mention a list of intangible assets, which have been aggregated and loosely termed as “goodwill” by the assessee in its books of account. Thus the fact that the slump sale consists of many intangible assets along with goodwill is not in dispute. It is true that no depreciation is allowable on goodwill. But at the same time, the legislature provides that depreciation should be allowed on all other intangible assets other than Goodwill. The assessee's additional evidence throws light on the valuation of each of the intangible assets. Such evidence goes into the root of the matter for the purpose of arriving at a decision as to whether the assessee is entitle for deduction u/s 32(1)(ii) of the Act and if so, the quantum of depreciation that he is entitled to. Thus, we admit this additional evidence and remit the matter back to the file of the assessing officer for fresh adjudication in accordance with law. Grounds 1 to 3 are disposed of accordingly.” 5. This brings us to the assessment year in question in the itxa743-12 present appeal viz. AY 2006-2007. The appellant relied upon the same reports. By the impugned order, the Tribunal refused to follow the earlier order of the Tribunal dated 28.5.2009, paragraph 5 whereof is quoted above. The impugned order quotes the above observations of the order of the Tribunal in respect of the AY 2003-2004 and holds that no depreciation is allowable on goodwill. The Tribunal however, rejected the valuation reports relied upon by the appellant and observed that depreciation has neither been claimed nor allowed on intangible assets in the preceding years and that the assessee cannot be allowed to claim depreciation in the assessment order in question. The Tribunal therefore, upheld the order of the AO disallowing depreciation on the entire amount. In other words, the Tribunal did not follow the earlier order of the Tribunal in respect of the AY 2003-2004. 6.The Supreme Court as recently as 22.8.2012 in CIT vs. Smifs Securities Limited, Civil Appeal No.5961 of 2012, held that goodwill would fall under the expression “any other business or commercial rights of similar nature” in section 32(1) Explanation 3 (b). It is therefore, contended on behalf of the appellant that it is entitled to depreciation in respect of goodwill. 7.A peculiar situation has therefore, arisen. The assessee would now in fact be benefited by the rejection of the Tribunal of the itxa743-12 6.The Supreme Court as recently as 22.8.2012 in CIT vs. Smifs Securities Limited, Civil Appeal No.5961 of 2012, held that goodwill would fall under the expression “any other business or commercial rights of similar nature” in section 32(1) Explanation 3 (b). It is therefore, contended on behalf of the appellant that it is entitled to depreciation in respect of goodwill. 7.A peculiar situation has therefore, arisen. The assessee would now in fact be benefited by the rejection of the Tribunal of the itxa743-12 valuation reports and the Tribunal proceeding on the basis that the entire amount of Rs.71.00 crores is attributable to goodwill. On the other hand, as far as the proceedings in respect of the AY 2003-2004 are concerned, the matter stands remanded to the AO including on the question of ascertaining the correctness of the bifurcation furnished by the valuation reports, relied upon by the appellant. This could possibly lead to contradictory assessments for the different assessment years. It is necessary to ensure consistency in respect of the same question for the different assessment orders. 8.In our view, the proper course therefore, would be to follow the same course that has been adopted in respect of the AY 2003-2004 proceedings in respect whereof the proceedings are pending before the AO pursuant to the earlier order of the Tribunal for the AY 2003-2004. 9.in the circumstances, the impugned order is set-aside. The appeal is disposed of in terms of the order of the Tribunal dated 28.5.2009 in respect of the AY 2003-2004. No order as to costs. (M.S. SANKLECHA, J.) (S.J. VAZIFDAR, J.)