IN THE ITAT MUMBAI BENCH ‘I’
India Capital Markets (P.) Ltd.
Deputy Commissioner of Income-tax
IT Appeal No. 2948 (Mum.) of 2010
[Assessment year 2006-07]
December 12, 2012
N.K. Billaiya, Accountant Member
These cross-appeals by the assessee and the Revenue are directed against the very same order of the CIT(A) dated 23-3-2010 pertaining to the assessment year 2006-2007. As both these appeals are directed against the very same order, both were heard together and disposed of by this common order for the sake of convenience and brevity.
2. ITA.No.2948/Mum/2010 : The assessee has challenged the correctness of the Order of the CIT(A) by raising three grounds of appeal. At the very outset, Counsel for the assessee stated that he is not pressing ground No.3. Accordingly, ground No.3 is dismissed.
3. Ground No.1 relates to the disallowance of depreciation on intangible asset amounting to Rs. 62,50,000/-. Ground No.2 is an alternative plea to ground No.1 by which the assessee claims that if no depreciation is allowed on capital expenditure incurred on intangible asset, then the same should be allowed as revenue expenditure.
4. Facts giving rise to the grievance raised by ground No.1 show that during the course of the assessment proceedings, the Assessing Officer noticed that the assessee is a share broker and the main source of income is generated through brokerage. The Assessing Officer further observed that during the year the assessee has purchased entire clientele business of M/s. Ashmavir Financial Consultants Pvt. Ltd. (hereinafter called as “M/s. AFC”) by assigning all clients to the appellant company for a consideration of Rs. 2.50 crores . The Assessing Officer noticed that the assessee has booked these expenses as purchase of goodwill and has claimed 25% of depreciation amounting to Rs. 62,50,000/- thereon.
5. The Assessing Officer sought explanation from the assessee to justify its claim on depreciation of such purchase of clientele business. The assessee filed a detailed reply. In its reply, the assessee also took an alternative plea that the payment if not considered eligible for depreciation then, the same should be allowed as revenue expenditure. The submissions and the explanations of the assessee did not find favour with the Assessing Officer who examined the submissions in the light of the provisions of section 32 of the Act. After considering the provisions of section 32, the Assessing Officer was of the opinion that in the said provision it is apparently clear that goodwill as such does not find any reference. The Assessing Officer went on to discuss the agreement vide Deed of Assignment of Business, Sale of Goodwill and Master Services agreement entered into between the assessee and M/s. AFC The Assessing Officer observed that due to regulatory changes brought in by the stock exchange by which no sub-broker was allowed to issue the bills and according to the new scheme, it is only the main broker who can charge brokerage which means that due to this change, M/s. AFC who hitherto was a sub-broker, could not independently do the business. Further, M/s. AFC was not a Member of the Stock Exchange and therefore, it could not have solicited independent business. As such, the question of transfer of any good will does not exist. The Assessing Officer pointed out that M/s. AFC was the exclusive sub-broker of the assessee vide agreement dated 13.10.2000. Due to regulatory changes brought by SEBI vide its circular dated 26th August, 2004 M/s. AFC could not carry on the business of share broker for the assessee independently and therefore, the agreement between M/s. AFC and the assessee dated 13.10.2000 was automatically terminated.
6. It is the say of the assessee that M/s. AFC had no other option but to link its business with some other Member Broker and re-negotiate terms and conditions for further conduct of the business in the same line, while on the other hand, assessee saw this as an opportunity for development and expansion of its business. Therefore, the assessee paid Rs. 2.5 crores to acquire the independent clientele business of M/s. AFC and also allotted 7.25% share in the company. This arrangement prompted the Assessing Officer to conclude that acquisition of business of another entity is not acquisition of goodwill.
7. Coming back once again to the provisions of section 32 (1) (ii) i.e., claim of depreciation on intangible assets, the Assessing Officer was of the opinion that the case of the assessee does not fall in any of the category to make it eligible for depreciation under this clause. The Assessing Officer was of the opinion that depreciation is allowable only to assets which are kept depreciating over a period of time due to damage, wear and tear and obsolescence whereas, client do not depreciate and moreover, they are tangible. Therefore, do not fulfil the conditions of intangibility. The Assessing Officer concluded that any capital asset tangible or intangible has to be put to use. The commercial right that the assessee company has claimed to have purchased has not been put to use during the year and accordingly, disallowed the claim of depreciation on account of goodwill at Rs. 62,50,000/-.
8. The assessee agitated this matter before the CIT(A) and reiterated that it has purchased an intangible asset in the form of clientele business of M/s. AFC and therefore, eligible for depreciation under section 32 (1) (ii) of the Act. After considering the facts and submissions, the CIT(A) was of the view that the disallowance of depreciation of Rs. 62,50,000/- is found to be correct for the following reasons :
(a) The payment of Rs. 2.50 crores was not for goodwill but for purchase of clientele business of M/s. AFC.
(b) The name and fame of old place of business goodwill and business itself of M/s. AFC got extinguished by assignment of business to the assessee.
8.1 The CIT(A) further observed that in the present case, the assessee has not paid the sum of Rs. 2.50 crores for the goodwill of M/s. AFC. The sum of Rs. 2.50 crores has been paid for extinguishment of M/s. AFC and for using the services of its Promoter-Director Mr. Mahaveer Lalchand Mehta as an employee of the company by virtue of master-services agreement dated 1-9-2005. The CIT(A) further held that it is not clear at all as to out of Rs. 2.50 crores what was the amount pertaining to assignment of business or what part was for goodwill, what is being paid for goodwill is not mentioned at all in the Deed with M/s. AFC itself has extinguished the question of having its goodwill after the agreement dated 29th August, 2005 does not arise. The real nature of transaction is that of Rs. 2.50 crores has been made for retail clientele of M/s. AFC numbering 3709 and to ensure that the business of M/s. AFC comes to an end and its Promoter-Director works for the appellant company. The CIT(A), finally concluded that the payment is not for goodwill at all nor is the payment for any commercial right. Therefore, the claim of depreciation on the consideration of Rs. 2.50 crores is found to be baseless and confirmed the disallowance of Rs. 62,50,000/-.
9. Aggrieved by the findings of the CIT(A), the assessee is in appeal before us. The Counsel for the assessee strongly contended that the revenue authorities have misunderstood and misinterpreted the provisions of section 32(1)(ii) of the Act. The assessee has very much acquired an intangible asset from M/s. AFC by paying the consideration of Rs. 2.50 crores and rightly claimed depreciation @ 25% which is the allowable rate of depreciation as per the provisions of the Act. It is incorrect on the part of the revenue authorities to state that no goodwill has been purchased by the assessee. By paying Rs. 2.50 crores, the assessee has acquired a right to directly deal with 3709 clients of M/s. AFC which in itself is a commercial right eligible for depreciation.
10. Per contra, learned D.R. relied upon the Orders of the lower authorities and pleaded that the assessee has grossly failed to substantiate its claim for depreciation.
11. We have heard the rival submissions and perused the Orders of the lower authorities. We have also gone through the copy of the Deed of Assignment of Business, Sale of Goodwill and Master Services Agreement. By virtue of Clause (1) of the said Deed, it is provided as under
“(1) Assignment and Consideration :
(a) That in consideration of the sum of Rs. 2,50,00,000/- (Rs. Two crore and Fifty Lacs Only) paid by the Assignee to the Assignor-1 on the execution of these presents, receipt whereof the Assignor-1 do hereby admit, the Assignor-1 as beneficial owner, irrevocably assigns, conveys, sells, grants and transfers onto the Assignee without limitation and in perpetual, all the said retail Clientele of the Assignor-1 in stock broking business including the existing business associates (a List of Retail Clientele/Business Associates is enclosed as Annexure-A), together with the Goodwill attached thereto with all the rights and benefits belonging thereto to hold the same and all the said retail Clientele hereby assigned on to the Assignee absolutely; as on 1st September, 2005.
(b) The Assignor-1 hereby covenants with the Assignee that he has full right and absolute authority to assign the said retail clientele together with the Goodwill attached thereto and that he has not assigned or agreed to assign the same in favour of any other person or created any encumbrances thereon and that the Assignee will be entitled to use the said retail clientele together with the goodwill attached thereto of the Assignor-1 without any objection and or interruption by the Assignor-1 or any person claiming under him including that of the Assignor-2 and that the Assignors will at the request and costs of the Assignee at any time execute any document as may be required for better and more perfectly assuring the said assignment of clientele and the goodwill attached thereto unto the Assignee.”
12. It is not in dispute that by virtue of this agreement, M/s. AFC has transferred its entire retail clientele to the assessee for a consideration of Rs. 2.50 crores. The only issue to be decided is, Whether this constitutes or creates an intangible asset eligible for depreciation under section 32 (1) (ii) of the Act ?
Let us first see the provisions of Section 32 (1) (ii) of the Act.
32. Depreciation.–(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.
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed…
13. A perusal of the above provision suggests that certain intangible assets on which depreciation could be claimed are – knowhow, patents, copy rights, trade marks, licenses, franchise or any other business or commercial rights of similar nature. This expression “any other business or commercial rights of similar nature” by itself would mean to include all kinds of commercial rights. The language in section 32 (1) (ii) clearly invites the application of the Rule of EJUSDEM GENERIS which means that words of a general nature following specific and particular words should be constitute as limited to things which are of same nature as those specified. The specific words in section 32 of the Act reveal the similarity in the sense that all the intangible assets specified are tools of the trade which facilitates the assessee to carry on the business. Therefore, the expression, ‘any other business or commercial rights of similar nature’ would include such rights which can be used as a tool to carry on the business. This view finds support from the decision of the Tribunal in the case of Skyline Caterers (P.) Ltd v. ITO  306 ITR (AT) 369 (Mum.)
14. In the light of these observations, it cannot be denied that by getting a right over 3709 clients of M/s. AFC, such right is used as a tool to carry on the business by the assessee. Merely because the assessee showed the payment to be on account of goodwill in the books of account, no adverse inference could be drawn against the assessee.
15. Even assuming that the payment has been made for the purchase of goodwill of M/s. AFC it has to be accepted that in this line of business the goodwill of the broker is paramount. Because of certain stray incidences which have taken place in the stock market which have shaken the confidence of the public at large in the past, the investors always depend upon the goodwill of the broker because no investor would like to burn his fingers by the unscrupulous activities undertaken by certain fraudulent broker. M/s. AFC had a strong clientele base of 3709 persons which itself show that M/s. AFC was holding a strong repute in the eyes of its clients. Undoubtedly, by purchase of rights to do the business with these 3709 clients the assessee has actually purchased the goodwill of M/s. AFC.
16. Lord Macnaghten Mark in IRC v. Muller & Co. Margarine Ltd.  AC 217 “HL” remarked that, although goodwill was easy to describe it was – – difficult to define. In a progressing business goodwill tends to show progressive increase and in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is effected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio economic ecology, or introduction to old customers and agreed absence of competition.
17. Commercial rights gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customer associate with such assets.
18. It would not be out of place to highlight the views expressed by the Hon’ble High Court of Delhi in the case of AREVA T & D India Ltd. v. Dy. CIT  345 ITR 421.
“In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression “business or commercial rights of similar nature” specified in section 32(1)(ii) of the Act. It is seen that such rights need not answer the description of “know-how, patents, trade marks, licences or franchises” but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term “business or commercial rights of similar nature”, it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words “business or commercial rights of similar nature” have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of “business or commercial rights” cannot be restricted to only the aforesaid six categories of assets, viz., know-how, patents, trade marks, copyrights, licences or franchises. The nature of “business or commercial rights” can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in the case of the assessee, intangible assets, viz., business claims ; business information ; business records ; contracts ; employees ; and know-how, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd.  327 ITR 323 (SC) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a “licence” or “akin to a licence” which is one of the items falling in section 32(1)(ii) of the Act.
In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of “business or commercial rights of similar nature” specified in section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that section.”
19. The I.T.A.T. Mumbai “G” Bench in the case of Dy. CIT v. Weizman Forex Ltd.  51 SOT 525 observed that the definition of the asset which is a subject matter of the transfer consists of all contract, licenses, franchise, distribution net work, customer lists, marketing strategies and software and when the intangible asset being commercial/business rights diminished in value or physical wear and tear is not an essential condition for admissibility for depreciation, if the asset is used as a business tool for earning income.
20. In the light of the above discussion, it is not in doubt or dispute that purchase of the clientele business by the assessee from M/s. AFC is a right which can be used as a tool to carry on the business. It can also be seen from the angle of purchase of entire marketing net work by the assessee from M/s. AFC even if considered from this angle the assessee is eligible for depreciation as held by the Tribunal. In the case of Jyoti India Metal Industries (P.) Ltd. v. Asstt. CIT [IT Appeal No.181/Mum/2008, dated 28-9-2012]. The Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd.  24 taxmann.com 222 has held that goodwill is an asset eligible for depreciation.
21. In our considerate view, after considering the entire gamut of facts of instant case, we have no hesitation to hold that the assessee is entitled for depreciation on payment of Rs. 2.50 crores @ 25% which comes to Rs. 62,50,000/- as claimed by the assessee. The Assessing Officer is accordingly directed to allow the depreciation. Ground No.1 is accordingly allowed.
22. Ground No.2 is an alternative plea claiming the payment of Rs. 2.50 crores as a revenue expenditure. As we have already held that it is a capital expenditure eligible for depreciation, ground No.2 becomes otios and accordingly dismissed.
23. In the result, assessee’s appeal is partly allowed.
24. ITA.No.4851/Mum/2010 : Revenue has shown its grievance by raising two grounds. Ground No.1 relates to the deletion of the addition made by the Assessing Officer on account of non-deduction of TDS on Bloomberg Data Services charges at Rs. 4,74,109/-. According to the Revenue, the CIT(A) erred in holding that no TDS was required to be deducted on payment of Rs. 4,74,109/- to Bloomberg. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has made payment to Bloomberg Data Services at Rs. 4,74,109/-. The Assessing Officer was of the opinion that the assessee was liable to deduct tax on these payments. As the assessee has failed to deduct tax the Assessing Officer invoked the provisions of section 40A(ia) and disallowed the entire payment of Rs.4,74,109/-.
25. Before the CIT(A), the assessee explained that the payment was made for terminal charges for on line information and data base access and retrieval services and therefore, no TDS was required to be deducted as the payment was for a subscription of financial e-magazine and therefore, the Assessing Officer erred in invoking the provisions of section 40A(ia). The CIT(A) after considering the facts, gave a categorical finding that the payment was nothing but a subscription to a financial e-magazine and therefore, not liable for TDS.
26. Before us, the learned D.R. could not bring any distinguishing facts which can suggest that the payment was liable for TDS. In that view of the matter and considering the fact that the payment is nothing but a subscription for e-magazine/journal we do not find any infirmity in the finding of the CIT(A) and we confirm the same. Ground No.1 is accordingly dismissed.
27. Ground No.2 relates to the decision of the CIT(A) who held that on the facts of the case provisions of section 2 (22) (e) are not applicable. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has received Rs.1.40 crores as loan from its related enterprise Nich Financial Services Ltd. The Assessing Officer observed that Rs. 1 crore was received on 17.3.2006 and Rs. 40 lakhs was received on 13.3.2006. The Assessing Officer also noticed that a similar addition was made in the immediately preceding assessment year. In view of the same, the Assessing Officer went on to treat the loan of Rs. 1.40 crores as deemed dividend and taxed as income from other sources.
28. When the matter was agitated before the CIT(A), the CIT(A) observed that similar issue was discussed in detail in the case of the assessee in assessment year 2005-2006 wherein it was held that the advance or loan by M/s. Nitch Financial services Pvt. Ltd. to the assessee was in the ordinary course of business where the lending of money is substantial part of the business of the company and in view of clause (ii) to section 2 (22) (e) such advance or loan are not dividend. The CIT(A) concluded that the facts and circumstances for the year under consideration being the same, following the decision in assessment year 2005-2006, deleted the entire addition made by the Assessing Officer.
29. Before us, the Counsel drew our attention to the decision of the Tribunal in assessee’s own case in ITA.No.1496/Mum/2009 and ITA.No.949/Mum/ 2009 pertaining to assessment year 2005-2006 and submitted that the Tribunal has dismissed Revenue’s appeal holding that section 2 (22) (e) is applicable in the case of deemed dividend only in the hands of shareholder. In the case under consideration the assessee-company is not share holder of NFSPL. Therefore, in the light of judgment of jurisdictional High Court in the case of CIT v. Universal Medicare  190 Taxman 144 (Bom.) held that deemed dividend under section 2 (22) (e) cannot be taken in the hands of the assessee. As no distinguishable facts has been brought on record by the D.R. we have no hesitation to follow the findings of the Tribunal in assessee’s own case in ITA. No. 1496/Mum/2009 and ITA.No.949/Mum/ 2009 (supra). Ground No.2 is accordingly dismissed.
30. In the result, appeal filed by the Revenue is dismissed.