Delhi High Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. (Judgement is Reproduced below) on the issue of whether payment for acquisition of diverse business and commercial rights, in the course of acquisition of business under a slump sale, are intangible assets eligible for depreciation although classified as ‘goodwill’ in books of account held that rights and benefits acquired in the nature of marketing and trading reputation, trading style and name, marketing and distribution territorial know-how, information of consumption patterns and habits of consumers, distribution network, contracts and other commercial rights qualify for depreciation as intangible assets and classification of such assets as ‘goodwill’ in books of account is not determinative.
Background and facts
- The Indian Tax Laws (ITL), after its amendment with effect from 1 April 1998, allows depreciation in respect of specified intangible assets viz., know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. Conspicuously, there is no direct reference to ‘goodwill’ in the specified intangible assets.
- The Taxpayer is engaged in the business of manufacturing and trading of non-alcoholic beverages. It acquired a business of bottling and distribution of non-alcoholic beverages for a slump price in the earlier. The Taxpayer allocated a part of the slump price towards ‘goodwill’ in its books of account.
- The slump price allocated to ‘goodwill’ comprised: (a) Consideration for the marketing and trading reputation, trading style and name, marketing and distribution, territorial know-how and information of the territory. (b) Difference between consideration paid for the business and the value of tangible assets determined by a valuer; such difference representing value of diverse contracts, rights etc. of the seller acquired by the Taxpayer.
- The Taxpayer claimed depreciation on amount classified as ‘goodwill’ which the Tax Authority initially allowed. Subsequently the Tax Authority sought a revision on the ground that the depreciation was erroneously allowed in the original assessment since ‘goodwill’ does not qualify for depreciation as an intangible asset.
- The Taxpayer appealed to the Income Tax Appellate Tribunal (ITAT) against the revision. The ITAT held that the revision was not justified since the allowance in the original assessment represented one of the plausible views of the issue.
- Being aggrieved by the ITAT’s order, the Tax Authority preferred an appeal before the HC.
Taxpayer’s contentions
