Madras High Court
Tax Case (Appeal) No. 989 of 2004
Commissioner of Income Tax, Chennai Vs India Cements Ltd.
Prayer: Appeal filed against the order of the Income Tax Appellate Tribunal “C” Bench, dated 31.12.2002, made in I.T.A No. 1890/Mds/96, under Section 260 A of the Income Tax Act, 1961.
(Judgement of the Court was made by CHITRA VENKATARAMAN, J.)
The Revenue is on appeal raising the following questions of law:
“1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the company purchased by the assessee had no goodwill as it was a loss making company?
2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that there is no goodwill attributable, as the manufacture of cement in the newly acquired company would involve problems?
3. Whether in the facts and circumstances of the case, the Tribunal had considered all the parameters that are necessary for the valuation of the goodwill of the purchased company?”
2. The assessment year under consideration is 1991-1992. During the relevant previous year relating to the assessment year 1991-1992, the assessee herein acquired the cement plant from M/s.Coromandel Fertilizers Limited, for a consideration of Rs. 105.30 crores. The Assessing Officer viewed that 10% of the said purchase price represented goodwill and on that basis he did not allow the depreciation on Rs.10.53 crores. The Assessing Officer has further pointed that though “Coromandel Cement” was suffering severe losses, the assessee purchasing the said plant, had the benefit of using the trade name of M/s. Coromandel Fertilisers Limited. Thus the Assessing Officer held that the cost of the goodwill at 10% of the total cost would have to be estimated. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax Appeals.
3. The First Appellate Authority pointed out that admittedly the assessee acquired the brand name, namely, “Coromandel Cement”, along with the other assets. Yet in the assessment of the Transferee Company no value was assigned to the goodwill and the entire sale consideration was reduced from the value of block of assets. It was also pointed out that even though the Transfer-or Company was established five years prior to the date of sale, throughout it was a loss making unit and the Transfer-or Company had no goodwill at all except the trade name that the company possessed for the cement marketed as “Coromandel cement. The Commissioner of Income Tax pointed out that the addition under the head of goodwill was really without any basis and hence, the same had to be deleted.
4. Aggrieved by the same, the Revenue went on appeal to the Income Tax Appellate Tribunal. Referring to the findings of the Commissioner of Income Tax Appeals and on going through the records the Tribunal pointed out that the purchase of the cement unit from M/s. Coromandel Fertilisers Limited did not automatically generate any income to the assessee. It had to expend further to acquire the mining rights for lime from the Government apart from restructuring the manufacturing plants for manufacturing operations.
5. Going by the financial loss suffered by the company, the Tribunal held that there was no goodwill left for any valuation at the hands of the assessee. The Tribunal further pointed out that there was shortage of electricity which seriously affected the production of the transferor and right from the start it was a loss making company. Thus, going through the materials the Tribunal came to the conclusion that the question of valuing goodwill at 10% of the total consideration did not arise.
6. Considering the nature of the problems affecting the transferoror at the time of sale, the Tribunal thus came to the conclusion that the order of the officer treating 10% of the purchase price as referrable to goodwill deserved to be set aside. Going by the findings of the Tribunal made on the basis of the materials, we do not find that there exists any ground to accept the plea of the Revenue. It is a matter of record that the company was a loss making company from the first year and except for a trade name in its possession, which was also not a popular name or was in existence, the company had no asset at all to quote. Considering the precarious financial position too, no value was taken towards goodwill and the entire consideration was reduced from the value of the block of assets. Learned counsel for the petitioner pointed out specific provision Section 55(2)(a) to include goodwill of a business or a trade mark in the cost of acquisition and hence, pleaded for setting aside the order of the Tribunal.
7. A reading of the order of the Tribunal and the Commissioner of Income Tax (Appeals) show that the assessee purchased loss making cement plant from M/s. Coramandel Fertilisers Limited, for a sale consideration of Rs. 105.30 crores. Evidently, the cement plant purchased was making loss ever since its commencement of the business, hence, no value was assigned in respect of the brand name as well as for goodwill. The Commissioner of Income Tax (Appeals) pointed out that the assessee company acquired the brand name along with the other assets. However, as regards goodwill, no value was assigned. Considering the huge loss suffered by the transfer-or company, the entire consideration was reduced from the value of block of assets. The Tribunal also pointed out that the assessee company got permission from the Central Government for mining rights and executed supplementary lease deed to the Government for extracting lime stone. Thus, on totality of the facts and circumstances, the authorities below held that the Assessing Officer was not justified in assigning the value towards the goodwill which was not there at all as a matter of fact. The authorities below pointed out that the finding of the Assessing Officer as without any basis and hence, the Officer was not justified in deducting 10% towards the estimated value on goodwill from the total purchase consideration for the purpose of grant of depreciation allowance to the assessee.
8. Going by the factual finding, in the absence of any materials placed to substantiate the contention of the Revenue that goodwill at 10% of the sale consideration only represented goodwill as item which was not shown to exist, we have no hesitation in confirming the finding of the Tribunal, thereby dismissing the tax case. The Tax Case Appeal is dismissed. No costs.