By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Chartered Accountants
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27 (2008) 118 TTJ 344 (Mum.)
Skyline Caterers (P) Ltd. v. ITO
ITA No. 2965 (Mum.) of 2007
A.Y. : 2003-04. Dated : 28-12-2007
S. 32(1)(i) and (ii) of the Income-tax Act, 1961 — Right of
catering acquired for a consideration was a tool to carry on business and
eligible for depreciation u/s.32(1)(ii).
As per agreement dated 16-8-2000, the assessee paid Rs.27
lacs for acquiring the catering business for HLL along with equipment, etc.
lying at HLL canteen and debited the same to ‘Goodwill’ account in its books.
Depreciation @ 25% claimed by the assessee was disallowed by the Assessing
Officer on the following grounds :
(a) Goodwill does not find place in S. 32 as part of
intangible assets, which included only know-how, patents, copyrights,
trademarks, etc.
(b) The expression ‘similar nature’ in S. 32(1)(ii) would
not include the goodwill.
The assessee’s appeal did not find favour with the CIT(A) who
upheld the disallowance on the grounds that :
(a) the assessee had not acquired any commercial right.
(b) the entire payment was in fact on account of
non-compete clause which amounted to capital expenditure not covered by S.
32(1)(ii) of the Act.
The Tribunal, applying the decision in the case of
Kedarnath Jute Mfg. Co. Ltd. v. CIT, (1971) 82 ITR 363 (SC), held in favour
of the assessee. The Tribunal noted as under :
1. The combined reading of all the clauses and the preamble
of the agreement reveals that the assessee had paid the sum of Rs.25 lacs for
acquiring all the rights under the contract between the first party and HLL as
well as certain assets belonging to the first party. On the other hand, the
sum of Rs.2 lacs has been paid on the ground that the first party shall not
compete with the assessee either by himself or through his agents in any
business of catering at HLL canteen.
2. The payment of Rs.25 lacs was specifically made for
acquiring all the rights under the catering contract between R and HLL and for
acquiring articles and paraphernalia belonging to the first party which were
lying in the canteen.
3. Since the payment related to the acquisition of rights
under the contract, it cannot be said that the payment was either on account
of goodwill or on account of non-compete clause.
4. Merely because the assessee showed the said payment on
account of goodwill in the books of accounts, no adverse inference can be
drawn against the assessee.
5. A perusal of S. 32(1)(ii) shows that the Legislature has
specified certain intangible assets on which depreciation can be claimed,
namely, know-how, patents, copyrights, trademarks, licences, franchises. These
specific intangible assets are followed by the expression ‘any other business
or commercial rights of similar nature’. In such a situation, the rule of
ejusdem generis would apply. The general words take the colour from the
specific words. The specific words in the above Section reveal the similarity
in the sense that all the intangible assets specified are tools of the trade
which facilitate the carrying on of the business.
6. If this test is applied, then the rights acquired by the
assessee under the agreement would fall within the expression mentioned above
since the catering business at HLL canteen could be carried on only with the
help of such rights under the contract and, consequently, the assessee would
be entitled to depreciation.
7. The articles and paraphernalia lying in the canteen of
HLL acquired by the assessee, being tangible assets, would be eligible for
depreciation under clause (i) of S. 32(1) and, therefore, their value will
have to be ascertained by the Assessing Officer and the balance amount shall
be allocated for the intangible asset for the purpose of granting depreciation
under clause (ii) of S. 32(1).
