(2014) 112 DTR 265 (Del) Thyssenkrupp Elevators (India) (P) Ltd. vs. ACIT A.Y.: 2003-04 Date of order: 29.08.2014

Facts:
The assessee acquired the running business in terms of ‘undertaking sale agreement’ of the “Elevator Division” of M/s. ECE Industries Ltd. on a slump basis for a value of Rs. 20,32,10,000. Apart from acquiring various other assets of the said business, the assessee has acquired maintenance contracts of 3,578 elevators which was the main source of revenue for the assessee and also maintenance contracts for 1,001 elevators which were under the warranty period and which would start yielding revenue once the warranty period expires. This portfolio of various maintenance contracts was valued at Rs.18,34,74,000 and depreciation u/s. 32 was claimed on it by treating it as an intangible asset. The learned AO while disallowing the claim of assessee for depreciation on ‘maintenance portfolio’ observed that the assessee was following a ‘complete contract method’ and hence, was not eligible to claim depreciation, as there was no income from the said contracts offered to taxation. Aggrieved by the disallowance the assessee preferred an appeal before the CIT (A). The learned CIT (A) observed that , the consideration can be equated to an amount paid to acquire income yielding apparatus which is nothing but capital in nature and cannot be inferred to result into a depreciable intangible assets.
Further, the excess of consideration over the net value of assets amounting to Rs. 1,85,44,612 was separately shown in the balance sheet and was treated to be ‘goodwill’ pertaining to the business. It was this value of goodwill that was claimed by the assessee as eligible for depreciation for the first time directly before the Tribunal based on the apex Court judgement in the case of CIT vs. SMIFS Securities Ltd. (2012) 75 DTR (SC) 417.

Held:
It was held that the aforesaid maintenance contracts were the very backbone of the business of the assessee. The fact that after the specified intangible assets referred to u/s. 32 (1)(ii) 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 other categories of intangible assets which were neither feasible nor possible to exhaustively enumerate. These annual maintenance contracts which constituted the whole and sole of the “maintenance division” business of the transferor and which was hitherto being carried out by the transferor, without any interruption were transferred under the said undertaking and sale agreement. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing business of the transferor. In absence of the aforesaid intangible assets, the assessee would have to commence the business from scratch and go through the gestation period whereas by creating new/fresh business right, the assessee got an up and running business. It would be prudent to note that these AMC’s in terms of value only come next to the value of fixed assets. Thus, it is unambiguously clear from the various clauses of the agreement and documents available on record that the present agreement represents a bundle of rights in the form of commercial rights. Thus, by applying the principle of ejusdem generis, it was held that such AMCs should get covered within the expression “business or commercial rights of similar nature” specified u/s. 32(1)(ii) of the Act and accordingly eligible for depreciation.

Regarding the issue of depreciation on the goodwill, the Honourable ITAT relied upon the decision of CIT vs. SMIFS Securities Ltd. (supra) wherein it was held that excess consideration paid by the assessee over the value of net assets should be considered as goodwill of business. Accordingly, the depreciation on the same was also allowed u/s. 32(1)(ii) by considering it as falling within the expression “business or commercial rights of similar nature”.