IN THE ITAT MUMBAI BENCH ‘SMC’
Skyline Caterers (P.) Ltd.
v.
Income-tax Officer, Ward - 8(3)2
K.C. SINGHAL, JUDICIAL MEMBER
IT APPEAL NO. 2965 (Mum.) of 2007
[ASSESSMENT YEAR 2003-2004]
DECEMBER 28, 2007
Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Assessment year 2003-04 - Whether expression any other business or commercial rights of similar nature appearing in clause (ii) of section 32(1) would include such rights which can be used as a tool to carry on business - Held, yes - Assessee-company was engaged in business of providing catering, house-keeping and allied services to a company HLL - Such catering business was earlier carried on by one R under a catering contract with HLL for last 30 years - Assessee entered into an agreement with R on 16-8-2000 for taking over catering contract of R with HLL with effect from September 1, 2000 against a consideration of Rs. 27 lakhs - In relevant previous year, assessee paid a sum of Rs. 25 lakhs to R as a consideration for acquiring all rights under catering contract between R and HLL as well as certain assets belonging to R and further paid a sum of Rs. 2 lakhs to R on account of not to compete with assessee - Assessee further reflected said amount of Rs. 27 lakhs in its balance sheet as goodwill and claimed depreciation thereon treating same as intangible assets as well as commercial rights acquired by it - Lower authorities disallowed assessee’s claim for depreciation - Whether since payment of Rs. 25 lakhs by assessee to R related to acquisition of all rights under catering contract between R and HLL as well as all articles and paraphernalia belonging to R which were lying at HLL canteen, it could not be said that said payment was either on account of goodwill or on account of not to complete with assessee - Held, yes - Whether since merely because assessee showed said payment on account of goodwill in books of account, no adverse inference could be drawn against assessee - Held, yes - Whether, since expression any other business or commercial rights of similar nature appearing in section 32(1)(ii) would include such rights which can be used as a tool to carry on business, rights acquired by assessee under catering contract between R and HLL would fall within expression mentioned above and further since catering business at HLL canteen could be carried on only with help of such rights under catering contract between R and HLL, assessee would be entitled to depreciation - Held, yes - Whether since assessee had not acquired rights under catering contract but also articles and paraphernalia lying in canteen of HLL and further since such articles being tangible assets would be eligible for depreciation under clause (i) of section 32(1), value of same would have to be ascertained by Assessing Officer and balance amount would be allocated for intangible asset for purpose of granting depreciation under clause (ii) section 32(1) - Held, yes
The expression ‘any other business or commercial rights of similar nature’ as appearing in clause (ii) of section 32(1) of the Income-tax Act, 1961.
The assessee-company was engaged in the business of providing catering, house-keeping and allied services to a company HLL. Such catering business was earlier carried on by one R under a catering contract with HLL for the last 30 years. The assessee entered into an agreement with R on 16-8-2000 for taking over the catering contract of R with HLL with effect from September 1, 2000 against a consideration of Rs. 27 lakhs. In the relevant previous year, the assessee paid a sum of Rs. 25 lakhs to R as a consideration for acquiring all the rights under the catering contract between R and HLL as well as certain assets belonging to R and further paid a sum of Rs. 2 lakhs to R on account of not to compete with the assessee. The assessee further reflected the said amount of Rs. 27 lakhs in its balance sheet as goodwill and claimed depreciation thereon treating the same as intangible assets as well commercial rights acquired by it. The Assessing Officer held that the goodwill did not find place in section 32 as part of intangible assets which included only know-how, patents, copyrights, trade marks, etc. He further held that the expression ‘similar nature’ in section 32(1)(ii) would not include the goodwill. He, therefore, disallowed the assessee’s claim for deprecation.
On appeal, the Commissioner (Appeals) held that since R could not have assigned the rights under catering contract with HLL in favour of the assessee in view of the agreement dated 16-8-2000 and further since the right to carry on the catering business in the canteen of HLL was entirely dependent on HLL and the assessee was responsible to obtain such permission from HLL and further since R had no obligation in this regard, it could not be said that assessee company had acquired any commercial right. He further held that the entire payment of Rs. 27 lakhs was infact on account of non-compete, which amounted to capital expenditure not covered by section 32(1)(ii). The Commissioner (Appeals), therefore upheld the action of the Assessing Officer.
On second appeal:
It is well settled that the nomenclature given to the entries in the books of account is not relevant for ascertaining the real nature of the transaction. The nature of transaction should be ascertained on the basis of the agreement between the parties. [Para 5]
The combined reading of the agreement dated 16-8-2000 entered into
between the assessee and R revealed that the assessee had paid the sum of Rs. 25 lakhs for
acquiring all the rights under the catering contract between R and HLL as well
as certain assets belonging R. On the other hand, the sum of Rs. 2 lakhs had
been paid on the ground that R would not compete with the assessee either by
himself or through his agents in any business of catering at HLL canteen.
Therefore, the Commissioner (Appeals) was not justified in holding that the
entire sum of Rs. 27 lakhs was paid for non-compete with the assessee. The
payment of Rs. 25 lakhs was specifically made for acquiring all the rights
under the catering contract between R and HLL and for acquiring articles and
paraphernalia belonging to R which were lying in the canteen. Since the payment
related to the acquisition of rights under the contract, it could not be said
that payment was either on account of goodwill or on account of not to be
complete with the assessee. Further merely because the assessee showed the said
payment on account of goodwill in the books of account no adverse inference
could be drawn against the assessee. (Para 7)
The Commissioner
(Appeals) had relied on the agreement dated 16-8-2000 to point out, that there
was no obligation on R to get the contract transferred and infact R could not
have done it legally. No adverse inference could be drawn on this ground. In
the commercial agreements when the rights under the contract are transferred
then mutual understanding is usually arrived at between the parties in such a
way that joint efforts are made to make the transaction and agreement
effectively. No doubt, the assessee was required to obtain the confirmation of
HLL but at the same time R was required to assist the assessee in getting the
contract transferred in assessee’s name. The agreement also provided that R
would inform HLL that he was still involved in the assessee company. All this
arrangement was made in order to get the said catering contract transferred in
the name of assessee so as to make the agreement effective. That did not mean
that payment was not made for acquiring the rights under the contract. The
substance of the agreement was to acquire all the rights in the contract.
Accordingly, it was to be held that the payment of Rs. 25 lakhs was paid by the
assessee for acquiring all the rights in the said contract as well as all the
articles and paraphernalia belonging to R which were lying at the canteen.
(Para 8)
The perusal of the provisions of
section 32(1)(ii) shows that 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 of
commercial rights of similar nature’. The expression mentioned above by itself
would include all kinds of commercial rights but for the words ‘similar
nature’. In such situation, the rule of Ejusdem Generis would apply. The
scope of the rule is that words of a general nature following specific and
particular words should be construed as limited to things which are of the same
nature as those specified. 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 assessee carrying 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. If this test was
to be applied, then the rights acquired by the assessee under the catering
contract between R and HLl would fall within the expression mentioned above.
Further since catering business at HLL canteen could be carried on only with
the help of such rights under the catering, the assessee would be entitled to
depreciation. (Para 9)
Since the assessee had not only acquired the rights under the contract but also
articles and paraphernalia lying in the canteen of HLL as stated in the
agreement and further since, such articles being tangible assets would be
eligible for depreciation under clause (i) of section 32(1), the value
of the same would have to be ascertained by the Assessing Officer and the
balance amount would be allocated for the intangible asset for the purpose of
granting depreciation under clause (ii) of section 32(1). (Para 10)
Therefore, the impugned order
passed by the Commissioner (Appeals) was set aside and the Assessing Officer
was directed to allow depreciation to the assessee in the light of the
aforesaid.
Bharatbhai J. Vyas v. ITO [2005] 97 ITD 248 (Ahd.) distinguished.