REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 10547-10548 OF 2011
M/s. Mangalore Ganesh Beedi Works ….Appellant
Versus
Commissioner of Income Tax,
Mysore & Anr. …Respondents
J U D G M E N T
Madan B. Lokur, J.
1. These appeals are directed against a judgment and order dated 23rd
December, 2010 passed by the Division Bench of the High Court of Karnataka
at Bangalore in ITA Nos. 69-70 of 2001.
2. The three substantial questions of law considered by the High
Court were as follows:-
Whether Rs. 12,24,700/- claimed as revenue expenditure by the Association
of persons which was constituted by the three partners of the erstwhile
firm, MGBW, can be allowed as permissible deduction in the hands of the
said Association of persons under Section 37 of the Income-Tax Act, 1961,
as being laid out or expended wholly and exclusively for the purpose of
business of the said Association of Persons?
Whether the Assessee was entitled to claim any deduction on the alleged
expenditure for acquisition of patent [trademarks] rights, copyrights and
know-how, in terms of Section 35A and 35AB of the Act?
Whether the Tribunal had erred in directing the Assessing Officer to
capitalize the value of trademarks, copyright and technical know-how by
treating the same as plant and machinery and grant depreciation therein?
3. In its conclusion, the High Court answered the first two
questions in the negative and the third question in the affirmative in
favour of the Revenue and against the Assessee. While doing so, the High
Court set aside the findings of the Income-Tax Appellate Tribunal (for
short ‘the Tribunal”) and restored the order of the Assessing Officer. The
relevant assessment year is 1995-96.
4. Broadly, the facts of the case indicate that in 1939 late Sri
S. Raghuram Prabhu started the business of manufacturing beedis. He was
later joined in the business by Sri Madhav Shenoy as a partner and thus
M/s. Mangalore Ganesh Beedi Works (for short ‘MGBW’) came into existence
with effect from 28th February, 1940.
5. The partnership firm was reconstituted from time to time and
its last reconstitution and partnership deed contained Clause 16 relating
to the manner in which the affairs of the partnership firm were to be wound
up after its dissolution. Clause 16 of the partnership deed reads as
follows:-
“16. If the partnership is dissolved, the going concern carried on under
the name of the Firm Mangalore Ganesh Beedi Works and all the trade marks
used in course of the said business by the said firm and under which the
business of the partnership is carried on shall vest in and belong to the
partner who offers and pays or two or more partners who jointly offer and
pay the highest price therefor as a single group at a sale to be then held
as among the partners shall be entitled to bid. The other partners shall
execute and complete in favour of the purchasing partner or partners at
his/her or their expense all such deed, instruments and applications and
otherwise and him/her name or their names of all the said trade marks and
do all such deed, acts and transactions as are incidental or necessary to
the said transferee or assignee partner or partners.”
6. Due to differences between the partners of MGBW, the firm was
dissolved on or about 6th December, 1987 when two partners of the firm
applied for its winding up by filing Company Petition No. 1 of 1988 in the
High Court. While entertaining the Company Petition the High Court
appointed an Official Liquidator and eventually, after hearing all the
concerned parties, a winding up order was passed on 14th June, 1991.
7. In its order passed on 14th June, 1991 the High Court held that
the firm is dissolved with effect from 6th December, 1987 and directed the
sale of its assets as a going concern to the highest bidder amongst the
partners. The relevant extract of the order passed by the High Court reads
as follows:-
“(i) The dissolved partnership firm - Mangalore Ganesh Beedi Works as a
going concern shall be sold to such of its partner/s, who makes an offer of
a highest price, the same not being less than the minimum (reserved) price
of Rs. 30 crores (Rupees Thirty Crores) within 11-7-1991 accepting further
liability to pay interest at 15% per annum towards the amount of the price
payable to partner/s from 6-12-1987 till the date of deposit.”
8. The High Court also prescribed certain other activities such as
conducting the auction by the Official Liquidator etc.
9. Pursuant to the order passed by the High Court on 14th June,
1991 an auction was conducted in which three of the erstwhile partners
forming an association of persons (hereinafter referred to as ‘AOP-3’)
emerged as the highest bidders and their bid of Rs.92 crores for the assets
of MGBW was accepted by the Official Liquidator on or about 17th November,
1994. With effect from 18th November, 1994 the business of the firm passed
on into the hands of AOP-3 but the tangible assets were actually handed
over by the Official Liquidator to AOP-3 on or about 7th January, 1995.
10. MGBW (hereinafter referred to as the ‘Assessee’) filed its
return for the period 18th November, 1994 to 31st March, 1995 and
subsequently filed a revised return. Broadly, the Assessee claimed a
deduction of Rs. 12,24,700/- as a revenue expenditure permissible under
Section 37 of the Income-Tax Act, 1961 (hereinafter referred to as ‘the
‘Act’) towards legal expenses incurred. The Assessee also claimed
depreciation under Section 35A and 35AB of the Act towards acquisition of
Intellectual Property Rights such as rights over the trademark, copyright
and technical know-how. In the alternative, the Assessee claimed
depreciation on capitalizing the value of the Intellectual Property Rights
by treating them as plant.
11. The Assessing Officer passed an order on 30th March, 1998
rejecting the claim of the Assessee under all the three Sections mentioned
above. Feeling aggrieved, the Assessee preferred an appeal before the
Commissioner of Income-Tax (Appeals) who passed an order on 15th October,
1998. The appeal was allowed in part inasmuch as it was held that the
Assessee was entitled to a deduction towards legal expenses. However, the
claim of the Assessee regarding deduction or depreciation on the
Intellectual Property Rights was rejected by the Commissioner of Income-Tax
(Appeals).
12. As a result of the appellate order, the Revenue was aggrieved
by the deduction granted to the Assessee in respect of legal expenses and
so it preferred an appeal before the Tribunal. The Assessee was aggrieved
by the rejection of its claim in respect of the Intellectual Property
Rights and also filed an appeal before the Tribunal.
13. By an order dated 19th October, 2000 the Tribunal allowed the
appeal of the Assessee while rejecting the appeal of the Revenue.
14. The impugned order was then passed by the High Court as
mentioned above. It is under these circumstances that the assessee is now
before us in appeal.
Question No. 1
15. In respect of the first question the issue really is whether
the expenses incurred by the Assessee were for protecting the business of
the firm or were expenses incurred for personal reasons namely consequent
to disputes or differences relating to the ownership of the going concern
with the erstwhile partners of the Assessee.
16. The Tribunal examined the issue in substantial detail. It was
held by the Tribunal that the concern was in fact a going concern and
therefore, the legal expenses incurred were for defending the business of
the going concern and for protecting its interests. It could not be said
that the expenses were personal in nature, nor could it be said that the
expenses were unreasonable or not bona fide. It was found that the
expenses incurred did not pertain to the period prior to the AOP-3 taking
over the going concern but they were expenses incurred after the business
was taken over by AOP-3 and that they related to legal proceedings that
were pending in the High Court. The Tribunal noted that even the Assessing
Officer did not treat the expenditure as being of a capital nature.
17. On a consideration of the issues placed before the Tribunal,
including the decision of this Court in Dalmia Jain and Company Limited v.
Commissioner of Income Tax[1] it was held that the expenses incurred by the
Assessee were honest and reasonable and were incurred for the purposes of
protecting the business of the firm as a going concern. In Dalmia Jain,
this Court relied upon Shree Meenakshi Mills v. CIT[2] and held:
“[D]eductibility of expenditure incurred in prosecuting a civil proceeding
depends upon the nature and purpose of the legal proceeding in relation to
the assessee’s business and the same cannot be affected by the final
outcome of that proceeding. However wrong-headed, ill advised, unduly
optimistic or overconfident in his conviction the assessee might appear in
the light of the ultimate decision; expenditure in starting and prosecuting
a civil proceeding cannot be denied as a permissible deduction in computing
the taxable income merely because the proceeding had failed, if otherwise
the expenditure was laid out for the purpose of the business wholly and
exclusively, that is, reasonably and honestly incurred to promote the
interest of the business. Persistence of the assessee in launching the
proceeding and carrying it from Court to Court and incurring expenditure is
not a ground for disallowing the claim.”
18. The High Court did not accept the view of the Tribunal and in
support of that it was contended before us by learned counsel for the
Revenue that the highest bid of AOP-3 was accepted by the High Court on or
about 21st September, 1994 and therefore there was no question of the
expenses being incurred for protecting the business of the going concern
subsequent to that date. In other words all the legal expenses incurred
were prior to 21st September, 1994 and were therefore personal in nature.
19. We are not at all impressed with the submission of learned
counsel for the Revenue. There is a clear finding of fact by the Tribunal
that the legal expenses incurred by the Assessee were for protecting its
business and that the expenses were incurred after 18th November, 1994.
There is no reason to reverse this finding of fact particularly since
nothing has been shown to us to conclude that the finding of fact was
perverse in any manner whatsoever. That apart, if the finding of fact
arrived at by the Tribunal were to be set aside, a specific question
regarding a perverse finding of fact ought to have been framed by the High
Court. The Revenue did not seek the framing of any such question. In this
regard, reference may be made to K. Ravindranathan Nair v. Commissioner of
Income Tax[3] wherein it was observed:
“The High Court overlooked the cardinal principle that it is the Tribunal
which is the final fact-finding authority. A decision on fact of the
Tribunal can be gone into by the High Court only if a question has been
referred to it which says that the finding of the Tribunal on facts is
perverse, in the sense that it is such as could not reasonably have been
arrived at on the material placed before the Tribunal. In this case, there
was no such question before the High Court. Unless and until a finding of
act reached by the Tribunal is canvassed before the High Court in the
manner set out above, the High Court is obliged to proceed upon the
findings of fact reached by the Tribunal and to give an answer in law to
the question of law that is before it.”
20. Accordingly, we hold that the High Court was not justified in
upsetting a finding of fact arrived at by the Tribunal, particularly in the
absence of a substantial question of law being framed in this regard.
Therefore, we set aside the conclusion arrived at by the High Court on this
question and restore the view of the Tribunal and answer the question in
favour of the Assessee and against the Revenue.
Question Nos. 2 & 3
21. As a preface to answering these questions, we must accept and
acknowledge that intellectual property rights have a value. There is a
tacit acceptance of this in Bharat Beedi Works (P) Ltd. v. CIT[4] wherein
it has been observed that there is a value attached to a brand name.
22. Proceeding from this starting point, it must be noted that the
fundamental basis on which these questions were decided against the
Assessee and in favour of the Revenue is the finding of the High Court that
what was sold by way of auction to the highest bidder was the goodwill of
the partnership firm and not the trademarks, copyrights and technical know-
how. Reliance was placed on the Report dated 24th January, 1989 of the
Chartered Accountants Rao and Swamy, commissioned during the pendency of
Company Petition in the High Court. In this Report, the total assets of
MGBW were valued at Rs. 28,58,01,410.02. The total liabilities were valued
at Rs.26,55,77,389.02 thereby making the net assets worth
Rs.2,02,24,021.30. The Chartered Accountants specifically stated in the
Report that the net assets excluded goodwill. The Report calculated
goodwill on the super profit method by taking three times the profit for 5
years (30.06.1983 to 30.06.1987). This was then calculated at Rs. 26.10
crores. It is on this basis that the reserve price for the auction was
fixed at Rs.30 crores, as mentioned in the order of 14th June, 1991 passed
by the High Court. According to learned counsel for the Revenue, MGBW was
already the owner of the trademarks, copyrights and technical know-how and
essentially the rights in the intellectual property might be included in
goodwill, but these were not auctioned off but were relinquished in favour
of AOP-3 and, therefore, the Assessee.
23. AOP-3 on the other hand had obtained a separate valuation from
the Chartered Accountant M.R. Ramachandra Variar. In his Report dated 12th
September, 1994 the technical know-how was valued at Rs. 36 crores,
copyright was valued at Rs 21.6 crores and trademarks were valued at Rs.
14.4 crores making a total of Rs. 72 crores. These figures were arrived at
by taking 5 times the average profits for the last 5 years (ended 31st
March, 1994). It is not necessary to go into calculating the bifurcated
value of the three intangible assets except to say that the trademarks were
given a value since in the beedi industry the trademark and brand name have
a value and the Assessee’s product under trademark ‘501’ had a national and
international market. As far as the copyright valuation is concerned,
beedis are known not only by the trademark but also by the depiction on the
labels and wrappers and colour combination on the package. The Assessee
had a copyright on the content of the labels, wrappers and the colour
combination on them. Similarly, the know-how had a value since the aroma
of beedis differs from one manufacturer to another, depending on the secret
formula for mixing and blending tobacco. The claim for
depreciation/amortization by the Assessee is limited to this amount of Rs.
72 crores.
24. While passing orders on the bid given by the Assessee, the High
Court tacitly accepted, in its order of 22nd December, 1994 that the
trademarks and copyrights were the intangible assets of MGBW.[5] It is on
this basis (and the extant accounting practice) that the Assessee made
necessary entries in its books including in the balance sheet.
25. However, what is equally important is that the Variar Report
mentioned that it did not consider any value for goodwill since the
trademarks, copyrights and know-how had tremendous business value as the
firm had been enjoying the status of being India’s largest beedi
manufacturer over the last five decades. After taking into consideration
the net assets and liabilities of MGBW, the Chartered Accountant arrived at
the net value of the going concern at Rs. 90 crores. On this basis, AOP-3
gave its bid of Rs. 92 crores which was eventually accepted.
26. In the case of M. Ramnath Shenoy[6] (an erstwhile partner of
MGBW) the Tribunal accepted (after a detailed discussion) the contention of
the Assessee that trademarks, copyrights and technical know-how alone were
comprised in the assets of the business and not goodwill. It was also held
that when the Revenue alleges that it is goodwill and not trademarks etc.
that is transferred, the onus will be on the Revenue to prove it, which it
was unable to do. The Tribunal then examined the question whether the sale
of these intangible assets would attract capital gains. The question was
answered in the negative and it was held that the assets are self-generated
and would not attract capital gains. The decision of the Tribunal has been
accepted by the Revenue and we really see no reason why a different
conclusion should be arrived at in so far as the Assessee is concerned.
27. The High Court denied any benefit to the Assessee under Section
35A and Section 35AB of the Act since it was held that what was auctioned
off was only goodwill and no amount was spent by AOP-3 towards acquisition
of trademarks, copyrights and know-how. In coming to this conclusion,
reliance was placed on the Report of the Chartered Accountants Rao and
Swamy who stated that the assets of MGBW were those of a going concern and
were valued on the goodwill of the firm and no trademarks, copyrights and
know-how were acquired. It was further held, in our opinion rather
speculatively by the High Court, that the valuation made by the Chartered
Accountant of AOP-3 that is M.R. Ramachandra Variar that the goodwill was
split into know-how, copyrights and trademarks only for the purposes of
claiming a deduction under Section 35A and Section 35AB of the Act and the
value of the goodwill was shown as nil and the deduction claimed did not
represent the value of the know-how, copyrights and trademarks.
28. We leave open the question of the applicability of Section 35A
and Section 35AB of the Act for an appropriate case. This is because
learned counsel submitted that if the Assessee is given the benefit of
Section 32 read with Section 43(3) of the Act (depreciation on plant) as
has been done by the Tribunal, the Assessee would be quite satisfied.
Unfortunately, the alternative aspect of the Assessee’s case was not looked
into by the High Court.
29. Therefore, now the question to be answered is whether the
Assessee is entitled to any benefit under Section 32 of the Act read with
Section 43(3) thereof for the expenditure incurred on the acquisition of
trademarks, copyrights and know-how.
30. The definition of ‘plant’ in Section 43(3) of the Act is
inclusive.[7] A similar definition occurring in Section 10(5) of the Income
Tax Act, 1922[8] was considered in Commissioner of Income Tax v. Taj Mahal
Hotel[9] wherein it was held that the word ‘plant’ must be given a wide
meaning. It was held:
“Now it is well settled that where the definition of a word has not been
given, it must be construed in its popular sense if it is a word of every
day use. Popular sense means “that sense which people conversant with the
subject-matter with which the statute is dealing, would attribute to it”.
In the present case, Section 10(5) enlarges the definition of the word
“plant” by including in it the words which have already been mentioned
before. The very fact that even books have been included shows that the
meaning intended to be given to “plant” is wide. The word “includes” is
often used in interpretation clauses in order to enlarge the meaning of the
words or phrases occurring in the body of the statute. When it is so used,
those words and phrases must be construed as comprehending not only such
things as they signify according to their nature and import but also those
things which the interpretation clause declares that they shall include.
The word “include” is also suspectible of other constructions which it is
unnecessary to go into.”
31. The question is, would intellectual property such as
trademarks, copyrights and know-how come within the definition of ‘plant’
in the ‘sense which people conversant with the subject-matter with which
the statute is dealing, would attribute to it’? In our opinion, this must
be answered in the affirmative for the reason that there can be no doubt
that for the purposes of a large business, control over intellectual
property rights such as brand name, trademark etc. are absolutely
necessary. Moreover, the acquisition of such rights and know-how is
acquisition of a capital nature, more particularly in the case of the
Assessee. Therefore, it cannot be doubted that so far as the Assessee is
concerned, the trademarks, copyrights and know-how acquired by it would
come within the definition of ‘plant’ being commercially necessary and
essential as understood by those dealing with direct taxes.
32. Section 32 of the Act as it stood at the relevant time[10] did
not make any distinction between tangible and intangible assets for the
purposes of depreciation. The distinction came in by way of an amendment
after the assessment year that we are concerned with. That being the
position, the Assessee is entitled to the benefit of depreciation on plant
(that is on trademarks, copyrights and know-how) in terms of Section 32 of
the Act as it was at the relevant time. We are, therefore, in agreement
with the view taken by the Tribunal in this regard that the Assessee would
be entitled to the benefit of Section 32 of the Act read with Section 43(3)
thereof.
33. In this context, it may also be mentioned that by denying that
the trademarks were auctioned to the highest bidder, the Revenue is
actually seeking to re-write clause 16 of the agreement between the
erstwhile partners of MGBW. This clause specifically states that the going
concern and all the trademarks used in the course of the said business by
the said firm and under which the business of the partnership is carried on
shall vest in and belong to the highest bidder. Under the circumstances, it
is difficult to appreciate how it could be concluded by the Revenue that
the trademarks were not auctioned off and only the goodwill in the
erstwhile firm was auctioned off. In D. S. Bist & Sons v. CIT[11] it was
held that the Act does not clothe the taxing authorities with any power or
jurisdiction to re-write the terms of the agreement arrived at between the
parties with each other at arm’s length and with no allegation of any
collusion between them. ‘The commercial expediency of the contract is to be
adjudged by the contracting parties as to its terms.’
34. The issue, looked at from any angle, would lead to the
conclusion that Question No. 3 is required to be answered in the negative,
in favour of the Assessee and against the Revenue. We do so accordingly.
Question No. 2 is left open for consideration in an appropriate case.
35. The appeals are disposed of in the above terms. No costs.
...…………………….J
(Madan B.
Lokur)
...…………………….J
(S.A. Bobde)
New Delhi;
October 15, 2015
-----------------------
[1] [1971] 81 ITR 754 (SC)
[2] [1967] 63 ITR 207 (SC)
[3] [2001] 247 ITR 178 (SC)
[4] (1993) 3 SCC 252, paragraph 13.
[5] The High Court held, Company Application No.436/1994 is allowed and
the sale of Mangalore Ganesh Beedi Works as a going concern with all its
assets, tangible and intangible whatsoever and wherever they are with trade
name and all other trade marks copy rights and privileges owned and enjoyed
by the said firm together with all liabilities of the out-going partners
excluding their tax liabilities is hereby confirmed in favour of the
purchasing group namely applicants in Company Application No.436/1994;
subject to the final orders that may be passed in Company Application
No.433/1994. The out-going group of partners presently in Management of
the affairs of M/s Mangalore Ganesh Beedi Works, are hereby directed to
deliver forthwith the possession of the entire business of the said
dissolved partnership firm together with all trade marks, trade names, copy
rights, Book of Accounts, documents relating to assets and liabilities,
Bank Accounts etc., under the supervision of the Official Liquidator, who
shall submit a report as to the completion of the process of delivery of
possession as aforesaid to this Court, within four weeks from today.
[6] ITA No.258 (Bangalore/1997) decided on 10th July, 1997 relevant to
Assessment Year 1995-96
[7] “plant” includes ships, vehicles, books, scientific apparatus and
surgical equipment used for the purposes of the business or profession but
does not include tea bushes or livestock;
[8] “plant” includes vehicles, books, scientific apparatus and surgical
equipment purchased for the purposes of the business, profession or
vocation;
[9] (1971) 3 SCC 550
[10] ‘In respect of depreciation of buildings, machinery, plant or
furniture owned, wholly or partly, by the assessee and used for the
purposes of the business or profession, the following deductions shall,
subject to the provisions of section 34, be allowed –’
[11] [1984] 149 ITR 276 (Delhi)
