REPORTABLE IN 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 JUDGMENT Madan B. Lokur, J. 1. These appeals are directed against judgment and order dated 23 rd December, 2010 passed by Division Bench of High Court of Karnataka at Bangalore in ITA Nos. 69-70 of 2001. 2. three substantial questions of law considered by High Court were as follows:- i) Whether Rs. 12,24,700/- claimed as revenue expenditure by Association of persons which was constituted by three partners of erstwhile firm, MGBW, can be allowed as permissible deduction in hands of said Association of persons under Section 37 of Income-Tax Act, 1961, as being laid out or expended wholly and exclusively for purpose of business of said Association of Persons? ii) Whether Assessee was entitled to claim any deduction on alleged expenditure for acquisition of patent [trademarks] rights, copyrights and know-how, in terms of Section 35A and 35AB of Act? iii) Whether Tribunal had erred in directing Assessing Officer 1 Page 1 to capitalize value of trademarks, copyright and technical know-how by treating same as plant and machinery and grant depreciation therein? 3. In its conclusion, High Court answered first two questions in negative and third question in affirmative in favour of Revenue and against Assessee. While doing so, High Court set aside findings of Income-Tax Appellate Tribunal (for short Tribunal ) and restored order of Assessing Officer. relevant assessment year is 1995-96. 4. Broadly, facts of case indicate that in 1939 late Sri S. Raghuram Prabhu started business of manufacturing beedis. He was later joined in business by Sri Madhav Shenoy as partner and thus M/s. Mangalore Ganesh Beedi Works (for short MGBW ) came into existence with effect from 28th February, 1940. 5. partnership firm was reconstituted from time to time and its last reconstitution and partnership deed contained Clause 16 relating to manner in which affairs of partnership firm were to be wound up after its dissolution. Clause 16 of partnership deed reads as follows:- 16. If partnership is dissolved, going concern carried on under name of Firm Mangalore Ganesh Beedi Works and all trade marks used in course of said business by said firm and under which business of partnership is carried on shall vest in and belong to partner who offers and pays or two or more partners who jointly offer and pay highest price therefor as single group at sale to be then held as among partners shall be entitled to bid. other partners shall execute and complete in favour of purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise 2 Page 2 and him/her name or their names of all said trade marks and do all such deed, acts and transactions as are incidental or necessary to said transferee or assignee partner or partners. 6. Due to differences between partners of MGBW, firm was dissolved on or about 6th December, 1987 when two partners of firm applied for its winding up by filing Company Petition No. 1 of 1988 in High Court. While entertaining Company Petition High Court appointed Official Liquidator and eventually, after hearing all concerned parties, winding up order was passed on 14th June, 1991. 7. In its order passed on 14 th June, 1991 High Court held that firm is dissolved with effect from 6 th December, 1987 and directed sale of its assets as going concern to highest bidder amongst partners. relevant extract of order passed by High Court reads as follows:- (i) dissolved partnership firm - Mangalore Ganesh Beedi Works as going concern shall be sold to such of its partner/s, who makes offer of highest price, same not being less than 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 amount of price payable to partner/s from 6-12-1987 till date of deposit. 8. High Court also prescribed certain other activities such as conducting auction by Official Liquidator etc. 9. Pursuant to order passed by High Court on 14 th June, 1991 auction was conducted in which three of erstwhile partners forming association of persons (hereinafter referred to as AOP-3 ) emerged as highest bidders and their bid of Rs.92 crores for assets 3 Page 3 of MGBW was accepted by Official Liquidator on or about 17 th November, 1994. With effect from 18th November, 1994 business of firm passed on into hands of AOP-3 but tangible assets were actually handed over by Official Liquidator to AOP-3 on or about 7 th January, 1995. 10. MGBW (hereinafter referred to as Assessee ) filed its return for period 18th November, 1994 to 31st March, 1995 and subsequently filed revised return. Broadly, Assessee claimed deduction of Rs. 12,24,700/- as revenue expenditure permissible under Section 37 of Income-Tax Act, 1961 (hereinafter referred to as Act ) towards legal expenses incurred. Assessee also claimed depreciation under Section 35A and 35AB of Act towards acquisition of Intellectual Property Rights such as rights over trademark, copyright and technical know-how. In alternative, Assessee claimed depreciation on capitalizing value of Intellectual Property Rights by treating them as plant. 11. Assessing Officer passed order on 30 th March, 1998 rejecting claim of Assessee under all three Sections mentioned above. Feeling aggrieved, Assessee preferred appeal before Commissioner of Income-Tax (Appeals) who passed order on 15 th October, 1998. appeal was allowed in part inasmuch as it was held that Assessee was entitled to deduction towards legal expenses. However, claim of Assessee regarding deduction or depreciation on Intellectual Property Rights was rejected by Commissioner of Income-Tax (Appeals). 4 Page 4 12. As result of appellate order, Revenue was aggrieved by deduction granted to Assessee in respect of legal expenses and so it preferred appeal before Tribunal. Assessee was aggrieved by rejection of its claim in respect of Intellectual Property Rights and also filed appeal before Tribunal. 13. By order dated 19th October, 2000 Tribunal allowed appeal of Assessee while rejecting appeal of Revenue. 14. impugned order was then passed by High Court as mentioned above. It is under these circumstances that assessee is now before us in appeal. Question No. 1 15. In respect of first question issue really is whether expenses incurred by Assessee were for protecting business of firm or were expenses incurred for personal reasons namely consequent to disputes or differences relating to ownership of going concern with erstwhile partners of Assessee. 16. Tribunal examined issue in substantial detail. It was held by Tribunal that concern was in fact going concern and therefore, legal expenses incurred were for defending business of going concern and for protecting its interests. It could not be said that expenses were personal in nature, nor could it be said that expenses were unreasonable or not bona fide. It was found that expenses incurred did not pertain to period prior to AOP-3 taking over going concern but they were expenses incurred after business 5 Page 5 was taken over by AOP-3 and that they related to legal proceedings that were pending in High Court. Tribunal noted that even Assessing Officer did not treat expenditure as being of capital nature. 17. On consideration of issues placed before Tribunal, including decision of this Court in Dalmia Jain and Company Limited v. Commissioner of Income Tax1 it was held that expenses incurred by Assessee were honest and reasonable and were incurred for purposes of protecting business of firm as going concern. In Dalmia Jain, this Court relied upon Shree Meenakshi Mills v. CIT2 and held: [D]eductibility of expenditure incurred in prosecuting civil proceeding depends upon nature and purpose of legal proceeding in relation to assessee s business and same cannot be affected by final outcome of that proceeding. However wrong-headed, ill advised, unduly optimistic or overconfident in his conviction assessee might appear in light of ultimate decision; expenditure in starting and prosecuting civil proceeding cannot be denied as permissible deduction in computing taxable income merely because proceeding had failed, if otherwise expenditure was laid out for purpose of business wholly and exclusively, that is, reasonably and honestly incurred to promote interest of business. Persistence of assessee in launching proceeding and carrying it from Court to Court and incurring expenditure is not ground for disallowing claim. 18. High Court did not accept view of Tribunal and in support of that it was contended before us by learned counsel for Revenue that highest bid of AOP-3 was accepted by High Court on or about 21st September, 1994 and therefore there was no question of 1 [1971] 81 ITR 754 (SC) 2 [1967] 63 ITR 207 (SC) 6 Page 6 expenses being incurred for protecting business of going concern subsequent to that date. In other words all legal expenses incurred were prior to 21st September, 1994 and were therefore personal in nature. 19. We are not at all impressed with submission of learned counsel for Revenue. There is clear finding of fact by Tribunal that legal expenses incurred by Assessee were for protecting its business and that expenses were incurred after 18 th November, 1994. There is no reason to reverse this finding of fact particularly since nothing has been shown to us to conclude that finding of fact was perverse in any manner whatsoever. That apart, if finding of fact arrived at by Tribunal were to be set aside, specific question regarding perverse finding of fact ought to have been framed by High Court. Revenue did not seek framing of any such question. In this regard, reference may be made to K. Ravindranathan Nair v. Commissioner of Income Tax3 wherein it was observed: High Court overlooked cardinal principle that it is Tribunal which is final fact-finding authority. decision on fact of Tribunal can be gone into by High Court only if question has been referred to it which says that finding of Tribunal on facts is perverse, in sense that it is such as could not reasonably have been arrived at on material placed before Tribunal. In this case, there was no such question before High Court. Unless and until finding of act reached by Tribunal is canvassed before High Court in manner set out above, High Court is obliged to proceed upon findings of fact reached by Tribunal and to give answer in law to question of law that is before it. 20. Accordingly, we hold that High Court was not justified in upsetting finding of fact arrived at by Tribunal, particularly in 3 [2001] 247 ITR 178 (SC) 7 Page 7 absence of substantial question of law being framed in this regard. Therefore, we set aside conclusion arrived at by High Court on this question and restore view of Tribunal and answer question in favour of Assessee and against Revenue. Question Nos. 2 & 3 21. As preface to answering these questions, we must accept and acknowledge that intellectual property rights have value. There is tacit acceptance of this in Bharat Beedi Works (P) Ltd. v. CIT 4 wherein it has been observed that there is value attached to brand name. 22. Proceeding from this starting point, it must be noted that fundamental basis on which these questions were decided against Assessee and in favour of Revenue is finding of High Court that what was sold by way of auction to highest bidder was goodwill of partnership firm and not trademarks, copyrights and technical know-how. Reliance was placed on Report dated 24 th January, 1989 of Chartered Accountants Rao and Swamy, commissioned during pendency of Company Petition in High Court. In this Report, total assets of MGBW were valued at Rs. 28,58,01,410.02. total liabilities were valued at Rs.26,55,77,389.02 thereby making net assets worth Rs.2,02,24,021.30. Chartered Accountants specifically stated in Report that net assets excluded goodwill. Report calculated goodwill on super profit method by taking three times profit for 5 years (30.06.1983 to 30.06.1987). This was then calculated at Rs. 26.10 4 (1993) 3 SCC 252, paragraph 13. 8 Page 8 crores. It is on this basis that reserve price for auction was fixed at Rs.30 crores, as mentioned in order of 14 th June, 1991 passed by High Court. According to learned counsel for Revenue, MGBW was already owner of trademarks, copyrights and technical know-how and essentially rights in intellectual property might be included in goodwill, but these were not auctioned off but were relinquished in favour of AOP-3 and, therefore, Assessee. 23. AOP-3 on other hand had obtained separate valuation from Chartered Accountant M.R. Ramachandra Variar. In his Report dated 12th September, 1994 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 total of Rs. 72 crores. These figures were arrived at by taking 5 times average profits for last 5 years (ended 31st March, 1994). It is not necessary to go into calculating bifurcated value of three intangible assets except to say that trademarks were given value since in beedi industry trademark and brand name have value and Assessee s product under trademark 501 had national and international market. As far as copyright valuation is concerned, beedis are known not only by trademark but also by depiction on labels and wrappers and colour combination on package. Assessee had copyright on content of labels, wrappers and colour combination on them. Similarly, know-how had value since aroma of beedis differs from one manufacturer to another, depending on secret formula for mixing and blending tobacco. 9 Page 9 claim for depreciation/amortization by Assessee is limited to this amount of Rs. 72 crores. 24. While passing orders on bid given by Assessee, High Court tacitly accepted, in its order of 22 nd December, 1994 that trademarks and copyrights were intangible assets of MGBW. 5 It is on this basis (and extant accounting practice) that Assessee made necessary entries in its books including in balance sheet. 25. However, what is equally important is that Variar Report mentioned that it did not consider any value for goodwill since trademarks, copyrights and know-how had tremendous business value as firm had been enjoying status of being India s largest beedi manufacturer over last five decades. After taking into consideration net assets and liabilities of MGBW, Chartered Accountant arrived at net value of going concern at Rs. 90 crores. On this basis, AOP-3 gave its bid of Rs. 92 crores which was eventually accepted. 26. In case of M. Ramnath Shenoy6 (an erstwhile partner of MGBW) Tribunal accepted (after detailed discussion) contention of Assessee that trademarks, copyrights and technical know-how alone 5 High Court held, Company Application No.436/1994 is allowed and sale of Mangalore Ganesh Beedi Works as 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 said firm together with all liabilities of out-going partners excluding their tax liabilities is hereby confirmed in favour of purchasing group namely applicants in Company Application No.436/1994; subject to final orders that may be passed in Company Application No.433/1994. out-going group of partners presently in Management of affairs of M/s Mangalore Ganesh Beedi Works, are hereby directed to deliver forthwith possession of entire business of 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 supervision of Official Liquidator, who shall submit report as to completion of 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 10 Page 10 were comprised in assets of business and not goodwill. It was also held that when Revenue alleges that it is goodwill and not trademarks etc. that is transferred, onus will be on Revenue to prove it, which it was unable to do. Tribunal then examined question whether sale of these intangible assets would attract capital gains. question was answered in negative and it was held that assets are self-generated and would not attract capital gains. decision of Tribunal has been accepted by Revenue and we really see no reason why different conclusion should be arrived at in so far as Assessee is concerned. 27. High Court denied any benefit to Assessee under Section 35A and Section 35AB of 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 Report of Chartered Accountants Rao and Swamy who stated that assets of MGBW were those of going concern and were valued on goodwill of firm and no trademarks, copyrights and know-how were acquired. It was further held, in our opinion rather speculatively by High Court, that valuation made by Chartered Accountant of AOP-3 that is M.R. Ramachandra Variar that goodwill was split into know-how, copyrights and trademarks only for purposes of claiming deduction under Section 35A and Section 35AB of Act and value of goodwill was shown 11 Page 11 as nil and deduction claimed did not represent value of know-how, copyrights and trademarks. 28. We leave open question of applicability of Section 35A and Section 35AB of Act for appropriate case. This is because learned counsel submitted that if Assessee is given benefit of Section 32 read with Section 43(3) of Act (depreciation on plant) as has been done by Tribunal, Assessee would be quite satisfied. Unfortunately, alternative aspect of Assessee s case was not looked into by High Court. 29. Therefore, now question to be answered is whether Assessee is entitled to any benefit under Section 32 of Act read with Section 43(3) thereof for expenditure incurred on acquisition of trademarks, copyrights and know-how. 30. definition of plant in Section 43(3) of Act is inclusive. 7 similar definition occurring in Section 10(5) of Income Tax Act, 1922 8 was considered in Commissioner of Income Tax v. Taj Mahal Hotel 9 wherein it was held that word plant must be given wide meaning. It was held: Now it is well settled that where definition of word has not been given, it must be construed in its popular sense if it is word of every day use. Popular sense means that sense which people conversant with subject-matter with which statute is dealing, would attribute to it . In present case, Section 10(5) enlarges definition of word plant by including in it words which have already been mentioned before. 7 plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for purposes of business or profession but does not include tea bushes or livestock; 8 plant includes vehicles, books, scientific apparatus and surgical equipment purchased for purposes of business, profession or vocation; 9 (1971) 3 SCC 550 12 Page 12 very fact that even books have been included shows that meaning intended to be given to plant is wide. word includes is often used in interpretation clauses in order to enlarge meaning of words or phrases occurring in body of 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 interpretation clause declares that they shall include. word include is also suspectible of other constructions which it is unnecessary to go into. 31. question is, would intellectual property such as trademarks, copyrights and know-how come within definition of plant in sense which people conversant with subject-matter with which statute is dealing, would attribute to it ? In our opinion, this must be answered in affirmative for reason that there can be no doubt that for purposes of large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary. Moreover, acquisition of such rights and know-how is acquisition of capital nature, more particularly in case of Assessee. Therefore, it cannot be doubted that so far as Assessee is concerned, trademarks, copyrights and know-how acquired by it would come within definition of plant being commercially necessary and essential as understood by those dealing with direct taxes. 32. Section 32 of Act as it stood at relevant time 10 did not make any distinction between tangible and intangible assets for purposes of depreciation. distinction came in by way of amendment after assessment year that we are concerned with. That being position, Assessee is entitled to benefit of depreciation on plant 10 In respect of depreciation of buildings, machinery, plant or furniture owned, wholly or partly, by assessee and used for purposes of business or profession, following deductions shall, subject to provisions of section 34, be allowed 13 Page 13 (that is on trademarks, copyrights and know-how) in terms of Section 32 of Act as it was at relevant time. We are, therefore, in agreement with view taken by Tribunal in this regard that Assessee would be entitled to benefit of Section 32 of Act read with Section 43(3) thereof. 33. In this context, it may also be mentioned that by denying that trademarks were auctioned to highest bidder, Revenue is actually seeking to re-write clause 16 of agreement between erstwhile partners of MGBW. This clause specifically states that going concern and all trademarks used in course of said business by said firm and under which business of partnership is carried on shall vest in and belong to highest bidder. Under circumstances, it is difficult to appreciate how it could be concluded by Revenue that trademarks were not auctioned off and only goodwill in erstwhile firm was auctioned off. In D. S. Bist & Sons v. CIT11 it was held that Act does not clothe taxing authorities with any power or jurisdiction to re-write terms of agreement arrived at between parties with each other at arm s length and with no allegation of any collusion between them. commercial expediency of contract is to be adjudged by contracting parties as to its terms. 34. issue, looked at from any angle, would lead to conclusion that Question No. 3 is required to be answered in negative, in favour of Assessee and against Revenue. We do so accordingly. 11 [1984] 149 ITR 276 (Delhi) 14 Page 14 Question No. 2 is left open for consideration in appropriate case. 35. appeals are disposed of in above terms. No costs. ... .J (Madan B. Lokur) ... .J (S.A. Bobde) New Delhi; October 15, 2015 15 Page 15 M/s. Mangalore Ganesh Beedi Works v. Commissioner of Income Tax, Mysore & Anr