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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:-

i)   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?

ii)   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?

iii)   Whether the Tribunal had erred in directing the Assessing Officer

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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

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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 14 th 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

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of  MGBW  was  accepted  by  the  Official  Liquidator  on  or  about  17 th

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  15 th

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).

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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

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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 Tax1 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. CIT2 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

1  [1971] 81 ITR 754 (SC) 2  [1967] 63 ITR 207 (SC)

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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

Tax3 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 3  [2001] 247 ITR 178 (SC)

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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. CIT4 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

4  (1993) 3 SCC 252, paragraph 13.

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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.

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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 Shenoy6 (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

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

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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

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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, 19228

was considered in  Commissioner of  Income Tax v.  Taj  Mahal Hotel9

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

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

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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 time10 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

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 –’

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(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. CIT11 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.

11  [1984] 149 ITR 276 (Delhi)  

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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

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