CIT v Smifs Securities Limited [2012] 24 taxmann.com 222 (SC)

Background:

In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company.

The assessee claimed that the extra consideration over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.

The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961. CIT(A) came to a conclusion that the assessee in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee stood increased. This finding was also been upheld by Income Tax Appellate Tribunal.

HELD:

• Explanation 3 clause (b) to section 32(1)states that the expression ‘asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.
• A reading the words `any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature’.
• The principle of ejusdem generis would strictly apply while interpreting the expression ‘any other business or commercial rights of similar nature’ which finds place in Explanation 3(b). In the circumstances, ‘Goodwill’ is an asset under Explanation 3(b) to section 32(1) of the Act.