2011 (6) TMI 779 - AT - Income Tax

ITAT upholds depreciation claim on goodwill under IT Act, in line with High Court decisions

The appeal by the revenue challenging the disallowance of depreciation on goodwill under section 32 of the IT Act for the assessment year 2006-07 was ... Depreciation on goodwill - intangible asset - acquisition of business and commercial rights - identifiable non-monetary assetDepreciation on goodwill - acquisition of business and commercial rights - intangible asset - Whether payment made for acquiring the running business and business rights (described in books as goodwill) is an intangible asset eligible for depreciation under section 32 and thus allowable to the assessee. - HELD THAT: - The Tribunal examined the nature of the payment of Rs. 25,00,000 by the assessee made for acquisition of the running business and business rights of a printing concern and accepted the factual finding that the acquisition materially benefited the assessee, as reflected by increased turnover. Distinguishing the facts from cases where payment was made to retiring partners (where no acquisition of business rights occurred), the Tribunal held that a payment made to acquire business and commercial rights is akin to other intangibles and falls within the ambit of assets eligible for depreciation. The Tribunal relied on authority where goodwill arising from transfer of business name and attendant customer trust was treated as comparable to trade mark/franchise and held eligible for depreciation, and on a decision recognizing that identifiable commercial assets such as marketing reputation and trade style are intangible assets for depreciation purposes. Having regard to these precedents and the facts, the Tribunal found no warrant to deny depreciation on the ground that the ledger entry is described as 'goodwill' or because the Assessing Officer took a contrary view. [Paras 4, 6, 7]Depreciation claim in respect of the payment made for acquiring the running business and business rights (recorded as goodwill) is allowable; the revenue's appeal is dismissed.Final Conclusion: The Tribunal dismissed the departmental appeal and upheld the allowance of depreciation on the amount paid for acquisition of the running business and business/commercial rights (recorded as goodwill) for Assessment Year 2006-07. Issues involved: Appeal against disallowance of depreciation on goodwill u/s 32 of the IT Act for assessment year 2006-07.Summary:The appeal by the revenue challenged the disallowance of depreciation on goodwill, contending it was not an intangible asset. The assessee acquired business rights and goodwill of a firm, justifying it as an intangible asset covered u/s 32 of the IT Act. The AO disallowed the claim, citing the absence of the term 'goodwill' in section 32(1)(ii) of the IT Act.The assessee argued before the CIT(A) that the payment made for acquiring business rights constituted an intangible asset, similar to the decision in Skyline Caterers Pvt. Ltd. Vs ITO. The CIT(A) allowed the claim, noting the benefits derived from acquiring the business rights and goodwill.The revenue relied on the AO's order, while the assessee cited the decision of the Kerala High Court in B. Raveendra Pillai Vs CIT, supporting the allowance of depreciation on goodwill. The ITAT found in favor of the assessee, referencing the decisions of the Kerala High Court and Delhi High Court, which recognized goodwill as an intangible asset eligible for depreciation u/s 32 of the IT Act.In conclusion, the ITAT dismissed the departmental appeal, upholding the allowance of depreciation on goodwill as an intangible asset under section 32 of the IT Act.Separate Judgement: None.