Goodwill qualifies as an asset for depreciation under Income Tax Act - ITAT Delhi ruling

The Appellate Tribunal ITAT Delhi dismissed the revenue's appeal against the deletion of an addition of depreciation on goodwill for Assessment Year 2007-08. The Tribunal ruled that goodwill qualifies as an asset under section 32 of the Income Tax Act, 1961, based on the precedent set by the Hon'ble Supreme Court and the ITAT in previous cases. Therefore, depreciation on goodwill was deemed admissible, and the revenue's appeal was rejected.

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Issues involved: Appeal against deletion of addition of depreciation on goodwill u/s 32(1) of the Income Tax Act, 1961 for Assessment Year 2007-08.

The Appellate Tribunal ITAT Delhi heard an appeal filed by the revenue against the order of CIT (Appeals)-V, New Delhi for the Assessment Year 2007-08. The only issue in question was the deletion of an addition of Rs. 40,04,517 made on account of depreciation on goodwill. The revenue contended that goodwill is not covered within intangible assets as specified under the Income Tax Act.

The assessee, engaged in manufacturing, distribution, and marketing of telephone instruments for landline, had its assessment completed at Rs. 63,89,37,240 against the returned income of Rs. 63,14,39,130. The crux of the matter revolved around the treatment of goodwill as an asset for the purpose of claiming depreciation.

During the hearing, the assessee's representative referred to a previous decision by the Hon'ble ITAT in the assessee's own case for Assessment Years 2008-09 and 2009-10. Citing the Hon'ble Supreme Court's ruling in the case of CIT vs. Smifs Securities Ltd., it was established that goodwill is indeed an asset under section 32 of the Income Tax Act, 1961, making depreciation on goodwill admissible.

The explanation provided by the assessee regarding the origin of goodwill stemmed from a Scheme of Amalgamation, resulting in the creation of goodwill in the company's books. The Assessing Officer had initially disallowed the depreciation on goodwill, contending that it did not fall under the specified intangible assets under Explanation 3 to Section 32(1) of the Act.

Explanation 3 to Section 32(1) of the Act defines assets as tangible assets like buildings, machinery, and intangible assets such as know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. The Tribunal, in line with the Supreme Court's decision, held that goodwill falls under the category of 'any other business or commercial rights of similar nature,' making it eligible for depreciation.

Ultimately, the Tribunal, following the precedent set by the Hon'ble Supreme Court and the ITAT in the assessee's previous cases, dismissed the revenue's appeal. The decision was pronounced on January 14, 2013, in open court after the conclusion of the hearing.

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