2011 (1) TMI 138 - HC - Income Tax

Depreciation allowed on goodwill as intangible asset under section 32(1)(ii); section 263 revision not justified

HC held that depreciation claimed on goodwill-representing marketing/trading reputation, trade style, territorial know-how and related commercial ... Revisionary jurisdiction under section 263 - erroneous or prejudicial to the Revenue - claim for depreciation on goodwill - Held that:- The depreciation was claimed on goodwill by the assessee on account of payment made for the marketing and trading reputation, trade style and name, marketing and distribution, territorial know-how, including information or consumption patterns and habits of consumers in the territory and the difference between the consideration paid for business and value of tangible assets. The Tribunal has treated the same to be valuable com- mercial asset similar to other intangibles mentioned in the definition of the block of assets and, hence, eligible to depreciation. The meaning of business or commercial rights of similar nature has to be understood in the backdrop of section 32(1)(ii) of the Act. - Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copy-rights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. Revision u/s 263 - it was not appropriate on the part of the Commissioner to exercise his power under section 263 solely on the ground that in the books of account it was mentioned as 'goodwill' and nothing else. As has been held by the apex court in Malabar Industrial Co. Ltd. [2000 (2) TMI 10 - SUPREME COURT], Max India Ltd. [2007 (11) TMI 12 - SUPREME COURT] and CIT v. Vimgi Investment P. Ltd. [2007 (2) TMI 176 - DELHI HIGH COURT] once a plausible view is taken, it is not open to the Commissioner to exercise the power under section 263 of the Act. Issues Involved:1. Validity of the exercise of revisionary jurisdiction under section 263 of the Income-tax Act, 1961.2. Admissibility of depreciation on goodwill as an asset under section 32 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Validity of the exercise of revisionary jurisdiction under section 263 of the Income-tax Act, 1961:The appeals challenged the composite order of the Income-tax Appellate Tribunal (ITAT) which held that the exercise of revisionary jurisdiction under section 263 by the Commissioner of Income-tax was invalid. The Commissioner had invoked section 263, asserting that the depreciation on goodwill accepted by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue. The Tribunal, however, found that the AO had considered detailed explanations and previous allowances of similar claims and thus had taken a plausible view. The Tribunal emphasized that merely because the Commissioner disagreed with the AO's view, it did not render the AO's order erroneous or prejudicial to the Revenue. The Tribunal relied on the Supreme Court's ruling in Malabar Industrial Co. Ltd. v. CIT, which stated that an order is erroneous if it is not in accordance with law and prejudicial to the interests of the Revenue. The Tribunal concluded that the AO's acceptance of the claim was a plausible view and thus not subject to revision under section 263.2. Admissibility of depreciation on goodwill as an asset under section 32 of the Income-tax Act, 1961:The core issue was whether goodwill qualifies as an 'intangible asset' eligible for depreciation under section 32(1)(ii) of the Act. The Tribunal noted that the AO had allowed the depreciation based on detailed submissions by the assessee, which included the nature of goodwill and its valuation. The Tribunal referred to the definition of intangible assets under section 32(1)(ii), which includes know-how, patents, copyrights, trademarks, licences, franchises, or any other business or commercial rights of similar nature. The Tribunal held that goodwill, being a valuable commercial asset, fits within the ambit of 'any other business or commercial rights of similar nature.' The Tribunal also cited its earlier decision in Skyline Caterers Pvt. Ltd. v. ITO, which stated that the nomenclature in the books of account is not determinative of the nature of the asset. The Tribunal concluded that the AO's decision to allow depreciation on goodwill was justified, as it fell within the statutory definition of intangible assets.The High Court upheld the Tribunal's decision, agreeing that the AO had taken a plausible view and that the Commissioner could not invoke section 263 merely because he held a different opinion. The Court emphasized the principle that when two views are possible, and the AO has taken one plausible view, it is not open to the Commissioner to exercise revisionary jurisdiction under section 263. The Court also supported the Tribunal's interpretation that goodwill, as described by the assessee, qualifies as an intangible asset eligible for depreciation under section 32(1)(ii).Conclusion:The High Court dismissed the appeals, affirming the Tribunal's order that the exercise of revisionary jurisdiction under section 263 was invalid and that depreciation on goodwill was admissible under section 32 of the Income-tax Act, 1961. The Court held that the AO had taken a plausible view, and the Commissioner could not revise the order merely because he had a different opinion. The Court also agreed with the Tribunal's interpretation that goodwill qualifies as an intangible asset eligible for depreciation.