Goodwill on purchase of running hospital held depreciable intangible asset under Section 32(1)(ii); AO to allow depreciation

HC held that goodwill arising from purchase of a running hospital, including its name and trademark, constitutes an intangible asset eligible for depreciation under s.32(1)(ii). The excess amount paid over tangible assets was treated as payment for goodwill, aimed at preserving the hospital's reputation and ensuring continuity of business, akin to business or commercial rights such as trademark, franchise, or copyright. HC concluded that goodwill falls within the residuary category of intangible assets and directed the AO to revise the assessment allowing depreciation on its written down value.

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Issues:
- Entitlement to depreciation on goodwill under section 32(1)(ii) of the Income-tax Act, 1961.

Analysis:
1. The issue in this income-tax appeal was whether the assessee is entitled to depreciation on goodwill under section 32(1)(ii) of the Act. The appellant purchased a hospital with its land, building, equipment, staff, name, trade mark, and goodwill. The Assessing Officer disallowed depreciation on goodwill, stating it is not covered by section 32(1)(ii). The question was whether goodwill falls within the ambit of the residuary item in section 32(1). The appellant argued that goodwill includes various aspects like business name, logo, and location, making it an intangible asset. The Delhi High Court and other judgments were cited to support the contention that goodwill is a capital asset. The court had to determine whether goodwill is an intangible asset similar to know-how, patents, copyrights, etc., as specified in section 32(1)(ii).

2. The court examined the definition of goodwill from various judgments, emphasizing its role in attracting customers and contributing to the reputation and connection of a business. The Supreme Court held that goodwill tends to increase in a progressing business and decrease in a failing one. In this case, the hospital purchased by the assessee had a successful reputation, and patients continued to visit post-purchase due to the unchanged facilities and name. The court concluded that the purchase of the hospital as a going concern with its name and trade mark involved the acquisition of goodwill, which is a commercial or business right comparable to trade marks, franchises, etc., mentioned in section 32(1)(ii). Therefore, the court allowed the appeal, directing the Assessing Officer to grant depreciation on the written down value of goodwill to the appellant.

3. The court rejected the argument that depreciation on goodwill is against the scheme of depreciation, stating that the purpose of depreciation is to account for wear and tear, regardless of actual erosion in value. It noted that tangible assets may appreciate over time due to inflation, even if their book value decreases due to depreciation. The court highlighted that goodwill represents the continued trust of patients and is essential for maintaining the hospital's reputation. By acquiring the right to use the hospital's name and trade mark, the appellant obtained the goodwill earned by the hospital. The court emphasized that goodwill is covered by the provisions of section 32(1)(ii), entitling the assessee to depreciation on it.

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