Depreciation claim on acquisition goodwill as an intangible asset u/s32(1) Explanation 3(b) upheld, revenue challenge rejected

Depreciation under s.32(1) of the Income-tax Act on goodwill arising from acquisition of business or commercial rights was in issue. Applying Explanation 3(b) to s.32(1), the HC held that goodwill constitutes an "asset" falling within "intangible assets," and therefore qualifies for depreciation; reliance was placed on the SC ruling recognising depreciation on goodwill as a depreciable intangible. Consequently, the ITAT's allowance of depreciation on goodwill was upheld and the revenue's challenge was rejected, with the issue decided in favour of the assessee.

---

---

Issues:
- Interpretation of Section 32(1)(ii) for depreciation on business or commercial rights
- Determination of depreciation eligibility for consideration paid for business or commercial rights
- Assessment of goodwill for depreciation under Explanation 3(b) to Section 32(1)

Interpretation of Section 32(1)(ii) for depreciation on business or commercial rights:
The High Court considered the appeal challenging the Tribunal's decision that business or commercial rights acquired are eligible for depreciation under Section 32(1)(ii). The Tribunal directed the assessing authority to reduce the advance amount from the business and commercial rights valued by the assessee to determine the depreciable amounts. The Court upheld the Tribunal's decision, emphasizing the eligibility of depreciation for such acquired rights.

Determination of depreciation eligibility for consideration paid for business or commercial rights:
The Court examined the substantial question of law regarding the entitlement to claim depreciation on an amount higher than the one mentioned in the sale agreement for the purchase of distance learning division. The assessee initially agreed to a lower price but later revalued the rights, seeking depreciation on the higher amount. The assessing authority and the Commissioner of Income Tax (Appeals) limited depreciation to the value in the agreement, while the Tribunal allowed depreciation to the full extent. The Court analyzed the differing views and ultimately ruled in favor of the assessee, citing the inclusion of intangible assets like goodwill for depreciation under Explanation 3 to Section 32(1).

Assessment of goodwill for depreciation under Explanation 3(b) to Section 32(1):
Referring to the Apex Court's decision in CIT v. SMIFS Securities Ltd., the Court clarified that goodwill is considered an asset under Explanation 3(b) to Section 32(1), making it depreciable. Relying on this precedent, the Court resolved the substantial question of law in favor of the assessee, dismissing the appeal by the Revenue. The judgment emphasized the depreciable nature of goodwill and upheld the Tribunal's decision to allow depreciation on the higher amount revalued by the assessee.

---