Tribunal allows depreciation on Goodwill but upholds treatment of termination compensation as revenue receipt

The Tribunal allowed the assessee's appeal regarding the claim of depreciation on Goodwill, directing the AO to allow the depreciation. However, the Tribunal dismissed the assessee's appeal regarding the compensation received for the termination of the SPA, upholding the CIT(A)'s decision to treat it as a revenue receipt.

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Issues Involved:
1. Disallowance of depreciation claimed on intangible assets recorded as Goodwill.
2. Addition on account of compensation received towards cancellation of Share Purchase Agreement (SPA).

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Intangible Assets Recorded as Goodwill:

The assessee filed appeals against the orders of the Commissioner of Income-tax (Appeals) [CIT(A)], Shimla, for the assessment years 2007-08 and 2008-09. The primary contention was the disallowance of depreciation claimed on intangible assets recorded as Goodwill.

Facts and Arguments:
- The assessee had entered into a Business Purchase Agreement (BPA) with Ranbaxy Laboratories Limited, acquiring its Animal Health Care and Diagnostics Business divisions for Rs. 62 crores. Out of this, Rs. 49.26 crores was allocated to tangible assets, and Rs. 12.74 crores was recorded as Goodwill.
- The Assessing Officer (AO) disallowed the depreciation on Goodwill, citing that Goodwill was not an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961.
- The CIT(A) upheld the AO's decision, stating that the term 'Goodwill' was not included in the specific categories of intangible assets enumerated in Section 32(1)(ii) and that the provisions were restrictive.

Tribunal's Findings:
- The Tribunal noted that the amended provisions of Section 32 w.e.f. 1.4.1999 allowed depreciation on both tangible and intangible assets, including know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature.
- The Tribunal relied on the Delhi High Court's judgment in Areva T and D India Ltd. Vs. DCIT, which applied the principle of ejusdem generis to interpret "business or commercial rights of similar nature" and held that intangible assets like business claims, business information, business records, contracts, employees, and know-how were eligible for depreciation.
- The Tribunal also referred to the Supreme Court's decision in CIT Vs. SMIFS Securities Ltd., which held that Goodwill is an intangible asset under Explanation 3(b) to Section 32(1) and is eligible for depreciation.
- The Tribunal concluded that the assessee was entitled to claim depreciation on the intangible assets recorded as Goodwill, directing the AO to allow the claim.

2. Addition on Account of Compensation Received Towards Cancellation of SPA:

The assessee also contested the addition of Rs. 2.25 crores received as compensation for the termination of the SPA.

Facts and Arguments:
- The assessee had entered into an SPA with sellers to acquire shares of Sarabhai Zydus Animal Health Limited, depositing Rs. 24.81 crores as Earnest Money Deposit (EMD).
- The SPA stipulated that if the sellers failed to obtain consent from Cadila (another shareholder) to give up their Right of First Refusal (ROFR), the SPA would terminate, and the sellers would return the EMD with interest and penalty.
- The SPA was terminated as Cadila exercised its ROFR, and the sellers repaid the EMD with interest and penalty. Additionally, the assessee received Rs. 2.25 crores as compensation for the termination of the SPA, which it claimed as a capital receipt.
- The AO and CIT(A) treated the compensation as a revenue receipt, arguing that the transaction was a business deal and the compensation was a windfall gain.

Tribunal's Findings:
- The Tribunal referred to the Supreme Court's judgment in CIT Vs. Saurashtra Cement Ltd., which held that compensation for the sterilization of a profit-earning source is a capital receipt.
- The Tribunal also considered the Supreme Court's decision in Oberoi Hotel Pvt. Ltd. Vs. CIT, which held that compensation received for giving up a right to purchase or operate a property is a capital receipt if it results in the loss of a source of income.
- However, the Tribunal distinguished the present case, noting that the assessee was exploring the possibility of acquiring a new business and the compensation received was for the failure of this venture.
- The Tribunal upheld the CIT(A)'s decision, holding that the compensation was a revenue receipt as it was received in the course of the assessee's normal business activities and did not result in the loss of any existing source of income.

Conclusion:
- The Tribunal allowed the assessee's appeal regarding the claim of depreciation on Goodwill, directing the AO to allow the depreciation.
- The Tribunal dismissed the assessee's appeal regarding the compensation received for the termination of the SPA, upholding the CIT(A)'s decision to treat it as a revenue receipt.

Order Pronounced in the Open Court on 2.4.2013.

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