2014 (12) TMI 523 - AT - Income Tax

Tribunal rejects depreciation claim on 'Goodwill' due to lack of new asset acquisition. Correct quantification upheld.

Video Effects Versus Income Tax Officer

The Tribunal dismissed the assessee's appeal, rejecting the claim for depreciation on 'Goodwill' as no new tangible or intangible asset was acquired. ... Depreciation on Goodwill – additional payment to retiring partner - Assessee is in business of supply of equipments for shooting and editing telefilms, etc. with computerized digital graphics on hire - Held that:- In CIT vs. Smifs Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] it has been held that ‘goodwill’ is a depreciable asset under Explanation 3(b) to section 32(1) - no deprecation having been allowed for AY 2002-03, the WDV of the relevant block of assets shall continue to be at ₹ 26.54 lacs, resulting in an enhancement in the assessee’s claim vis-à-vis as made per its return, i.e., by deducting depreciation claimed for the preceding year - the sole ground on which depreciation was disallowed by the Revenue, which found the tribunal’s ‘acceptance’, is of goodwill being not a qualifying asset under Explanation 3(b) to section 32(1)(ii) - The retiring partners could start their own venture, greatly impeding the firm’s, whose name carries a brand value in the trade, built over time, prospects/business - It is to restrain them from so doing that the payment, by purchasing their share in the intangible assets of the firm, had been made - all that the payment signifies is that the firm has been able to retain its’ operational capability consequent to the retirement/s - There is no purchase or acquisition of any asset, tangible or intangible - Rather, to the extent goodwill of the firm is attached to the partners, representing its human and thus most vital, resource, a part of the goodwill of the firm stands definitely eroded. Quantification of depreciation – Held that:- No ‘goodwill’ or any other tangible or intangible asset, thus, stands acquired by the firm consequent to the payment to the retiring partners in pursuance of the retiring deed/s - the second retiring partner, having along with the other continuing partners, acquired share (20%) in the goodwill of the firm of the first retiring partner, the payment to him subsequently includes his share in the share, so that there is in fact to that extent a double payment, i.e., vis-à-vis the total share in the firms’ assets of the two partners - the transaction in right perspective, i.e., as one between the partners inter se, would resolve such issues, which arise only on misconstruing the transactions as one of purchase/acquisition of goodwill by the assessee-firm – Decided against assessee. No goodwill stands acquired by the assessee firm upon the impugned payment/s, the question of the extent of the depreciation does not arise for consideration - the nature of the additional payment to the second retiring partner not arising out of his retirement deed, would have to be examined/determined - the assessee’s claim as not tenable - without doubt, no depreciation has been allowed on goodwill, and it is only the depreciation as actually allowed that would be eligible for being deducted in computing the WDV of the relevant block of assets – reference made to Madeva Upendra Sinai vs. Union of India [1974 (11) TMI 7 - SUPREME Court] - the assessee, it having not acquired ‘goodwill’, or any other depreciable asset for that matter, thus, i.e., upon payment of the impugned sums to the retiring partners, gets reversed to any extent, so that the assessee’s claim becomes valid (to that extent), the same shall have to be allowed - assessee’s claim for additional depreciation, on the basis of having not been allowed deprecation for A.Y. 2002-03, is rejected – Decided against assessee. Issues Involved:1. Maintainability in law of the assessee's claim for depreciation on 'Goodwill'.2. Correct quantification of the assessee's claim for depreciation.Detailed Analysis:1. Maintainability in Law of the Assessee's Claim for Depreciation on 'Goodwill':The primary issue in this appeal is the maintainability of the assessee's claim for depreciation on 'Goodwill'. The assessee, a partnership firm, claimed depreciation on goodwill, which was capitalized in its books after paying retiring partners their share of goodwill. The Revenue negated this claim, and the Tribunal initially confirmed the decision based on its earlier ruling in R.G. Keswani vs. Asst. CIT, where 'Goodwill' was not considered an intangible asset under Explanation 3(b) to section 32(1)(ii) of the Income Tax Act, 1961.The Tribunal, however, acknowledged the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which clarified that 'Goodwill' is a depreciable asset under Explanation 3(b) to section 32(1). Despite this, the Tribunal found that no 'Goodwill' had been actually acquired by the firm upon the payment to the retiring partners. The retirement deeds specified that the payments were for the retiring partners' share in the partnership and its assets, including goodwill, but did not create a new capital asset in the hands of the firm.The Tribunal concluded that the payments ensured the firm retained its operational capability post-retirement of the partners, but did not result in the acquisition of any new tangible or intangible asset. Thus, the claim for depreciation on 'Goodwill' was not maintainable.2. Correct Quantification of the Assessee's Claim for Depreciation:The assessee also raised an additional ground concerning the correct quantification of its claim for depreciation. The Tribunal found that no depreciation had been allowed for the previous year (A.Y. 2002-03), and the written down value (WDV) of the relevant block of assets should be computed by reducing the depreciation 'actually allowed'. Since no depreciation was allowed for A.Y. 2002-03, the WDV should remain at Rs. 26.54 lakhs, not reduced by the disallowed depreciation claim of Rs. 4,87,943/-.The Tribunal emphasized that the depreciation allowance must be allowed while computing the total income for any year, as per Explanation 5 to section 32(1)(ii), inserted by Finance Act, 2001. This provision applies regardless of whether the assessee claimed the deduction. The Tribunal noted that the assessee's claim for depreciation would be covered by the Supreme Court's decision in Smifs Securities Ltd., which applies retroactively to the year the substituted section 32 came into effect (01.04.1999).However, the Tribunal held that since no 'Goodwill' was acquired, the question of the extent of depreciation did not arise. The Tribunal also stated that if their view on the non-acquisition of 'Goodwill' was reversed by a higher court, depreciation should be allowed for both the current and preceding years.In conclusion, the Tribunal dismissed the assessee's appeal, rejecting the claim for depreciation on 'Goodwill' and the additional ground for correct quantification of depreciation. The order was pronounced in the open court on December 10, 2014.