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

The Tribunal dismissed the assessee's appeal, rejecting the claim for depreciation on 'Goodwill' as no new tangible or intangible asset was acquired. Additionally, the Tribunal found that the correct quantification of depreciation should not include the disallowed amount from the previous year, maintaining the written down value at Rs. 26.54 lakhs. The decision was based on the Supreme Court's ruling that 'Goodwill' is depreciable but only if actually acquired, leading to the denial of the depreciation claim and the appeal on correct quantification.

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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.

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