Court upholds depreciation on goodwill; royalty payment legitimate under Income Tax Act

The appeal filed by the Revenue challenging the disallowance of depreciation on goodwill and royalty paid was dismissed. The court held that goodwill qualifies as an intangible asset eligible for depreciation under Section 32 of the Income Tax Act, following precedent and the definition of intangible assets. Additionally, the royalty paid was deemed legitimate as the benefit transferred was not exclusive and enduring, as specified in the agreement. The decision was pronounced on 06 Jan., 2015.

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Issues Involved:
1. Disallowance of depreciation on goodwill
2. Disallowance of royalty paid

Analysis:

Issue 1: Disallowance of Depreciation on Goodwill
The appellant, ACIT, sought to set aside the impugned order regarding the deletion of the addition of depreciation on goodwill. The Assessing Officer disallowed the depreciation claimed on goodwill by the assessee company, as goodwill is not considered an intangible asset under the Income Tax Act. However, the Ld. CIT(A) took a different view, allowing the depreciation. The business transfer agreement showed that the assessee paid for the right to use the brand name 'CARYAIR,' indicating the purchase of goodwill. The issue was whether this payment for goodwill qualifies as an intangible asset under Section 32(1)(ii) of the Act.

A similar issue was addressed by the Income Tax Appellate Tribunal, Delhi Bench 'E,' in a previous case, where it was held that goodwill is eligible for depreciation under Section 32 of the Act. Citing the judgment of the Hon'ble Supreme Court in the case of CIT Vs SMIF Securities Ltd., it was established that goodwill falls under intangible assets like trademarks, licenses, and franchises. As the issue was already decided in favor of the assessee in a previous case, the current appeal's ground regarding depreciation on goodwill was determined against the Revenue.

Issue 2: Disallowance of Royalty Paid
The assessee debited an amount as royalty paid under administrative and other expenses, based on a technical services and license agreement. The Assessing Officer disallowed this claim, referring to a previous judgment where exclusive and enduring advantages led to disallowance of technical aid fees or royalty. However, in the current case, the agreement indicated that the benefit was of an enduring nature transferred to the assessee. The agreement specified royalty payment based on turnover, not a lump sum amount, distinguishing it from the case cited by the Assessing Officer.

The judgment cited by the Assessing Officer was not applicable to the present case's facts and circumstances, as the benefit transferred to the assessee was not exclusive and enduring in the same manner. The Ld. CIT(A) found no illegality or perversity in the findings and determined this issue against the Revenue as well.

In conclusion, the appeal filed by the Revenue was dismissed, and the order was pronounced in open court on 06 Jan., 2015.

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