2016 (4) TMI 73 - AT - Income Tax

Tribunal affirms depreciation claim on intangible assets, rejecting goodwill presumption.

The Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s decision to allow the depreciation claim on intangible assets, rejecting the Assessing ... Depreciation on intangible assets - license and franchise rights as intangible assets - depreciation under section 32(1)(ii) - depreciation on goodwill - character of asset governs allowance of depreciationDepreciation on intangible assets - license and franchise rights as intangible assets - depreciation under section 32(1)(ii) - depreciation on goodwill - Depreciation claimed on amount paid for acquisition of licence and franchise rights in the course of purchase of a business as a going concern is allowable. - HELD THAT: - The Tribunal accepted the CIT(A)'s finding that the assessee acquired the Delhi business as a going concern and, in that transaction, stepped into the seller's position under a letter of intent issued by Pepsi Food Ltd., whereby licence and franchise rights devolved upon the assessee. The CIT(A) examined the business transfer agreement, the letter of intent and related arrangements and concluded that what was acquired were licence, franchise and related intangible rights which fall within the ambit of intangible assets eligible for depreciation under section 32(1)(ii). The Coordinate Bench's earlier decision in the assessee's own case (reproduced at length) and authorities holding that the true basis for allowance of depreciation is the character of the asset (and that even amounts described as goodwill may, if they embody depreciable intangible rights, attract depreciation) were applied. Although divergent tribunal views exist on depreciation on goodwill, the Tribunal relied on binding coordinate-bench reasoning and on precedents recognizing depreciation where the asset's character fits s.32(1)(ii), and thus found no justification for the AO's conclusion that the payment represented non-depreciable goodwill. Consequently the CIT(A)'s allowance of depreciation was confirmed and the revenue's appeal was dismissed. [Paras 8]The order of the CIT(A) allowing depreciation on the licence/franchise intangibles is confirmed and the revenue's appeal is dismissed.Final Conclusion: The Tribunal, following the Coordinate Bench's reasoning that the assessee acquired licence, franchise and allied intangible rights on purchase of the business and that such intangible assets attract depreciation under section 32(1)(ii), confirms the CIT(A)'s order and dismisses the revenue's appeal for A.Y. 2008-09. Issues Involved:1. Deletion of the addition made by the Assessing Officer on account of disallowance of depreciation claim on intangible assets.Detailed Analysis:Issue 1: Deletion of the Addition Made by the Assessing Officer on Account of Disallowance of Depreciation Claim on Intangible AssetsBackground and Arguments:The appeal was filed by the revenue against the order of the learned C.I.T.(A)-II, Jaipur, which deleted an addition of Rs. 93,43,872 made by the Assessing Officer (AO) due to disallowance of depreciation on intangible assets. The assessee's representative argued that this issue was already covered by a previous order of the Hon'ble ITAT, Jaipur Bench, in the assessee's own case for earlier assessment years, where similar additions were deleted. The revenue's representative, however, supported the AO's order and requested its reversal.Tribunal's Findings:The Tribunal reviewed the rival contentions and the material on record. It noted that the identical issue had been decided in favor of the assessee in its own case for previous assessment years (ITA Nos. 405, 503, 504, 505, 506 & 507/JP/2010, dated 30/09/2011). The Tribunal reproduced the operative portion of the earlier order, which detailed the following:- The CIT(A) had considered the agreement between the assessee and Pepsi Food Ltd., and concluded that the license and franchise rights purchased by the assessee were intangible assets eligible for depreciation under the law.- The CIT(A) also referenced the decision in Hindustan Coca Cola Beverages Pvt. Ltd., where it was held that even goodwill, if it fits the description under Section 32(1)(ii), is eligible for depreciation.- The CIT(A) further reasoned that the payment made by the assessee could not be construed as payment for goodwill, as the transferor undertaking (DKD) was in financial distress, and thus, the payment was for acquiring license and franchise rights.Legal Precedents and Analysis:The Tribunal affirmed the CIT(A)'s findings, noting that the assessee had acquired business rights, interest, privileges, assets, and liabilities, which are considered intangible assets under Section 32(1)(ii). The Tribunal also acknowledged the conflicting views on whether goodwill qualifies for depreciation but emphasized the decision of the Hon'ble Kerala High Court in B. Raveendran Pillai, which allowed depreciation on goodwill.Conclusion:The Tribunal concluded that the AO's presumption of the payment being for goodwill was incorrect. It upheld the CIT(A)'s decision that the assessee had acquired intangible assets eligible for depreciation and confirmed the order allowing the depreciation claim. Consequently, the revenue's appeal was dismissed.Final Order:The revenue's appeal was dismissed, and the order of the CIT(A) was upheld. The decision was pronounced in the open court on 12/02/2016.