2016 (7) TMI 1013 - AT - Income Tax

Tribunal Grants Depreciation on Goodwill and Allows Carry Forward of Business Losses

The Tribunal allowed both appeals, directing the AO to grant depreciation on goodwill and to allow the carry forward of determined business losses for ... Depreciation on goodwill as an intangible asset under section 32(1)(ii) - goodwill as purchase consideration in excess of net assets (slump sale / going concern) - application of ejusdem generis to Explanation 3(b) to section 32(1) - block of assets continuity and entitlement to depreciation once an asset enters the block - validity of return filed electronically and requirement of furnishing ITR-V within prescribed time - condonation of delay and proviso to section 139(9) - treatment of defective return - assessing officer acting on and accepting an electronically filed returnDepreciation on goodwill as an intangible asset under section 32(1)(ii) - goodwill as purchase consideration in excess of net assets (slump sale / going concern) - application of ejusdem generis to Explanation 3(b) to section 32(1) - block of assets continuity and entitlement to depreciation once an asset enters the block - Whether depreciation is allowable on goodwill acquired on acquisition of a sole proprietorship taken over as a going concern - HELD THAT: - The Tribunal examined the assessment and appellate orders and the factual position that the appellant acquired the sole proprietorship as a going concern and that goodwill was shown in the vendor's balance sheet and the takeover agreement. It rejected the A.O.'s accountancy objection that goodwill cannot be depreciated because its value does not necessarily erode over time, observing authority that depreciation allowance does not depend on actual erosion in market value. The Tribunal held that where purchase consideration exceeds net asset value on acquisition of a going concern, the excess constitutes goodwill and is an intangible asset. Applying the rule of ejusdem generis to Explanation 3(b) to section 32(1), the Tribunal followed the Supreme Court in Smifs Securities Ltd. and subsequent High Court decisions to conclude that goodwill falls within 'any other business or commercial rights of similar nature' and is therefore eligible for depreciation. The Tribunal also noted the principle that once an asset enters a block of assets, depreciation entitlement continues under the relevant provisions, and directed the A.O. to allow depreciation on goodwill. [Paras 20, 21, 22, 25, 26]Depreciation on goodwill acquired on takeover as a going concern is allowable; appeal allowed and A.O. directed to grant depreciation.Validity of return filed electronically and requirement of furnishing ITR-V within prescribed time - condonation of delay and proviso to section 139(9) - treatment of defective return - assessing officer acting on and accepting an electronically filed return - Whether the appellant's return is valid for purposes of carry forward of losses despite belated physical receipt of ITR-V - HELD THAT: - The Tribunal found it undisputed that the appellant e-filed the return and that the signed ITR-V was posted and received with a short delay. The A.O. had acted on the electronically filed return and did not communicate any defect to the assessee. The Tribunal relied on the statutory scheme under section 139(9) (allowing condonation where defects are rectified before assessment) and on precedents holding that declaration of a return invalid for non-receipt of ITR-V is not sustainable where the A.O. has acted on the return. In these circumstances the Tribunal held that the A.O. could not treat the return as invalid and that the assessee was entitled to carry forward the determined losses; the A.O. was directed to grant the benefit. [Paras 27, 28]Belated receipt of ITR-V did not vitiate the return where the A.O. acted on it and no defect was communicated; carry forward of losses to be allowed.Final Conclusion: Both appeals are allowed: depreciation on goodwill acquired on takeover as a going concern is to be allowed and the assessing officer is directed to grant depreciation; the return filed electronically (with short delay in ITR V receipt) is to be treated as valid for carry forward of losses and the assessing officer is directed to allow the same. Issues Involved:1. Depreciation on Goodwill2. Carry Forward of LossesDetailed Analysis:1. Depreciation on Goodwill:The appellant contended that the CIT(A) wrongly disallowed the claim for depreciation on goodwill, arguing that goodwill qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. The CIT(A) upheld the AO's decision, stating that the goodwill in question was a self-generated asset and not acquired by the company, thus not eligible for depreciation.The Tribunal noted that the AO denied depreciation on goodwill on the grounds that goodwill is not specified as an intangible asset under Section 32(1) and that its value does not depreciate over time. However, the Tribunal found that the AO did not dispute the existence of goodwill but only its eligibility for depreciation. The CIT(A) also held that no commercial rights were acquired, thus denying depreciation.The Tribunal referred to the Supreme Court's decision in CIT v. Smifs Securities Ltd., which held that goodwill is an asset under Explanation 3(b) to Section 32(1) and eligible for depreciation. The Tribunal also cited other High Court decisions supporting the depreciation of goodwill. Consequently, the Tribunal concluded that the appellant is entitled to depreciation on goodwill and directed the AO to allow the same.2. Carry Forward of Losses:The appellant argued that the CIT(A) wrongly disallowed the carry forward of losses due to the belated receipt of Form ITR-V. The appellant claimed that the delay was procedural and occurred due to transmission issues. The AO had acted upon the original return of income but later denied the carry forward of losses based on the late submission of Form ITR-V.The Tribunal acknowledged that the Form ITR-V was submitted with a delay of only five days and that the AO had acted upon the return of income. The Tribunal noted that the AO did not communicate any defect in the return to the appellant, which implied that the AO had condoned the delay. The Tribunal referred to the Bombay High Court's decision in Crawford Bayley & Co. v. UOI, which held that declaring a return invalid for non-receipt of ITR-V was unjustified.The Tribunal concluded that the AO was not justified in treating the original return as invalid due to the belated receipt of Form ITR-V and directed the AO to grant the benefit of the determined business losses for future years.Conclusion:The Tribunal allowed both appeals, directing the AO to grant depreciation on goodwill and to allow the carry forward of determined business losses for future years. The judgment emphasized the eligibility of goodwill for depreciation and the procedural flexibility in the submission of Form ITR-V.