2019 (11) TMI 1139 - AT - Income Tax

Tribunal allows depreciation on goodwill, rejects Revenue's appeals.

The Asst. Commissioner of Income-tax (OSD), Corporate Range-1, Chennai. Versus M/s. Dorma India Pvt. Ltd.

The Asst. Commissioner of Income-tax (OSD), Corporate Range-1, Chennai. Versus M/s. Dorma India Pvt. Ltd. - TMI Issues Involved:1. Allowability of depreciation on goodwill generated on acquisition of businesses.2. Classification of excess consideration over net assets as goodwill or non-compete fee.3. Admissibility of depreciation claims not made in the original or revised return of income.Detailed Analysis:Issue 1: Allowability of Depreciation on Goodwill Generated on Acquisition of BusinessesThe primary issue raised by the Revenue was whether the depreciation claimed by the assessee on goodwill generated from the acquisition of businesses of two entities, GTS Exports Private Limited and Arc Trend Systems Private Limited, was allowable under the Income-tax Act, 1961. The assessee claimed depreciation on goodwill created in its books after acquiring the assets and liabilities of these entities.The Assessing Officer (AO) rejected the claim, stating that the goodwill was not a depreciable asset as per Section 32(1)(ii) and explanation 3(b) of the Act. The AO contended that the excess consideration over net assets was not towards goodwill but rather a non-compete fee, which does not qualify for depreciation. The AO also noted that the assessee did not claim depreciation on goodwill in its original or revised return of income.The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, relying on judicial precedents, including the Supreme Court's decision in CIT v. Smifs Securities Ltd. The CIT(A) held that the excess consideration paid over the net assets taken over was in the nature of business or commercial rights and thus eligible for depreciation under Section 32 of the Act.Issue 2: Classification of Excess Consideration Over Net Assets as Goodwill or Non-Compete FeeThe AO argued that the excess consideration paid by the assessee should be treated as a non-compete fee rather than goodwill. The AO referred to the non-compete clause in the slump sale agreements and contended that no separate consideration was stipulated for non-compete agreements, implying that the excess paid was towards non-compete fee.The CIT(A) disagreed, stating that the non-compete clause was a supporting clause to strengthen the commercial rights transferred to the assessee. The CIT(A) emphasized that the agreements were composite agreements for acquiring the businesses on a going concern basis, including tangible and intangible assets such as business contracts, customer relations, and intellectual property. The CIT(A) concluded that the excess consideration was towards goodwill and other intangible assets, thus qualifying for depreciation.Issue 3: Admissibility of Depreciation Claims Not Made in the Original or Revised Return of IncomeThe AO rejected the depreciation claim on the grounds that it was not made in the original or revised return of income. The AO cited that such claims could not be made during the assessment proceedings without filing a revised return.The CIT(A) allowed the claim, referring to Explanation 5 to Section 32 of the Act, which states that depreciation is to be allowed whether or not it was claimed in the return of income. The CIT(A) also cited judicial precedents supporting the view that depreciation is a statutory allowance and must be granted even if not claimed in the return.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, dismissing the appeals filed by the Revenue. The Tribunal noted that the assessee had acquired the businesses on a going concern basis, including tangible and intangible assets, and the excess consideration was rightly classified as goodwill. The Tribunal also emphasized that depreciation on goodwill is allowable under Section 32, supported by the Supreme Court's decision in CIT v. Smifs Securities Ltd. and other judicial precedents.The Tribunal further held that depreciation is a statutory deduction and must be allowed even if not claimed in the return of income, as per Explanation 5 to Section 32. The Tribunal dismissed the Revenue's appeals for all assessment years involved, affirming the CIT(A)'s order.Conclusion:The Tribunal's judgment comprehensively addressed the issues of depreciation on goodwill, classification of excess consideration, and admissibility of depreciation claims not made in the original or revised return. The Tribunal upheld the CIT(A)'s decision, allowing the assessee's claim for depreciation on goodwill and dismissing the Revenue's appeals.