Depreciation on goodwill for acquisition of a going concern by slump sale affirmed as allowable after statutory proviso excluded.

Treatment of goodwill as an intangible asset eligible for depreciation is affirmed: the Supreme Court held that goodwill falls within "any other business or commercial rights of similar nature," making it depreciable under the statutory provision for intangible assets. The decision clarifies that where goodwill arises on acquisition of a going concern by slump sale between unrelated parties, the proviso limiting depreciation for transfers by way of amalgamation, demerger or succession does not apply, and therefore depreciation is allowable on such goodwill. The note distinguishes slump sale acquisitions from transfers covered by succession provisions and confirms precedent supporting depreciability subject to statutory exceptions.

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Issues: Whether depreciation under section 32(1)(ii) of the Income-tax Act, 1961 is allowable on goodwill recognised on acquisition of a going concern by slump sale and whether the fifth proviso to section 32(1) applies to such acquisition.

Analysis: The assessee acquired a manufacturing unit as a going concern for a lump-sum consideration and allocated part of the consideration to identifiable tangible assets with the residue accounted as goodwill. The legal question turns on whether such goodwill qualifies as an intangible asset eligible for depreciation under section 32(1)(ii) and whether the statutory restriction in the fifth proviso to section 32(1) applies. The Hon'ble Supreme Court in CIT v. Smifs Securities Ltd. has held that goodwill falls within "any other business or commercial rights of similar nature" under Explanation 3(b) to section 32(1) and is therefore an asset eligible for depreciation. The jurisdictional High Court in Grindwell Norton Ltd. has reaffirmed that position. The fifth proviso to section 32(1), relied upon by the Revenue and applied in United Breweries Ltd., operates as a statutory restriction in cases of amalgamation/succession to limit aggregate depreciation; it is factually and legally inapplicable to a slump sale between unrelated parties. In the present facts various licences, approvals and commercial rights transferred with the business support that the residual consideration represents business/intangible rights and not merely a book entry.

Conclusion: Depreciation on the goodwill arising on acquisition of the going concern by slump sale is allowable under section 32(1)(ii); the fifth proviso to section 32(1) is not attracted to the present slump sale. The disallowance of depreciation is set aside in favour of the assessee.

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