TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 1013
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....ns made by the learned Assessing Officer ("AO") on untenable and unlawful grounds much contrary to law. Ground 2: Depreciation on Goodwill 2.1 The learned CIT(A) has erred in upholding the disallowance of the Appellant's claim for depreciation on Goodwill amounting to Rs. 2,76,85,547 and further erred in disallowing the valid claims, of the Appellant, citing irrelevant and unlawful grounds, baseless presumptions. The valid claim for deduction of depreciation by the Appellant deserves to be allowed in toto. 2.2 The learned CIT(A) has failed to appreciate that the rights acquired are in the nature of Goodwill and further that as an intangible asset, the same is lawfully eligible for depreciation under Section 32(1)(ii) of the Act. 2.3 The learned CIT(A) erred in not appreciating that intangible assets acquired by Appellant in the nature of customer/ supplier contracts, export quotas and assembled workforce (employee base) are in the nature of business/ commercial rights and thus eligible for depreciation under Section 32(1)(ii) of the Act and has wrongly ignored to consider the law laid down by various courts, disallowing valid contentions of the Appellant on relevant, unten....
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....hat the appellant is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and export of readymade garments. The return of income for the AY 2008-09 was filed on 29.9.2008 disclosing a loss of Rs. 6,58,03,141. This return was revised on 20.11.2008 at the same income. It was stated that the revised income was necessitated on account of enhanced claim for refund. 4. Against the said return of income, the AO i.e., DCIT, Circle 11(3), Bangalore completed the assessment u/s. 143(3) of the Act vide order dated 27.12.2010 at a loss of Rs. 3,81,17,594. While doing so, the AO denied the depreciation claimed on goodwill of Rs. 2,76,85,547 holding that goodwill does not quality for depreciation. The AO held as follows:- "Therefore, it is not the case that depreciation has to be allowed at the rate prescribed under the Income tax Rules 1962 on all the assets whether tangible or intangible of the assessee while computing the business income of the assessee carrying on business profession etc., It is only in respect of such assets owned and used by the assessee in his business qualify for depreciation allowance. Similarly, it ....
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....rder. The brief facts of the issues are that, the appellant company acquired 'Fibres and Fabrics International', a sole proprietorship concern on slump sale basis and as a going concern in the F.Y: 2002-03. As a part of the business acquisition, a number of intangible assets including customer/supplier contracts, export quotas and assembled workforce (employee base) were acquired and the consideration for the same was settled by way of issuance of shares. The said intangible assets were classified as 'goodwill' for the purpose of disclosure in the financial statement. The appellant claimed depreciation u/s 32(1)(ii) of the Act on the said intangible asset classified as goodwill. In fact the said claim was rejected by the A.O for the Assessment Years 2004-05 & 2005-06 and the said orders are pending in appeal. 5.1 As per the provisions of Sec. 32(1)(ii) of the Act, an assessee is entitled for depreciation of - (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, license, franchises or any other business or commercial rights of similar nature. being intangible assets acquired on or after the 1st day of April,....
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....#39; in the form of intangible assets was acquired by the company. I am of the considered opinion that the said rights are not goodwill and also cannot be considered as acquired by the company and it is a self generated asset , as 99% of the share holding was controlled by the erstwhile proprietor. When this was pointed out, the appellant made elaborate submissions explaining that 'company' is a separate legal entity and the share holder / erstwhile proprietor has a separate legal status. However, I am not able to accept the assessee's explanation because the ultimate beneficiary is one and the same. Therefore, the submissions of the appellant are not acceptable that the so called 'goodwill' is not eligible for depreciation. 5.4. It may be seen from the submissions of the appellant that the amount paid towards 'goodwill' was actually towards the customer / supplier contracts on export quotas and assembled workforce etc.,. It is the contention of the appellant that these are business and commercial rights under the category of intangible assets. As per the Explanation 32(1)(ii) of the Act, the commercial or business right should be similar to 'licence' or 'f....
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....y concern at the time of acquisition of the same by the appellant company and in support of this submission, he filed before us the balance sheet of the erstwhile sole proprietary concern wherein goodwill of Rs. 35 crores was shown on the asset side of the balance sheet of the said company. 10. The ld. counsel for the appellant submitted that valuation of goodwill has not been disputed by the AO. Though the sole proprietary concern was acquired during the previous year relevant to AY 2003-04, there was no claim made towards depreciation on the goodwill. It was only in A.Y. 2004-05 for the first time that the claim for depreciation on goodwill was made. The same came to be allowed in the original assessment proceedings for both the AYs 2004-05 and 2005-06. However, in the reassessment proceedings imitated under the provisions of section 148, the same was sought to be disallowed. On appeal before the Tribunal, reassessment proceedings were held to be invalid and consequently the claim for depreciation finally came to be allowed. 11. For the AYs 2006-07 & 2007-08, depreciation claim was sought to be withdrawn by exercising the revision proceedings u/s. 263 of the Act and the issue i....
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....rn continues to enjoy 99% shareholding in the new company and therefore, there was no transfer of goodwill involved in the present case. He further submitted that goodwill acquired by the appellant is not valued as per the prescribed methods. Thus he prayed that the orders of lower authorities may be upheld in this regard. 16. As regards the other issue, the ld. Sr. DR submitted that non-receipt of Form ITR-V within the stipulated time does not constitute a valid return of income and therefore the assessee company is not entitled to carry forward of determined losses for future years. 17. We have heard the rival submissions and perused the material on record. We shall first deal with the grounds challenging the disallowance of depreciation on goodwill. 18. From a perusal of the assessment order, it is clear that the AO denied the benefit of depreciation on goodwill on two grounds; (i) goodwill is not of those assets which is specified as intangible asset under the provisions of section 32(1) of the Act, and (ii) goodwill is not an asset whose value goes down with the passage of time, on the other hand, the value of goodwill grows with every year. Thus, the AO had not doubted the....
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....titling assessee for the relief in terms of the statutory provision. In fact, it is common knowledge that on account of the inflation even tangible assets such as building, machinery, plant or furniture will fetch higher price in later years, though in the assessee's books value got eroded on account of depreciation written off. The Income-tax Act also takes into account the possibility of appreciation or at least retention of value of depreciable assets on which depreciation is allowed. While section 41(2) provides for assessment of profit arising on sale of intangible depreciable assets, section 50 provides for assessment of capital gains on sale of depreciable assets. Therefore, we do not think assessee's entitlement for depreciation on assets including intangible assets can be negative on the ground that no erosion in value takes place on account of use of the asset in business or profession. ............................." 22. This leaves us with the limited question of considering whether goodwill is eligible for depreciation by residual clause in section 32(1)(ii) of the Act. 23. The Hon'ble Kerala High Court in the case of B. Raveendran Pillai v. CIT, 194 Taxman 477 (Ker) ....
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....C), the Supreme Court had explained th at:- "Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill was nothing more than 'the probability that the old customers would resort to the old places' was expanded by Wood V. C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business." The Court had further explained that: "A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in IRC v. Muller and Co.'s Margarine Limited [1901] AC 217 (HL) that although goodwill was easy t....
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....s or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act." 26. The ratio of the Hon'ble Supreme Court was followed by the Hon'ble Delhi High Court in the case of Triune Energy Services (P.) Ltd., Hon'ble Gujarat High Court in the case of Principal CIT v. Swastik Industries, 68 taxman.com 329 (Gujarat), Hon'ble Bombay High Court in the case of CIT v. Birla Global Asset Finance Co. Ltd., 41 taxmann.com 262 (Bombay) and the Hon'ble Karnataka High Court in the case of CIT v. M/s. Manipal Universal Learning Pvt. Ltd., ITA No.61 of 2007 dated 1.4.2013. Respectfully following the decision of the Hon'ble Supreme Court and the decisions of several High Courts, we hold that assessee is entitled for depreciation on goodwill. We hold accordingly and direct the AO to allow the same. Hence, the ground of appeal is allowed. 27. The second issue relates to the denial of carry forward losses on the ground of belated receipt of Form ITR-V. It is not ....