Depreciation on Goodwill is Allowed or not?

Brief Facts of the Case 

Brief Facts: The assessee company was formed on 19.2.1999.  the assessee had taken over the business of a partnership firm, namely, Sujag Fine Chemicals and  filed its return of income on 23-12-2006 declaring total income of Rs. 5,39,660/-. An assessment order was passed u/s. 143(3) on 22-12-2008 determining total income at Rs. 90,90,889/-

 On verification of depreciation claimed, it was revealed to the Assessing Officer that, assessee has claimed depreciation of Rs. 1,09,810/- @ 25% written down value of goodwill. According to the Assessing Officer, the depreciation on goodwill is not admissible, therefore, he reopened the assessment and issued notice u/s. 148 of the income tax act and disallowed the claim of assessee.

Question Raised:

1 Whether Depreciation on goodwill is allowed or not?

Contention of the Assessee

The goodwill was acquired by the assessee in the Assessment Year 1999-2000 when the firm, as a going concern, was taken over by the company along with all the assets. At the time of acquisition, the goodwill as an asset was purchased from the firm for a consideration of Rs.24,67,926/-. Thereafter for A.Y. 1999-00, 2000-01 and 2001-02, the assessee company had claimed depreciation @ 25%.

The question which is in dispute is covered by the order of ITAT which was passed in Assessee’s case pertaining to 2003-04 whereby depreciation was allowed to assessee, and copy of the Tribunal’s order passed in ITA No. 2087/Ahd/s2012

Contention of Revenue:

During the assessment proceedings the CIT(A)  disallowed depreciation on goodwill  , “The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax, Act, 1961.The Objection of Assessing officer was that goodwill was not in existences when the assessee company had taken over the firm.

And The Assessing Officer Relied on the Following Judgement: Vyomit Shares, Stocks & Investments P. Ltd. Vs. DCIT, 106, ITD 408 (Mum)

Held by ITAT:

ITAT held that It is observed from records that since the assessee had taken over the business of a partnership firm, namely, Sujag Fine Chemicals, goodwill was acquired by the assessee in the Assessment Year 1999-2000 and depreciation claimed by the Asseesee is allowed as per Explanation 3 to section 32(1) of the Act.

“Explanation 3- For the purposes of this sub-section, the expressions ‘assets’ and ‘block of assets’ shall mean – (a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature:”

Explanation 3 states that the expression”asset” shall mean an intangible asset, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

By plain reading the words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature. The principle of ejusdem generic would apply in the said expression which finds place in Explanation 3(b). In the circumstances, ITAT Held that “goodwill” is an asset under Explanation 3(b) to section 32 (1) of the Act.

So the Appeal was allowed in favour of the assessee and the disallowances that were made were rejected.

Analysed by Shruti Juneja