Consideration paid for goodwill on acquisition of running business is eligible for depreciation

Background

• The taxpayer took over a running business in Assessment Year (AY) 2000-01. The consideration payable towards acquiring the assets and liabilities of the business also included amount attributable towards goodwill. The taxpayer claimed depreciation on goodwill at the rate applicable for intangible assets (25%). The claim for depreciation on goodwill was accepted by the Assessing officer (AO) in AY 2000-01 and subsequent years.

• For AY 2003-04, the AO examined the issue of claim for depreciation on goodwill and allowed the claim.

• For the year under consideration (AY 2004-05), the AO continued to follow the precedence for allowing depreciation on goodwill.

• The Commissioner of Income-tax (CIT), exercising his revisionary powers u/s 263, held that the taxpayer is not eligible for claim of depreciation on goodwill since it is not covered under the items specified for allowance of depreciation.

Contentions of the Revenue

• The CIT contended that there was no specification of assets, such as know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, which was represented by the said goodwill. Further, the agreement for purchase of business did not specify any item of intangible on which depreciation was allowable.

Observations & Ruling of the Tribunal

• The Tribunal observed that the taxpayer had made elaborate submissions on the merits for admission of claim of deduction.

•  The Tribunal reiterated the observations in the case of Hindustan Coca Cola Beverages Pvt. Ltd. 2011-TIOL-33-HC-DEL-IT, which may apply to the tax payer, in upholding the allowance of depreciation on the amount paid by the taxpayer for goodwill acquired.

– To effectively understand what would constitute an intangible asset, certain aspects like the nature of goodwill involved, how the goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset it represents, namely trademark, right, patent, etc. and whether it would come within the clause “any other business or commercial rights of similar nature” would need to be kept in mind.

– Assets which are included in the definition of “intangible assets” include, among other things, any other business or commercial rights of similar nature.

– Commercial rights are rights which are obtained for effectively carrying on the business and commerce. Commerce being a term of wider connotation, any right which is obtained for carrying on business effectively is likely to fall within the ambit of “intangible asset”.

– However, the business or commercial right should be of similar nature as know-how, patents, copyrights, trademarks, licenses, franchises etc., which are brought into existence by experience and reputation.

– The term “goodwill” also conveys a positive reputation built by a person/ company/ business concern over a period of time.

Conclusion

• The ruling seems to reiterate the view expressed by the Kerala High Court in the case of B. Raveendran Pillai v. CIT (Kerala) 7 Taxmann.com 92 (ITA No. 1741 of 2009) and by the Delhi High Court that depreciation would be allowable on goodwill where a business is purchased on a going concern basis, leading credence to the claim that depreciation on goodwill may be allowable based on the facts of the case.

Source: Koch Chemical Technology Group India Pvt. Ltd. (ITA No. 2680/Mum/09) dated 28 January 2011