QUESTION: The assessee, purchased a running business from M/s R.G.K. At the time of acquiring the business, the assessee had paid certain amount in respect of trade name, goodwill and for all other business and commercial rights and claimed depreciation on said amount. The Assessing Officer rejected the assessee’s claim holding that goodwill could not be treated as intangible asset and, therefore, not depreciable. Decide.
ANSWER: As per Section 32(1)(ii) of Income tax Act, depreciation is allowable in respect of knowhow, patent, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature being intangible assets.
Scanning the anatomy of this section, it can safely be stated that the provision allows depreciation on both tangible and intangible assets and clause (ii) enumerates the intangible assets on which depreciation is allowable.
The assets which are included in the definition of ‘intangible assets’ under Section 32(1)(ii) includes, along with other things, any other business or commercial rights of similar nature.
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 further whether, it would come within the clause, namely, ‘any other business or commercial rights which are of similar nature are to be borne in mind.
Yet, allowability of depreciation on goodwill has been a matter of debate before various Courts/Tribunal. In various cases, it has been held that depreciation is not allowable on goodwill because it is not of similar nature to that of intangible assets viz. know-how, patents, trademarks, licences, franchise, etc. as specified under Section 32 of the Income- tax Act, 1961 (the Act).
The Supreme Court in the case of Smifs Securities Ltd. Vs.CIT ( date 24/08/2012) has put the above controversy at rest and held that the goodwill being a difference between the amount paid and cost of shares in case of amalgamation scheme, is an asset eligible for depreciation under Section 32 of the Act.
Smifs Securities Ltd. Vs.CIT ( date 24/08/2012) -Supreme Court
Goodwill” is an intangible asset eligible for depreciation u/s 32
Pursuant to an amalgamation of another company with the assessee, the difference between the consideration paid by the assessee and the net value of assets of the amalgamating company was treated by the assessee as “goodwill” and depreciation of Rs. 54 lakhs were claimed thereon u/s 32(1)(ii). The AO rejected the claim on the ground that (i) “goodwill” was not an “intangible asset” as defined in Explanation 3 to s. 32(1) and (ii) the assessee had not paid anything for the same. The Tribunal and High Court upheld the assessee’s claim. On appeal by the department to the Supreme Court, HELD dismissing the appeal:
Explanation 3 to s. 32 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.
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 generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
Consequently, “Goodwill” is an asset under Explanation 3(b) to s. 32(1) & eligible for depreciation. Though the AO held that the assessee had not “paid” anything for the goodwill, this cannot be accepted because.
(a) the CIT (A) & Tribunal (correctly) held that that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted “goodwill” and
(b) this aspect was not challenged by the department before the High Court.
The Supreme Court has applied the principle of ejusdem generis and held that the expression ‘any other business or commercial rights of a similar nature includes goodwill for the purpose of allowability of depreciation. The contention of AO was dismissed.
DISCLAIMER : the above write up is only for information and knowledge of readers. The view expressed above are the personal view of the author. It is advisable to consult with professional in case of necessity.