Goodwill is an asset eligible for depreciation U/s. 32 of I.T. Act, 1961

1. This appeal is filed by the revenue against the order of the Commissioner of Income Tax (Appeals), Rajahmundry vide ITA No. 0239/13-14/ACIT/C-1/RJY/2014-15 dated 30.03.2015 for the assessment year 2010-11.

2. All the grounds of appeal are related to the depreciation on goodwill. During the assessment proceedings, the assessing officer found that the assessee had introduced an intangible asset worth Rs. 3,73,00,000/- and claimed the depreciation of Rs. 93,25,000/-. It was explained by the assessee before the assessing officer that the company had obtained the logo of CRESA (Central for Rural Reconstruction through Social Action) Trust and it is goodwill that was acquired by the assessee which is an intangible asset. The company has acquired the entire customer base of the micro finance programme from CRESA and acquired the business. The value of software for MIS, accounting systems, internal control systems, other intellectual property rights, CRESA brand, logo and reputation in the area of operations, financial service delivery system including branch operations which is valued at Rs. 3,73,00,000/- was taken over by the assessee company which is said to be goodwill, and the intellectual property right by the company from CRESA Trust and argued that the above rights were acquired by the business transfer agreement and the difference between the value of the assets and the payment was treated as goodwill and claimed the depreciation. The assessee further argued that on intellectual property rights depreciation is allowable. However, the assessing officer was not convinced with the explanation of the assessee for to the following reasons .

“At the outset, it is mentioned that such intangible asset cannot be called at all as “goodwill” or any “intellectual property right” because the CRESA Trust where from the business transfer is said to have taken place, is not at all engaged in any activity with the advent of the so called merger or transfer of the business. Moreover, CRESA is a Trust which is assessed with Income Tax Officer, Ward-3, Rajahmundry. It is ascertained that the assessing officer has recorded some discrepancies with regard to the micro finance activity conducted under the masquerade of charity and submitted proposals to the Commissioner of Income Tax for withdrawal of registration u/s12A of the I.T. Act. First it is mentioned that it is not at all a business but a charitable organization as claimed by it, and the so called transfer, of intellectual property rights or ^,goodwill will be of no avail. The assessee company is totally engaged in banking activity and it is not at all connected to the activity of CRESA Trust in any way. It is not made clear as to how the assessee gained momentum in his business with rapid and meteoric rise by obtaining the good-will. It is only a colourable device selected by the assessee to introduce the intangible asset for the first time during the relevant year, only for the purpose of lesser incidence of tax. It is also noted that Sri Varikuti Prabhudas who is the Managing Director of the assessee company is the chief source for the CRESA Trust also. Both entities are under the total; control and management of Sri Prabhudas. All the clients either to the CRESA Trust or to the assessee are, in majority from unorganized sector and by no stretch of imagination the arguments canvassed on behalf of the assessee that because of the good-will or the Trust he can improve the business, is not convincing. There is no logical meaning in drawing a conclusion to the transaction that intellectual property right is transferred. In this case, very particularly it is noticed that in guise of intellectual property right, the intangible asset was Introduced which was purported to be from a related concern (Trust) created by the assessee itself. Both the Managing Director of the assessee and the founder of the Trust are one and the same and such transfer of intellectual property right cannot be termed as good-will and claim depreciation on it. The following points are mentioned specifically.

(1) Introduction of intangible asset in the balance sheet is not supported by any convincing reasoning. There is no basis at all for valuation of all the items grouped in the goodwill. it is only a report obtained from a professional. The items shown In the grouping were not actually reflected in the return filed by the & trust ‘CRESA’. When it is not appearing In the balance sheet as a capital asset in the hands of CRESA, it cannot take the character of a capital asset in the hands of the assessee. The assessee could not properly explain as to what was the basis for estimating the value of goodwill or Intellectual rights. It is only a transaction among the group organizations controlled and managed fully by one person. Hence, at the outset, it cannot be said that the goodwill of the other organization is purchased.

(2) Terming the intangible asset as good-will does not hold water.

(3) Claiming depredation on such intangible asset is not acceptable because dis allowance of the same is only consequential in nature when, such intangible asset itself is not recognized valid by the Assessing Officer.”

2.1. The assessing officer relied on the decision of ITAT Mumbai in the case of RG Keswani V. ACIT [308 ITR 271] and held that the depreciation is not allowable on goodwill. The AO observed that the Goodwill is a right in personam and the depreciation on goodwill is not allowable as per Section 32(1)(ii) of the I.T. Act. The AO further viewed that the Goodwill does not result into an intangible asset like know-how, patents, copyrights, trademarks, licenses and franchises. Further the assessing officer also held that the goodwill obtained by the assessee is like personal service contract which is unassignable. No third party can be roped in, in the agreement for goodwill by way of sale / assignment. Further, “business or commercial rights of similar nature” are not manufactured or produced overnight, but are brought into existence by experience and reputation. Hence, the goodwill does not result into an intangible asset. (like know-how, patents, copyright, trademarks, licenses/franchises etc.] which can be transferred/assigned/leased. Accordingly the AO disallowed the depreciation claimed by the assessee.