SUMMARY OF CASE LAW
Even if an asset is described as goodwill but it fits in the description of section 32(1)(ii), depreciation is to be granted on the same; the true basis of depreciation allowance is the character of the asset and not it’s description.
5. We find that, as noted by the learned Commissioner in page 7 in the impugned order, the audit report has made following disclosure below the computation of depreciation on goodwill:
“Goodwill of the company comprises of (a) payment for the marketing and trading reputation, trading style and name, marketing and distribution territorial know how, including information of consumption patterns and habits of consumers in the territory, and (b) the difference between the consideration paid for business and value of tangible assets.
The management is of the view that the amounts referred to in (a) above assists in planning production schedules and difference referred to in (b) above represents the value of various contracts and agreements acquired by the company. This being a valuable commercial asset similar to other intangibles mentioned in the definition of the block of assets, is eligible to depreciation. Accordingly, depreciation on goodwill payments after 1.4.98 has been calculated as per Section 32 of the Income Tax Act, 1961″
6. The matter did not rest at filing of this justification itself. Vide letter dated 15th September 2003, the Assessing Officer did raise a query on the admissibility of the above claim. His specific question was as follows:
You have claimed that the goodwill acquired by you was eligible for depreciation being in the nature of knowhow and depreciation was allowable on the same. Please justify your claim.
7. In response to the aforesaid question, the assessee, vide letter dated 8th January 2004, had submitted as follows:
Goodwill is the consideration paid to various bottlers for marketing and trading reputation, trading style and name, marketing and distribution territorial know how and information of territory. It includes know how related to acquired business, customer database, distribution network, contracts and other commercial rights.
Intangible assets like know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, acquired after 1.4.1998, are eligible for depreciation.
Your assessee has, accordingly, claimed depreciation on goodwill acquired after 1.4.98
8. In the backdrop of the above facts, the first thing that we need to examine is whether or not a claim of depreciation on, what is termed as goodwill in the books of accounts but is stated to be in the nature of covered by the scope of ‘any other business or commercial rights of similar nature (i.e. ‘know how, patent, copyrights, trade marks, licenses, franchises)’ referred to in the definition of block of assets, is admissible at all. It is after all the very foundation of learned Commissioner’s case that such a claim is a patently inadmissible claim. We find help and guidance from Tribunal’s decision in the case of Skyline Caterers Pvt Ltd Vs ITO (116 ITD 348). In this case, the assessee had shown goodwill of Rs 25 lakhs but claimed depreciation on the ground that “the payment under the head goodwill in the books of accounts represented the rights acquired by the assessee under the contract acquired by the assessee which amounted to commercial rights and, therefore, the depreciation was allowable under section 32”. This claim did not find favor with the Assessing Officer or with the Commissioner (Appeals) but when the matter traveled to the Tribunal, Tribunal, inter alia, observed that “There is no dispute to the legal proposition that nomenclature given to the entries in the books of accounts is not relevant for ascertaining the real nature of the transaction, as held by the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg Co Ltd Vs CIT (82 ITR 363)” and proceeded to ascertain the true nature of the asset by reference to the agreement between the parties. As a result of the exercise thus conducted by the Tribunal, the grievance of the assessee against dis allowance of depreciation was partly upheld but that is not really relevant for our purposes; what is relevant for our purposes at present is the Tribunal’s finding that depreciation on what is termed as goodwill is not a patently inadmissible claim. We also share this perception. One cannot proceed on the basis, as the learned Commissioner has chosen to proceed, that once an amount is described as goodwill in the books of accounts, depreciation thereon as an intangible asset can not be admissible on the same. It is also important to bear in mind that it not plainly on perusal of an assessment order that the Commissioner exercise his powers under section 263; he must examine the entire records of proceedings. Learned Commissioner must therefore take into account all the material facts on record which are of relevance. As for learned Departmental Representative’s reliance on the decision of Ahmedabad C bench of this Tribunal in the case of Bharatbahi J Vyas Vs ITO (97 ITD 248), that is a case in which Tribunal gave a categorical finding that the goodwill was paid only for retirement of a partner and “without acquisition of any intangible asset as contemplated under section 32(1) (ii)”. The facts of the present case, in which the payment is made towards business acquired on slump price and a part of the price so paid is allocated to the intangible assets covered under the head ‘goodwill’, are materially different and have no resemblance to the case before the Ahmedabad bench. The allocation of amount paid as a slump price is not in dispute and the fact that a part of consideration represents consideration for rights, as detailed in the audit report notes extracted above, is also not in disputed. The case of the Commissioner mainly is that depreciation is not admissible on goodwill but the fact the accounting treatment of a payment per se cannot govern its treatment in the income tax proceedings. Even if an amount is termed as ‘Goodwill’ in the books of accounts but it is a business or commercial rights in the nature of know how, patent, copyrights, trade marks, licenses, franchises, the claim of depreciation is indeed admissible thereon. It is not that ‘goodwill’ is specifically excluded from the intangible assets eligible for depreciation, and, therefore, even if an asset is described as goodwill but it fits in the description of Section 32(l)(ii), depreciation is to be granted on the same; the true basis of depreciation allowance is the character of the asset not it’s description. Learned Departmental Representative has also justified the action of the learned Commission by arguing that necessary inquiries were not made, but then, as is held by Hon’ble Punjab and Haryana High Court in the case of CIT v. Jagadhari Electric Supply & Industrial Co (140 ITR 490), while examining the validity of a revision order under section 263, Tribunal cannot substitute the ground on which the Commissioner has based his order. The very foundation of learned Commissioner’s order is thus devoid of leally sustainable merits.