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2010 (12) TMI 258 - AT - Income TaxDisallowance of expenditure - Whether goodwill is an intangible assets - Assessee had acquired a distillery unit by name Chagallu Distillery from M/s. Nizam Sugar Limited (NSL) - The excess of the amount paid over the value of the fixed assets acquired amounting to Rs. 4.75 crores has been termed as the payment towards ‘goodwill’ as per the agreement - Held that: depreciation u/s 32(l)(i)&(ii) is to be allowed on tangible and intangible assets. Intangible assets should either be knowhow, patents, copy rights, trade mark, license, franchise or any other business or commercial rights of similar nature. In the case of B. Ravindran (supra), it has been categorically held that the erosion in the value of the assets is not a relevant factor to decide whether it is entitled for depreciation or not. In clause (ii) of section 32(1) depreciation is to be outrightly allowed on knowhow, patents, copy rights, trade mark, licenses and franchise, but with respect to other intangible assets, depreciation would only be allowed if business or commercial rights are of similar nature, to that of knowhow, patents, copy right, trade mark, license or franchise. Business or a commercial rights which move along with the establishment on its sale and not akin to the know how, patents, copy rights, trade marks, license, franchises are not entitled for depreciation - not entitled to depreciaiton Business or commercial rights - which confers upon the purchaser a right to carry on its trade in a particular manner are akin to the know how, patents, copy rights, trade marks, license, franchises, etc. - Entitled to depreciation. Excess payment over and baove the cost of tangible assets - There is no bifurcation of the total cost which can be allocated towards the commercial benefits and the commercial rights acquired by the assessees. Complete details of cost of acquisition of the commercial benefits and the commercial rights cannot be available on record. It is only a question of estimate. - total goodwill cost should be bifurcated in two equal parts; one is for commercial benefits and the other is for commercial rights and the amount incurred in acquiring the commercial right should be eligible for depreciation u/s 32 of the Act. Therefore, we direct the A.O. to divide the entire cost of goodwill in two parts and 50% of the cost of the goodwill be treated as a cost of acquisition of the commercial rights and to allow the depreciation thereon at a prescribed rate.
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