Intangible assets- true meaning is required to be considered and not nomenclature given like ‘goodwill’.

[C.A. DEV KUMAR KOTHARI]

Intangible assets- true meaning is required to be considered and not nomenclature given like ‘goodwill’.

Earlier article:

An article titled “Goodwill is intangible asset, eligible for depreciation allowance”, was web hosted on this website at

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1916

In that article author had discussed about various assets which are acquired in case of purchase, acquisition, statutory transferes, or vesting of any business as a going concern in any scheme etc. In the article with help and reference of another article titled “A lesson from supreme courts judgment in CIT v. Hooghly Mills Co. Ltd 2006 (11) TMI 137 - SUPREME COURT” webhosted at link http://www.taxmanagementindia.com/wnew/print_Article.asp?ID=204

 it was also suggested  various assets should be specifically described instead of clubbing various assets under the head ‘GOODWILL’, as is a general practice. The discussion is found under heading “Amount described as goodwill”

Recent judgment of Delhi High Court:

AREVA T & D INDIA LTD. Versus THE DEPUTY COMMISSIONER OF INCOME-TAX 2012 (4) TMI 79 - DELHI HIGH COURT, X

In this case while considering provisions relating to depreciation allowance on intangible assets the court considered assets like Business information, contracts, records etc. After detailed consideration the Court came to conclusion that such assets are “intangible assets” of the business and are eligible for depreciation

In this case the mode of acquisition of business was under ‘slump sale agreement’.

Under such agreement the assessee, acquired a transmission and distribution business as a going concern for a lump sum consideration of Rs.44.7 crores.

The net tangible assets were valued at Rs.28.11 crores and the balance Rs. 16.58 crores was allocated by the assessee / acquirer towards acquisition of bundle of “business and commercial rights” being business information; business records; contracts; employees etc, and described them collectively and compendiously as “goodwill”.

The assessee claimed that the said “business and commercial rights” were an “intangible asset” which were like tool of trade with which assessee carried business and hence  eligible for depreciation u/s 32(1)(ii).

The claim so made was rejected at all lower stages that is by the AO, CIT(A) & Tribunal.

The main ground for rejection was that depreciation was not allowable on “goodwill”.

Assessee preferred an appeal under section 260A and on such appeal the High Court reversed orders of lower authorities including Tribunal and allowed depreciation holding that these assets were intangible assets. The Court observed that S. 32(1)(ii) allows depreciation on “intangible assets” which are defined to mean “know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature”. Applying the principle of ejusdem generis, the expression “business or commercial rights of similar nature” need not answer the description of “knowhow, patents, trademarks, licenses or franchises” but must be of similar nature as the specified assets. The specified intangible assets are not of the same kind and are clearly distinct from one another. The nature of “business or commercial rights” cannot be restricted to only the aforesaid six categories of assets but can be of the same genus in which all the aforesaid six assets fall and form part of the tool of trade of an assessee facilitating smooth carrying on of the business. The intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee without any interruption. These intangible assets are comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. Accordingly, the intangible assets acquired under slump sale agreement were in the nature of “business or commercial rights of similar nature” and eligible for depreciation u/s 32(1)(ii) (Techno Shares & Stocks Ltd. Versus The Commissioner of Income Tax IV 2010 (9) TMI 6 - SUPREME COURT OF INDIA (SC) followed)

(Q whether goodwill per se is eligible for depreciation u/s 32(1)(ii) left open).

Goodwill:

In earlier article the author had already discussed that ‘goodwill’ as such can also be considered as intangible asset eligible for depreciation. This is because ‘goodwill’ is a name given in commercial world, in fact it represents various intangible assets of business which help businessman to carry business easily, effectively and more economically, and profitably. (But profitability is not necessity because profitability depend on many economic factors)

In CIT vs. Smifs Securities 2012 (8) TMI 713 - SUPREME COURT Ltd decided by the Supreme Court. The Supreme Court has also held that ‘goodwill’ is intangible asset, as discussed in earlier article.

True character of assets:

True character of assets, and their role in a business is required to be considered and not only the nomenclature or description given in agreement, scheme or accounts. If assets are intangible assets with which assessee carry business then such assets can be eligible for depreciation. 

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