CLAIM OF DEPRECIATION ON GOODWILL

[Mr. M. GOVINDARAJAN]

Goodwill – An asset?

In ‘Commissioner of Income Tax, Kolkata v. SMIFS Securities Limited’ – 2012 (8) TMI 713 – Supreme Court, the assessee had claimed deduction of ₹ 54,85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under:

“In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 01.04.1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company.”

It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.  

The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961.  Against this order the assessee filed an appeal before Commissioner of Income Tax (Appeals) [`CIT(A)', for short].  The CIT (A) has come to the conclusion that the authorized representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee- Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased.

The Revenue filed appeal against the order of CIT (A) before Income Tax Appellate Tribunal (‘ITAT’ for short).  The ITAT upheld the findings of Commissioner (Appeals).  Against the order of ITAT, the Revenue filed appeal before Supreme Court.  One of the questions arised in this appeal is –

• Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on `goodwill' is allowable under the said Section?

The Supreme Court analyzed Explanation 3 to section 32(1).  Explanation 3 to section 32(1) provides that the expressions `assets' and `block of assets' shall mean-

1. tangible assets, being buildings, machinery, plant or furniture;
2. intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature

The Supreme Court observed that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. A reading 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 Supreme Court was of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.

Depreciation on good will

As per the judgment of the Supreme Court discussed above, the goodwill is an asset and is eligible for depreciation on such goodwill. 

In ‘Principal Commissioner of Income Tax v. Zydus Wellness Limited’ – 2017 (10) TMI 373 – Gujarat High Court, in the return filed for the assessment year 2010-11, the assessee had not raised claim of depreciation on goodwill. However, during the course of assessment proceedings, the assessee presented revised computation which included the claim of depreciation of ₹ 7.19 crores on the goodwill expanded at the time of amalgamation of the companies.   The Assessing Officer disallowed the claim on two grounds-

• The claim was not made in the original return nor did the assessee file the revised return.
• The claim was fictitious and the goodwill has been accounted as a balancing factor in the hands of the assessee without acquisition of an intangible asset as contemplated under Section 32 of the Act.

The assessee carried the matter in appeal. The CIT (Appeals) as well as the ITAT both ruled in favor of the assessee.   With respect to raising an additional claim without revising the return the Tribunal relied on the decision of the Bombay High Court in ‘COMMISSIONER OF INCOME TAX. CENTRAL-I VERSUS M/S. PRUTHVI BROKERS & SHAREHOLDERS PVT. LTD. [2012 (7) TMI 158 - BOMBAY HIGH COURT] With respect to the claim of depreciation on acquisition of goodwill, the Tribunal relied on the decision of the Supreme Court in case of Smifs Securities Limited (supra).

Against the order of CIT (Appeals) the Revenue filed an appeal before the High Court.  The High Court held that the decision of Supreme Court in case of Smifs Securities Ltd. (supra) would squarely apply. There is no material referred to by the Assessing Officer to hold that the claim of depreciation was fictitious. If we read his entire expression in this respect, he seems to be suggesting that being an intangible asset acquisition thereof would not qualify for depreciation. If that be so, the view of the Assessing Officer was opposed to the decision of the Supreme Court in case of Smifs Securities Limited (supra). 

In ‘INOX Leisure Limited v. The Assistant Commissioner of Income Tax, Circle – 1 (1) (2), Vadodara,  - 2021 (3) TMI 758 – ITAT, Ahmedabad, the Assessing Officer has completed the assessment under section 143(3) of the Act on 23.03.2016.  The impugned claim of depreciation on goodwill was not made in the return of income.  Assessing Officer had not at all discussed its claim of goodwill arising on account of amalgamation of its subsidiary company in the assessment order in spite of that fact that its claim of depreciation on account of amalgamation was made vide letter dated 20.01.2016 during the course of assessment proceedings.  The assessee has submitted that under section 391 to 394 of the Companies Act, 1956, its subsidiary named Fame India Limited was amalgamated into Inox as per  High Court of Gujarat order dated 12.03.2013 with effect from  01.04.2012. Pursuant to the scheme, shareholders of erstwhile Fame were entitled to 5 shares of Inox for every 8 shares held by them in Fame. The assessee has computed goodwill amounting to ₹ 56.7 crores arises on amalgamation of Fame Group with Inox and claimed depreciation @ 25% amounting to the amount of ₹ 14.19 crores. 

Therefore the assessee filed appeal before Commissioner of Income Tax (Appeals).   The Commissioner of Income Tax (Appeal)  has dismissed the appeal of the assessee stating that the issue raised by the assessee required a lot of investigation and verification of the fact and rather revision of its books of account including the balance sheet and P & L A/c which to his understanding is not permitted under the existing law.

Against the order of Commissioner of Income Tax (Appeals) the assessee filed an appeal before the ITAT.  Before the ITAT the appellant contended that-

• In spite of filing relevant detail in support of its claim of depreciation on goodwill to the amount of ₹ 14.19 crores, the Assessing Officer has not considered its claim without any reason at the time of assessment proceedings.
• The Commissioner of Income Tax (Appeals) has not adjudicated the claim of the assessee on merit. 

The ITAT analyzed the accounts submitted by the appellant.  The ITAT observed that on the basis of above working there arises, on the basis of excess consideration, a Goodwill of ₹ 3,231.03 Lacs on amalgamation of Fame and its subsidiaries with Inox on 1.04.2012.  The ITAT further observed that the Commissioner of Income Tax (Appeals) has not made any discussion or reference to the material furnished by the assessee in support of its claim of goodwill arised on account of amalgamation of erstwhile Fame India Limited.  Commissioner of Income Tax (Appeals) has held in a unwarranted manner that the claim of the assessee is not permitted under the existing law on the pretext that the issue raised requires investigation and verification. The ITAT considered that the decision of the Commissioner of Income Tax (Appeals)  is unjustified and he had not made any discussion to the legal findings and not substantiated his decision with any material to come to the conclusion. As per law it is required to carry out the required investigation and verification of the facts to tax the real income. The ITAT directed the Commissioner of Income Tax (Appeals) to consider the claim of the assessee on merit after verification/examination of the material to be produced by the assessee with reference to claim of goodwill arsied on account of amalgamation of companies. Therefore, the ITAT restored this issue to the file of Commissioner of Income Tax (Appeals) for adjudicating the impugned issue of claim of depreciation on goodwill afresh on merit after examination. 

Present position

From the above discussions it can be inferred that ‘goodwill’ is an asset and entitled for depreciation.  But the scenario is changed at present.  The Finance Act, 2021 brought changes to goodwill with effect from 01.04.2021.  Section 32(1) of the Income Tax Act provides that in respect of depreciation of-

1. buildings, machinery, plant or furniture, being tangible assets;
2. know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, not being goodwill of a business or profession,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

1. in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
2. in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.

Explanation 3 to section 32(i) provides that the expression ‘assets’ shall mean-

1. tangible assets, being buildings, machinery, plant or furniture;
2. intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, not being goodwill of a business or profession.