NEW DELHI, JULY 20, 2018: THE ISSUE BEFORE THE SPECIAL BENCH OF THE TRIBUNAL WAS - Whether goodwill earned over a period of time falls within the provisions of Clause (ii) of Sec 32(1) which refers to certain unspecified intangible assets for permitting depreciation. YES IS THE ANSWER.
Facts of the case
THE assessee company was incorporated with three share subscribers. It subsequently took over the assets & liabilities of a partnership firm, whereupon an agreement for transfer of all assets and liabilities was signed. The assets were acquired for about Rs 1.20 crores. Also, the goodwill of the erstwhile partnership firm, which was valued a Rs 10 crores, was transferred to the assessee. As consideration, the assessee agreed to issue shares worth abut Rs 11.20 crores to the partners of the erstwhile partnership firm. On assessment for the relevant AY, the AO sought an explanation for the valuation of the goodwill acquired by the assessee. In the valuation report submitted by the assessee, the AO found several discrepancies therein & held that if the past performance of the partnership firm and the declining profits were to be considered, then there would be nil value of goodwill of the erstwhile partnership firm. Hence the AO held there to be no transfer of goodwill in the real sense as this was a case in which a firm had been succeeded by a company. The AO further held that the scope of Section 32(1) did not include goodwill of a business, as the same was different from know-how, patent, copyrights and trade marks used in the literature of the provision. Hence the AO disallowed the depreciation of about Rs 2.50 crores claimed on the amount of goodwill. Such findings were later upheld by the CIT(A).
On appeal, the Special Bench held that,
++ considering the provisions of Section 32(1), it is overt from the command of clause (ii) of section 32(1) of the Act that depreciation is permissible in respect of intangible assets listed herein, acquired on or after 01.04.1998. This clause contains certain specified and unspecified species of intangible assets. Whereas the specified intangible assets enshrined in the provision include know-how, patent and copyrights etc., the unspecified intangible assets have been described with the expression 'or any other business or commercial rights of similar nature.' It is nobody's case that goodwill is a specified intangible asset. The assessee has sought to cover `goodwill' within the expression deployed to define unspecified intangible assets. In our considered opinion, this issue is no more res integra in view of the judgment of the Apex court in CIT vs. Smifs Securities Ltd. in which it has been held: "...that goodwill will fall under the expression 'or any other business or commercial rights of similar nature..." and hence, qualifies for depreciation u/s 32(1) of the Act. We, therefore, answer the legal issue raised in the question before the Special bench in affirmative by holding, in principle, that depreciation is available on genuine goodwill.
++ the AO held that no depreciation can be granted on genuine goodwill in terms of section 32(1) of the Act, which opinion stands overturned. The AO also held that in the facts and circumstances of the instant case, a firm has been succeeded by a company and net assets of the firm have vested in the company, and consequently there is no transfer of goodwill in real sense and further the valuation of goodwill done by the assessee in the instant case was erroneous. Both the sides candidly accepted that the second broader limb involved in the instant appeal does not precisely emanate from the substance of the question referred to the Special bench. It was urged that the same may be returned to the Division Bench for disposal along with the other grounds raised by the assessee. We agree with such a common contention and, accordingly, send the matter back to the Division Bench for disposing off the appeal in above terms.
(See 2018-TIOL-1113-ITAT-DEL-SB)
