2009 (8) TMI 851 - AT - Income Tax

Depreciation on goodwill - Whether goodwill does not fall within the category of the class of assets or rights listed in the provisions of section 32(1)(ii)? - What is the meaning of business or commercial rights of similar nature?- HELD THAT - We find that the goodwill paid by the assessee is towards the use of the name Kotak in the name of the assessee company. The assessee company was in no way related to Shri Uday S. Kotak at the time of acquiring the name and the business and in order to take advantage of the reputation built up by Shri Uday S. Kotak for carrying on the business, the assessee company has agreed to pay the goodwill. The assets which are included in the definition of intangible assets given in clause ( ii ) are know-how, patents, copyrights, trademarks, licenses, franchises etc., and any other business or commercial rights of similar nature are also included. Therefore, all these rights are similar to the rights under goodwill. Applying the principles of ejusdem generis , the meaning has to be extended to the phrase other business or commercial rights of similar nature . As seen from the agreement of sale between Shri Uday S. Kotak and the assessee company formerly known as Komaz Financial Services Ltd., we find that the name Kotak has tremendous importance as the assessee company was to be benefited by the usage of the said name and it has gone as far as amending its name by including Kotak in its name. Therefore, it is of commercial value for which the assessee has paid the amount as goodwill. Once it is held that the goodwill is also an intangible asset of the similar nature referred to in clause ( ii ) of section 32(1), the depreciation is consequently allowable on the same. The same is fortified by the decisions relied upon by the ld. counsel for the assessee are also to this effect. The decision of the Ahmedabad Bench in the case of Bharatbhai J. Vyas 2005 (8) TMI 279 - ITAT AHMEDABAD-C relied upon by the ld. CIT(A) is misplaced. Accordingly, we allow the appeal of the assessee.

Summary

Issues:
Depreciation on goodwill under section 32(1)(ii) of the Income-tax Act.

Analysis:
The appeal concerns the denial of depreciation on goodwill amounting to Rs. 23,55,000 by the CIT(A) on the grounds that goodwill does not fall within the category of assets listed in section 32(1)(ii). The Assessing Officer allowed depreciation on forex business rights but disallowed it on goodwill, stating that goodwill was not specifically included in the definition of intangible assets. The assessee argued that goodwill falls under the term "business or commercial rights" and cited judicial precedents to support the claim. The CIT(A) upheld the Assessing Officer's decision, leading to the current appeal.

The assessee contended that the payment made for the use of the name "Kotak" was akin to the consideration for a trademark and should be eligible for depreciation under section 32. The assessee highlighted the commercial value of using the name "Kotak" and argued that goodwill should be considered an intangible asset under section 32(1)(ii). The principle of "ejusdem generis" was invoked to argue that goodwill falls within the purview of intangible assets.

The Tribunal found that the goodwill paid by the assessee was for the use of the name "Kotak" and was unrelated to Shri Uday S. Kotak at the time of acquisition. Section 32 allows depreciation on both tangible and intangible assets, and goodwill was considered a business or commercial right of similar nature to assets like patents and trademarks. The Tribunal interpreted business or commercial rights as those obtained for effective business operations and profitability, encompassing assets built on reputation and experience. Goodwill, being a positive reputation developed over time, was deemed a business or commercial right of similar nature.

The Tribunal concluded that goodwill qualifies as an intangible asset under section 32(1)(ii) and is eligible for depreciation. The decision of the CIT(A) to disallow depreciation on goodwill was overturned, citing relevant judicial precedents. Therefore, the appeal of the assessee was allowed, granting depreciation on goodwill.