2012 (9) TMI 975 - AT - Income Tax

Allowability of depreciation u/s 32 on the commercial right of marketing network - Held that - Assessee acquired the marketing network of Jyothi Industries by which the assessee got access to the marketing network of Jyothi Industries consisting of representative, infrastructure, customer lists, marketing strategies etc. Considering the commonality of the facts of the issue, assessee s acquisition of distribution network is eligible for depreciation u/s 32 of the Act and therefore, the issue under consideration stands covered in favour of the assessee. Allowability of depreciation on the goodwill - Held that - It is a settled position that the goodwill is an intangible asset entitled for the depreciation. Considering the above said nature of the issue, we are of the opinion that the assessee is entitled for depreciation u/s 32 in respect of the goodwill acquired by the assessee vide the agreement dated 1.3.2000 placed at page 39 of the paper book. Accordingly, ground no. 2 is allowed.

Summary

Issues:
1. Disallowance of depreciation on marketing network.
2. Disallowance of depreciation on Goodwill.

Issue 1: Disallowance of depreciation on marketing network:

The assessee appealed against the disallowance of depreciation on the marketing network acquired from a sister concern. The CIT (A) upheld the disallowance, stating that the marketing network did not fall under the specified list of intangible assets for depreciation under section 32(1)(ii). The assessee argued that the marketing network was eligible for depreciation as an intangible asset. The Tribunal referred to a previous decision in the case of Weizmann Forex Ltd., where it was held that acquiring rights over a marketing network constituted an intangible asset eligible for depreciation under section 32(1)(ii). The Tribunal found that the assessee's acquisition of the marketing network was comparable to the case in Weizmann Forex Ltd., and thus, allowed the depreciation claim. The Tribunal emphasized that the purpose of such rights obtained for effectively carrying on business and commerce is crucial in determining the eligibility for depreciation.

Issue 2: Disallowance of depreciation on Goodwill:

The second ground related to the disallowance of depreciation on goodwill acquired by the assessee. The assessee relied on a decision of the Hon'ble Supreme Court, which held that goodwill is an asset within the meaning of section 32 of the Income Tax Act and is entitled to depreciation. The Tribunal noted that Explanation 3 to section 32(1) includes goodwill as an intangible asset falling under the category of "any other business or commercial rights of similar nature." The Tribunal also highlighted that factual findings confirmed the payment for goodwill and its impact on the market worth of the assessee company. Considering the settled position that goodwill is an intangible asset entitled to depreciation, the Tribunal allowed the depreciation claim on goodwill acquired by the assessee.

In conclusion, the Tribunal allowed the appeal of the assessee, permitting the depreciation claims on both the marketing network and goodwill. The judgment emphasized the importance of the purpose of acquiring such rights in determining their eligibility for depreciation under section 32 of the Income Tax Act.