2011 (1) TMI 30 - HC - Income Tax

Depreciation on goodwill - revision u/s 263 - depreciation was claimed on goodwill by the assessee on account of payment made for the marketing and trading reputation, trade style and name, marketing and distribution, territorial know-how, including information or consumption patterns and habits of consumers in the territory and the difference between the consideration paid for business and value of tangible assets - Held that - meaning of business or commercial rights of similar nature has to be understood in the backdrop of Section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. Goodwill, when appositely understood, does convey a positive reputation built by a person / company / business concern over a period of time. Regard being had to the wider expansion of the definition after the amendment of Section 32 by the Finance Act (2) 1998 and the auditor s report and the explanation offered before the assessing officer, we are of the considered opinion that the tribunal is justified in holding that if two views were possible and when the assessing officer had accepted one view which is a plausible one, it was not appropriate on the part of the Commissioner to exercise his power under Section 263 solely on the ground that in the books of accounts it was mentioned as goodwill and nothing else.

Issues Involved:
1. Validity of the exercise of Revisionary Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Admissibility of depreciation on goodwill under Section 32 of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of the exercise of Revisionary Jurisdiction under Section 263 of the Income Tax Act, 1961.

The High Court examined whether the Income Tax Appellate Tribunal (ITAT) erred in holding that the exercise of revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, was invalid. The Commissioner of Income Tax (CIT) invoked Section 263, claiming the assessment order allowing depreciation on goodwill was erroneous and prejudicial to the interests of the revenue. The CIT argued that goodwill is not an asset eligible for depreciation under Section 32, thus the assessment order was erroneous.

The ITAT found that the Assessing Officer had examined the claim for depreciation on goodwill and accepted it based on detailed submissions and past assessments. The tribunal noted that the CIT's action was based on the entry in the books of accounts, and not on a comprehensive examination of the entire record. The ITAT relied on the principle that when an Assessing Officer takes a possible view on a matter, the order cannot be revised merely because another view is possible, as held by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT.

The High Court upheld the ITAT's decision, emphasizing that the CIT must show the assessment order was not in accordance with law to invoke Section 263. The court referenced several precedents, including Malabar Industrial Co. Ltd. v. CIT, which clarified that the CIT can only revise an order if it is both erroneous and prejudicial to the interests of the revenue. The court concluded that the Assessing Officer's acceptance of the depreciation claim was a plausible view, making the CIT's exercise of revisionary jurisdiction under Section 263 invalid.

2. Admissibility of depreciation on goodwill under Section 32 of the Income Tax Act, 1961.

The High Court examined whether the ITAT erred in setting aside the CIT's order under Section 263, which denied depreciation on goodwill. The assessee claimed depreciation on goodwill, arguing it was an intangible asset under Section 32(1)(ii) of the Act. The CIT contended that goodwill is not covered under the definition of intangible assets eligible for depreciation.

The ITAT found that the assessee had provided a detailed justification for the claim, including payments made for marketing and trading reputation, trading style, name, and territorial know-how. The tribunal noted that these elements fit within the definition of "any other business or commercial rights of similar nature" under Section 32(1)(ii). The ITAT referred to its earlier decision in Skyline Caterers Pvt. Ltd. v. ITO and the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. IT, which held that the nomenclature in the books of accounts is not determinative of the nature of the asset.

The High Court upheld the ITAT's decision, stating that the scope of Section 32 was widened by the Finance (No.2) Act, 1998, to include intangible assets acquired after April 1, 1998. The court emphasized that business or commercial rights of similar nature to know-how, patents, copyrights, trademarks, licenses, and franchises are eligible for depreciation. The court cited the Supreme Court's definition of goodwill in Commissioner of Income Tax v. B.C. Srinivasa Setty, which includes benefits arising from business reputation and customer connection.

The court concluded that the assessee's claim for depreciation on goodwill was justified, as it represented valuable commercial rights similar to other intangible assets. The court held that the CIT's order denying depreciation was not sustainable, as the Assessing Officer had taken a plausible view in allowing the claim. The High Court dismissed the revenue's appeals, affirming the ITAT's decision to allow depreciation on goodwill.

Conclusion:
The High Court dismissed the revenue's appeals, upholding the ITAT's decision that the exercise of revisionary jurisdiction under Section 263 was invalid and that depreciation on goodwill was admissible under Section 32 of the Income Tax Act, 1961. The court emphasized that a plausible view taken by the Assessing Officer cannot be revised merely because another view is possible.

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