2014 (1) TMI 540 - AT - Income Tax

Depreciation on Goodwill Nature of Goodwill Tangible or intangible u/s 32(1)(ii) of the Act Held that - The marketing network, a commercial right, acquired is an intangible asset eligible for depreciation on the reason that the assessee acquired the rights to avail the infrastructure of the networking - the meaning of business or commercial rights of similar nature mentioned in section 32 of the Act has to be understood in the context of purpose of such rights obtained as for effectively carrying on the business and commerce Relying upon Skyline Caterers (P.) Ltd. Versus Income-tax Officer, Ward-8(3) 2, Mumbai 2007 (12) TMI 308 - ITAT MUMBAI diminution in value of the asset is not a relevant factor for allowing the depreciation u/s 32 of the Act - 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. - assessee s acquisition of distribution network is eligible for depreciation u/s 32 of the Act Thus, the assessee is entitled for depreciation on the distribution rights ie marketing network Decided against Revenue and in favour of Assessee. Allowability of Depreciation on Trademark rights and Intangible asset Held that - Following B. Raveendran Pillai vs. CIT 2010 (9) TMI 434 - Kerala High Court - Payment made towards goodwill for ensuring retention and continued business in the hospital acquired by assessee on going concern basis is comparable with trademark, franchise, copyright etc referred to in sub-clause (ii) of section 32(1) entitling the assessee for depreciation Decided against Revenue and in favour of Assessee. Allowability of deduction Held that - Following Balmukund Acharya Vs Deputy Commissioner of Income-tax 2008 (12) TMI 88 - BOMBAY HIGH COURT - only real income should be taxed and the AO should allow the deduction permissible under the law matter remitted back to the AO for fresh adjudication Decided partly in favour of Revenue.

Issues:
1. Allowability of depreciation on Goodwill
2. Allowability of depreciation on distribution rights, trademarks, and technical know-how
3. Allowability of depreciation on intangible assets
4. Claim of deduction for expected sales return
5. Applicability of provisions of section 240 of the Act

Issue 1: Allowability of depreciation on Goodwill

In the case under consideration, the Revenue filed an appeal against the order of CIT (A) directing the AO to grant depreciation on Goodwill. The Revenue argued that Goodwill is not an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. However, the assessee relied on the judgment of the Hon'ble Supreme Court in CIT vs. Smifs Securities Ltd., which held that Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act and is depreciable. The Tribunal upheld the assessee's claim, citing the binding nature of the Supreme Court judgment, and allowed depreciation on Goodwill.

Issue 2: Allowability of depreciation on distribution rights, trademarks, and technical know-how

The CIT (A) had already decided in favor of the assessee regarding the allowance of depreciation on distribution rights, trademarks, and technical know-how. The Tribunal examined relevant judgments, including those from the Kerala High Court and Delhi High Court, supporting the depreciation claim on distribution rights as intangible assets under section 32(1) of the Act. The Tribunal found that the acquisition of the marketing network by the assessee made them eligible for depreciation. Consequently, the Tribunal allowed depreciation on distribution rights, trademarks, and technical know-how in favor of the assessee.

Issue 3: Allowability of depreciation on intangible assets

The Tribunal referred to a decision by the ITAT, Bangalore Bench in the case of DCIT vs. M/s. Hewlett Packard India Sales Pvt. Ltd., which favored the assessee regarding the allowance of depreciation on intangible assets. Citing the settled nature of the issue, the Tribunal directed the AO to grant depreciation on the intangible assets, including goodwill, trademarks, marketing network, and technical know-how. The Tribunal held that the issue was in favor of the assessee, and depreciation on intangible assets was allowed.

Issue 4: Claim of deduction for expected sales return

One of the issues raised by the Revenue was the claim of deduction for expected sales return. The Tribunal set aside this issue to the AO for further examination in accordance with relevant laws, including the Hon'ble Supreme Court judgment emphasizing the taxation of only real income. The Tribunal directed the AO to re-decide the issue after examining the book entries and granting a reasonable opportunity of being heard to the assessee.

Issue 5: Applicability of provisions of section 240 of the Act

The Revenue also raised concerns about the applicability of the provisions of section 240 of the Act regarding the claim of deduction for expected sales return. The Tribunal's decision to set aside the issue to the AO for re-examination implied that the applicability of section 240 would be considered during the reassessment process. The Tribunal partially allowed the appeal filed by the Revenue for statistical purposes.

In conclusion, the Appellate Tribunal, ITAT Mumbai, in a consolidated order, addressed various issues related to the allowability of depreciation on different assets and claims. The Tribunal upheld the assessee's claims for depreciation on Goodwill, distribution rights, trademarks, and technical know-how, citing relevant judgments and settled legal principles. The Tribunal also directed the AO to re-examine the claim of deduction for expected sales return in accordance with the law. The judgment provided a detailed analysis of each issue raised by the parties, ensuring a comprehensive and fair adjudication of the matters in dispute.

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