2016 (3) TMI 1347 - AT - Income Tax

Depreciation on goodwill - depreciation on customer relationship rights (non-compete fees) which was considered as an intangible asset by the Appellant - slump sale - This asset was acquired by the Appellant as a part of business transfer agreement with MIS TVS Electronics Ltd. - Whether the expression any other business or commercial right of similar nature would include such Customer Relationship Rights (Non-compete fees) , which is essential to carry on the business after the business transfer? - HELD THAT - The transaction of purchase of contract manufacturing service division of TVS Electronics Ltd. by the assessee is slump sale as the consideration was agreed and paid in lump sum without assigning any value to specific assets. Therefore as per the agreement the consideration was paid lump sum without giving any details of payment for any specific assets. The business was purchased by the assessee and it was transferred by the TVS Electronics as an on going business/division. However, in its books of accounts the assessee has valued the fixed asset and intangibles as per the valuation made by the consultants. The assessee in its books of accounts has allocated sum to the intangible being customer relationship. Therefore, though the seller has agreed not to engage in any business for a period of three years or participate or engage as owner, partner shareholder, consultant, advisor or any other capacity solicit the employees of the CMS Business however in the absence of any intention of parties to pay consideration for such restrictive covenants in the agreement the payment in question cannot be regarded as non-compete fees The claim of the assessee is required to be considered by treating the said payment as goodwill. The learned Authorised Representative of the assessee has relied upon the judgment of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT and submitted that in view of the said judgment of the Hon'ble Supreme Court, goodwill eligible for depreciation as per the Section 31(1)(ii) . Since the assessee did not claim depreciation on goodwill in the return of income and even not made any claim before the CIT (Appeals). Therefore, the issue of allowing depreciation on goodwill has not been examined by the authorities below. Additional ground in respect of depreciation on goodwill - The issue of depreciation on goodwill is a legal issue and does not require any further investigation of fact as the Assessing Officer has not disputed or disturbed the valuation allocated/assigned by the assessee in the books of accounts to the fixed assets and intangibles including goodwill. Therefore we admit the additional ground raised by the assessee. Since this issue has been raised for the first time by the assessee before us, therefore we set aside this issue to the record of the Assessing Officer for deciding the same as per law. Appeal of the assessee is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of depreciation on customer relationship rights (non-compete fees).
2. Eligibility of customer relationship rights as intangible assets under Section 32(1)(ii) of the Income-tax Act, 1961.
3. Consideration of customer relationship rights as goodwill.
4. Claim of depreciation on goodwill.
5. Additional grounds regarding revenue expenditure and depreciation on goodwill.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation on Customer Relationship Rights (Non-Compete Fees):
The assessee claimed depreciation on customer relationship rights, which were part of a business transfer agreement with TVS Electronics Ltd. The Assessing Officer (AO) disallowed this claim, stating that customer relationship rights do not fall under the expression of similar nature used in Section 32(1)(ii) of the Income-tax Act, 1961. The AO applied the Doctrine of ejusdem generis and held that customer relationship rights cannot be considered as business or commercial rights similar to patents, copyrights, trademarks, and franchises. Consequently, the AO treated the payment as goodwill, which is not eligible for depreciation, and brought the amount to tax for the assessment years under consideration.

2. Eligibility of Customer Relationship Rights as Intangible Assets Under Section 32(1)(ii):
The assessee argued that customer relationship rights should be included under the expression "any other business or commercial right of similar nature" as per Section 32(1)(ii) of the Act. The CIT(A) confirmed the AO's disallowance, relying on the Hon'ble Delhi High Court's judgment in Sharp Business System Vs. CIT. The assessee contended that the jurisdictional High Court in CIT Vs. Ingersoll Rand International India Ltd. had decided in favor of the assessee on similar issues, making the customer relationship rights eligible for depreciation.

3. Consideration of Customer Relationship Rights as Goodwill:
The AO considered customer relationship rights as goodwill, a view supported by the assessee's submission that these rights are almost in the nature of goodwill. The AO's decision was based on the similarity between customer relationship rights and goodwill, leading to the denial of depreciation on the grounds that goodwill is not eligible for depreciation. The CIT(A) upheld this view.

4. Claim of Depreciation on Goodwill:
The assessee did not initially claim depreciation on goodwill in its return of income or before the CIT(A). However, the assessee later raised this issue, citing the Hon'ble Supreme Court's judgment in CIT Vs. Smifs Securities Ltd., which held that goodwill is eligible for depreciation under Section 32(1)(ii) of the Act. The Tribunal admitted this additional ground, noting that the issue is legal and does not require further factual investigation. The Tribunal set aside this issue to the AO for a fresh decision as per law.

5. Additional Grounds Regarding Revenue Expenditure and Depreciation on Goodwill:
The assessee raised additional grounds, arguing that if depreciation on non-compete fees is not allowed, the fees should be considered as revenue expenditure incurred wholly and exclusively for business purposes. The assessee also contended that depreciation on goodwill should be allowed as per Section 32(1)(ii) of the Act. The Tribunal admitted these additional grounds and remanded the issues to the AO for reconsideration.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, remanding the issues of depreciation on goodwill and the treatment of non-compete fees to the AO for fresh consideration. The Tribunal emphasized the need to follow the jurisdictional High Court's judgment and the Hon'ble Supreme Court's ruling on the eligibility of goodwill for depreciation. The Tribunal's decision ensures that the AO re-examines the claims in light of the relevant legal precedents.