2016 (4) TMI 169 - HC - Income Tax

Payments made to retiring partners - whether in the nature of compensation can be termed as goodwill and subsequently eligible for depreciation? - Held that - The Supreme Court in the case of Commissioner of Income Tax v. SMIFS Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT ) was dealing with the question as to whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on goodwill is allowable under the said section. The Assessing Officer had held that goodwill is not an asset falling under Explanation 3 to section 32(1) of the Act. The Supreme Court held that Explanation 3 states that the expression asset shall mean intangible assets, being knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial rights of similar nature . The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). The court was, accordingly, of the view that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act, and accordingly, answered the question in favour of the assessee. In the present case, from the findings recorded by the Assessing Officer, the Commissioner (Appeals) as well as the Tribunal, it is an undisputed fact that the payment made to the retiring partners has been considered to be goodwill. The Supreme Court in the above decision has held that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Thus, the Tribunal has merely applied the above decision of the Supreme Court to the facts of the present case. Under the circumstances, it is not possible to state that there is any infirmity in the impugned order passed by the Tribunal so as to give rise to a question of law, much less, a substantial question of law, warranting interference. - Decided against revenue

Summary

Issues:
Appeals under section 260A of the Income Tax Act questioning the treatment of payments made to retiring partners as goodwill and eligibility for depreciation.

Analysis:
The appeals involved a common question of law regarding the treatment of payments made to retiring partners as goodwill and the eligibility for depreciation under the Income Tax Act. The appellant, a partnership firm engaged in embroidery job work, had claimed depreciation on goodwill in the assessment year 2003-04. The Assessing Officer disallowed the claim, stating that goodwill is neither a tangible nor an intangible asset under section 32 of the Act. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Tribunal allowed the claim for depreciation, considering the payment to retiring partners as goodwill.

The key contention raised was whether the payment made to retiring partners constituted goodwill eligible for depreciation. The appellant argued that the payment was in the nature of compensation and not goodwill, hence not eligible for depreciation. The Assessing Officer and the Commissioner (Appeals) considered the payment as goodwill, disallowing depreciation. The Tribunal, relying on the Supreme Court decision in Commissioner of Income Tax v. SMIFS Securities Ltd., allowed the claim for depreciation, stating that goodwill falls under the definition of intangible assets.

The Supreme Court in the SMIFS Securities Ltd. case clarified that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act, falling under the category of "any other business or commercial rights of similar nature." In the present case, all authorities considered the payment to retiring partners as goodwill, aligning with the Supreme Court's interpretation. Therefore, the Tribunal's decision to allow depreciation on goodwill was upheld, as it applied the Supreme Court's decision correctly to the facts of the case.

In conclusion, the High Court dismissed the appeals, stating that there was no infirmity in the Tribunal's decision to give rise to a question of law or substantial question of law warranting interference. The treatment of payments to retiring partners as goodwill and eligibility for depreciation were in accordance with the law, as clarified by the Supreme Court.