2016 (7) TMI 174 - HC - Income Tax

Depreciation u/s 32 on Goodwill - Held that - Depreciation on goodwill allowed relying on Supreme Court in Smifs Securities 2012 (8) TMI 713 - SUPREME COURT wherein it was held that the difference between the cost of assets and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased - Decided in favour of assessee.

Summary

Issues:
1. Depreciation on Goodwill - Assessee's Appeal
2. Classification of Goodwill as Intangible Asset - Assessee's Appeal
3. Disallowance of Depreciation on Goodwill - Revenue's Appeal
4. Classification of Goodwill under Section 32(1)(ii) - Revenue's Appeal
5. Accounting Treatment in Amalgamation

Depreciation on Goodwill - Assessee's Appeal:
The appeals were filed against the Income-tax Appellate Tribunal's order. The assessee claimed depreciation on goodwill, which was disallowed by the Assessing Officer based on a previous Tribunal decision. The Commissioner of Income-tax (Appeals) allowed the depreciation claim, but the Tribunal, following its earlier decision, ruled against the assessee. The High Court admitted the appeals and framed questions regarding the eligibility of goodwill for depreciation under Section 32 of the Income-tax Act, 1961. The assessee argued that a previous court decision favored their claim based on the Apex Court's judgment in another case.

Classification of Goodwill as Intangible Asset - Assessee's Appeal:
The assessee contended that goodwill should be considered an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961. The High Court considered the Apex Court's judgment in a related case, emphasizing the importance of factual findings regarding the payment for goodwill and its impact on market worth. The court highlighted the relevance of accounting treatment in amalgamations and upheld the assessee's claim for depreciation on goodwill.

Disallowance of Depreciation on Goodwill - Revenue's Appeal:
The Revenue challenged the order of the Commissioner of Income-tax (Appeals) that allowed depreciation on goodwill. The Tribunal confirmed the Commissioner's decision, leading to the Revenue's appeal before the High Court. The court reviewed the factual findings and accounting treatment in the amalgamation process, ultimately ruling in favor of the assessee based on the Supreme Court's decision in a similar case.

Classification of Goodwill under Section 32(1)(ii) - Revenue's Appeal:
The Revenue questioned the Tribunal's acceptance of goodwill falling under the category of "any other business or commercial rights of similar nature" in Section 32(1)(ii) for depreciation purposes. The High Court analyzed the accounting methods in amalgamations and the nature of goodwill to determine its eligibility for depreciation. Relying on previous court decisions and the Apex Court's judgment, the court dismissed the Revenue's appeal and upheld the assessee's claim for depreciation on goodwill.

Accounting Treatment in Amalgamation:
The High Court addressed the accounting treatment in amalgamations, emphasizing the importance of factual findings, market worth impact, and the nature of goodwill in determining its eligibility for depreciation. The court considered the Apex Court's judgment and previous decisions to rule in favor of the assessee, highlighting the significance of uniformity in accounting policies and the treatment of goodwill as an intangible asset.