2018 (7) TMI 1404 - AT - Income Tax

Depreciation on genuine goodwill - Held that - In our considered opinion this issue is no more res integra in view of the judgment of the Hon ble Summit court in CIT vs. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) in which it has been held that goodwill will fall under the expression or any other business or commercial rights of similar nature and hence qualifies for depreciation u/s 32(1) of the Act. We therefore answer the legal issue raised in the question before the Special bench in affirmative by holding in principle that depreciation is available on genuine goodwill.

Summary

Issues:
Entitlement of depreciation on goodwill under section 32 of the Income Tax Act.

Analysis:
1. The case involved a reference to a Special Bench by a Division Bench regarding the entitlement of depreciation on goodwill, with conflicting decisions on the matter. The Special Bench rephrased the question for consideration. The assessee requested to defer the hearing as it could impact a pending High Court case involving a related concern. The Special Bench granted the request and reframed the question for consideration.
2. The assessee filed a fresh application for appeal disposal, leading to the reconstitution of the Special Bench to decide on the previously formulated question.
3. The factual background included the incorporation of the assessee company, the takeover of assets and liabilities from a partnership firm, and the valuation of goodwill at ?10 crore. The assessing officer (AO) raised concerns about the valuation methodology, leading to a disallowance of depreciation claimed on goodwill.
4. The appeal challenged not only the valuation and transfer of goodwill but also the denial of depreciation under section 32(1) of the Income Tax Act.
5. The authorities divided the issue into two parts: the legality of depreciation on genuine goodwill and the transfer of goodwill in the case of succession from a firm to a company. The AO disallowed depreciation on genuine goodwill, a decision overturned based on legal precedent.
6. The legal analysis focused on section 32(1) of the Act, which allows depreciation on specified and unspecified intangible assets acquired after April 1, 1998. The debate centered on whether goodwill falls under the category of unspecified intangible assets, with the AO arguing against its inclusion. However, a Supreme Court judgment clarified that goodwill qualifies for depreciation under section 32(1).
7. The AO's second argument regarding the transfer of goodwill in the case of succession was not directly related to the question before the Special Bench. Both parties agreed to refer this aspect back to the Division Bench for further consideration along with other grounds raised by the assessee.