2020 (10) TMI 880 - AT - Income Tax

Depreciation u/s 32 claimed on self valued, unsubstantial intangibles declared as customers contract goodwill - HELD THAT - Hon ble Supreme Court in CIT vs. Smiffs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT held that, goodwill is an asset under Explanation 3B to section 32 of the Act and is eligible for depreciation Hon ble Delhi High Court in Areva T D India Ltd. 2012 (4) TMI 79 - DELHI HIGH COURT has held that when goodwill in books of account comprises inter alia business claims, business information, business records, contracts, skilled employees knowhow has been purchased for a consideration to acquire the running business, it is comparable to a licence to carry out the existing transmission and distribution business of the transferor and in the absence of aforesaid intangible assets business, assessee would have to commence business from scratch. Effect of acquiring running business with tangible and intangible assets including goodwill and customer contracts are quite visible as turnover of the assessee has been increased during the year under assessment. Despite the fact that the assessee has given the complete details of agreement vide which tangible and intangible assets of running business of M/s. KPIT Cummins Infosystems Ltd. were purchased as per valuation report, AO has disallowed the depreciation on goodwill and customer contracts by ignoring the settled principle of law that goodwill / customer contracts duly recorded in the audited financials are eligible for depreciation being intangible assets under section 32 (1)(ii) of the Act. CIT (A) has rightly deleted the disallowance made by the AO by following settled proposition of law discussed in the preceding paras. Appeal filed by the Revenue is hereby dismissed.

Summary

Issues:
Appeal challenging disallowance of depreciation on goodwill and customer contract.

Analysis:
The Revenue filed appeals seeking to set aside orders disallowing depreciation claimed on intangible assets like goodwill and customer contract. The Assessing Officer (AO) disallowed the depreciation claimed by the assessee on the grounds that transferring part investment as intangible assets was not justified. The ld. CIT (A) deleted the disallowance made by the AO, allowing the appeals. The Revenue then approached the Tribunal challenging the decision.

The assessee acquired business interest from another company, showing goodwill and customer contract as intangible assets. The valuation report detailed the consideration paid for these assets. The Business Transfer Agreement specified the acquisition of BFSI Software Services business. The AO disallowed the depreciation on goodwill and customer contract based on surmises, alleging tax liability reduction. However, the ld. CIT (A) found the disallowance unjustified, following legal precedents.

The Tribunal examined the valuation report and the Business Transfer Agreement, emphasizing the value of intangible assets in the acquisition. Legal precedents were cited to support the eligibility of goodwill for depreciation. The High Court's decision in a similar case was also referenced to justify depreciation on customer contracts. Despite providing complete details and following accounting standards, the AO's disallowance was deemed incorrect. The ld. CIT (A) rightly deleted the disallowance, upholding the eligibility of goodwill and customer contracts for depreciation.

In conclusion, the Tribunal dismissed the Revenue's appeals, as the issues raised were identical to the case discussed. The decision was based on established legal principles and the proper recording of intangible assets in financial statements. The judgment reaffirmed the eligibility of goodwill and customer contracts for depreciation under the relevant tax provisions.