2022 (11) TMI 373 - AT - Income Tax

Depreciation on goodwill - zero asset shown in the books - HELD THAT - In the present case, the assessee has quantified the subscription fee in entirety as goodwill which is an intangible asset being service provided to its 5000 subscribers. Thus, the assessee has demonstrated that as part of market practice, there is no standard rate or standard method prescribed for acquisition of such businesses. The valuation of assets is altogether different issue and no such standard valuation method is prescribed. The acquisition price is determined through negotiation and any amount which is paid over and above the book value of assets and liabilities is recognized as Goodwill in the books of acquiring company. It works principally on one to one basis wherein factors such as synergy, weave length, future proximities, area, industry, number of years etc. are facts are considered in determining the business valuation. In this type of businesses, the valuation of business is identified generally by way of potential number of subscriber and rates of subscriber fees applicable to them. In case the subscribers decrease in subsequent to becoming the partnership firm, the depreciation is claim on that basis. These contentions of the Ld. AR are accepted. Thus, in case of Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT the claim of the assessee appears to be proper. The contention of the Ld. DR that it has zero asset shown in the books of CRAZY NETWORK appears to be incorrect when the 5000 subscriber has entered into the partnership firm through CRAZY NETWORK which has added as assets to the partnership firm's assets. AO was not right in disallowing the claim of the assessee relating to depreciation on goodwill. Thus, appeal of the assessee is allowed.

Summary

Issues:
- Disallowance of depreciation on intangible assets under section 32(1)
- Appreciation of valuation of goodwill based on subscriber's valuation
- Recognition of Goodwill for claiming depreciation under section 32(1)

Analysis:
- The appeal was filed against the order confirming disallowance of depreciation on intangible assets under section 32(1) for the assessment year 2016-17. The appellant contended that the disallowance was illegal and against natural justice, emphasizing that the recognition of Goodwill should have been appreciated for allowing the depreciation claim.
- The Assessing Officer disallowed depreciation on goodwill, stating that the partnership firm was formed after the intangible asset was acquired, and therefore, depreciation could only be claimed from the acquisition date. The CIT(A) upheld this decision, leading to the appeal.
- The appellant argued that Goodwill arose due to the acquisition of the network, which was reflected in the acquiring company's books. The payment made was considered a premium for acquiring the business, making it eligible for depreciation under section 32(1)(ii) of the Act. The appellant referenced the decision in CIT vs. Smiff Securities Ltd. to support their claim.
- The valuation of assets in such businesses is based on negotiation and factors like subscriber base and rates. The appellant demonstrated that the subscription fee was considered goodwill, aligning with market practices. The Tribunal accepted these contentions, noting that the Assessing Officer's disallowance was incorrect as the subscriber base added value to the partnership firm's assets.
- Ultimately, the Tribunal allowed the appeal, emphasizing that the claim of depreciation on goodwill was valid based on the principles established in the cited case law. The decision was made in favor of the appellant, overturning the disallowance of depreciation on intangible assets.

This detailed analysis covers the issues raised in the appeal regarding the disallowance of depreciation on intangible assets, the valuation of goodwill based on subscriber's valuation, and the recognition of Goodwill for claiming depreciation under section 32(1) of the Income Tax Act.