2005 (8) TMI 279 - AT - Income Tax

Allowance of depreciation claimed on goodwill - misinterpretation of provision of section 32 - HELD THAT - Intangible asset, other than specified one shall be of similar nature i.e., the prescribed assets. It shall be pertinent here to mention that the legislature has inserted a fiction, by which, specified intangible assets, are held to depreciate and allowance is given therefor. Know-how, patents, copyrights, trademarks etc. are sometimes assigned different names, therefore, by using the word 'similar nature', the legislature has restricted the scope of intangible assets similar to the specified one. The assessee has nowhere established that it has acquired any know-how, patents, copyrights, trademarks etc. What it has paid for, simplicitor is an amount as a consideration for retirement of one partner, Shri Oni Ahesan Husein Lokhandwala, as goodwill, which amounts to giving compensation to a retiring partner and the term has been used as goodwill. This does not signify acquisition of any know-how, patents, copyrights, trademarks etc. or any business or commercial right of similar nature. In these circumstances, the amount of so-called goodwill is consideration paid for retirement of a partner without any acquisition of any intangible assets as contemplated in section 32(1)(ii). As, we have already observed that there may be innumerable number of intangible assets, which may be transacted in business realities. We have to deal with intangible assets as specified by the amended Act i.e., amendment to section 32(1)(ii). There cannot be a dispute about the terming such compensation as a 'goodwill', but while deciding the allow ability of depreciation, one has to recourse to specific provisions. Thus, the amount paid by the assessee's goodwill does not result into acquisition of any know-how, patents, copyrights, trade-marks etc. as prescribed in this behalf. Consequently, the assessee is not entitled to claim of depreciation. This Ground No. 1 of the assessee is dismissed. In the result assessee's appeal is dismissed.

Summary

Issues:
1. Disallowance of miscellaneous expenditure
2. Disallowance of depreciation claimed on goodwill

Analysis:
1. The appeal was made against the CIT(A)'s order, challenging the disallowance of miscellaneous expenditure, which was not pressed and hence dismissed. The issue of interest was considered consequential and not requiring adjudication. The main issue was the disallowance of depreciation claimed on goodwill.

2. The Assessing Officer disallowed the depreciation claim on goodwill, amounting to Rs. 1,89,375, stating that goodwill was not specifically included in the intangible assets specified in Section 32. The appellant argued that the amendment in the Finance Act of 1998 allowed depreciation on intangible assets, including goodwill. The appellant fulfilled the requirements for depreciation claim on goodwill, as it fell under intangible assets, was acquired after 1st April 1998, owned by the assessee, and used for business purposes.

3. The appellant contended that the term "goodwill" fell under intangible assets as per Section 32(1)(ii), and the payment made for goodwill acquisition qualified as capital expenditure. Case laws were cited to support the argument that goodwill is an intangible asset eligible for depreciation. However, the Departmental Representative relied on the lower authorities' order.

4. The Tribunal analyzed the provisions of Section 32(1)(ii) and emphasized that specified intangible assets must be of a similar nature to the prescribed assets for depreciation allowance. The appellant failed to establish the acquisition of know-how, patents, copyrights, trademarks, etc., as the payment for goodwill was considered compensation to a retiring partner, not for acquiring intangible assets. The case laws cited were distinguished, as they did not align with the specific provisions of the amended Act regarding depreciation eligibility.

5. Ultimately, the Tribunal dismissed the appeal, stating that the payment made for goodwill without acquiring specified intangible assets did not entitle the appellant to claim depreciation. The decision was based on the specific provisions of the law and the lack of acquisition of qualifying intangible assets.