2008 (2) TMI 443 - AT - Income Tax

Depreciation on goodwill - Generated on acquisition of businesses - HELD THAT - In the present case the amount was paid by the assessee towards the acquisition of goodwill. Therefore the said payment does not come under either know-how patents copyrights trademarks licences franchises. The only remaining category is the residual one any other business or commercial rights of similar nature . It is to be seen that any other business or commercial rights are not by themselves intangible assets eligible for depreciation. Those rights must be of similar nature; all similar nature to know-how patents copyrights trademarks licences franchises. Any business or commercial rights not similar in nature to the above mentioned six items cannot be treated as intangible assets qualified for depreciation. Ejusdem generis rule is the rule of generic words following more specific one. The rule is that when general words follow specific words of same nature the general words must be confined to the things of the same kind as those specified. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like know-how patents copyrights etc. form a distinct genesis or category inasmuch as all those items are specific and elucidated rights of business or commercial nature. In such circumstances the expression any other business or commercial rights of similar nature also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore in the light of the statutory provisions contained in section 32(1)(ii) the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to know-how patents copyrights etc. The expression all business and commercial rights used in the agreement is too a generic expression which does not find similarity with the specific expressions like know-how patents licences etc. Therefore such a very general expression of business and commercial rights cannot be equated with the expression of any other business or commercial rights of similar nature occurring in section 32(1)(ii). There is nothing on record including in the agreement to show that the assessee had paid the amount for something other than goodwill. The Tribunal through its decisions has already held that the goodwill is not an intangible asset entitled for depreciation. Useful reference may be made to Bharatbhai J. Vyas case 2005 (8) TMI 279 - ITAT AHMEDABAD-C Guruji Entertainment Network Ltd. s case 2007 (3) TMI 307 - ITAT DELHI-E and CIT v. Mangalore Ganesh Beedi Works case 2002 (12) TMI 34 - KARNATAKA HIGH COURT . Therefore we find that the contention of the assessee is not tenable either in facts or in law. Therefore we hold that the lower authorities have rightly held the acquisition cost of goodwill is not entitled for depreciation. In result this appeal filed by the assessee is dismissed.

Summary

Issues:
Appeal against disallowance of depreciation on goodwill acquired by the assessee.

Analysis:
The appeal involved the disallowance of depreciation claimed by the assessee on goodwill acquired for Rs. 25,00,000. The assessee contended that the goodwill acquired was an intangible asset eligible for depreciation under section 32(1)(ii) of the Income-tax Act, 1961. The assessee argued that the acquired goodwill, along with the trade name and other business rights, increased the business manifold, justifying the claim for depreciation. However, the Assessing Authority rejected the claim, stating that goodwill was not an intangible asset. The CIT(A) upheld this decision, emphasizing that goodwill did not fall under the specified categories eligible for depreciation. The CIT(A) also noted that the provisions related to depreciation and capital gains did not support granting depreciation on goodwill. The second appeal challenged these decisions.

The assessee's representative argued that the payment made was not solely for goodwill but also for transferring the trade name and other business rights, qualifying as intangible assets under section 32(1)(ii). The representative referred to statutory provisions specifying eligible intangible assets and highlighted the importance of the trade name in business development. Additionally, an alternate argument was presented to exclude the portion attributable to goodwill from the total consideration for depreciation calculation. The representative cited precedents where intangible assets like membership cards were granted depreciation, supporting the claim for goodwill depreciation.

In contrast, the revenue contended that goodwill did not qualify as an intangible asset eligible for depreciation, citing tribunal decisions and court rulings. The revenue emphasized the specific categories of intangible assets mentioned in the law and argued that goodwill did not fit within those categories. The revenue relied on precedents where depreciation was denied for goodwill and stressed that specific provisions must be met for depreciation eligibility.

The tribunal analyzed the statutory provision for depreciation on intangible assets, listing specific categories like know-how, patents, copyrights, trademarks, licences, and franchises. The tribunal emphasized that not all intangible assets were eligible for depreciation. It concluded that the payment for goodwill did not fall under the specified categories, and goodwill did not qualify as an intangible asset for depreciation. The tribunal applied the principle of ejusdem generis to interpret the law and held that goodwill did not align with the specific categories mentioned for depreciation. The tribunal dismissed the appeal, affirming that the acquisition cost of goodwill was not entitled to depreciation.

In summary, the tribunal upheld the lower authorities' decision to disallow depreciation on the acquired goodwill, emphasizing that goodwill did not meet the criteria for intangible assets eligible for depreciation under the Income-tax Act, 1961. The tribunal's analysis focused on the specific statutory provisions and precedents, concluding that goodwill did not fall under the specified categories for depreciation allowance.