2012 (10) TMI 147 - HC - Income Tax

Depreciation on goodwill - whether depreciation is not allowable u/s 32(1)(ii) on various intangible assets classified as goodwill on consolidated basis - Held that - As decided recently in CIT vs. Smifs Securities Limited 2012 (8) TMI 713 - SUPREME COURT goodwill would fall under the expression any other business or commercial rights of similar nature in section 32(1) Explanation 3 (b). As the Tribunal in AY 2003-2004 in assessee s own case admitted the additional evidence which threw light on the valuation of each of the intangible assets and remit the matter back to the file of the AO for fresh adjudication this could possibly lead to contradictory assessments for the different assessment years as the Tribunal refused to follow the earlier order of the Tribunal dated 28.5.2009. It is necessary to ensure consistency in respect of the same question for the different assessment orders. Thus it would be better to follow the same course that has been adopted in respect of the AY 2003-2004.

Summary

Issues:
Appeal under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal pertaining to the assessment year 2006-2007. Substantial question of law regarding the allowance of depreciation on intangible assets classified as "goodwill."

Analysis:
The appellant purchased a catering business on a slump sale basis, including tangible and intangible assets, for Rs.206.40 crores. The purchase included goodwill valued at Rs.71 crores. The appellant claimed depreciation on goodwill for the assessment year 2003-2004, but the Assessing Officer disallowed the claim. The CIT (A) confirmed the disallowance.

The Tribunal admitted additional evidence from a valuation report by Ernst and Young, which revealed that the goodwill included other intangible assets worth Rs.49.60 crores. The Tribunal acknowledged that depreciation is not allowable on goodwill but should be allowed on other intangible assets. The matter was remitted back to the assessing officer for fresh adjudication.

For the assessment year 2006-2007, the Tribunal refused to follow its earlier order regarding depreciation on goodwill. The Tribunal rejected the valuation reports and disallowed depreciation on the entire amount of Rs.71 crores. The appellant argued that goodwill qualifies for depreciation under section 32(1) Explanation 3 (b) based on a recent Supreme Court judgment.

A discrepancy arose as the Tribunal's decision could lead to contradictory assessments for different years. To maintain consistency, the High Court set aside the impugned order and disposed of the appeal in line with the Tribunal's order for the assessment year 2003-2004. The proper course was to follow the same approach as in the earlier proceedings.

In conclusion, the High Court upheld consistency in the treatment of depreciation on intangible assets, specifically goodwill, by aligning the decision for the assessment year 2006-2007 with the Tribunal's order for the assessment year 2003-2004.