2013 (11) TMI 1487 - AT - Income Tax

Depreciation on goodwill Held that - The assessee as per slump sale agreement, acquired a going concern, business of on-line and other electronic media through internet and other networks including databases, online newspapers and magazines An amount which is reflected in the balance sheet as goodwill was for acquisition of bundle of business or commercial rights which was defined in the slump sale agreement, termed as goodwill in the books of accounts Following R.G. Keshwani vs. ACIT 2008 (2) TMI 443 - ITAT BOMBAY-H - The principle of ejusdem generis is applicable in such case - Where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind as specified In the given case for interpreting the expression business or commercial rights of similar nature specified in section 32(1)(ii) - Such rights need not answer the description of know-how, patents, trademarks, licenses or franchises but must be of similar nature as the specified assets - On a perusal of the meaning of the categories of specific intangible assets referred in section 32(1)(ii) preceding the term business or commercial rights of similar nature, it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. In the absence of the aforesaid intangible assets (business or commercial rights), the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring these business rights along with the tangible assets, the assessee got an up and running business Following Hon ble Supreme Court in the case of C.I.T., Kolkata vs. Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT - Goodwill is an asset under Explanation 3(b) to Section 32(1) qualifies for depreciation u/s. 32 - Explanation 3 states that the expression asset shall mean an intangible asset, being know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings initiated under sections 147/148 of the I.T. Act, 1961.
2. Disallowance of depreciation on goodwill amounting to Rs. 16,69,020.
3. Initiation of proceedings under section 271(1)(c) of the I.T. Act, 1961.

Detailed Analysis:

1. Validity of Proceedings under Sections 147/148 of the I.T. Act, 1961:
The appellant initially raised an issue regarding the initiation of proceedings under sections 147/148 of the I.T. Act, 1961, claiming it was done "wrongly, arbitrarily, without any justification and basis, merely on surmises and conjectures." However, this ground was not pressed by the appellant and was subsequently dismissed.

2. Disallowance of Depreciation on Goodwill:
The primary contention in this appeal was the disallowance of depreciation on goodwill amounting to Rs. 16,69,020.

Facts of the Case:
- The assessee, a Private Limited Company engaged in online and other electronic media, filed a return for the assessment year 2005-06 declaring NIL total income and book profit of Rs. 29,85,574.
- The return was initially processed under section 143(1), and a refund was issued.
- Subsequently, a notice under section 148 was issued for reopening the assessment, leading to the disallowance of depreciation on goodwill by the AO.

Arguments and Findings:
- The assessee argued that goodwill is an intangible asset eligible for depreciation under Section 32 of the I.T. Act, 1961, citing the Supreme Court judgment in C.I.T., Kolkata vs. Smifs Securities Ltd., which held that goodwill is an asset under Explanation 3(b) to Section 32.
- The AO and CIT(A) had disallowed the depreciation claim, referencing the ITAT Mumbai decision in R.G. Keswani vs. ACIT, which held that the acquisition cost of goodwill is not entitled to depreciation.
- The Tribunal considered the slump sale agreement and noted that the goodwill represented a bundle of business and commercial rights, including patents, trademarks, copyrights, and employee benefits, which facilitated the smooth continuation of the business.

Legal Interpretation:
- Section 32(1) provides for depreciation on tangible and intangible assets, including "know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature."
- The Tribunal applied the principle of ejusdem generis to interpret "any other business or commercial rights of similar nature," concluding that goodwill falls within this category.

Conclusion:
- The Tribunal found that the assessee had consistently shown the value of goodwill in its balance sheet since the acquisition and that the Revenue had not objected to this valuation until the impugned assessment year.
- Based on the judgments of the Supreme Court and Delhi High Court, the Tribunal held that goodwill is an intangible asset eligible for depreciation under Section 32.
- The disallowance of Rs. 16,69,020 on account of depreciation on goodwill was deleted, and the appeal was partly allowed.

3. Initiation of Proceedings under Section 271(1)(c) of the I.T. Act, 1961:
The appellant also contested the initiation of proceedings under section 271(1)(c) for concealment of income or furnishing inaccurate particulars. However, this issue was not elaborately discussed in the judgment, and the focus remained on the primary issue of depreciation on goodwill.

Final Judgment:
The appeal filed by the assessee was partly allowed, primarily on the ground that goodwill qualifies as an intangible asset eligible for depreciation under Section 32 of the I.T. Act, 1961. The addition of Rs. 16,69,020 made on this account was deleted. The decision was pronounced in the open court on 27/11/2013.