2014 (7) TMI 679 - AT - Income Tax

Depreciation on goodwill Whether goodwill is an asset covered under Explanation (3)(b) of Section 32 of the Act or not Held that - The assessee had purchased quality register division of KPMG and the consideration made over and above book value of net current asset as appearing in books as on 15.12.2005 was recorded as goodwill and depreciation was claimed by treating the same as intangible asset - CIT(A) rightly followed CIT Vs Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - goodwill is an asset which is covered under Explanation (3)(b) of Section 32(1) of the Act which would fall under the expression any other business or commercial rights of similar nature thus, there was no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
- Depreciation on goodwill under Explanation (3)(b) of Section 32 of the Income-tax Act, 1961.

Analysis:
1. The appeal was filed by the Revenue against the order of Ld. CIT(A) for the assessment year 2008-09, specifically challenging the allowance of depreciation on goodwill amounting to Rs. 4,48,25,483. The primary contention was whether goodwill could be considered an asset covered under Explanation (3)(b) of Section 32 of the Income-tax Act, 1961.

2. The Appellant argued that the issue was settled in favor of the assessee by a decision of the Hon'ble Supreme Court in the case of CIT Vs Smifs Securities Ltd. The Appellant contended that Ld. CIT(A) had rightly allowed depreciation on goodwill, and this decision should be upheld.

3. The Ld. D.R. conceded to the submissions made by the Appellant but relied on the assessment order, presenting the Revenue's perspective on the matter.

4. Upon hearing both parties and reviewing the material on record, it was noted that the assessee was involved in providing testing services and had acquired the quality register division of KPMG. The surplus consideration paid over the net current asset value was recorded as goodwill, and depreciation was claimed on it as an intangible asset. The Assessing Officer initially rejected this claim, stating that goodwill did not fall under the definition of intangible assets under Section 32 of the Act. However, Ld. CIT(A) referred to the decision of the Hon'ble Supreme Court and held that goodwill is covered under Explanation (3)(b) of Section 32(1) of the Act, falling under 'any other business or commercial rights of similar nature'.

5. The findings of Ld. CIT(A) emphasized that the surplus consideration was an aggregation of various intangible assets, making each component eligible for depreciation. Citing the decision in CIT Vs Smifs Securities Ltd., it was concluded that goodwill qualifies as a business or commercial right of similar nature, justifying the depreciation claim. Consequently, the appeal by the Revenue was dismissed, aligning with the Supreme Court's ruling.

6. The judgment highlighted that the Supreme Court's decision firmly established goodwill as falling within the scope of 'any other business or commercial right of similar nature'. As a result, the order of Ld. CIT(A) allowing depreciation on goodwill was upheld, and the Revenue's appeal was ultimately dismissed.