2019 (5) TMI 278 - AT - Income Tax

Depreciation on Customer Relationship Rights (Non-compete fee) - customer relationship rights (non-compete fees) which was considered as an intangible asset by the Appellant - HELD THAT - As decided in assessee's own case 2016 (3) TMI 1347 - ITAT BANGALORE the claim of the assessee is required to be considered by treating the said payment as goodwill. We found strength in the submissions of the learned AR on the claim of depreciation on Customer Relationship Rights supported with observations of the Co-ordinate bench and following the judicial discipline, we set aside the order of the CIT(A) and direct the AO to grant depreciation on Customer Relationship Rights treating the same as Goodwill and allow the grounds of appeal of the assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on Customer Relationship Rights (Non-compete fee)
2. Treatment of Customer Relationship Rights as Goodwill for the purpose of depreciation

Detailed Analysis:

1. Disallowance of depreciation on Customer Relationship Rights (Non-compete fee):
The primary issue in the appeals was the disallowance of depreciation on Customer Relationship Rights, which the assessee claimed as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961. The assessee argued that these rights were akin to Goodwill and thus eligible for depreciation. The Assessing Officer (AO) initially disallowed this claim, and the CIT(A) upheld the AO's decision. The Tribunal had previously directed the AO to reconsider the depreciation claim in light of the Supreme Court's decision in CIT vs. Smifs Securities Ltd. However, the AO, in the reassessment, continued to disallow the depreciation on Customer Relationship Rights, treating them differently from Goodwill.

2. Treatment of Customer Relationship Rights as Goodwill for the purpose of depreciation:
The Tribunal examined whether Customer Relationship Rights could be treated as Goodwill and thus be eligible for depreciation. The Tribunal noted that the AO had characterized Customer Relationship Rights as Goodwill but did not grant depreciation. The Tribunal referenced its earlier decision and the Supreme Court's ruling in CIT vs. Smifs Securities Ltd., which held that Goodwill is eligible for depreciation. The Tribunal found that the AO had erred in not following these directions and in not treating Customer Relationship Rights as Goodwill. The Tribunal observed that the AO should have allowed depreciation on Customer Relationship Rights by treating them as Goodwill, as per the earlier Tribunal's findings and the Supreme Court's judgment.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the AO to grant depreciation on Customer Relationship Rights by treating them as Goodwill. The Tribunal allowed the assessee's appeals for the assessment years 2009-10, 2010-11, and 2011-12, emphasizing adherence to judicial discipline and the Supreme Court's ruling. The order was pronounced in the open court on 30th April 2019.