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TMI Blog2014 (12) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... the intangible assets of the firm, had been made - all that the payment signifies is that the firm has been able to retain its’ operational capability consequent to the retirement/s - There is no purchase or acquisition of any asset, tangible or intangible - Rather, to the extent goodwill of the firm is attached to the partners, representing its human and thus most vital, resource, a part of the goodwill of the firm stands definitely eroded. Quantification of depreciation – Held that:- No ‘goodwill’ or any other tangible or intangible asset, thus, stands acquired by the firm consequent to the payment to the retiring partners in pursuance of the retiring deed/s - the second retiring partner, having along with the other continuing partners, acquired share (20%) in the goodwill of the firm of the first retiring partner, the payment to him subsequently includes his share in the share, so that there is in fact to that extent a double payment, i.e., vis-à-vis the total share in the firms’ assets of the two partners - the transaction in right perspective, i.e., as one between the partners inter se, would resolve such issues, which arise only on misconstruing the transactions as one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of supply of equipments for shooting and editing telefilms, etc. with computerized digital graphics on hire, since 10.04.1995. Two of its partners, holding 20% share each in the profits (or losses) of the firm, retired there-from during the financial year 2001-02, the previous year corresponding to the immediately preceding assessment year (i.e., A.Y. 2002-03), and were paid their share of goodwill at an aggregate of ₹ 26,53,536/-, as under: Date of retirement Name of partner Goodwill paid % of share held by him on date of retiremnet 31.01.2002 Mr. Razak Sheikh 14,03,536/- 20% 30.05.2001 Mr. Ramzan Sheikh 12,50,000/- 20% The assessee s claim of deprecation on goodwill, as an intangible asset of the firm, to which account the said sum was capitalized in its books of account, was negated by the Revenue and, further, confirmed by the Tribunal following its decision in R.G. Keswani vs. Asst. CIT [2009] 116 ITD 133 (Mum). Goodwill , it was the constant refrain, is not an intangible asset within the meaning of Explanation 3(b) to section 32(1)(ii), which reads as under, following the principle of ejusdem generis: Depreciation. 32. (1) In respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. This sums up the assessee s case as made before us. 4. We have heard the parties, and perused the material on record. The assessee s case is principally legal. Though claimed to be covered in its favour by the decision by the apex court in Smifs Securities Ltd. (supra), the same, notwithstanding the applicability of the said decision, in-as-much as it settles the issue of goodwill being an intangible asset u/s.32(1)(ii) r/w Explanation 3(b) thereto, fails. The reason for the same, even as observed during hearing, is that no goodwill has been actually acquired by the firm on the payment of the impugned sum/s. The relevant clauses, identically worded for both the retirement deeds, i.e., dated 30.05.2001 and 31.01.2002 (PB pgs.33-36, 37-40), i.e., except for the amount involved and its payment details, read as under (PB pgs.33 to 36): 1. That the retiring party Mr. Ramzan Shaikh will retire from the business of partnership with effect from 30th May, 2001 and the continuing parties shall pay to the retiring partner as the purchase money for his share and interest in the partnership and the capital effects and goodwill thereof a sum of ₹ 12,50,000/- (Rupees Twe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 lacs, so that the nature of the additional payment to him (Rs.3.04 lacs) would have to be ascertained in-as-much as the accounting entries cannot be treated as conclusive. Then, again, the question is as to the basis of the said accounting treatment? Be that as it may, what has been paid is not by the firm per se, but by the continuing partners, toward the purchase of the share of the retiring partners in the assets of the firm nothing more and nothing less. The said payment shall not by itself create a capital asset in the hands of the firm. Goodwill, tenancy rights and permit licence, already exist with the firm prior to the retirement/s, and continues therewith, post it, as do all other assets, in-as-much as the business survives the retirement/s, which is thus on a going concern basis. That is, there is no accretion to the asset base of the assessee-firm. What all has been done by and through the said payment to the retiring partners - which could be financed by either borrowing capital or introducing funds by the continuing partners, is that they have thereby ensured that there is no depletion in the capital base of the firm. The share in the assets, albeit undefined, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifying any differently in the matter) would be to recognize the full value of the asset in the accounts, crediting each partner to the extent of his share therein. In the context of goodwill , a self generated asset, which therefore does not appear on the firms books, it would translate into reflecting the same in its accounts at its full value, at ₹ 60 lacs (say). Each of the partners immediately before retirement would stand to be credited to the extent of his share therein. It is this share for and toward which the payment is being made by the firm, implying the continuing partners of the firm. So done, which represents the correct accounting treatment, it would make it inconsequential as to, firstly, when the payment to the retiring partners (say, at ₹ 24 lacs) is made and, two, how is the same financed. In this context, we observe that the second retiring partner, Mr. Razak Sheikh, is paid, apart from ₹ 11 lacs in cash/cheque, in kind, by way of takeover of four debtors, aggregating in value to ₹ 79,310/-. The firm follows cash method of accounting, so that it recognizes revenue only on receipt basis. There is, accordingly, no question of any trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retain its operational capability consequent to the retirement/s. There is no purchase or acquisition of any asset, tangible or intangible. Rather, to the extent goodwill of the firm is attached to the partners, representing its human and thus most vital, resource, a part of the goodwill of the firm stands definitely eroded. As regards the retention of the operational capability, to what extent it materializes is something that lies in the womb of future, and would surely depend upon if the retiring partners actually worked in the relevant trade after retirement, as also the area of their operations. Further, one of the two partners also taking over some debtor accounts would rather suggest of their continuing, or intending to continue to work. There is, in fact, as stated earlier, no restrain placed upon them in the matter. Be that as it may, that is something that would not detain us in this matter in-as-much as this neither flows from the retirement deed nor is contended by either party; we having explained the nature of the payment to be an attempt to ensure, as far as possible, the maintenance of the functional capacity of the firm, i.e., post retirement, by the continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on thereon does not arise for consideration. So, however, our order being appealable and, accordingly, subject to modification, we may dwell, albeit briefly, on this aspect of the matter as well. 7. We have heard the parties, and perused the material on record. Firstly, as stated here-in-before, the nature of the additional payment of ₹ 3,03,536/- to the second retiring partner not arising out of his retirement deed, would have to be examined/determined. On merits, we again find the assessee s claim as not tenable. Without doubt, no depreciation, as is apparent, has been allowed on goodwill, and it is only the depreciation as actually allowed that would be eligible for being deducted in computing the WDV of the relevant block of assets (refer: Madeva Upendra Sinai vs. Union of India [1975] 98 ITR 209 (SC)). At the same time, however, Explanation 5 below section 32(1)(ii), reading as under, inserted by Finance Act, 2001 w.e.f. 01.04.2002, cannot be lost sight of: Depreciation. 32. (1) In respect of depreciation of (i) (ii) . Explanation 5. For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, modifying it, with which it will stand to merge. Accordingly, the assessee, in the event of our view of it having not acquired goodwill , or any other depreciable asset for that matter, thus, i.e., upon payment of the impugned sums to the retiring partners, gets reversed to any extent, so that the assessee s claim becomes valid (to that extent), the same shall have to be allowed. The assessee shall, therefore, upon a favorable verdict by the hon ble high court, be (actually) allowed depreciation both for the current year as well as for the immediately preceding year in accordance with law. This is more so as the two amounts are interrelated. We, therefore, without prejudice to our decision that the assessee s claim for depreciation is not valid, hold that the same shall in any case be restricted to the claim as preferred per the original return. The assessee s claim for additional depreciation, on the basis of having not been allowed deprecation for A.Y. 2002-03, is accordingly rejected; that for the said year standing to be allowed, to it. We decide accordingly. 8. In the result, the assessee s appeal is dismissed. Order pronounced in the open court on December 10, 2014. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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