Allowability of deprecation on goodwill as per provisions of the Income-tax Act, 1961

The word goodwill is not a term of law and it has nowhere been defined in the provisions of the direct taxes acts. The Courts have tried to define the precise meaning of term 'goodwill' in the course of their judgments.

What is goodwill ?

As per Ind AS 103 - Business Combinations, goodwill is an asset representing the future economic benets arising from other assets acquired in a business combination, which are not individually identied and separately recognised.

NATURE OF GOODWILL

Broadly, the goodwill can exist in a normal course of business in two manners. It can be acquired from the seller of the business in cash or for any considerations to run that business with same name and reputation as earlier. Secondly, it can come into the existence on account of amalgamation in nature of ‘self-generated goodwill’. Starting with the first kind of goodwill, it is often acquired in lieu of some specific consideration which can be earmarked towards the same. Now, whether depreciation should be allowed or not can be understood from the following legal precedent.

Depreciation allowable on goodwill from acquisition of Business unit

Assessing Officer disallowed the depreciation of ₹ 9,43,34,545/- claimed at the rate of 25% under section 32 of the Act on the brought forward balances and written down value of block of assets of ₹ 37,73,38,183/-under the heard intangible assets i.e. goodwill consisting of various intangible assets arising out of the acquisition of business unit of Lee and Muirhead (P) Ltd. in the Financial year 2007-08 relevant to Assessment year 2008-09.

It was held that “We have to consider whether goodwill is an intangible asset under section 32, hence, eligible for claim of depreciation. In our view, this issue is no more res integra in view of the decision of Hon’ble Supreme Court in Smifs Securities Ltd. (supra) where the Hon’ble Supreme Court has held that goodwill is in the nature of any other business or commercial rights as provided under Explanation–3(b) of section 32(i) r/w section 32(1)(ii). In view of the same Assessee is eligible for depreciation on Goodwill resulting from acquisition of Business Unit of Lee & Muirhead (P) Ltd.” (Related Assessment Year : 2013-14) – [DHL Logistics Private Limited v. DCIT - Date of Judgement : 07.01.2020 (ITAT Mumbai)]

Payment over and above net assets acquired is towards goodwill under slump sale transaction and depreciation is allowed on the same

The Chennai Bench of ITAT in the case of Dorma India (P) Ltd. dealt with the eligibility of depreciation on goodwill under the slump sale agreement. The Tribunal held that the excess payment made by the taxpayer over and above book value of tangible movable assets (net of liabilities) acquired is towards intangible assets (acquired by the taxpayer in the form of business contracts, customer orders, customer business information, etc.). Thus, payments made by the taxpayer over and above net assets acquired is towards goodwill and depreciation is allowed on the same. (Related Assessment Years : 2010-11 to 2012-13) – [ACIT v. Dorma India (P) Ltd. Date of Judgement : 20.11.2019 – (ITAT Cnennai)]

Business and commercial rights – Goodwill – Intangible Asset - Entitle for depreciation

The assessee company is stated to have dealership of Mercedes-Benz and as per the ongoing business strategy, the assessee company acquired the business of going concern which was holding dealership of Mercedes-Benz in Kolkata.  In the process, the excess consideration of Rs. 7.50 crores over and above the value of the tangible assets was claimed to have been incurred for acquiring various business and commercial rights categorized under the head ‘goodwill’ in the books of the assessee.  The assessee claimed depreciation on such ‘goodwill’ pegged at Rs. 7. 50 crores. In the course of the scrutiny assessment, the Assessing Officer however denied the claim of such depreciation on ‘goodwill’. The CIT(A) after consideration of relevant facts found the claim of the assessee to be in consonance with law enunciated by way of judicial precedents. An appeal has been filed at the instance of the Revenue against the order of the CIT(A).  The Tribunal held that extra consideration paid for acquisition of assets and the business of the concern represents cost of goodwill.  This being so, the assessee would be entitled in law for claim of depreciation.  (Related Assessment year :  2013-14) – [DCIT v. Landmark Cars (East) (P) Ltd. (2019) 71 ITR 19 (SN) (ITAT Ahmedabad)]

Goodwill- Intangible asset-Goodwill will fall under the expression ‘or any other business or commercial rights of similar nature’ hence depreciation is available on genuine goodwill. Whether there is transfer of goodwill and valuation done by the assessee is erroneous has to be decided by division Bench , accordingly the matter is sent back to division Bench

It was held that ,goodwill will fall under the expression ‘or any other business or commercial rights of similar nature’ hence  depreciation is available on genuine goodwill. Followed  CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) .However the question whether when a firm has been succeeded by a company and net assets of the firm have vested in the company, there is any transfer of goodwill in the real sense and whether the valuation of goodwill done by the assessee is erroneous has to be decided by the Division Bench. Accordingly the matter is sent back to division Bench for disposing off the appeal in above terms. (Related Assessment year : 2001-02) – [CLC & Sons (P) Ltd. v. ACIT (2018) 194 TTJ 700 : 171 ITD 139 : 168 DTR 157 (SB) (ITAT Delhi)]

When no payment made for acquisition, there is no goodwill

Assessee bank had not paid any consideration towards acquisition of another bank and also had not shown any depreciation towards goodwill or commercial rights. In such case, it could not be considered that assessee had acquired goodwill or commercial rights of said bank and, thus, assessee would not be eligible for depreciation on goodwill under section 32.

The Tribunal upheld CIT(A)’s order disallowing assesse’s claim of depreciation on acquisition of commercial rights of ‘P’ bank which had amalgamated with it, noting that the CIT(A) had rightly followed the Apex Court judgement the case of CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC). It was observed that in the said case, the claim of depreciation was allowed on goodwill which was the amount paid in excess to the net asset acquired. Whereas, in the instant case, the assessee had not paid any consideration for acquisition of P Bank and had only taken over accumulated losses. Further, it was observed that the assessee had not shown any amount towards towards goodwill / commercial rights in the depreciation schedule and thus had not acquired any goodwill / commercial rights. – [Kanaka Mahalakshmi Cooperative Bank Ltd. v. ACIT (2018) 97 taxmann.com 638 (ITAT Vishakhapatnam)]

Goodwill acquired by assessee on acquisition of a proprietary concern as a going concern is an asset hence eligible for depreciation

Assessee-company acquired a sole proprietary concern as a going concern with all assets and liabilities including goodwill. It claimed depreciation on such goodwill. ITAT held that goodwill is an asset within meaning of section 32 and assessee was entitled for depreciation on goodwill. (Related Assessment Years 2008-09, 2009-10) - [Fibres & Fabrics International (P) Ltd. v. DCIT (2016) 182 TTJ 374 : 160 ITD 102 (ITAT Bangalore)]

Depreciation is allowable at the applicable rate on the payment relatable to goodwill. (Related Assessment Years : 2006-07, 2007-08, 2009-10, 2010-11) - [Hinduja Foundries Ltd. ACIT (2016) 178 TTJ 88 (ITAT Chennai)]

Claim of depreciation on goodwill arising on amalgamation not allowable

It was held that claim of depreciation on goodwill arising on amalgamation cannot be allowed. The Tribunal relied on fifth proviso to section 32(1) of the Income-tax Act, 1961 which provides that depreciation on the assets acquired on amalgamation cannot be more than the depreciation as was allowable to the amalgamating company had the amalgamation not taken place. The Tribunal held that since no depreciation was being claimed on goodwill by the amalgamating company prior to amalgamation, taxpayer’s claim of depreciation on goodwill was required to be restricted to nil. – [United Breweries Ltd. v. ACIT (2016) 76 taxmann.com 103 (ITAT Bangalore)]

Goodwill - One time Licence fee - Eligible for depreciation.

The assessee incurred certain expenditure being one time licence fee paid to the owner for granting to the user and it claimed said expenditure as revenue expenditure. The Assessing Officer disallowed 50 per cent of the same holding that income was obtained for a period of 2 years. CIT(A) disallowed the entire expenditure on the ground that the same was for acquiring of goodwill for 2 years and on which no depreciation could be allowed. The honorable ITAT held that, There is no dispute to the fact that the assessee has incurred expenditure being one time licence fee paid to the owner for granting to the user, the licence to continue to use the trade mark as per the name licence agreement. The assessee treated the same as revenue expenditure in the books. The entire amount should be allowed as revenue expenditure. The depreciation should be allowed as it is held to be acquisition of goodwill. It has been held that goodwill under Explanation 3(b) of section 31(2) is eligible for depreciation. (Related Assessment year : 2003-04) – [ACIT v. GKN Sinter Metal (P) Ltd. (2015) 153 ITD 311 (ITAT Pune)]

Goodwill – Assessing Officer was not justified in apportioning certain amount towards acquisition of goodwill and denying depreciation on said amount

Assessee company acquired business of magazine and event division of BCCL as an on-going concern on a slum sale basis. On basis of valuation obtained from professionals, certain amount was paid for acquiring intangible assets like trademark and copyright. Assessee claimed depreciation on said amount. Assessing Officer apportioned the certain amount towards acquisition of goodwill and denied the depreciation on said amount. CIT(A) granted partial relief to assessee. On cross appeals allowing the appeal the Tribunal held that; since depreciation was allowable on goodwill like any other intangible asset, it would not make any difference to segregate various intangible assets for purpose of making disallowance on account of depreciation. Disallowance made by the Assessing Officer was deleted. (Related Assessment years : 2005-06 to 2007–08) – [DCIT v. Worldwide Media (P) Ltd. (2015) 30 ITR 181 : 153 ITD 162 (ITAT Mumbai)]

Assessee was entitled to depreciation on goodwill as goodwill was an asset under explanation 3(b) to section 32(1)

 We have carefully gone through the decision of the hon'ble Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC) and the decision of the hon'ble Bombay High Court as well as decision of co-ordinate Bench of the Tribunal cited at bar. The hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra), held as under (page 304) :

"8. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to  section 32(1) of the Income-tax Act, 1961 ("the Act", for short).

9.  We quote herein below Explanation 3 to section 32(1) of the Act :

“Explanation 3.- For the purposes of this sub-section, the expres sions "assets" and "block of assets" shall mean-
(a) tangible assets, being buildings, machinery, plant or furniture ;
(b) intangible assets, being know-how, patents, copyrights, trade marks, licences,

       franchises or any other business or commercial rights of similar nature.”

10. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of sim ilar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or com mercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).

11. In the circumstances, we are of the view that 'goodwill' is an asset under Explanation 3(b) to section 32(1) of the Act."

7. The co-ordinate Bench of the Tribunal in the case of PPG Asian Paints (P) Ltd. v. ACIT (LTU) (2015) 43 ITR (Trib) 307 (ITAT Mumbai), held as under (page 308) :

“In view of the categorical finding of the hon'ble Supreme Court that the goodwill also falls under the expression 'any other business or commercial right of a similar nature' and thus would be an asset under Explanation 3(b) to section 32(1) of the Act, we accordingly hold that the assessee is entitled to the claim of depreciation on goodwill. This issue is accordingly decided in favour of the assessee.”

  As the facts and circumstance of the case in all the years under consideration are same, following the same reasoning, we direct the Assessing Officer to allow the assessee's claim of depreciation on "good-will" in all the years under consideration. (Related Assessment years : 2002-03 to 2008-09) – [St Angelo's Computers Ltd. v. ITO (2015) 44 ITR (Trib) 112 (ITAT Mumbai)]

Goodwill - Depreciation is allowable

Assessee’s claim of depreciation on goodwill will be allowed in view of Tribunal’s decision in a series of earlier years that goodwill is an asset as per section 32 and depreciation is admissible thereon. The Tribunal followed the decision of Hon’ble Supreme Court in the case of CIT v. SMIFS Securities Ltd. (2012) 348 ITR 302 (SC) and held that the assessee is entitled to depreciation on goodwill. (Assessment year : 2006-07) - [ACIT v. Bharti Teletech Ltd. (2014) 163 TTJ 36 (UO) : 153 ITD 185 (ITAT Delhi)]

Goodwill - Amendment is not retrospective hence depreciation is not allowable on good will for the assessment year 1987-88. Depreciation is not allowable on goodwill in Assessment year 1987-88 as amendment of section 32 with effect from 01.04.1997 is not retrospective. (Related Assessment year : 1987-88) – [CIT v. Wipro Ltd. (No.2) (2014) 360 ITR 658 (Karn.)]

No depreciation could be allowed on goodwill where very purchase of goodwill was not proved by assessee

The Mumbai Tribunal in the case of Toyo Engineering India Ltd. has held that the difference between the consideration paid upon an amalgamation and net book value of assets acquired cannot generally be regarded as ‘goodwill’. It is observed that such goodwill shown in the books was a mere book entry and that in the absence of specific valuation of the assets, liability and goodwill of the amalgamating company, depreciation cannot be claimed on the amount of ‘goodwill’. The Tribunal observed that the fair value of the assets was much higher than the book value, therefore; the consideration could not be said to have been paid for acquiring assets at a book value. – [DCIT v. Toyo Engineering India Ltd (2013) 33 taxmann. com 560 : (2012) 18 ITR (T) 159 (ITAT Mumbai)]

Goodwill arising as a result of amalgamation of two companies

FACTS

In the instant case, the assessee-company SMIFS Securities Limited had entered into a scheme of amalgamation with YSN Shares & Securities Private Limited (Transferor company), pursuant to which the assets and liabilities of the Transferor company were transferred to SMIFS Securities Limited. The Scheme was duly approved by the High Courts of Bombay and Calcutta.

In this amalgamation process of the companies, goodwill had arisen in the books of SMIFS Securities Limited due to the excess consideration paid to the Transferor company, over and above the book value of the assets taken over.

The excess consideration paid by the assessee over the value of net assets acquired of YSN (P) Ltd. was considered as goodwill arising on amalgamation by assessee. Assessee claimed the depreciation which was disallowed by Revenue.

HELD

The taxpayer claimed depreciation on goodwill under section 32(1)(ii) of the Income-tax Act, 1961 considering the same to be an intangible asset. The depreciation on goodwill was not allowed by the Revenue Authorities. On appeal, both the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal (Tribunal) decided the issue in favour of the taxpayer company i.e. SMIFS Securities Limited and allowed depreciation on goodwill.  When the matter went for further appeal, the High Court held that no question of law arose in the appeal and dismissed the same. Aggrieved with this order the “Revenue” further appealed to Hon’ble Supreme Court.

Supreme Court held that Goodwill falls under Explanation 3(b) to section 32(1) of the Act by applying the principle of ejusdem generis. In the process of amalgamation the difference between actual consideration paid and cost of net assets constituted capital asset in form of Goodwill. Therefore, depreciation on such Goodwill is allowed. - [CIT v. SMIFS Securities Ltd. (2012) 348 ITR 302 (SC)]

Depreciation on goodwill where assessee had purchased hospital with land, building, equipments, name, trademark and staff.

FACTS

Assessee purchased a hospital and under the sale deed, the value of the goodwill was declared as Rs. 2 crores which included the name of the hospital and its logo and trade mark. Subsequently, the assessee claimed the depreciation on goodwill on value shown in the sale deed. In subsequent years depreciation on goodwill was claimed on the written down value. Revenue contended that motive of providing depreciation is to take care of wear and tear in asset over a period of time. Since there can be no erosion in the value of goodwill, the claim of depreciation on goodwill is fundamentally against the scheme of depreciation.

HELD

It was held that trademarks and franchises cover name, logo etc. and the value of same were included in the Goodwill. Since, the assessee continued running the hospital in the very same building, same premises, same town and with same name, it was clear that he has acquired the enduring benefit by way of goodwill. The name of the hospital was incidental to the successful running of the hospital after it was sold to the assessee. The benefit derived by the assessee was nothing but was the retention of continued trust of the patients who were patients of the previous owner.

It is certainly for acquiring a business and commercial rights and it is certainly comparable with trademark, franchises, copyright etc. referred to in first part of section 32(2)(ii) and so, goodwill is covered by the above provision of the Act entitling the assessee for depreciation - [Raveendran Pillai v. CIT (2011) 332 ITR 531 : 237 CTR 80 (Ker)]

Goodwill is also an intangible asset of similar nature referred to in section 32(1)(ii), and therefore, depreciation is allowable on the same. - [Kotak Forex Brokerage Ltd. v. ACIT (2010) 41 DTR 387 (ITAT Mumbai)]

It was held that, where expenditure is for acquisition of goodwill, it should be considered as capital in nature, but when it is not for acquisition of goodwill, it should be allowable as revenue expenditure. - [Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 (SC)]

The Supreme Court has made an attempt to define it in its decision in the case of S.C. Cambatta & Co. (P) Ltd. v. CEPT (1961) 41 ITR 500 in the following words :

“...the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. At the same time locality is not everything. The power to attract custom depends on one or more of the other factors as well.” – [S.C. Cambatta & Co. (P) Ltd. v. CEPT (1961) 41 ITR 500 (SC)]