Depreciation allowable on Genuine Goodwill: ITAT [Read Order]

A Special Bench of the Income Tax Appellate Tribunal ( ITAT ), Delhi has held that the goodwill is an intangible asset which falls under the expression “any other business or commercial rights of similar nature” and is eligible for depreciation under Section 32(1)(ii) of the Income Tax Act if the same is genuine.

In the instant case, the assessee- Company took over all the assets and liabilities of a partnership Firm along with its goodwill. While completing the assessment, the Assessing Officer felt that if the past performance of the firm and the declining profits were to be taken into account, there would be Nil value of goodwill of the partnership firm and therefore, no transfer of goodwill in real sense was involved.

He therefore, held that the whole exercise done by the assessee in valuing the goodwill and issuing shares of equal amount to the erstwhile partners of the firm was a win-win situation, aimed at benefitting such partners on one hand with increase in their capitals by Rs.10 crore and on the other hand by claiming depreciation on such goodwill in the hands of the successor company.

The bench comprising President G.D. Agrawal, Bhavnesh Saini (Judicial Member)and R.S. Syal (Accounting Member) noticed that the issue of depreciation on goodwill, the authorities below have divided it into two broader compartments by holding that i) no depreciation can be legally allowed on the amount of genuine goodwill in terms of section 32 of the Act; and ii) when a firm is succeeded by a company and all its net assets vest in the company, there is no transfer of goodwill in real sense and further the valuation of goodwill done by the assessee in the instant case is fallacious.

“In our considered opinion, this issue is no more res integra in view of the judgment of the Hon’ble Summit court in CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) in which it has been held: “that goodwill will fall under the expression ‘or any other business or commercial rights of similar nature’” and, hence, qualifies for depreciation u/s 32(1) of the Act. We, therefore, answer the legal issue raised in the question before the Special bench in affirmative by holding, in principle, that depreciation is available on genuine goodwill.”