Depreciation on Goodwill Allowed :Delhi High Court

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Goodwill can get depreciation as Delhi High court in case of Areva T & D India Ltd and a view which will immensely help business organisation because most of the decision till now were against such view.
The facts of the case is that the assessee under a slump sale agreement acquired, the transmission and distribution business of the transferor-company. The total consideration for such slum sale was accounted for in two parts .The book value of the net tangible assets (assets minus liabilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as Rs. 28.11 crores were recorded in the books of transferee at the same value as appeared in the books of the transferor.
The balance payment of Rs. 16, 58, 76, 000 over and above the book value of net tangible assets, was allocated by assessee towards acquisition of a set of business and commercial rights, compendiously termed as ‘goodwill’ in the book of account.
The assessee-company claimed depreciation under section 32(1)(ii) with respect to the aforesaid amount of Rs. 16, 58, 76, 000 as being a price paid for acquisition of above mentioned intangible assets.
The Assessing Officer disallowed the depreciation on ‘goodwill’ as claimed in the return on grounds, that depreciation under section 32(2)(ii) is not available on goodwill and also that the assessee was unable to demonstrate that the amount shown as goodwill in the books of account .The Commissioner (Appeals) affirmed the view of the Assessing Officer. The Tribunal dismissed the assessee’s appeal

The issue before , Delhi High Court in Areva T & D India Ltd vs DCIT 345 ITR 421 (DELHI)/[2012] was

“Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that know-how, business contacts, business information, etc. acquired as part of the slump sale described as ‘goodwill’ were not entitled for depreciation under Section 32(1)(ii) of the Income Tax Act?”

The Delhi High Court held vide its order 30-03-2012 as under :

13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression “business or commercial rights of similar nature” specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of “knowhow, patents, trademarks, licenses or franchises” but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) of the Act preceding the term “business or commercial rights of similar nature”, it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words “business or commercial rights of similar nature” have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of “business or commercial rights” cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of “business or commercial rights” can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares & Stocks Ltd. ( supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a “license” or “akin to a license” which is one of the items falling in Section 32(1)(ii) of the Act.

14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of “business or commercial rights of similar nature” specified in Section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section.