Depreciation on goodwill and non compete fee allowed by the Tribunal in view of the binding judgment of Hon’ble Supreme Court and jurisdictional High Court
ABCAUS Case Law Citation:
ABCAUS 2953 (2019) (05) ITAT
Important Case Laws Cited/relied upon by the parties
CIT Vs. Smifs Securities Ltd., (2012) 24 taxmann.com 22
CIT Vs. Ingersoll Rand International Ltd., (2014) 48 taxmann.com 349
The instant case involved appeals filed by the both i.e. the assessee and the Revenue. In the appeals filed by the assessee, the decision of ld CIT(A) in confirming the disallowance of depreciation claimed on goodwill was challenged. Whereas, the Revenue was aggrieved by the decision CIT(A) in granting depreciation on non-compete fee.
The assessee company had purchased a retail business as a going concern for a consideration of Rs. 18.50 crores. The net book value of tangible asset was determined at Rs. 2.18 crores and hence the difference amount of Rs.16.32 crores was treated as goodwill by the assessee.
The above said sum of Rs. 16.32 crores consisted of non-compete fee of Rs. 5 crores. The assessee claimed depreciation on the goodwill amount of Rs. 16.32 croers in the first assessment year and the continued to claim it @ 25% on the opening WDV every year onwards.
However, the Assessing Officer (AO disallowed the same by holding that depreciation is not allowable on goodwill.
Before the AO, the assessee took an alternative plea that the entire amount of Rs. 16.32 crores was not related to goodwill and it also included sale consideration paid towards purchase of trade name. It was also submitted that the seller company was making huge losses in the preceding years and hence no amount can be attributed towards goodwill.
The AO did not accept the contentions of the assessee by holding that the alternative contention of the assessee was on account of change in stand and the same is an afterthought. Accordingly he disallowed the depreciation claimed by the assessee on good will in all the years under consideration.
The CIT(A) noticed that the assessee itself had submitted that no amount could be attributed towards Goodwill. Accordingly he, in principle, held the disallowance of depreciation on goodwill was justified. However, following the jurisdictional High Court the CIT(A) directed the AO to allow depreciation on non-compete fee of 5.00 crores in all the years under consideration.
Regarding the the Tribunal noticed that the CIT(A) had followed the binding decision rendered by the Hon’ble jurisdictional High Court even though the other High Court had taken a different view. In view of that the decision rendered by the jurisdictional High Court is binding on all the persons falling within its jurisdiction, the Tribunal upheld the order passed by the ld CIT(A) on this issue.
The Tribunal noted that the issue relating to eligibility to claim depreciation on Goodwill has since been settled by Hon’ble Supreme Court. Hence the assessee is eligible to claim depreciation on the amount paid for Goodwill.
The Tribunal observed that as per the decision of the Hon’ble Supreme Court, the difference between the cost of an asset and the amount paid for acquiring the same constituted goodwill. In commercial parlance also, the amount paid over and above the value of tangible and intangible rights is considered as goodwill.
The Tribunal opined that merely because the assessee had taken a different stand before the AO to the effect that the difference/excess amount paid by it represented payment made for trademark/trade name would not change the character of payment made by the assessee. In the case, the alternative contention raised before the AO would not disentitle the assessee to claim depreciation on the amount, which was otherwise could be considered as goodwill in its hand.
The Tribunal opined that the tax authorities were not justified in denying the depreciation claimed by the assessee on the amount of goodwill.