Delhi High Court: Goodwill is an intangible asset entitled to depreciation u/s 32(1)(ii)

CIT v. Hindustan Coca Cola Beverages on 14 January, 2011

Assessment Year: 2001-2002, 2002-03 and 2003-04

Substantial question of law before the Hon’ble Court:

“(1) Whether learned ITAT erred in holding that exercise of Revisionary Jurisdiction under Section 263 of the Income Tax Act, 1961 was invalid?

(2) Whether learned ITAT erred in setting aside the order of the CIT under Section 263 ignoring the fact that the goodwill generated in a business cannot be described as an "asset" so as to be entitled to depreciation under Section 32 and, therefore the depreciation on goodwill was not admissible?”

Relevant facts: After the order of assessment was framed after exercising jurisdiction u/s 143(3), the Commissioner of Income Tax-IV, New Delhi invoked the jurisdiction under Section 263 of the Act as he noticed that the depreciation on goodwill which was accepted by the assessing officer was not an asset so as to entitle the assessee the benefit of depreciation as claimed under Section 32 of the Act and, hence, the order was erroneous and prejudicial to the interest of the revenue which resulted in escapement of income and, accordingly, issued notice to the assessee. After hearing the party, the Commissioner set aside the order of the assessing officer relating to the claim of depreciation on goodwill and sent the matter for fresh adjudication.

Paving the path for dismissal of the appeal of the revenue, the Hon’ble Court held that:

Para 24: “It is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of Section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customers associate with such assets. Goodwill, when appositely understood, does convey a positive reputation built by a person / company / business concern over a period of time.

Regard being had to the wider expansion of the definition after the amendment of Section 32 by the Finance Act (2) 1998 and the auditors report and the explanation offered before the assessing officer, we are of the considered opinion that the tribunal is justified in holding that if two views were possible and when the assessing officer had accepted one view which is a plausible one, it was not appropriate on the part of the Commissioner to exercise his power under Section 263 solely on the ground that in the books of accounts it was mentioned as goodwill and nothing else.”

The decision is available here.