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Delhi High Court Rules That Payment For Goodwill Is Eligible For Depreciation
The taxpayer acquired a business for a lump-sum price as a going concern. It treated a certain portion of the price paid as 'Goodwill' in its books and claimed depreciation on the same under section 32 of the Income-tax Act, 1961 ('Act"). While the Tax Officer allowed the claim, the Commissioner of Income Tax ("CIT") held that depreciation could not be allowed on the Goodwill, as it did not fit within the meaning of intangible assets under section 32 of the Act. Taxand India analyses several decisions covering direct and indirect tax concerning the eligibility of goodwill for depreciation under the Act.
On appeal before the Tribunal, the taxpayer contended that the 'Goodwill' was towards marketing and trading reputation, trading style and name, know-how on territory, customer database, distribution network, contract and other commercial rights. It noted that the amount accounted as 'Goodwill' was in fact an allocation of the lump-sum price and represented the consideration for various business rights. Accordingly, it held in favour of the taxpayer. On further appeal, the High Court held that it would be necessary to consider certain aspects such as the nature of goodwill, manner in which it was generated, method of valuation, agreement under which it was acquired, the intangible assets that it represents and whether it would fall within the realm of 'any other business or commercial rights of similar nature' as referred to under section 32 of the Act. It further observed that any right obtained for carrying on business with effectiveness was likely to fall within the meaning of intangible asset under the Act. In light of these principles and considering the facts as recorded by the Tribunal, the High Court held that the taxpayer was eligible for depreciation under the Act on the sums treated as 'Goodwill' in its books.