2011 TaxPub(DT) 0741 (Visakhapatnam-Trib) : (2011) 139 TTJ 0475 : (2011) 044 SOT 0625 :

(2011) 056 DTR 0229

Jeypore Sugar Company Ltd. v. ACIT

INCOME TAX ACT, 1961

--Depreciation--AllowabilityGoodwill--The assessee claimed depreciation at Rs. 44,77,486/- in A.Y. 2005-06
and at 25% on goodwill including in the block of intangible assets in the depreciation statement enclosed to the
computation of total income. When the assessee was asked to explain how the goodwill is eligible for
depreciation under clause (ii) of section 32(1) the assessee submitted that the intangible assets value represents
the difference between price paid by the assessee to the Government on closed tender for the purchase of
Chagallu distillery. The price offered by the assessee-company was Rs. 9 crores and the company took over
assets valued at Rs. 4,75,46,800 as per the details in the annexure. It was further stated that balance amount
represents the amounts paid as consideration towards transfer of distillery license which otherwise would not
have been possible to acquire. The AO has examined the claim of the assessees. Being not convinced with it he
disallowed the claim of depreciation on goodwill. On appeal before the CIT(A) it was held that the view
expressed by AO that goodwill cannot be treated as intangible asset, therefore, not depreciable. Held: From
looking to the nature of various components of the goodwill, certain components can be called to be business or
a commercial rights. Therefore, those commercial benefits which move along with the establishment on its sale
and not akin to the know-how, patents, copy rights, trade marks, license, franchises are not entitled for
depreciation. Total goodwill cost should be bifurcated in two equal parts; one is for commercial benefits and the
other is for commercial rights and the amount incurred in acquiring the commercial right should be eligible for
depreciation under section 32. Therefore, the AO is directed to divide the entire cost of goodwill in two parts and
50% of the cost of the goodwill be treated as a cost of acquisition of the commercial rights and to allow the
depreciation thereon at a prescribed rate.
Section 32 was amended by the Finance Act, 1998 with effect from 1-4-1999. After this amendment, depreciation
is allowed on know-how, patents, copy rights, trade marks, license, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or after 1-4-1998. Dispute arises with
regard to the business or commercial rights of similar nature being intangible assets. Emphasis given on the words
of "similar nature". Meaning thereby only those business or commercial rights are eligible for depreciation which
are either akin to know-how, patents, copy rights, trade marks, license, franchises or falls within the same genesis.
The residuary category "any other business or commercial rights of similar nature" as found in the company of
expression know-how, patents, copy rights, trade marks, license, franchises has to be read ejusdem generis,
hence must be in the same genesis. Meaning thereby that all sort of intangible assets falls in the residuary category
are eligible for depreciation. Now, the question arise whether the goodwill falls within the residuary category, i.e.,
"any other business or commercial rights of similar nature". Before dealing with this issue, first understand that
what is "goodwill". [Para 9] The word "goodwill" has been defined repeatedly through judicial pronouncements
by the Apex Court and the various High Courts. After the amendment in section 32, depreciation is to be allowed
on tangible and intangible assets irrespective of the facts that there is no erosion in value of these assets.
Therefore, the arguments of the Departmental Representative that there is no erosion in the value of so-called
goodwill is not relevant to decide the controversy with regard to the entitlement of depreciation on goodwill
purchased. Now the main controversy is whether the goodwill is business or commercial right of similar nature of
know-how, patents, copy rights, trade marks, license or franchises. [Para 13] Depreciation under section 32(1)(i)
and (ii) is to be allowed on tangible and intangible assets. Intangible assets should either be know-how, patents,
copy rights, trade mark, license, franchise or any other business or commercial rights of similar nature. In the
case of B. Ravindran, it has been categorically held that the erosion in the value of the assets is not a relevant
factor to decide whether it is entitled for depreciation or not. In clause (ii) of section 32(1) depreciation is to be
outrightly allowed on know-how, patents, copy rights, trade mark, licenses and franchise, but with respect to
other intangible assets, depreciation would only be allowed if business or commercial rights are of similar nature,
to that of know-how, patents, copy right, trade mark, license or franchise. The business or commercial right must
be of the same genesis. The goodwill has already been defined through various judicial pronouncements and it
has been held that the goodwill is basically a bundle of commercial benefits and rights. It depends upon a variety
of circumstances or a combination of them. The location, the service, the standing of business, the honesty of
those who run it, the lack of competition and many other factors go individually or together to make up the
goodwill. Goodwill also includes the certain business or a commercial rights move along with the establishment.
Now, the question arise whether all the components of the goodwill or the goodwill as a whole is entitled for
depreciation? From looking to the nature of various components of the goodwill, certain components can be
called to be business or a commercial rights. Therefore, those commercial benefits which move along with the
establishment on its sale and not akin to the know-how, patents, copy rights, trade marks, license, franchises are
not entitled for depreciation. The legislature has used the word in a residuary clause "is other business or
commercial rights of similar nature". The commercial rights cannot be equated with the commercial benefits.
Commercial rights confers certain right upon the purchaser to carry on its trade in a particular manner in order to
earn more profit. Therefore, the commercial rights can be called to be equated with the know-how, patents, copy
rights, trade marks, license, franchises as all these items confers certain rights upon the owner to carry on its trade
in a particular way. Therefore, the commercial benefits which moves along with the establishment on its sale are
not akin to or do not belong to the same genesis of know-how, patents, copy rights, trade marks, license,
franchises because they do not confer any right upon the purchaser. These benefits are like the locality, particular
type of customer, the person who owned it, etc., and these benefits though they are the part of the goodwill, but
they are not entitled for depreciation under section 32(1)(ii). Whereas, the business or commercial rights which
confers upon the purchaser a right to carry on its trade in a particular manner are akin to the know-how, patents,
copy rights, trade marks, license, franchises, etc. That is why their Lordship of the Apex Court in the case of
Techno Shares have held that membership of a stock exchange which confers the right upon the assessee to
trade is entitled for depreciation being a commercial right of similar nature as that of know-how, patents, copy
rights, trade marks, license, franchises. [Para 23] The assessee has made the excess payment over and above the
cost of tangible assets and that excess payment was claimed to have been made against the goodwill. From the
information, memorandum and bid document filed it is noticed from its clause 3.8, that under the head valuation,
fair market value of the asset was estimated at Rs.475.56 lakhs and the realizable value estimated at Rs.587.52
lakhs. It was also stated under that clause that the definition of assets in the asset valuation report does not
include contract, records and goodwill or the right to carry out distilling that form part of sale. It was stated on
behalf of the assessee that purchase price of the complete establishment was consolidated price of Rs.9 crores
and it includes the consideration for assets and business. It was also explained that the goodwill means the right
to carry on business with a specific provisions from the use of the name "Nizam Sugars Limited". There is no
dispute that assessee has paid the excess amount against the cost of goodwill and the goodwill was defined in the
sale and purchase agreement executed on 26-4-2001 according to which goodwill is all the goodwill, interest and
connection of NSL (Nizam Sugars Limited) in and concerning the business together with the right to represent the
purchaser as carrying on business as a going concern in succession to NSL but not including any right to use the
name of "Nizam Sugars Limited or any associated or related name". Therefore, by virtue of a goodwill, assessee
has acquired all business/commercial benefits or rights to run the Chagallu distillery but without using the name of
Nizam Sugars Limited or any of its associates. Goodwill is a bundle of business/commercial benefits and rights.
Undisputedly in the instant case, assessee has made the excess payment over and above the cost of the tangible
assets. No doubt the goodwill is an intangible asset but all intangible assets are not eligible for depreciation as per
the ratio laid down by the Apex Court and various High Courts through their judicial pronouncements. Only those
intangible assets which are akin to or belong to the same genesis of know-how, patents, copy rights, trade mark,
license or franchise are eligible for depreciation. Other intangible assets which do not fall within the category, are
not eligible for depreciation under section 32. The know-how, patents, copy right, trade mark, license and
franchise are known as intellectual property rights (IPR) in the present world and that is why the legislature has
brought the amendment under section 32(1) to make them eligible for depreciation, though, their value may not
erode in the years to come. All these items are of the same genesis and they do confer certain rights upon the
assessee to trade or to run its business by utilizing them in a particular manner to earn more profit. After acquiring
the know-how, patents, copy rights, trade mark, license or franchise, assessee acquires certain right to run its
business in a particular way. Meaning thereby, wherever any intangible assets confers certain right upon the
assessees like above items it would be eligible for depreciation under section 32(1). But those intangible assets
which confers only a commercial/business benefits upon the assessees, they are certainly not eligible for
depreciation in as much as by acquiring that benefit assessee would not get an exclusive right to trade or to run its
business in that way. [Para 26] In the present case, the goodwill includes the location of the distillery, customers
of the distillery, reputation of the distillery, etc., are the commercial benefits which move to the assessee along
with the establishment on its purchase. But these benefits do not confer any right to trade upon the assessee. It is
also brought to notice that generally in the sugar factory, the factory owners entered into an agreement with the
sugar cane growers to purchase their sugar cane at a particular rate and this right also moves along with the
establishment on its sale. It is also brought to notice that it is not easy to obtain a license to set up of sugar
factory and distillery. It requires lot of efforts. That is why it has its own value and without licenses one cannot
run distillery and sugar factory. Beside this license, other licenses or permission are required from various
agencies to run a sugar factory smoothly and it has its own value. A lumpsum amount over and above the cost of
the tangible assets is considered to be the cost of the goodwill, which includes business or commercial benefits
and rights. There is no bifurcation of the total cost which can be allocated towards the commercial benefits and
the commercial rights acquired by the assessees. Complete details of cost of acquisition of the commercial
benefits and the commercial rights cannot be available on record. It is only a question of estimate. Since this
Tribunal has also taken a view that in such type of cases goodwill is a bundle of commercial benefits and
commercial rights and commercial benefits are not eligible for depreciation whereas the commercial rights being
akin to the know-how, patent, copy right, trade mark, license or franchise are eligible for depreciation in as much
as on account of those rights the assessee would be able to carry on its business smoothly. Therefore, total
goodwill cost should be bifurcated in two equal parts; one is for commercial benefits and the other is for
commercial rights and the amount incurred in acquiring the commercial right should be eligible for depreciation
under section 32. Therefore, the AO is directed to divide the entire cost of goodwill in two parts and 50% of the
cost of the goodwill be treated as a cost of acquisition of the commercial rights and to allow the depreciation
thereon at a prescribed rate. [Para 27]

Income Tax Act, 1961, Section 32(1)

Jeypore Sugar Company Ltd. v. ACIT

In the ITAT, Visakhapatnam Bench, Visakhapatnam

ITA NOS. 255 & 256/VIZAG/2010

Decided on 21 December 2010
ORDER
Shri S.K. Yadav, Judicial Member
These appeals are preferred by the assessee against the respective order of the Commissioner (Appeals) on
common grounds. Therefore, these appeals were heard together and are being disposed of through this
consolidated order.
2. Ground Nos.1&2 in these appeals relate to disallowance of expenditure incurred by the assessee for the units
of the company M/s. Ramakrishna Maize Products & M/s. GSR Sugars. The disallowance in this regard was
repeatedly made in earlier years and it was confirmed by the Tribunal also. The Ld. Counsel for the assessee has
candidly admitted during the course of hearing of the appeal that both these grounds are covered against the
assessee by the orders of the Tribunal for the assessment years 2002-03 to 2004-05. Copy of the Tribunals order
for the assessment years 2003-04 and 2004-05 is placed on record and from its perusal, we find that both the
issues are covered against the assessees. Therefore, following the earlier order of the Tribunal, we dismiss these
grounds and confirm the order of the Commissioner (Appeals) in this regard.
3 . Now the next issue involved in both the appeals relate to the disallowance of claim of depreciation on
intangible assets i.e. Goodwill.
4 . Brief facts borne out from the record in this regard are that the assessee claimed depreciation at Rs.
44,77,486/- in A.Y. 2005-06 and at Rs. 33,58,115/- in A.Y. 2006-07 at 25% on goodwill including in the block of
intangible assets in the depreciation statement enclosed to the computation of total income. When the assessee
was asked to explain how the goodwill is eligible for depreciation under clause (ii) of section 32(1) of the Income
Tax Act (hereinafter referred as Act) the assessee submitted that the intangible assets value represents the
difference between price paid by the assessee to the Government on closed tender for the purchase of Chagallu
distillery. The price offered by the assessee company was Rs. 9 crores and the company took over assets valued
at Rs. 4,75,46,800/- as per the details in the annexure. It was further stated that balance amount represents the
amounts paid as consideration towards transfer of distillery license which otherwise would not have been
possible to acquire. The assessing officer has examined the claim of the assessees. Being not convinced with it he
disallowed the claim of depreciation on goodwill.
5. The assessee preferred an appeal before the Commissioner (Appeals) with the submission that assessee had
acquired a distillery unit by name Chagallu Distillery from M/s. Nizam Sugar Limited (NSL). The seller NSL is a
government company in which substantial share holding to the extent of 98.88% is owned by the Government of
Andhra Pradesh. The sale of distillery unit took place consequent to the decision of the Government of Andhra
Pradesh under the privatization process in which the Chagallu Distillery has been included. As per the sale and
purchase agreement, the purchase price of the distillery unit was termed as a single price of Rs. 9 crores as per its
clause 2.3 besides separate payment of stocks. It was further stated that as per clause 1 specifying construction
and interpretation, the various terms has been defined as follows:
Purchase price:
The consideration for the assets and business set out in clauses 2and3. The term Assets and Business has been
defined as NSLs right, title and interest in the following assets:
(i) Premises
(ii) Immovable and Movable Fixed Assets More particularly described in Schedule 1 to this Agreement
(iii) Goodwill and Records,
(iv) Stocks
(v) Assumed Liabilities
Each as defined in the agreement.
Goodwill:
Goodwill--All the goodwill, interest and connection of NSL in and concerning the Business together with the right
to represent the Purchaser as carrying on the business as a going concern in succession to NSL but not including
any right to the use of the name of The Nizam Sugars Limited or any associated or related name.
Premises:
The Premises, particulars of which are set out in Schedule 1 (and includes land and any part thereof and/or any
building, structure and/or works thereon and any easement that NSL enjoys at the Assets and the Business.
Excluded Assets:
(a) Cash in hand or at bank and all other cheques and other securities representing the same;
(b) Any right to use or continue to use after Completion any trade or service name or mark of NSL.
Transfer:
The transfer of the Assets and Business pursuant to this Agreement.
6 . It was further urged before the Commissioner (Appeals) that it is evidently clear from the agreement for
purchase of business that the purchase price is a consolidated price of Rs.9 crores and it means consideration for
assets and business. He has also placed a document titled Information memorandum and bid documents, with the
submission that the goodwill has been clearly specified as the right to carry out distillery that forms part of sale. It
was also specified therein that the Chagallu has potential access to molasses from nearby sources as well as from
NSL Sugar Mills. It was further contended that the goodwill means the difference between the value of the asset
acquired from NSL and amount paid to NSL only towards the right to manufacture rectified spirit. It is the only
right to carry on the business but specifically forbidding the right to use the name. Besides, he has also placed a
reliance upon some orders of the Tribunal in support of his contention but the assessee did not find the favour
from the Commissioner (Appeals) and Commissioner (Appeals) accordingly confirmed the disallowance on
depreciation made by the assessing officer, after having observed that in the light of the statutory provisions
contained in section 32(1)(II), the goodwill acquired by the assessee does not come under the expression of any
other business or commercial rights of the nature similar to know how, patents, copy rights, trade marks, license,
franchises. The relevant observation of the Commissioner (Appeals) are extracted hereunder:
I have considered the above facts of the case, the appellants submissions as well as A.Os contention. In this
case, the appellant had acquired a distillery unit by name Chagallu Distillery from M/s. Nizam Sugars Ltd. (NSL).
As per the sale and purchase agreement, the appellant had paid a consolidated price of Rs.9.00 crores for
acquiring the unit. The excess of the amount paid over the value of the fixed assets acquired amounting to Rs.
4.75 crores has been termed as the payment towards goodwill as per the agreement. It is the appellants contention
that the term goodwill has been employed as conveying only the right to carry on the business of operation of
distillery and the purchase price is for assets and business put together and purchase of business can only mean
the purchase of the right to carry on the business. Therefore, goodwill has to be considered as an intangible asset
eligible for depreciation.
The appellants claim has been rejected by the assessing officer on the ground that depreciation cannot be allowed
on goodwill as the legislature has consciously excluded goodwill from the purview of sec. 32(1) of the I. T Act.
Further, the appellants claim that it is similar to the right and license paid for acquiring the right to carry on the
business of the unit was also rejected as assessing officer is of the view that the license was not purchased
directly and the appellant has paid premium for purchase of assets of M/s. Nizam Sugars.
I entirely agree with the view expressed by the assessing officer that goodwill cannot be treated as intangible
asset, therefore, not depreciable. It is also not in the nature of business or commercial right. The law has specified
items of intangible assets eligible for depreciation in the following categories:
I. Knowhow
II. Patents
III. Copy rights
IV. Trade marks
V. Licenses
VI. Franchises
As stated above, the law has specified six categories of intangible assets entitled for depreciation, therefore it is
obvious that all intangible assets are not eligible for depreciation allowance. In the instant case, the differential
amount as per the agreement was paid by the appellant towards the acquisition of goodwill. Therefore, the said
payment did not come under either know how, patents, copy rights, trade marks, licenses, franchises. Any
business or commercial right not similar in nature to the above mentioned six items cannot be treated as intangible
assets qualified for depreciation. Those rights must be of similar nature to knowhow, patents, copy rights, trade
marks, licenses, franchises. Therefore, in the light of the statutory provisions contained in sec. 32(1)(ii), the
goodwill acquired by the appellant does not come under the expression of any other business or commercial right
of the nature similar to knowhow, patents, copy rights, trade marks, licenses, franchises. In the instant case, the
term goodwill has been used in the agreement itself. Therefore, the same could not be equated with the expression
of any other business or commercial right of similar nature occurring in section 32(1)(ii) of the Income Tax Act.
In such circumstances, there was nothing on record including in the agreement to show that the appellant had paid
the amount for something other than goodwill. The departments view is also supported by the Honble ITAT has
held that goodwill does not fall in the category of intangible assets as prescribed under section 32(1)(ii) and
therefore acquisition cost of goodwill is not entitled for depreciation. Therefore, the acquisition cost of goodwill
is not an intangible asset entitled for depreciation. This ground of appeal is decided against the appellant. This
ground of appeal stands as dismissed.
7 . Aggrieved, the assessee has preferred an appeal and reiterated its contentions. The Ld. Counsel for the
assessee Mr. G.V.N. Hari has contended that goodwill is a bundle of rights which move along with the
establishment/industry/unit. The value of the good will depends upon the location of the establishment of the
industry/unit and the nature of commercial benefits which are being transferred along with the
establishment/industry/unit. Therefore, in a sale of going concern, the value of the goodwill is to be determined
separately and since it is an intangible asset akin to the know how, patents, copy rights, trade marks, license,
franchises etc. it is eligible for depreciation u/s 32(1)(ii) of the Act. Mr. Hari has also invited our attention to the
provisions of section 32 of the Act with the submission that clause 2 of sub-section 1 of section 32 is an inclusive
section and not an exclusive. According to this section, other business or commercial rights which are of similar
nature of know how, patents, copy rights, trade marks, license, franchises being intangible assets acquired on or
after 1st April, 1998 are eligible for depreciaton at a prescribed rate. Since the goodwill is a bundle of commercial
rights and benefits and being intangible asset, it is eligible for depreciation as per the prescribed rate. In support
of his contention, he has placed a reliance upon the judgment of the Kerala High Court in the case of B.
Ravindran Pillai v. CIT in IT appeal No. 1741 of 2009 in which the depreciation was allowed on written down
value of the goodwill. He has also placed a reliance upon the judgment of the apex court in the case of Techno
Shares and Stocks Limited v. CIT civil appeal Nos.7780-7781 of 2010 in which the depreciation was allowed on
BSE Membership card. He has also placed a reliance upon the order of the Tribunal in the case of Kotak Forex
Brokerage v. ACIT 41 DTR (Mum.) (Trib.) 387 in which the depreciation was allowed on goodwill.
8. The Ld. D.R. on the other hand has submitted that the goodwill is bundle of commercial rights and benefits
acquired by an establishment over a period of time. It depends upon a location where the establishment situate,
the nature of business, the nature of customers of an establishment, nature of rights to trade and also the
reputation developed over a period of time. The Ld. D.R. further contended that the goodwill was defined by the
apex court way back in 1960 in the case of S.C. Cambatta & Co. (P) Ltd. v. CIT 41 ITR 500(SC) in which it
was held that the goodwill of a business depends upon a variety of circumstances or a combination of them. The
location, the service, the standing of the business, the honesty of those who run it and the lack of competition and
many other factors go individually or together to make up goodwill, though locality always plays a considerable
part. Goodwill includes the commercial benefits and the commercial rights. If the assessee acquires a commercial
right which is akin to the know how, patents, copy rights, trade marks, license, franchises, being an intangible
asset it may be eligible for depreciation u/s 32 of the Act. But the commercial benefits which are accrued on
account of its location, reputation, the lack of competition and for other various reasons, the same are not eligible
for depreciation u/s 32 of the IT. Act. In support of his contention that goodwill though it is an intangible asset,
but it is not of similar nature of that know how, patents, copy rights, trade marks, license, franchises; therefore,
not eligible for depreciation. He placed a reliance upon the following judgments:
1. Borkar Packaging (P) Ltd. v. ACIT 131 TTJ 99
2. Guruji Entertainment Network Ltd. v. ACIT 108 TTJ (Del) 180
3. CIT & ANR v. Mangalore Ganesh Beedi Works 264 ITR 142
4. Bharatbhai J. Vyas v. Income Tax Officer 97 ITD 248 (Ahd.)
5. R.G. Keswani v. ACIT 116 ITD 133
9. Having heard the rival submissions and from a careful perusal of record, we find that the sole controversy in
these appeals revolves around an issue whether goodwill being an intangible asset is eligible for depreciation u/s
32 of the IT. Act. The section 32 was amended by the Finance Act, 1998 with effect from 1.4.1999. After this
amendment, depreciation is allowed on know how, patents, copy rights, trade marks, license, franchises or any
other business or commercial rights of similar nature, being intangible assets acquired on or after 1st day of April,
1998. Dispute arises with regard to the business or commercial rights of similar nature being intangible assets.
Emphasis given on the words of similar nature. Meaning thereby only those business or commercial rights are
eligible for depreciation which are either akin to know how, patents, copy rights, trade marks, license, franchises
or falls within the same genesis. The residuary category any other business or commercial rights of similar nature
as found in the company of expression know how, patents, copy rights, trade marks, license, franchises has to be
read ejusdem generis, hence must be in the same genesis. Meaning thereby that all sort of intangible assets falls in
the residuary category are eligible for depreciation. Now the question arise whether the goodwill falls within the
residuary category i.e., any other business or commercial rights of similar nature. Before dealing with this issue,
we have to first understand that what is goodwill.
10. The word goodwill has been defined repeatedly through judicial pronouncements by the apex court and the
various High Courts. In the case of S.C. Cambatta & Co. Pvt. Ltd. (s upra) their Lordship of the apex court had
examined the interpretations of goodwill given in different cases and also by different authors. In IRC v. Muller &
Co.s Margarine Ltd. (1901) AC 217 Lord Macnaghten at pg.Nos.223 & 224 has made the following
observations:
What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the
good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the
one thing which distinguishes an old established business from a new business at its first start'''' if there is one
attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence.
It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with
it, though elements remain which may perhaps be gathered up and be revived again.
11. Their Lordship of this apex court in the case of S.C. Cambatta & Co. finally concluded that the goodwill of a
business depends upon a variety of circumstances or a combination of them. The location, the service, the
standing of business, the honesty of those who run it and the lack of competition and many other factors go
individually or together to make up the goodwill, though locality always plays a considerable part. Shift the
locality and the goodwill may be lost. Their Lordship further observed that at the same time locality is not
everything. The power to attract customers depends upon one or more of the other factors as well. In the case of
Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba Boatwaua AIR 1970 SC 1147,their Lordship of the
Apex court have examined the goodwill by holding that it is the benefit and advantage of the good name,
reputation and connection of business. It is the attractive force which brings in customers. It is the magnetic
quality of a particular trade of business which attracts customers to it as a matter of course. This quality springs
from and is developed by various contributing factors that earn a reputation for honest dealing, quality and
standard. It is an intangible asset being the whole advantage of the reputation and connections formed with the
customers together with the circumstances which makes connection durable. It is a component of total values of
the undertaking which is attributable to the ability of the concern to earn profit over a course of years because of
its reputation, location and other features. In the case of CIT v. B.C. Srinivasa Setty reported in 128 ITR 294,
the Honble Supreme Court have held that in a progressing business, goodwill tends to show progressive increase
and in failing business it may begin to wane.
12. In the case of Ravindran (supra) their Lordship of Kerala High Court have held that the depreciation though is
an allowance take care of loss or erosion in value of the assets in the course of time on account of use, such
consequences need not actually take place for the purpose of entitling assessee for the relief in terms of statutory
provisions. In fact, it is common knowledge that on account of inflation even tangible assets such as building,
machinery, plant or furniture will fetch higher price in the later years though in the assessees book value got
eroded on account of depreciation written off. The Income Tax Act also takes into account the possibility of
appreciation or atleast retention of value of depreciable assets on which depreciation is allowed. While section
41(2) provides for assessment of profit arising on sale of tangible depreciable assets, section 50 provides for
assessment of capital gains on sale of depreciable assets. Therefore, entitlement for depreciation on assets
including intangible assets cannot be negatived on the ground that no erosion on value takes place on account of
the use of the asset in business or profession.
13. In the light of these observations of the Kerala High Court in the case of Ravindran, we are of the view that
after the amendment in section 32, depreciation is to be allowed on tangible and intangible assets irrespective of
the facts that there is no erosion in value of these assets. Therefore, the arguments of the Ld. D.R. that there is no
erosion in the value of so called goodwill is not relevant to decide the controversy with regard to the entitlement
of depreciation on goodwill purchased. Now the main controversy before us is whether the goodwill is business
or commercial right of similar nature of know how, patents, copy rights, trade marks, license or franchises.
14. We have also examined the facts of the case of Ravindran and we find that assessee purchased a hospital
with its land, building, equipments, staff, name, trade mark and goodwill as a going concern under 2 separate sale
deeds. While immovables are covered by one sale deed, movables covering trade mark, goodwill, etc. are
covered by another sale deed. In schedule B besides the name and get up, the parties have given the emblem or
trade mark of hospital purchased by the assessees. Under the sale deed, the value of goodwill which includes the
name of the hospital and its logo and trade mark was declared as Rs.2 crores. The depreciation u/s 32(1)(ii) of
the Act was claimed on goodwill and while dealing with the issue, their Lordship have observed that the value of
the goodwill covers the trade mark or logo and the name of the hospital. Without resorting to residuary entry, the
assessee is entitled to claim depreciation on the name, trade mark, logo under the specific head provided u/s
32(1)(ii) which covers trade mark and franchise. It was further observed that trade mark and franchise covers
name, logo etc., the value of which are included in the value of goodwill claimed for the purpose of depreciation
by the assessee. Their Lordship further observed that by transferring the right to use the name of the hospital
itself, the previous owner has transferred the goodwill to the assessee and the benefit derived by the assessee is
retention of continued trust of the patients who are patients of the previous owner. When the goodwill paid is for
ensuring retention and continued business in the hospital, it is certainly for acquiring a business and commercial
right and it is certainly comparable with the trade mark, franchise, copy right etc. referred to in first part of subject
clause (ii) of section 32(1) and so much so, the goodwill is covered by the above provisions of the act entitling
the assessee for depreciation. The relevant observations of the Kerala High Court are extracted hereunder:
The question now to be considered is whether the facts in this case can lead us to the conclusion that the
purchase of the Hospital by the assessee with its name and trade mark as a going concern involves any purchase
of goodwill. Admittedly the Hospital was run in the same building, in the same town, in the same name for several
years prior to purchase by the assessee. It obviously had the name of a successful Hospital and that is why the
assessee chose to continue the same business with the same name. It is the reputation of the Hospital that brings
patients to it and the same may involve the quality of Doctors, staff, equipments and other facilities available in
the Hospital. Even after purchase of the Hospital by the assessee, all the facilities and name continued to be the
same and therefore, patients may not know even the change of management of the Hospital when they go for
treatment in the Hospital after its purchase by the assessee. The purpose of purchasing a business concern,
whether it be Hospital or Hotel, is to ensure continuity of business with the same reputation. What is most
important in the purchase of a Hospital, in our view, is the name of the Hospital and what is more important in
this case is that the Hospital after purchase by the assessee continued to be run in the very same building, in the
very same premises, in the very same town and with the same name. So much so, the purpose of paying a very
huge amount for goodwill is for maintenance of the continued reputation of the Hospital which was run in so
much so, purchase of Hospital as a going concern with its name and trade mark is nothing but acquisition of
goodwill earned by the Hospital and it cannot be termed anything other than a commercial or business right. In
fact, if the previous owner of the Hospital wanted to retain the name, logo or trade mark of the Hospital even after
sale of building and premises, he could have retained the same without transferring it to the appellant-assessee. By
transferring the right to use the name of the Hospital itself, the previous owner has transferred the goodwill to the
appellant-assessee and the benefit derived by the appellant-assessee is retention of continued trust of the patients
who were patients of the previous owners. When the goodwill paid is for ensuring retention and continued
business in the Hospital, it is certainly for acquiring a business and commercial rights and it is certainly
comparable with trade mark, franchise, copy right etc., referred to in first part of sub-clause (ii) of section 32(1)
and so much so, in our view, goodwill is covered by the above provision of the Act entitling the assessee for
depreciation. We, therefore, allow the appeal by reversing the orders of the Tribunal and that of the lower
authorities and by directing the assessing officer to revise the assessment by granting depreciation on the written
down value of goodwill to the appellant-assessee.
15. We have also examined the judgment in the case of CIT v. Mangalore Ganesh Beedi Works (supra) referred
to by the Ld. D.R. but this judgment is not on the point of controversy. It talks about the depreciation of trade
mark, copy right and technical knowhow and there is no dispute in this regard. Therefore, the judgment will not
render any assistance in resolving the controversy.
16. We have also examined the judgment of the Pune Bench of the Tribunal in the case of Modular Infotech
Private Ltd. v. DCIT 40 DTR Pune (Trib) 172 in which it has been held that section 32 prescribes the
entitlement of depreciation with effect from 1st April, 1998 in respect of certain intangible assets such as know
how, patents, copy rights, trade marks, licenses or any other commercial rights of similar nature acquired. This
section has made it clear that if such intangible asset is acquired wholly or partly by the assessee and used for the
purpose of business, then it is entitled for depreciation. The Tribunal further held that the goodwill depends upon
the past performance of the going concern; on the other hand the intellectual property rights (IPR) depends upon
the probability of the future performance. Therefore, both have independent and divergent direction of valuation.
Relying upon the orders of the other coordinate benches, the Tribunal has held that on other intangible assets
which are not akin to know how, patents, copy rights, trade marks, license, franchises, the depreciation is not
allowable.
17. In the case of R.G. Keswani v. ACIT (supra), the Tribunal has rather held that the goodwill is not an
intangible asset within the meaning of section 32 (l)(ii), hence, the acquisition cost of goodwill is not entitled to
depreciation.
18. In the case of Bharatbhai J. Vyas v. ITO (supra), the Tribunal has held that the legislature has inserted a
fiction by which specified intangible assets are held to depreciate and allowances given to therefore Know how,
patents, copy rights, trade marks etc. are sometimes assigned in different names and therefore by using the word
similar nature, the legislature has restricted the scope of intangible assets similar to the specified one. What it has
paid for, in this case, simplicitor is an amount as a consideration for retirement of one partner, as goodwill, which
amounts to giving compensation to a retiring partner and the term has been used as a goodwill. This does not
signify acquisition of any know how, patents, copy rights, trade mark etc. or any business or commercial rights
of similar nature. There may be an innumerable number of intangible assets, which may be transacted in business
realities. There cannot be a dispute about terming such compensation as goodwill, but while deciding the
allowability of depreciation, one has to take recourse of specific provisions. Therefore, the amount paid by the
assessee to retiring partners towards goodwill was not eligible for depreciation u/s 32(1)(ii) as the payment did
not result in any acquisition in know how, patents, copy rights, trade mark, etc. as prescribed in that section.
19. In the case of Guruji Entertainment Network Limited v. ACIT(supra), the Tribunal has also held that though
the assessee was not eligible for depreciation on goodwill, it was entitled for depreciation in respect of other
intangible assets, such as copy rights, telecast rights etc.
20. In the case of Borkar Packaging Pvt. Limited v. ACIT(supra), the Tribunal has held that assessee company
having not acquired any special rights of business or commercial nature in the course of amalgamation of three
companies with it, the goodwill appearing in its books of account as balancing figure of the assets acquired and
the price paid is goodwill simplicitor and therefore it is not eligible for depreciation.
21. In the case of Kotak Forex Brokerage Ltd. v. ACIT (supra) of which heavy reliance was placed by the Ld.
Counsel for the assessee that Tribunal has held that any right which is obtained for carrying on the business
effectively and profitably has to fall within the meaning of intangible assets. Goodwill is nothing but positive
reputation built by a person/company/business/house over a period of time. Thus, goodwill is a business or a
commercial right of a similar nature, therefore, entitled for depreciation. They further held that the business or
commercial rights are rights obtained for effectively carrying on the business or commerce. Commerce is a wider
term, which encompasses business in its fold. Therefore, any right which is obtained for carrying on the business
effectively and profitably has to fall within the meaning of intangible assets. The definition further provides that
business or commercial right should be of similar nature as know how, patents, copy rights, trade marks, license,
franchise, etc. all these are the assets which are not manufactured or produced over night but brought into
existence by experience and reputation. They assume importance in the commercial world as they represent a
particular benefit or advantage or reputation built over a period of time and customer associate with such assets.
Simiarly, goodwill is nothing but positive reputation built by a person/company/business/house over a period of
time. Thus goodwill is a business or a commercial right of similar nature. The name Kotak has tremendous
importance as the business company was to be benefited by the usage of said name and it has gone as far as
amending its name by including Kotak in its name. Therefore, it is of commercial value for which assessee has
paid a substantial amount and is eligible for depreciation. The facts of this case are that assessee has acquired the
foreign exchange broking business from M/s. Uday S. Kotak for a sum of Rs.5.90 crores out of which Rs. 1.88
crores was towards goodwill and Rs.3.83 crores was towards net current assets. The assessee claimed
depreciation on goodwill and on forex business rights u/s 32(1)(ii) of the Act being intangible assets. It was also
stated that assessee proposed to change the name of the company to Kotak Forex Brokerage Limited subject to
receipt of necessary approvals from the ROC, Mumbai to ensure smooth transition of the business, the seller
permits the purchaser to carry on the business style as Uday S. Kotak, until such time as the purchaser obtains
the approval of the ROC for the change of its name to Kotak Forex Brokerage Limited. In the light of these facts,
the Tribunal has held that the assessee is entitled for depreciation on goodwill being an intangible asset.
22. We have also examined the judgment of the apex court in the case of Techno Shares & Stocks Limited
(supra) recently rendered in which their Lordship have held that the right of membership with the exchange is a
business or a commercial right which gives non-defaulting continuing member a right to access the exchange and
to participate therein and in that sense it is a license or akin to license in terms of section 32(1)(ii) of the IT. Act.
While rendering judgment, their Lordship has clarified categorically that this judgment is confined to the rules and
by laws of BSE as they stood during the relevant assessment year. The judgment should not be understood to
mean that every business or commercial right would constitute a license or a franchise in terms of section 32(1)(ii)
of the Act.
23. Having carefully examined the aforesaid judgments of the apex court, various High Courts and also of the
Tribunal, we are of the view that depreciation u/s 32(1)(i)&(ii) is to be allowed on tangible and intangible assets.
Intangible assets should either be knowhow, patents, copy rights, trade mark, license, franchise or any other
business or commercial rights of similar nature. In the case of B. Ravindran (supra), it has been categorically held
that the erosion in the value of the assets is not a relevant factor to decide whether it is entitled for depreciation or
not. In clause (ii) of section 32(1) depreciation is to be outrightly allowed on knowhow, patents, copy rights,
trade mark, licenses and franchise, but with respect to other intangible assets, depreciation would only be allowed
if business or commercial rights are of similar nature, to that of knowhow, patents, copy right, trade mark, license
or franchise. The business or commercial right must be of the same genesis. The goodwill has already been
defined through various judicial pronouncements and it has been held that the goodwill is basically a bundle of
commercial benefits and rights. It depends upon a variety of circumstances or a combination of them. The
location, the service, the standing of business, the honesty of those who run it, the lack of competition and many
other factors go individually or together to make up the goodwill. Goodwill also includes the certain business or a
commercial rights move along with the establishment. Now the question arise whether all the components of the
goodwill or the goodwill as a whole is entitled for depreciation? From looking to the nature of various
components of the goodwill, we are of the view that certain components can be called to be business or a
commercial rights. Therefore those commercial benefits which move along with the establishment on its sale and
not akin to the know how, patents, copy rights, trade marks, license, franchises are not entitled for depreciation.
The legislature has used the word in a residuary clause is other business or commercial rights of similar nature.
The commercial rights cannot be equated with the commercial benefits. Commercial rights confers certain right
upon the purchaser to carry on its trade in a particular manner in order to earn more profit. Therefore, the
commercial rights can be called to be equated with the know how, patents, copy rights, trade marks, license,
franchises as all these items confers certain rights upon the owner to carry on its trade in a particular way.
Therefore, we are of the considered view that the commercial benefits which moves along with the establishment
on its sale are not akin to or do not belong to the same genesis of know how, patents, copy rights, trade marks,
license, franchises because they do not confer any right upon the purchaser. These benefits are like the locality,
particular type of customer, the person who owned it, etc. and these benefits though they are the part of the
goodwill, but they are not entitled for depreciation u/s 32(1)(ii) of the Act. Whereas, the business or commercial
rights which confers upon the purchaser a right to carry on its trade in a particular manner are akin to the know
how, patents, copy rights, trade marks, license, franchises, etc. That is why their Lordship of the apex court in
the case of Techno Shares (supra) have held that membership of a stock exchange which confers the right upon
the assessee to trade is entitled for depreciation being a commercial right of similar nature as that of know how,
patents, copy rights, trade marks, license, franchises. Similar was the case of Ravindran in which the entire
hospital along with its logo and trade mark, staff, equipments as a going concern was purchased. Except the
purchasers and the seller sale was not known rather to the patients. The entire management of the hospital is
changed in hands on account of its sale. Therefore, their Lordship have held that the goodwill comprise of name
of the hospital, logo, trade mark, staff, equipments, etc. is entitled for depreciation.
24. Similar was the case of Kotak Forex Brokerage Limited (supra) where the company was sold along with its
name, trade mark and all assets.
25. But in other cases in which the Tribunal has held that goodwill is not entitled for depreciation u/s 32(1)(ii) of
the Act, the entire company was not sold as a going concern along with its name, trade mark, logo, etc. In those
cases assessee has claimed the depreciation on one of the component of the goodwill which was in fact a
commercial benefit and not the commercial right. Therefore, the Tribunal has rightly held that the depreciation is
not allowable on the goodwill.
26. Turning to the facts of the case, we find that the assessee has made the excess payment over and above the
cost of tangible assets and that excess payment was claimed to have been made against the goodwill. From the
information, memorandum and bid document filed before us at pg.Nos.46 to 70 of the compilation we noticed
from its clause 3.8, that under the head valuation, fair market value of the asset was estimated at Rs.475.56 lakhs
and the realizable value estimated at Rs.587.52 lakhs. It was also stated under that clause that the definition of
assets in the asset valuation report does not include contract, records and goodwill or the right to carry out
distilling that form part of sale. It was stated on behalf of the assessee that purchase price of the complete
establishment was consolidated price of Rs.9 crores and it includes the consideration for assets and business. It
was also explained that the goodwill means the right to carry on business with a specific provisions from the use
of the name' Nizam Sugars Limited. There is no dispute that assessee has paid the excess amount against the cost
of goodwill and the goodwill was defined in the sale and purchase agreement executed on 26-4-2001 which is
available at pg.Nos.3 to 38 according to which goodwill is all the goodwill, interest and connection of NSL
(Nizam Sugars Limited) in and concerning the business together with the right to represent the purchaser as
carrying on business as a going concern in succession to NSL but not including any right to use the name of
Nizam Sugars Limited or any associated or related name. Therefore, by virtue of a goodwill, assessee has
acquired all business/commercial benefits or rights to run the chagallu distillery but without using the name of
Nizam Sugars Limited or any of its associates. We have already discussed in foregoing paras that goodwill is a
bundle of business/commercial benefits and rights. Undisputedly in the instant case, assessee has made the
excess payment over and above the cost of the tangible assets. No doubt the goodwill is an intangible asset but
all intangible assets are not eligible for depreciation as per the ratio laid down by the apex court and various High
Courts through their judicial pronouncements. Only those intangible assets which are akin to or belong to the
same genesis of know how, patents, copy rights, trade mark, license or franchise are eligible for depreciation.
Other intangible assets which do not fall within the category, are not eligible for depreciation u/s 32 of the Act.
The know how, patents, copy right, trade mark, license and franchise are known as intellectual property rights
(IPR) in the present world and that is why the legislature has brought the amendment under section 32(1) to make
them eligible for depreciation, though, their value may not erode in the years to come. All these items are of the
same genesis and they do confer certain rights upon the assessee to trade or to run its business by utilizing them
in a particular manner to earn more profit. After acquiring the know how, patents, copy rights, trade mark, license
or franchise, assessee acquires certain right to run its business in a particular way. Meaning thereby, wherever any
intangible assets confers certain right upon the assessees like above items it would be eligible for depreciation u/s
32(1) of the Act. But those intangible assets which confers only a commercial/business benefits upon the
assessees, they are certainly not eligible for depreciation in as much as by acquiring that benefit assessee would
not get an exclusive right to trade or to run its business in that way.
27. In the present case, the goodwill includes the location of the distillery, customers of the distillery, reputation
of the distillery, etc. are the commercial benefits which move to the assessee along with the establishment on its
purchase. But these benefits do not confer any right to trade upon the assessee. It is also brought to our notice
that generally in the sugar factory, the factory owners entered into an agreement with the sugar cane growers to
purchase their sugar cane at a particular rate and this right also moves along with the establishment on its sale. It is
also brought to our notice that it is not easy to obtain a license to set up of sugar factory and distillery. It requires
lot of efforts. That is why it has its own value and without licenses one cannot run distillery and sugar factory.
Beside this license, other licenses or permission are required from various agencies to run a sugar factory
smoothly and it has its own value. A lumpsum amount over and above the cost of the tangible assets is
considered to be the cost of the goodwill, which includes business or commercial benefits and rights. There is no
bifurcation of the total cost which can be allocated towards the commercial benefits and the commercial rights
acquired by the assessees. Complete details of cost of acquisition of the commercial benefits and the commercial
rights cannot be available on record. It is only a question of estimate. Since we have also taken a view that in such
type of cases goodwill is a bundle of commercial benefits and commercial rights and commercial benefits are not
eligible for depreciation whereas the commercial rights being akin to the know how, patent, copy right, trade
mark, license or franchise are eligible for depreciation in as much as on account of those rights the assessee
would be able to carry on its business smoothly, Therefore, we are of the view that total goodwill cost should be
bifurcated in two equal parts; one is for commercial benefits and the other is for commercial rights and the
amount incurred in acquiring the commercial right should be eligible for depreciation u/s 32 of the Act. Therefore,
we direct the assessing officer to divide the entire cost of goodwill in two parts and 50% of the cost of the
goodwill be treated as a cost of acquisition of the commercial rights and to allow the depreciation thereon at a
prescribed rate.
28. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on 21-12-2010.