Assessee Entitled To Charge Depreciation On Purchase Of Goodwill: Delhi High Court

The Delhi High Court has made it clear that goodwill is not 'income' but rather 'expenditure' for acquisition of assets and therefore, an assessee is entitled to charge depreciation on the amount spent towards it.

A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma cited Commissioner of Income Tax, Kolkata v. Smifs Securities Ltd. (2012) whereby the Supreme Court had held that goodwill could be considered as an intangible asset eligible for depreciation.

In the case at hand, the assessee had paid a sum of ₹47,00,000/- to M/s Nebula Technologies Pvt. Ltd. for purchasing certain assets. The said assets were valued at ₹12,37,450/- and the assessee treated the balance amount of ₹34,63,450/- paid to Nebula as goodwill. 

The assessee claimed that it had not acquired any benefit against the said amount and had, accordingly, written off the said goodwill in its books of accounts. The Assessing Officer however rejected the said claim and added a sum of ₹34,63,450/- as income chargeable to tax. 

The AO reasoned that ₹34,63,450/- was not wholly and exclusively expended for the purposes of business and was not allowable under Section 37(1) of the Income Tax Act, 1961.

The provision provides deduction for general expenses laid out wholly and exclusively for the purposes of the business or profession.

In assessee's appeal, the CIT allowed 25% of the amount as depreciation, reasoning that even intangible assets could be treated as depreciable assets.

Revenue then approached the Income Tax Tribunal which declined to interfere in the matter.

The High Court, at the outset noted that the assessee had paid a sum of ₹47,00,000/- for acquisition of assets of Nebula and therefore, the entire amount is to be treated as expenditure for acquisition of assets. 

“Since the assets acquired have been valued at ₹12,37,450/-, there is no infirmity in treating the balance amount as pan intangible asset, and the decision of the CIT(A) to allow deprecation on such intangibles cannot be faulted,” it held and dismissed Revenue's appeal.

Appearance: Sr. Standing Counsel Vipul Agrawal with Jr. Standing Counsels Gibran Naushad and Ms. Sakshi Shairwal for Revenue; Sr. Advocate Prem Lata Bansal with Advocates Sumit Batra and Shivang Bansal for Respondent

Case title: The Pr. Commissioner Of Income Tax-3 v. Esys Information Technologies Ltd

Citation: 2024 LiveLaw (Del) 1159

Case no.: ITA 898/2018

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