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Judgment
PER SATBEER SINGH GODARA, JM
This Revenue’s appeal for assessment year 2016-17 arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2024-25/1071727237(1), dated 31.12.2024 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).
Case called twice. None appears at the assessee/respondent’s behest. It is accordingly proceeded ex-parte.
Learned departmental representative Ms. Ankush Kalra next vehemently submits that the CIT(A)/NFAC herein has erred in law and on facts in reversing the Assessing Officer’s assessment findings adding the assessee’s goodwill claim of Rs. 2,55,54,231/-as unexplained investment under section 69 of the Act and further deleting the depreciation on goodwill of Rs.8,79,736/-; respectively, vide following detailed discussion:
“7. Decision
I have carefully examined the submission of the appellant as reproduced in the preceding paragraph and the facts emanating from the A.O’s order, wherein addition has been made.
7.1Addition of INR 2,55,54,231 with respect to Ground No. 1 and 3
7.2We have carefully considered the facts of the case, assessment order dated 28 December 2018 and submission of the appellant. Section 69 of the Income-tax Act, 1961, deals with the treatment of unexplained investments. It states that if an assessee has made investments that are not recorded in their books of account, and they cannot offer a satisfactory explanation about the nature and source of such investments, the value of the investments may be deemed as the appellant’s income for the financial year in which the investments are discovered.
7.3Vide submission dated 27.03.2023, Ground no.1 and 3, the difference of INR 2,55,54,231 between the value of the assets received and the consideration paid to the vendors was recognized as 'goodwill’. The said ‘goodwill’ is an intangible-assets which was accounted for when a purchaser acquired a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The same has been recognized by the Appellant following the accounting policy, which is also line with the various judicial pronouncements as quoted by the Appellant.
7.4As per the relevant agreement and bank statements submitted during the course of proceedings, the appellant has explained the source of investment with the supporting documents, which is satisfactory itself. Further, the conclusion of the Assessing Officer that the claim of additional amount of INR 2,55,54,231 is not supported by any supporting or credible evidence without appreciating that it were covered within the ambit of BTA entered into vendor, and the payment has been through banking channel, which do not satisfy the criteria for application of section 69 of the Act.
For invoking section 69 of the Act, the following condition has to be satisfied
1.Nature of the Investment: The investments in question are fully accounted for in the books of accounts maintained by the appellant. All details, including the source of funds and relevant documentation, have been provided.
2.Satisfactory Explanation: The appellant has provided a clear and satisfactory explanation regarding the nature and source of the investment Supporting evidence such as bank statements and agreements have been furnished.
3.Genuineness of the Transaction: The transaction is genuine and has been conducted through proper banking channels.
6.5Based on above discussion and facts of case, the appellant has provided the nature of investment along with relevant documents (such as agreements and bank statements) and satisfactory explanation, therefore section 69 shall not be applicable and accordingly ground 1 and 3 of the appellant is allowed.
8.Addition of INR 8,79,736 with respect to Ground No. 2
8.1With respect to denial of depreciation on goodwill amounting to INR 8,79,736, following extract from the judgement of Hon’ble Supreme Court of India in the case of CIT vs Smifs Securities Ltd reported in (2012) 348 ITR 302 as referred above by the Appellant is reproduced hereunder:
We quote hereinbelow Explanation 3 to Section 32(1) of the Act:
"Explanation 3.-- For the purposes of this sub-section, the expressions `assets' and `block of assets' shall mean— [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature."
Explanation 3 states that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee.
9.1Further, following relevant extracts of Memorandum explaining the provisions of Finance Bill, 2021 is highlighted as under:
“Depreciation on Goodwill
Section 2 of the Act provides the definitions for the purposes of the Act. Clause (11) of the said section defines―block of assetsǁ to mean a group of assets falling within a class of assets comprising, tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
Section 32 of the Act relates to depreciation. Sub-section (1) of the said section provides for deduction on account of depreciation on tangible assets (Building, machinery, plant and furniture) and intangible assets (know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature) acquired on or after the 1st day of April, 1998 which are owned, wholly or partly by the assessee which are used wholly and exclusively for the purpose of business and profession while computing the income under the head ‗Profits and gains of business or profession‘.
Further, Explanation 3 to sub-section (1) provides that for the purposes of this subsection, the expression "assets" shall mean to be tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.
Section 50 of the Act provides for conditions for the applicability of provisions of section 48 and 49 for computation of capital gains in case of depreciable assets where the capital asset is an asset forming part of a block of asset in respect of which depreciation has been allowed under this Act.
Section 55 of the Act provides meaning of terms "adjusted", "cost of improvement" and "cost of acquisition "for the purposes of sections 48 and 49 of the Act. In relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy rights, stage carriage 68 permits or loom hours, it is defined to mean the purchase price if it is acquired by purchase. In other cases it is nil except when it is covered by sub-clauses (i) to (iv) of sub-section (1) of section 49. It is seen that Goodwill of a business or a profession has not been specifically provided as an asset either in the definition under clause (11) of section 2 of the Act or in section 32 of the Act. The question whether goodwill of a business is an asset within the meaning of section 32 of the Act and whether depreciation on goodwill is allowable under the said section, is an issue which came up before Hon‘ble Supreme Court in the case Smiff Securities Limited [(2012)348 ITR 302 (SC)]. Hon‘ble Supreme Court answered the question in affirmative. Thus, as held by Hon‘ble Supreme Court, Goodwill of a business or profession is a depreciable asset under section 32 of the Act. ………………………………..
However, in some other cases (like that of acquisition of goodwill by purchase) there could be valid claim of depreciation on goodwill in accordance with the decision of Hon‘ble Supreme Court holding goodwill of a business or profession as a depreciable asset.
It is seen that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill in the manner there is a need to provide for depreciation in case of other intangible assets or plant & machinery. Hence there appears to be little justification 70 for depreciation on goodwill even in the category of cases referred to in the immediately preceding paragraph.
In view of above discussion, it has been decided to propose that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. In a case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill……………………
These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years”
9.2After considering the above amendment made by Finance Act, 2021, depreciation on goodwill has been withdrawn from FY 2020-21 and onwards. In other words, claim or tax benefit of depreciation on goodwill of a business or profession prior to FY 2020-21 is tenable by placing reliance on the Apex Court Ruling (supra).
9.3Accordingly, considering the above legality and facts of the case, treatment of goodwill as an ‘intangible asset’ by the appellant in its books of accounts and claiming depreciation thereon for the year under consideration is in accordance with the provisions of explanation 3(b) to section 32(1) of the Act, Therefore, deprecation on such goodwill should be allowed and accordingly ground no.2 is allowed.
10.In view of the above, taking an overall view of the matter, the addition made by the assessing officer is deleted and appeal preferred by the appellant is allowed.”
This is what leaves the assessee aggrieved.
We have given our thoughtful consideration to the Revenue’s and the asssessee’s rival pleadings all along. We find no merit in the Revenue’s instant twin substantive grounds, be it that of unexplained investment addition, as well as depreciation on goodwill; as the case may be. This is for the precise reason that the learned CIT(A)’s detailed discussion in para 7.4 has made it clear that the assessee had not only accounted for the impugned sum in its books but also duly pleaded the source thereof which was nowhere either considered or specifically rejected in the Assessing Officer’s assessment findings.
We thus conclude in this factual backdrop that the impugned unexplained investment under section 69 of the Act made in the Assessing Officer’s assessment has rightly been deleted in the lower appellate discussion.
The outcome would be hardly any different in the Revenue’s instant latter substantive ground regarding depreciation on goodwill as well since their lordship’s land mark decision in Smifs Securities Ltd. (supra) has already concluded that the same is indeed entitled for depreciation upto to the statutory amendment in the Act vide Finance Act, 2021. It is made clear that the learned CIT(A) has thereafter concluded holding the assessee’s goodwill as an asset covered under section 32(1) Explanation 3(b) of the Act since relating to assessment year 2016-17. We thus find no reason to interfere with the lower appellate findings under challenge to the very effect. The Revenue fail in its instant latter substantive ground therefore.
This Revenue’s appeal is dismissed.