Raveendran Pillai vs Commissioner of Income Tax

C.N. Ramachandran Nair, J.—The question raised in this Income Tax Appeal filed by the assessee is whether he is entitled to depreciation

on goodwill u/s 32(1)(ii) of the Income Tax Act (hereinafter called ""the Act""). Appellant purchased a Hospital in Quilon with it''s land, building,

equipments, staff, name, trademark and goodwill as a going concern under two separate sale deeds. While immovables are covered by one sale

deed, movables covering trade mark, goodwill etc. are covered by another sale deed. Schedule B of the sale deed second above referred

produced in this appeal describe the trade name transferred as ""Upasana Hospital"". In Schedule B besides the name and get up, the parties have

given the emblem or trademark of the Hospital purchased by the appellant. Under the sale deed, the value of goodwill which includes the name of

the Hospital and it''s logo and trademark is declared as Rs. 2 crores. In the income tax returns filed subsequent to purchase of the Hospital,

assessee claimed depreciation on goodwill on the value shown in the sale deed. In subsequent years depreciation on goodwill was claimed on the

written down Value. It seems the returns filed for a few years got accepted and scrutiny assessment was made for the first time only for the

assessment year 2004-2005. In the return filed for this assessment year, the assessee''s claim for depreciation was on a written down value of Rs.

55,37,109/- and the depreciation claimed at 25% was Rs. 13,84,277/-. In the scrutiny assessment for the assessment year 2004-2005, the

Assessing Officer held that ""goodwill"" is not covered by Section 32(1)(ii) of the Act and so much so, assessee is not entitled to depreciation, even

though depreciation claimed on goodwill got allowed for earlier years. The appeals filed by the assessee before the C.I.T. (Appeals) and the

Tribunal were also unsuccessful and hence the assessee has filed this appeal u/s 260A of the Act contending that assessee is entitled to

depreciation on goodwill u/s 32(1)(ii) of the Act. We have heard Adv. Sri. P. Balakrishnan appearing for the appellant-assessee and Standing

Counsel appearing for the respondent.

In the beginning itself Standing Counsel submitted that the claim of depreciation on goodwill happened to be allowed for earlier years because

no scrutiny assessments were made for any of those years. According to him, the Assessing Officer will reopen assessments for disallowing

depreciation already allowed, wherever limitation permits and so much so, his contention is that the claim allowed for earlier years should not be

the basis for granting relief for this year. On this question we do not think there can be any dispute because if assessee is not entitled to

depreciation on an item under the statute, then it cannot be granted merely because for earlier years depreciation on same item happened to be

allowed in the course of acceptance of returns without scrutiny. Therefore, we proceed to consider the question of assessee''s eligibility for

depreciation on goodwill with reference to the statutory provision applicable to the case in hand.

Goodwill is not specifically mentioned in Section 32(1)(ii) of the Act. Therefore, the question to be considered is whether goodwill falls within

the ambit of the residuary item referred to in Section 32(1). For easy reference we extract hereunder Section 32(1):

(1) In respect of depreciation of-

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible

assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

...

What is clear from the above provisions is that depreciation is allowable not only on tangible assets covered by Sub-clause (i) above, but on the

intangible assets specifically enumerated in cl.(ii) and such of the other business or commercial rights similar to the items specifically covered

therein. The contention of counsel for the appellant-assessee is that goodwill takes in several aspects such as business-name, logo, location and

several other factors and the cumulative value of all these could be called goodwill in business. On facts it is seen that what is purchased by the

assessee is a Hospital which has been running in Quilon town for a long period under the name ""Upasana Hospital"". Under the sale deed, the

assessee purchased the Hospital with it''s name, logo, trade mark, staff and equipments as a going concern without any break in the running of the

Hospital. In other words, from the date of taking over of the Hospital, the patients under care of the Hospital continued to be patients of the

Hospital taken over by the appellant-assessee. Therefore, whatever goodwill the Hospital had is admittedly acquired by the assessee under the

sale deed. In assessment or in appeals before lower authorities the department does not have a case that the sale deed on movables covering

goodwill is not genuine or the value shown for goodwill is not correct. Therefore, in the appeal we have to only consider whether goodwill is

covered by Section 32(1)(ii) entitling assessee for depreciation as claimed by him. In support of his contentions counsel for the assessee has relied

on decision of the Delhi High Court in Rajesh Brothers Vs. Commissioner of Income Tax, , decision of the Calcutta High Court in Commissioner

of Income Tax, Central Vs. Bird and Co. (P.) Ltd., and decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C.

Srinivasa Setty, . Standing Counsel appearing for the respondent submitted that there is no decision directly on the point and the decisions relied on

by the counsel for the assessee are not directly on the point raised in this appeal. No doubt, the Supreme Court and the Calcutta High Court in the

judgments abovereferred have clearly held that goodwill is a capital asset, even though the question of eligibility for depreciation was not

considered in the decided cases. The Delhi High Court was considering the question of valuation of goodwill and depreciation was not an issue

there. Therefore, we have to consider the question as to whether depreciation is an intangible asset in the form of a business or commercial right of

the nature similar to know how, patent, copyright, trade mark, licence or franchise, to fall within Section 32(1)(ii) of the Act. Standing Counsel

submitted that depreciation is provided for to take care of wear and tear and there can be no erosion in goodwill and so much so, claim of

depreciation on goodwill is fundamentally against the scheme of depreciation. Counsel for the assessee on the other hand contended that benefit by

way of depreciation u/s 32(1)(ii) is admissible to the assessee, no matter whether mere is real erosion in value or not on the tangible or intangible

assets referred to therein. Depreciation though is an allowance to take care of loss or erosion in value of the asset in the course of time on account

of use, such consequence need not actually take place for the purpose of entitling assessee for the relief in terms of the statutory provision. In fact,

it is common knowledge that on account of the inflation even tangible assets such as building, machinery, plant or furniture will fetch higher price in

later years, though in the assessee''s 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, we do not dunk assessee''s entitlement for depreciation on assets including intangible assets can be negatived on the ground that

no erosion in value takes place on account of use of the asset in business or profession. This leaves us with the limited question of considering

whether goodwill is covered by the residuary clause in Section 32(1)(ii) of the Act.

From Schedule B of the sale deed which gives the value of goodwill, we notice that me trade mark or the logo and the name of the Hospital are

specifically covered by it. In fact, without resorting to the residuary entry appellant-assessee is entitled to claim depreciation on the name, trade

mark and logo under the specific head provided u/s 32(1)(ii) which covers trade mark and franchise. It is common knowledge 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.

Though it may be difficult to define goodwill, it''s meaning and scope are explained in several Court judgments. In the case of Khushal Khemgar

Shah and Others Vs. Khorshed Banu Dadiba Boatwalla and Another, , the Supreme Court has explained goodwill as follows:

It is the benefit and advantage of the good name, reputation and connection of a 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 make connections durable. It is the component of

total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation,

location and other features.

In Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, the Supreme Court held that in a progressing business goodwill tends to

show progressive increase and in a failing business it may begin to wane.

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 it''s 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 it''s 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 the same name for several years. The

assessee''s intention is only to earn good business in the Hospital and so much so, purchase of Hospital as a going concern with it''s 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, copyright 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.