Goodwill / customer contracts duly recorded in the audited financials are eligible for depreciation being intangible assets u/s 32(1)(ii)?

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Goodwill / customer contracts duly recorded in the audited financials are eligible for depreciation being intangible assets u/s 32(1)(ii)?
DCIT Vs Infrasoft Technologies Ltd
ITA No.3475/Del/2018
Assessment Year: 2012-13
ITA No.3850/Del/2018
Assessment Year: 2013-14
ITA No.4330/Del/2018
Assessment Year: 2014-15
ITA No.1637/Del/2019
Assessment Year: 2015-16
Short overview of the case:
Assessee company is into the business of sale of software licence. The AO noticed that during the years under assessment, assessee had shown addition in the intangible assets in goodwill amounting to Rs.6,52,80,577/- and Rs.10,89,00,000/- in goodwill and in customer contract and claimed substantial depreciation thereon. Assessee was called upon to file details of the said intangible assets and prove allowability of depreciation claimed. Declining the explanation offered by the assessee, AO proceeded to conclude that the claim of the assessee in transferring part investment as intangible assets i.e. customer contract and goodwill was not justified and thereby disallowed depreciation claimed by the assessee on such intangible assets and framed the assessment accordingly. On appeal, the CIT(A) deleted the disallowance of depreciation on goodwill and customer contract.
On appeal, the ITAT held that,
Whether goodwill / customer contracts duly recorded in the audited financials are eligible for depreciation being intangible assets u/s 32(1)(ii) – YES: ITAT
 during the year under assessment, the assessee has acquired certain business interest from M/s. KPIT Cummins Infosystems Ltd. for a consideration of Rs.19,02,00,000/- out of which an amount of Rs.6,52,80,577/- and Rs.10,89,60,000/- has been shown as goodwill and customer contract respectively. It is also not in dispute that assessee has furnished detail of amount of Rs.17.52 crores paid during the year under assessment based on the valuation report. It is also not in dispute that the assessee has claimed said investment in two intangible assets and claimed depreciation thereon. It is also not in dispute that the aforesaid intangible assets have been acquired by the assessee by virtue of the Business Transfer Agreement entered into between the assessee and M/s. KPIT Cummins Infosystems Ltd. for acquiring BFSI Software Services business comprising target customer contracts, target employees and target assets. The AO has disallowed goodwill and customer contract merely on the basis of surmises; that consideration paid on account of customer contract and goodwill has been classified as intangible assets just to reduce its tax liability by wrongfully claiming goodwill and customer contract;
 the Delhi High Court in Areva T&D India Ltd. has held that when goodwill in books of account comprises inter alia business claims, business information, business records, contracts, skilled employees & knowhow has been purchased for a consideration to acquire the running business, it is comparable to a licence to carry out the existing transmission and distribution business of the transferor and in the absence of aforesaid intangible assets business, assessee would have to commence business from scratch.
 Effect of acquiring running business with tangible and intangible assets including goodwill and customer contracts are quite visible as turnover of the assessee has been increased from Rs.18.32 crores to Rs.13.92 crores during the year under assessment. Despite the fact that the assessee has given the complete details of agreement vide which tangible and intangible assets of running business of M/s. KPIT Cummins Infosystems Ltd. were purchased as per valuation report, AO has disallowed the depreciation on goodwill and customer contracts by ignoring the settled principle of law that goodwill / customer contracts duly recorded in the audited financials are eligible for depreciation being intangible assets u/s 32(1)(ii).
Therefore, the CIT(A) has rightly deleted the disallowance made by the AO.

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