Whether goodwill paid is an allowable expenditure is one of the most common questions in business or whether depreciation on goodwill be claimed as expenses is often an issue before AO.
It is held in few cases that when the goodwill paid was for ensuring retention and continued business, it was for acquiring a business and commercial rights and was comparable with trademark, franchise, copyright etc rendered to in the first part of clause 2 of Section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the Assessee for depreciation.
Hon’ble Apex Court in the case of CIT vs. SMIFS Securities Ltd. (2012) 348 ITR 302 has held that goodwill is an asset under Explanation 3(b) to Section 32(1).
In short, when goodwill paid is for ensuring retention and continued business, or for acquiring business and commercial rights that is comparable with trade mark, franchise, copy right etc rendered to in first part of S. 32(1)(2) than Assessee shall be entitled for depreciation.
SWASTIK INDUSTRIES vs. INCOME TAX OFFICER
ITAT, AHMEDABAD TRIBUNAL (C)
ANIL CHATURVEDI, AM & KUL BHARAT, JM
I.T.A. Nos. 203 to 207/AHD/2012
29th May, 2015
(2015) 44 CCH 0460 AhdTrib
(2015) 70 SOT 0405 (Ahmedabad)
Legislation Referred to
Case pertains to
Asst. Year 2003-2004 to 2006-2007 & 2008-2009
- These 5 appeals filed by the Assessee are against the order of CIT(A)-IV, Surat dated 30-09-2011 for A.Ys. 2003-04, 2004-05, 2005-06, 2006-07 & 2008-09.
- At the outset, before us, ld. D.R submitted that though the appeal of the Assessee relates to 5 different assessment years but the facts and circumstances of all the cases are similar except for the assessment years and amounts and the submissions are also common for all the appeals and therefore all the appeals can be heard together. We therefore proceed to dispose of all the appeals together for the sake of convenience and thus proceed with the facts in A.Y. 2003-04 in ITA No. 203/AHD/2012.
- In this case, none appeared on behalf of Assessee but however written submissions were filed by the Assessee. We therefore proceed to decide the appeals, ex parte qua the Assessee on the basis of material on record and written submissions.
- Assessee is a partnership firm stated to be engaged in the business of doing job work of embroidery. Assessee filed its return of income on 30.06.2003 for A.Y. 2003-04 declaring total loss of Rs. 2,18,480/-. The return of income was initially accepted u/s. 143(1). Subsequently, the case was re-opened by issuing notice u/s. 148 and thereafter assessment was framed u/s. 147 r.w.s. 143 (3) vide order dated 22.10.2010 and the total income was determined at Rs. 5,94,680/-. Aggrieved by the order of A.O, Assessee carried the matter before ld. CIT(A) who vide order dated 30.09.2011 dismissed the appeal of the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following ground;-
- The ld. CIT(A) grossly erred in confirming addition of Rs. 4,86,443/- on account of disallowance of depreciation of goodwill as per para 3 of the appeal order.
- On perusing the depreciation chart furnished along with the return of income, it was noticed by A.O that Assessee had claimed depreciation of Rs. 4,86,443/- on the “goodwill”. A.O was of the view that Assessee was not eligible to claim depreciation of goodwill and accordingly disallowed the claim of depreciation on “goodwill”. Aggrieved by the order of A.O, Assessee carried the matter before ld. CIT(A) who dismissed the ground of the Assessee by holding as under:-
- The only common ground across all three appeals is against the A.O. making an addition on account of disallowance of depreciation on goodwill. It is seen that the appellant firm had made payment to retiring partners over and above their capital in the firm. This additional amount was mentioned in the fixed assets schedule as goodwill and depreciation was claimed on this. It was the contention of the appellant that the payment had been made to acquire commercial rights which are intangible assets and therefore eligible for depreciation. This issue has been decided by me against the assessee in my order in appeal No. CASIV/164/09-10, for A.Y. 2002-03. For the detailed reason given in that order, it is held that the appellant was not eligible for depreciation on goodwill. The disallowance is upheld. This ground fails.
- Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.
- Before us, in the written submissions, the Assessee has submitted that the firm was initially started on 17thJuly, 1981. It was further submitted that Assessee had paid compensation on retirement to the retiring partners and it was towards acquiring commercial right but in the books of accounts it was named as “goodwill”. It is further submitted that payment for acquiring commercial rights is eligible for depreciation with effect from 01.04.1999 and the payment made for the purpose of acquiring commercial rights was eligible for depreciation. Reliance was also placed on the decision of Kerala High Court in the case of B. Ravindran Pillai vs. CIT (2011) 332 ITR 531. The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A) and further submitted that that similar controversy is also inA.Y. 04-05, 05-06, 06-07 & 07-08 and in those years also the Assessee is now in appeal before Tribunal.
- We have heard the ld. D.R. and perused the material on record. It is Assessee’s submission that the payments were made to the retiring partners for acquiring commercial rights which was in the nature of intangible assets. We find that ld. CIT(A), following his order for in Assessee’s own case for A.Y. 2002-03 disallowed the claim of depreciation. Before us, the aforesaid decision of ld. CIT(A) for A.Y. 02-03 has not been placed by either parties. Further the ld. D.R. could also not throw light as to whether the Assessee had preferred any appeal against the order for A.Y. 2002-03 whereby its claim of depreciation was denied by ld. CIT(A) nor has the Assessee placed any material on record in respect of the aforesaid. As far as the payment to retiring partners over and above the capital and disclosed as goodwill by the Assessee is concerned, the same is not in dispute. We find that in the case of B. Ravindran Pillai (supra), the Hon’ble High Court has held that when the goodwill paid was for ensuring retention and continued business, it was for acquiring a business and commercial rights and was comparable with trade mark, franchise, copy right etc rendered to in the first part of clause 2 of Section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the Assessee for depreciation. We also find that the Hon’ble Apex Court in the case of CIT vs. SMIFS Securities Ltd. (2012) 348 ITR 302 has held that goodwill is an asset under Explanation 3(b) to Section 32(1). Before us, Revenue has not pointed out any contrary binding decision in its support. In view of these facts and relying on the aforesaid decisions we are of the view that Assessee is eligible for depreciation. We thus direct accordingly.
- In the result, this ground of Assessee is allowed for A.Y. 03-04, 04-05, 05-06, 06-07 & 08-09.
- We now take up the other ground which is common for A.Y. 06-07 & 07-08 pertaining to disallowance of milgin and factory expenses and the grounds raised by the Assessee for A.Y. 2006-07 reads as under:-
- The ld. CIT(A) grossly erred in confirming addition of Rs. 1,58,606/- on account of lump sum disallowance out of milgine and factory expenses as per para 5 of the appeal order.
The ground is with respect to addition of Rs. 1,58,606/- out of milgin and factory expenses.
- A.O noticed that Assessee had debited milgine expenses of Rs. 7,79,014/and factory expenses of Rs. 14,014/- aggregating to Rs. 7,93,028/-. A.O noticed that some of the expenses incurred were not fully supported by proper vouchers or some of the bills vouchers were missing or were self made vouchers. Thus in the absence of complete supporting evidence with regard to the quantum of claim and the purpose of expenses, A.O was of the view that the expenses cannot be verified and further as to whether the entire expenses have been incurred wholly and exclusively for the purpose of business. He accordingly disallowed 1/5thof the expenses amounting to Rs. 1,58,606/-. Aggrieved by the order of A.O, Assessee carried the matter before ld. CIT(A) who upheld the order of A.O and confirmed the disallowance by holding as under:-
- Ground No.3 in A.Y. 2006-07 and Ground No.3 in A.Y. 2008-09 are against the A.O. making addition on account of millgin & factory expenses. The A.O. during the course of assessment proceedings observed that these expenses were not fully supported by vouchers and bills and also some of the bills/vouchers were self made and not in chronological order and hence unverifiable. He therefore held that the entire expenses cannot be held as incurred wholly & exclusively for the purpose of business. He therefore disallowed l/5thof the expenses and made addition of Rs. 1,58,606/- and Rs. 1,01,507/- in A.Y. 2006-07 and in A.Y. 2008-09, respectively. During the course of appeal proceedings, no submissions have been made in respect of this ground. The SOF accompanying the appeal does not give any reason why the action of the A. O. should not be upheld. I am therefore constrained to uphold the action of the A.O. Ground No.3 in A.Y. 2006-07 and Ground No.3 in A.Y. 2008-09 are therefore dismissed.
- Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.
- Before us, the Assessee in the written submissions has submitted that no specific defects were found in the vouchers and most of the milgine expenses were paid by account payee cheques. It was further submitted that the factory expenses in comparison to the total turnover was reasonable and no disallowance was called for. Ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).
- We have heard the ld. D.R. and perused the material on record. We find that while confirming the disallowance, ld. CIT(A) has noted that no submissions were made by the Assessee in respect of the aforesaid ground. Before us also apart from the general statement, no details have been filed by the Assessee in support of its submissions. In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus this ground of Assessee is dismissed. Since similar ground has been raised by Assessee for A.Y. 08-09, the ground for A.Y. 08-09 is also disallowed.
15.In the result, the appeals of Assessee in ITA Nos. 203,204 & 205/AHD/2012 are allowed and ITA Nos. 206 & 207/AHD/2012 are partly allowed.
Order pronounced in Open Court on 29-05-2015.