Karnataka H.C : consideration paid for business or commercial rights is eligible for depreciation

High Court Of Karnataka

CIT, Central Circle Vs. Manipal Universal Learning (P.) Ltd.

Assessment Year : 2003-04

Section : 32

N. Kumar And B. Manohar, Jj.

IT Appeal No. 61 Of 2007

April 1, 2013


N. Kumar, J. – The Revenue has preferred this appeal challenging the order of the Tribunal holding that business or commercial rights acquired will be eligible for depreciation under Section 32(1)(ii) and consideration paid for business or commercial rights is eligible for depreciation. No amount can be considered as representing the goodwill on which no depreciation is admissible. Therefore, the assessing authority was directed to reduce the quantum of advance from the business and commercial rights valued by the assessee to ascertain the amounts on which depreciation will be allowed.

2. This appeal was admitted to consider the following substantial question of law:

“Whether the Tribunal was right in holding that the assessee would be entitled to claim depreciation in respect of an amount of Rs.98,73,25,000-00 (including goodwill) and not the amount of Rs.51,63,00,000-00 as reflected in the sale agreement and ICDS Ltd., for purchase of distance learning division?”

3. The assessee has agreed in the sale agreement the price of Rs.51,63,00,000-00 as the value of the SMU agency rights. On the very next day, the assessee has chosen to revalue such rights to Rs.98,73,25,000-00 and claimed depreciation on the revalued rights. The assessing authority held that the excess consideration paid over the value of the net assets is in the nature of goodwill paid for the future’ profits of the business. Therefore, he allowed the depreciation only on the value mentioned in the agreement.

4. Aggrieved by the same, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals), who affirmed the said order. However, the Tribunal allowed the depreciation to the entire extent. Aggrieved by the same, the Revenue is before this Court.

5. The Apex Court in the case of CIT v. SMIFS Securities Ltd. [2012] 24 taxmann.com 222/210 Taxman 428 has held that Explanation 3 to Section 32(1) of the Act, which defines the expression ‘asset’ includes intangible asset like goodwill. Therefore, the goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Therefore, the depreciation is leviable even on the goodwill. In view of the law declared by the Apex Court in the aforesaid judgment, the substantial question of law framed is answered in favour of the assessee and against the Revenue. No merits. Dismissed.

[Citation : 359 ITR 369]