I.T.A. No. 3928/Mum/2008, (Assessment Year: 2003-2004). Case: Video Effects Vs Income Tax Officer-11(1)(4). ITAT (Income Tax Appellate Tribunal)

Case Number:I.T.A. No. 3928/Mum/2008, (Assessment Year: 2003-2004)
Party Name:Video Effects Vs Income Tax Officer-11(1)(4)
Counsel:For Appellant: Ketan L. Vajani and For Respondents: Pawan Kumar Beerla
Judges:Joginder Singh, Member (J) and Sanjay Arora, Member (A)
Issue:Income Tax Act, 1961 - Sections 143(3), 154, 32, 32(1), 32(1)(ii)
Judgement Date:December 10, 2014
Court:ITAT (Income Tax Appellate Tribunal)


Sanjay Arora, Member (A), (ITAT Mumbai 'F' Bench)

1. This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-XI, Mumbai ('CIT(A)' for short) dated 28.04.2008, dismissing the assessee's appeal contesting its assessment vide order dated 28.02.2006 u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2003-04.

2. The issue arising in the instant appeal is the maintainability in law of the assessee's claim for deprecation on 'Goodwill'. The same, claimed at Rs. 5,41,399/- per the return of income, stands now claimed at Rs. 6,63,384/- per the additional ground. In-as-much as, therefore, the additional ground concerns the correct quantification of the assessee's claim for depreciation, which is the subject matter of appeal, we consider it as intrinsic to the issue arising in this appeal and, consequently, admit the same.

3. The brief facts of the case are that the assessee is a partnership firm in the business of supply of equipments for shooting and editing telefilms, etc. with computerized digital graphics on hire, since 10.04.1995. Two of its partners, holding 20% share each in the profits (or losses) of the firm, retired there-from during the financial year 2001-02, the previous year corresponding to the immediately preceding assessment year (i.e., A.Y. 2002-03), and were paid their share of 'goodwill' at an aggregate of Rs. 26,53,536/-, as under:

The assessee's claim of deprecation on goodwill, as an intangible asset of the firm, to which account the said sum was capitalized in its books of account, was negated by the Revenue and, further, confirmed by the Tribunal following its decision in R.G. Keswani vs. Asst. CIT [2009] 116 ITD 133 (Mum). 'Goodwill', it was the constant refrain, is not an intangible asset within the meaning of Explanation 3(b) to section 32(1)(ii), which reads as under, following the principle of ejusdem generis:


32. (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-

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed

Explanation 3.--For the purposes of this sub-section, the expression "assets" shall mean--

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

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

The matter has since been clarified by the apex court vide its decision in CIT vs. Smifs Securities Ltd. [2012] 348 ITR 302 (SC), so that 'goodwill' is, following the said principle, a depreciable asset under Explanation 3(b) to section 32(1). The decision by the tribunal in its' own case, as well as by the Revenue authorities, per their respective orders, for the immediately preceding year, would therefore be to no avail. Further, no depreciation having been admittedly allowed for the immediately preceding year, the written down value (WDV) of the relevant block of assets, which consists only of 'goodwill' at Rs. 26.54 lacs, and not the amount arrived at by reducing there-from the assessee's claim for depreciation for the said preceding year, i.e., Rs. 4,87,943/-, since disallowed. This is as the WDV is, by definition, to be computed by reducing the deprecation 'actually allowed', which expression stands explained per a host of decisions, to mean depreciation, as actually allowed as against a notional disallowance. No deprecation having been allowed for A.Y. 2002-03, the WDV of the relevant block of assets shall continue to be at Rs. 26.54 lacs, resulting in an enhancement in the assessee's claim vis-à-vis as made per its return, i.e., by deducting depreciation claimed for the said preceding year. This sums up the assessee's case as made before us.

4. We have heard the parties, and perused the material on record.

The assessee's case is principally legal. Though claimed to be covered in its favour by the decision by the apex court in Smifs Securities Ltd. (supra), the same, notwithstanding the applicability of the said decision, in-as-much as it settles the issue of 'goodwill' being an intangible asset u/s. 32(1)(ii) r/w Explanation 3(b) thereto, fails. The reason for the same, even as observed during hearing, is that...

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