IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN THURSDAY, THE 23RD SEPTEMBER 2010 / 1ST ASWINA 1932 ITA.No. 1741 of 2009() ---------------------- ITA.613/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- B.RAVEENDRAN PILLAI, SREEVALSAM, KOLLAM. BY ADV. SRI.P.BALAKRISHNAN (E) RESPONDENT: --------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 23/09/2010, THE COURT ON 23/09/2010 DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & K.SURENDRA MOHAN, JJ. .................................................................... I.T. Appeal No.1741 of 2009 .................................................................... Dated this the 23rd day of September, 2010. JUDGMENT Ramachandran Nair, J. The question raised in this Income Tax Appeal filed by the assessee is whether he is entitled to depreciation on goodwill under Section 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 abovereferred 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 ITA No.1741/2009 2 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 under Section 260A of the Act contending that assessee is entitled to depreciation on goodwill under Section 32(1)(ii) of the Act. We have heard Adv. Sri.P.Balakrishnan appearing for the appellant-assessee and Standing ITA No.1741/2009 3 Counsel appearing for the respondent. 2. 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. 3. Goodwill is not specifically mentioned in Section 32(1)(ii) of the Act. Therefore, the question to be considered is whether goodwill ITA No.1741/2009 4 falls within the ambit of the residuary item referred to in Section 32(1). For easy reference we extract hereunder Section 32(1): “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-- ...........” 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 clause (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 ITA No.1741/2009 5 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 reported in (2001) 252 ITR 213, decision of the Calcutta High Court in ITA No.1741/2009 6 COMMISSIONER OF INCOME-TAX VS. BIRD AND CO.(P) LTD. reported in (1977) 108 ITR 253 and decision of the Supreme Court in COMMISSIONER OF INCOME TAX VS. B.C.SRINIVASA SETTY reported in 128 ITR 294. 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 knowhow, 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 ITA No.1741/2009 7 goodwill is fundamentally against the scheme of depreciation. Counsel for the assessee on the other hand contended that benefit by way of depreciation under Section 32(1)(ii) is admissible to the assessee, no matter whether there 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 think assessee's ITA No.1741/2009 8 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. 4. From Schedule B of the sale deed which gives the value of goodwill, we notice that the 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 under Section 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 VS. MRS.KHORSHED BANU DADIBA BOATWAUA reported in AIR 1970 SC 1147, the Supreme Court has explained goodwill as follows: ITA No.1741/2009 9 "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 VS. B.C.SRINIVASA SETTY reported in (1981) 128ITR 294 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. 5. 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 ITA No.1741/2009 10 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 ITA No.1741/2009 11 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 ITA No.1741/2009 12 and by directing the Assessing Officer to revise the assessment by granting depreciation on the written down value of goodwill to the appellant-assessee. C.N.RAMACHANDRAN NAIR Judge K.SURENDRA MOHAN Judge pms