Ita/1741/2009 Of B.raveendran Pillai, Sreevalsam v. The Commr. Of Incometax

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.N.RAMACHANDRAN NAIR &K.SURENDRA MOHAN, JJ. ....................................................................I.T. Appeal No.1741 of 2009 ....................................................................Dated this the 23rd day of September, 2010. C.R. JUDGMENT Ramachandran Nair, J. The question raised in this Income Tax Appeal filed by theassessee is whether he is entitled to depreciation on goodwill underSection 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 concernunder two separate sale deeds. While immovables are covered by onesale deed, movables covering trade mark, goodwill etc. are covered byanother sale deed. Schedule B of the sale deed second abovereferredproduced in this appeal describe the trade name transferred as"Upasana Hospital". In Schedule B besides the name and get up, theparties have given the emblem or trademark of the Hospital purchasedby the appellant. Under the sale deed, the value of goodwill whichincludes the name of the Hospital and it's logo and trademark is ITA No.1741/2009 declared as Rs.2 crores. In the income tax returns filed subsequent topurchase of the Hospital, assessee claimed depreciation on goodwill onthe value shown in the sale deed. In subsequent years depreciation ongoodwill was claimed on the written down value. It seems the returnsfiled for a few years got accepted and scrutiny assessment was madefor the first time only for the assessment year 2004-2005. In the returnfiled for this assessment year, the assessee's claim for depreciation wason a written down value of Rs.55,37,109/- and the depreciation claimedat 25% was Rs.13,84,277/-. In the scrutiny assessment for theassessment year 2004-2005, the Assessing Officer held that “goodwill”is not covered by Section 32(1)(ii) of the Act and so much so, assesseeis not entitled to depreciation, even though depreciation claimed ongoodwill got allowed for earlier years. The appeals filed by theassessee before the C.I.T.(Appeals) and the Tribunal were alsounsuccessful and hence the assessee has filed this appeal under Section260A of the Act contending that assessee is entitled to depreciation ongoodwill 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 Counsel appearing for the respondent. ITA No.1741/2009 Counsel appearing for the respondent. 2. In the beginning itself Standing Counsel submitted that theclaim of depreciation on goodwill happened to be allowed for earlieryears because no scrutiny assessments were made for any of thoseyears. According to him, the Assessing Officer will reopenassessments for disallowing depreciation already allowed, whereverlimitation permits and so much so, his contention is that the claimallowed for earlier years should not be the basis for granting relief forthis year. On this question we do not think there can be any disputebecause if assessee is not entitled to depreciation on an item under thestatute, then it cannot be granted merely because for earlier yearsdepreciation on same item happened to be allowed in the course ofacceptance of returns without scrutiny. Therefore, we proceed toconsider the question of assessee's eligibility for depreciation ongoodwill with reference to the statutory provision applicable to the casein hand. 3. Goodwill is not specifically mentioned in Section 32(1)(ii) ofthe Act. Therefore, the question to be considered is whether goodwill ITA No.1741/2009 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, beingtangible assets; (ii) know-how, patents, copyrights, trade marks,licences, franchises or any other business or commercialrights of similar nature, being intangible assets acquired onor after the 1[st] day of April, 1998, owned, wholly or partly, by the assessee and used for thepurposes of the business or profession, the followingdeductions shall be allowed--...........” What is clear from the above provisions is that depreciation isallowable not only on tangible assets covered by sub-clause (i) above,but on the intangible assets specifically enumerated in clause (ii) andsuch of the other business or commercial rights similar to the itemsspecifically covered therein. The contention of counsel for theappellant-assessee is that goodwill takes in several aspects such asbusiness-name, logo, location and several other factors and thecumulative value of all these could be called goodwill in business. On ITA No.1741/2009 facts it is seen that what is purchased by the assessee is a Hospitalwhich has been running in Quilon town for a long period under thename "Upasana Hospital". Under the sale deed, the assessee purchasedthe Hospital with it's name, logo, trade mark, staff and equipments as agoing concern without any break in the running of the Hospital. Inother words, from the date of taking over of the Hospital, the patientsunder care of the Hospital continued to be patients of the Hospitaltaken over by the appellant-assessee. Therefore, whatever goodwill theHospital had is admittedly acquired by the assessee under the sale deed.In assessment or in appeals before lower authorities the departmentdoes not have a case that the sale deed on movables covering goodwillis not genuine or the value shown for goodwill is not correct.Therefore, in the appeal we have to only consider whether goodwill iscovered by Section 32(1)(ii) entitling assessee for depreciation asclaimed by him. In support of his contentions counsel for the assesseehas relied on decision of the Delhi High Court in RAJESHBROTHERS VS. COMMISSIONER OF INCOME TAX reported in(2001) 252 ITR 213, decision of the Calcutta High Court in ITA No.1741/2009 ITA No.1741/2009 COMMISSIONER OF INCOME-TAX VS. BIRD AND CO.(P) LTD.reported in (1977) 108 ITR 253 and decision of the Supreme Court inCOMMISSIONER OF INCOME TAX VS. B.C.SRINIVASA SETTYreported in 128 ITR 294. Standing Counsel appearing for therespondent submitted that there is no decision directly on the point andthe decisions relied on by the counsel for the assessee are not directlyon the point raised in this appeal. No doubt, the Supreme Court andthe Calcutta High Court in the judgments abovereferred have clearlyheld that goodwill is a capital asset, even though the question ofeligibility for depreciation was not considered in the decided cases.The Delhi High Court was considering the question of valuation ofgoodwill and depreciation was not an issue there. Therefore, we haveto consider the question as to whether depreciation is an intangibleasset in the form of a business or commercial right of the nature similarto knowhow, patent, copyright, trade mark, licence or franchise, to fallwithin Section 32(1)(ii) of the Act. Standing Counsel submitted thatdepreciation is provided for to take care of wear and tear and there canbe no erosion in goodwill and so much so, claim of depreciation on ITA No.1741/2009 goodwill is fundamentally against the scheme of depreciation.Counsel for the assessee on the other hand contended that benefit byway of depreciation under Section 32(1)(ii) is admissible to theassessee, no matter whether there is real erosion in value or not on thetangible or intangible assets referred to therein. Depreciation though isan allowance to take care of loss or erosion in value of the asset in thecourse of time on account of use, such consequence need not actuallytake place for the purpose of entitling assessee for the relief in terms ofthe statutory provision. In fact, it is common knowledge that onaccount 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 ofdepreciation written off. The Income Tax Act also takes into accountthe possibility of appreciation or atleast retention of value ofdepreciable assets on which depreciation is allowed. While Section 41(2) provides for assessment of profit arising on sale of tangibledepreciable assets, Section 50 provides for assessment of capital gainson sale of depreciable assets. Therefore, we do not think assessee's ITA No.1741/2009 entitlement for depreciation on assets including intangible assets can benegatived on the ground that no erosion in value takes place on accountof use of the asset in business or profession. This leaves us with thelimited question of considering whether goodwill is covered by theresiduary clause in Section 32(1)(ii) of the Act. 4. From Schedule B of the sale deed which gives the value ofgoodwill, we notice that the trade mark or the logo and the name of theHospital are specifically covered by it. In fact, without resorting to theresiduary entry appellant-assessee is entitled to claim depreciation onthe name, trade mark and logo under the specific head provided underSection 32(1)(ii) which covers trade mark and franchise. It is commonknowledge that trade mark and franchise covers name, logo etc., thevalue of which are included in the value of goodwill claimed for thepurpose of depreciation by the assessee. Though it may be difficult todefine goodwill, it's meaning and scope are explained in several Courtjudgments. In the case of KHUSHAL KHEMGAR SHAH VS.MRS.KHORSHED BANU DADIBA BOATWAUA reported in AIR1970 SC 1147, the Supreme Court has explained goodwill as follows: "It is the benefit and advantage of the good name,reputation and connection of a business. It is the attractiveforce which brings in customers. It is the magnetic qualityof a particular trade of business which attracts customers toit as a matter of course. This quality springs from and isdeveloped by various contributing factors that earn areputation for honest dealing, quality and standard. It is anintangible asset being the whole advantage of the reputationand connections formed with the customers together withthe circumstances which make connections durable. It is thecomponent of total value of the undertaking which isattributable to the ability of the concern to earn profits overa course of years because of its reputation, location andother features." In COMMISSIONER OF INCOME TAX VS. B.C.SRINIVASA SETTY reported in (1981) 128ITR 294 the Supreme Court held that ina progressing business goodwill tends to show progressive increase andin 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 bythe assessee with it's name and trade mark as a going concern involvesany purchase of goodwill. Admittedly the Hospital was run in the samebuilding, in the same town, in the same name for several years prior topurchase by the assessee. It obviously had the name of a successful ITA No.1741/2009 Hospital and that is why the assessee chose to continue the samebusiness with the same name. It is the reputation of the Hospital thatbrings patients to it and the same may involve the quality of Doctors,staff, equipments and other facilities available in the Hospital. Evenafter purchase of the Hospital by the assessee, all the facilities andname continued to be the same and therefore, patients may not knoweven the change of management of the Hospital when they go fortreatment in the Hospital after it's purchase by the assessee. Thepurpose of purchasing a business concern, whether it be Hospital orHotel, is to ensure continuity of business with the same reputation.What is most important in the purchase of a Hospital, in our view, isthe name of the Hospital and what is more important in this case is thatthe Hospital after purchase by the assessee continued to be run in thevery same building, in the very same premises, in the very same townand with the same name. So much so, the purpose of paying a veryhuge amount for goodwill is for maintenance of the continuedreputation of the Hospital which was run in the same name for severalyears. The assessee's intention is only to earn good business in the ITA No.1741/2009 Hospital and so much so, purchase of Hospital as a going concern withit's name and trade mark is nothing but acquisition of goodwill earnedby the Hospital and it cannot be termed anything other than acommercial or business right. In fact, if the previous owner of theHospital wanted to retain the name, logo or trade mark of the Hospitaleven after sale of building and premises, he could have retained thesame without transferring it to the appellant-assessee. By transferringthe right to use the name of the Hospital itself, the previous owner hastransferred the goodwill to the appellant-assessee and the benefitderived by the appellant-assessee is retention of continued trust of thepatients who were patients of the previous owners. When the goodwillpaid is for ensuring retention and continued business in the Hospital, itis certainly for acquiring a business and commercial rights and it iscertainly comparable with trade mark, franchise, copyright etc.,referred to in first part of sub-clause (ii) of Section 32(1) and so muchso, in our view, goodwill is covered by the above provision of the Actentitling the assessee for depreciation. We, therefore, allow the appealby reversing the orders of the Tribunal and that of the lower authorities ITA No.1741/2009