Delhi High Court recently held that depreciation can be charged even on an intangible asset like goodwill, as it is a form of a commercial right and is used to carry out business. In Commissioner of Income Tax – IV v Hindustan Coca Cola Beverages Pvt Ltd the court was considering an appeal by the revenue authorities against a ruling by the Income Tax Appellate Tribunal.
Dismissing the appeal the high court held that section 32(1)(ii) of the Income Tax Act, 1961, allows depreciation in respect of know-how, patent, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Any right obtained for carrying on business effectively comes within the meaning of an intangible asset. Goodwill, being the positive reputation built by a person or a company over a period of time, is similar to the other items listed in the definition of intangible assets and accordingly depreciation can be allowed on it.
When Coca Cola Beverages acquired businesses through slump sale, it allocated part of what it paid under intangible assets as goodwill. In December 2003 in its tax return the company claimed depreciation on goodwill under section 32 of the Income Tax Act, which it calculated as the amounts paid to the businesses for their marketing and trading reputation, trading style and name, territory know-how, etc. The tax assessing officer allowed Coca Cola’s claim under section 143(3) of the act. The Commissioner of Income Tax revised the assessment under section 263 of the act on the ground that goodwill was not an intangible asset. On appeal, the tax appeal tribunal upheld Coca Cola’s claim.
With this decision Delhi High Court has made positive observations in favour of allowing depreciation on goodwill.
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