Payment to retiring partner above his capital is depreciable as goodwill

Nimesh Yadav for the Respondent.

ORDER

1. These 5 appeals filed by the assessee are against the order of the Commissioner of Income-tax (Appeals)-IV, Surat dated September 30, 2011 for the assessment years 2003-04, 2004-05, 2005-06, 2006-07 and 2008-09.

2. At the outset, before us, the learned Departmental representative submitted that though the appeal of the assessee relates to 5 different assessment years but the facts and circumstances of all the cases are similar except for the assessment years and amounts and the submissions are also common for all the appeals and therefore all the appeals can be heard together. We therefore proceed to dispose of all the appeals together for the sake of convenience and thus proceed with the facts in the assessment year 2003-04 in I.T.A. No. 203/AHD/2012.

3. In this case, none appeared on behalf of the assessee but however written submissions were filed by the assessee. We therefore proceed to decide the appeals, ex parte qua the assessee on the basis of material on record and written submissions.

4. The assessee is a partnership-firm stated to be engaged in the business of doing job work of embroidery. The assessee filed its return of income on June 30, 2003 for the assessment year 2003-04 declaring total loss of Rs.2,18,480. The return of income was initially accepted under section143(1). Subsequently, the case was reopened by issuing notice under section 148 and thereafter assessment was framed under section 147 read with section 143(3) vide order dated October 22, 2010 and the total income was determined at Rs. 5,94,680. Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned Commissioner of Income-tax (Appeals) who vide order dated September 30, 2011 dismissed the appeal of the assessee. Aggrieved by the aforesaid order of the learned Commissioner of Income-tax (Appeals), the assessee is now in appeal before us and has raised the following ground :

“1. The learned Commissioner of Income-tax (Appeals) grossly erred in confirming addition of Rs. 4,86,443 on account of disallowance of depreciation of goodwill as per para 3 of the appellate order.”

5. On perusing the depreciation chart furnished along with the return of income, it was noticed by the Assessing Officer that the assessee had claimed depreciation of Rs. 4,86,443 on the “goodwill”. The Assessing Officer was of the view that the assessee was not eligible to claim depreciation of goodwill and accordingly disallowed the claim of depreciation on “goodwill”. Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned Commissioner of Income-tax (Appeals) who dismissed the ground of the assessee by holding as under :

“2. The only common ground across all three appeals is against the Assessing Officer making an addition on account of disallowance of depreciation on goodwill. It is seen that the appellant-firm had made payment to retiring partners over and above their capital in the firm. This additional amount was mentioned in the fixed assets schedule as goodwill and depreciation was claimed on this. It was the contention of the appellant that the payment had been made to acquire commercial rights which are intangible assets and therefore eligible for depreciation. This issue has been decided by me against the assessee in my order in appeal No. CASIV/164/09-10, for the assessment year 2002-03. For the detailed reason given in that order, it is held that the appellant was not eligible for depreciation on goodwill. The disallowance is upheld. This ground fails.”

6. Aggrieved by the aforesaid order of the learned Commissioner of Income-tax (Appeals), the assessee is now in appeal before us.

7. Before us, in the written submissions, the assessee has submitted that the firm was initially started on July 17, 1981. It was further submitted that the assessee had paid compensation on retirement to the retiring partners and it was towards acquiring commercial right but in the books of account it was named as “goodwill”. It is further submitted that payment for acquiring commercial rights is eligible for depreciation with effect from April 1, 1999 and the payment made for the purpose of acquiring commercial rights was eligible for depreciation. Reliance was also placed on the decision of the Kerala High Court in the case of B. Raveendran Pillai v. CIT [2011] 332 ITR 531  The learned Departmental representative on the other hand supported the order of the Assessing Officer and the learned Commissioner of Income-tax (Appeals) and further submitted that the similar controversy is also in the assessment years 2004-05, 2005-06, 2006-07 and 2007-08 and in those years also the assessee is now in appeal before the Tribunal.

8. We have heard the learned Departmental representative and perused the material on record. It is the assessee’s submission that the payments were made to the retiring partners for acquiring commercial rights which was in the nature of intangible assets. We find that the learned Commissioner of Income-tax (Appeals), following his order in the assessee’s own case for the assessment year 2002-03 disallowed the claim of depreciation. Before us, the aforesaid decision of the learned Commissioner of Income-tax (Appeals) for the assessment year 2002-03 has not been placed by either parties. Further the learned Departmental representative could also not throw light as to whether the assessee had preferred any appeal against the order for the assessment year 2002-03 whereby its claim of depreciation was denied by the learned Commissioner of Income-tax (Appeals) nor has the assessee placed any material on record in respect of the aforesaid. As far as the payment to retiring partners over and above the capital and disclosed as goodwill by the assessee is concerned, the same is not in dispute. We find that in the case of B. Raveendran Pillai (supra), the hon’ble High Court has held that when the goodwill paid was for ensuring retention and continued business, it was for acquiring a business and commercial rights and was comparable with trade mark, franchise, copyright, etc., rendered in the first part of clause 2 of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation. We also find that the hon’ble apex court in the case of CIT v. Smifs Securities Ltd.[2012] 348 ITR 302 has held that goodwill is an asset under Explanation 3(b) to section 32(1). Before us, the Revenue has not pointed out any contrary binding decision in its support. In view of these facts and relying on the aforesaid decisions we are of the view that the assessee is eligible for depreciation. We thus direct accordingly.

9. In the result, this ground of the assessee is allowed for the assessment years 2003-04, 2004-05, 2005-06, 2006-07 and 2008-09.

10. We now take up the other ground which is common for the assessment years 2006-07 and 2007-08 pertaining to disallowance of milgin and factory expenses and the grounds raised by the assessee for the assessment year 2006-07 reads as under :

“2. The learned Commissioner of Income-tax (Appeals) grossly erred in confirming addition of Rs. 1,58,606 on account of lump sum disallowance out of milgine and factory expenses as per para 5 of the appellate order.”

11. The ground is with respect to addition of Rs. 1,58,606 out of milgin and factory expenses.

12. The Assessing Officer noticed that the assessee had debited milgine expenses of Rs. 7,79,014 and factory expenses of Rs. 14,014 aggregating to Rs. 7,93,028. The Assessing Officer noticed that some of the expenses incurred were not fully supported by proper vouchers or some of the bills vouchers were missing or were self-made vouchers. Thus in the absence of complete supporting evidence with regard to the quantum of claim and the purpose of expenses, the Assessing Officer was of the view that the expenses cannot be verified and further as to whether the entire expenses have been incurred wholly and exclusively for the purpose of business. He accordingly disallowed one-fifth of the expenses amounting to Rs.1,58,606. Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned Commissioner of Income-tax (Appeals) who upheld the order of the Assessing Officer and confirmed the disallowance by holding as under :

“5. Ground No. 3 in the assessment year 2006-07 and ground No. 3 in the assessment year 2008-09 are against the Assessing Officer making addition on account of millgin and factory expenses. The Assessing Officer during the course of assessment proceedings observed that these expenses were not fully supported by vouchers and bills and also some of the bills/ vouchers were self-made and not in chronological order and hence unverifiable. He therefore held that the entire expenses cannot be held as incurred wholly and exclusively for the purpose of business. He therefore disallowed one-fifth of the expenses and made addition of Rs. 1,58,606 and Rs. 1,01,507 in the assessment year 2006-07 and in the assessment year 2008-09, respectively. During the course of the appellate proceedings, no submissions have been made in respect of this ground. The SOF accompanying the appeal does not give any reason why the action of the Assessing Officer should not be upheld. I am therefore constrained to uphold the action of the Assessing Officer. Ground No. 3 in the assessment year 2006-07 and ground No. 3 in the assessment year 2008-09 are therefore dismissed.”

13. Aggrieved by the aforesaid order of the learned Commissioner of Income-tax (Appeals), the assessee is now in appeal before us.

14. Before us, the assessee in the written submissions has submitted that no specific defects were found in the vouchers and most of the milgine expenses were paid by account payee cheques. It was further submitted that the factory expenses in comparison to the total turnover was reasonable and no disallowance was called for. The learned Departmental representative on the other hand supported the order of the Assessing Officer and the learned Commissioner of Income-tax (Appeals).

15. We have heard the learned Departmental representative and perused the material on record. We find that while confirming the disallowance, the learned Commissioner of Income-tax (Appeals) has noted that no submissions were made by the assessee in respect of the aforesaid ground. Before us also apart from the general statement, no details have been filed by the assessee in support of its submissions. In view of the aforesaid facts, we find no reason to interfere with the order of the learned Commissioner of Income-tax (Appeals) and thus this ground of the assessee is dismissed. Since similar ground has been raised by the assessee for the assessment year 2008-09, the ground for the assessment year 2008-09 is also disallowed.

16. In the result, the appeals of the assessee in I. T. A. Nos. 203, 204 and 205/AHD/2012 are allowed and I.T.A. Nos. 206 and 207/AHD/2012 are partly allowed.