Goodwill Archives - Tax Heal

No Tax on sum received by partner on retirement from firm for goodwill : HC

CA Satbir Singh — Fri, 25 May 2018 14:44:29 +0000

HIGH COURT OF BOMBAY

Principal Commissioner of Income-tax-26 Mumbai

R.F. Nangrani HUF

M.S. SANKLECHA AND SANDEEP K. SHINDE, JJ.

IT APPEAL NO. 33 OF 2016

APRIL 18, 2018

A.R. Malhotra and N.A. Kazi for the Appellant. Ajaykumar R. Singh and Ravindra Poojary for the Respondent.

ORDER

1. This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act) challenges the order dated 10th December, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 2009-10.

2. The Revenue urges the following questions of law for our consideration :—

“(i)		Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the addition of Rs.14,15,61,370/- made u/s 45(1) of the Income Tax Act under the head long term capital gains?
(ii)		Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in not appreciating that the right of partner in the partnership firm is a capital asset u/s 2(14) of the Act and retirement of partner lead to extinguishment of such right in the firm amounting to transfer u/s 2(47) of the Act giving rise to capital gains exigible to tax?
(iii)		Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not holding the transaction amounting to transfer within the meaning of section 2(47) of the Act as mode of retirement employed was a lumpsum consideration of the retiring partner relinquishing his share in the partnership and its assets in favour of continuing partners and further erred in not appreciating that the said preposition laid down by the Hon’ble Bombay High Court in the case of Tribhuvandas G. Patel has not been disapproved by the Hon’ble Apex Court or other Courts as held by the Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta v. ITO (2004) 83 TTJ 542?
(iv)		Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified that in not considering that in the case of Commissioner of Income Tax v. Riyaz A. Sheikh, the retiring partner received the amount from partnership firm arising on transfer of goodwill, however, int eh case of Assessee there is no goodwill in the balance sheet of M/s. Landmark Development?
(v)		Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not considering that the Assessee did not fulfill the conditions laid down in Section 54F of the Act as the allowability should be restricted to cost of construction incurred after the date of transfer and not prior to the said date?
(vi)		Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not considering that claim of deduction, if any, allowable should be restricted to as claimed in the return of income filed u/s 139(1) and not u/s 139(4)?”

3. Regarding question Nos. (i) to (iv):—

(a)		The impugned order of the Tribunal allowed the respondent assessee’s appeal on the common issues as made out in question nos. (i) to (iv) i.e. whether the amount received as goodwill on retirement is taxable in the hands of the retiring partner as capital gain. This by following the order of its co-ordinate bench in the case of Riyaz A. Sheikh v. ITO, [IT Appeal No.352 (PN) of 2006, dated 29-10-2010] and the order of this Court upholding the above view of the Tribunal reported as CIT v. Riyaz A. Sheikh [2014] . In the aforesaid decision, the question urged by the Revenue for consideration of this Court is as under :—
		“Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in reversing the decision of CIT(A) and deleting the addition of Rs.66,20,005/- made by the assessing officer towards long term capital gain on transfer of goodwill?”
(b)		This Court dismissed the Revenue’s appeal upholding the order of the Tribunal that amounts received as goodwill on retirement from a partnership firm is not subject to capital gains tax in the hands of the retiring partner. This after consideration of all binding decisions which the Revenue seeks to rely upon including the decision of the Supreme Court in Tribhuvandas G. Patel v. CIT [1999]
(c)		Mr. Malhotra, learned Counsel appearing in support of the appeal submits that the decision of this Court in Riyaz A. Sheikh (supra) will not apply as the amounts received by the respondent was not on account of goodwill. Particularly because there is no goodwill in the balance sheet of the partnership firm M/s. Land Mark Developers. It is also submitted that the decision in Riyza A. Shaikh (supra) did not properly appreciate the position in law while rejecting the appeal. It was also submitted that the amounts received by the respondent on account of goodwill will be taxable even when there is no cost of acquisition, in view of amended Section 55 of the Act. Therefore, this appeal requires admission.
(d)		So far as the first objection is concerned, we find that there is nothing on record to indicate that it was a Revenue’s contention before the authorities that the amount received by the respondent was not goodwill. In fact, the submission that in the absence of goodwill being indicated in the balance sheet of the partnership firm, there could not be no goodwill available to the firm is an issue being urged for the first time before this Court. Therefore, in the absence of this issue being raised before the authorities under the Act, it will not be question arising from the case. Thus, there is nothing on record on facts to indicate that the amount received by the respondent is not goodwill. Therefore, the decision of this Court in Riyaz A. Sheikh (supra) will apply.
(e)		So far as the issue of cost of acquisition of goodwill is concerned, the same will not arise for consideration in the present facts. This is so as in Riyaz A. Sheikh (supra), this Court has already decided that the amounts received on retirement on account of goodwill by the retiring partner will not be subjected to tax as capital gains in his hands. The question of cost of acquisition being NIL is a matter of computation of capital gains. This issue of computation would only come into play once it is held that the amounts received on account of goodwill by a partner is liable to capital gains tax under the Act. Therefore, this submission also has no merits.
(f)		So far as the second objection is concerned that the order of this Court in Riyaz A Sheikh (supra) did not properly appreciate the law, we note it was rendered on 26^th February, 2013. The aforesaid order of this Court would have been applied by all authorities within the State to the retiring partners on receipt of goodwill. In fact, this Court itself has specifically dismissed an identical question raised by the Revenue in CIT v. Rajnish M. Bhandari [IT Appeal No.2058 of 2012, dated 18-3-2013] by following Riyaz A. Sheikh (supra). In this case, no distinguishing features on facts in the present case have been shown from that existing in the matter of Riyaz A. Sheikh (supra). The submission that the law was not properly appreciated in the above case is not a distinction which would warrant interference. The remedy if any would be an appeal to the Apex Court.
(g)		In response, Mr. Malhotra, informs us that the decision of this Court in Riyaz A. Shaikh (supra) was not appealed to the Apex Court because of low tax effect. At the relevant time, the CBDT Circular / Instruction No.3/2011 dated 9th February, 2011 governed the filing of appeals by the Revenue. In such cases, the Instruction particularly states that when a appeal is not filed for low tax effect, it must also record that the decision is not acceptable. No such record is shown. Further, nothing has been shown to us as to whether the decision in case of Rajnish M. Bhandari (supra) has been challenged, if not, why not. We must proceed on the basis that it has been accepted. In any event, the decision of a co-ordinate bench is binding upon us in the absence of any distinction being shown to us on facts. It must be clarified that non-filing of an appeal for low tax effect from an order of a co-ordinate bench of this Court would not result in the order loosing its status as a binding precedent.
(h)		The rule of law would oblige us to follow decisions of a co-ordinate bench in the absence of any distinction on facts as the law has to be applied equally to all concerned. This would be the position in the absence of it being stayed, till the same is set aside and / or modified by a higher forum.
(i)		In the above view, question nos. 1 to 4 which deal with the same issue, do not give rise to any substantial question of law as the impugned order has merely followed the decision of this Court in Riyaz A. Sheikh (supra). Thus, not entertained.

4. Regarding question Nos. (v) and (vi) :—

(a)		It is an agreed position between the parties that these questions do not survive in the absence of question nos. (i) to (iv) being admitted.
(b)		In the aforesaid circumstances, these questions in the context of the present facts are academic. Therefore, the proposed questions would not give rise to any substantial questions of law. Thus, not entertained.

5. The appeal is dismissed. No order as to costs.

Other Income Tax judgments

Depreciation on goodwill -When claim not made in Return – Case Law

CA Satbir Singh — Wed, 18 Jan 2017 03:51:06 +0000

Depreciation on goodwill

The Ahmedabad Bench of Income Tax Appellate Tribunal allowed the taxpayer’s claim of depreciation on goodwill under Section 32 of the Income-tax Act, 1961 (even though the claim was not made by the taxpayer on an amended return, but was made during the course of assessment proceedings). The case is: Zydus Wellness Ltd. Read a January 2017 report on Depreciation on Goodwill [PDF 329 KB] of KPMG

Depreciation of goodwill – Case Law

CA Satbir Singh — Thu, 20 Oct 2016 04:02:11 +0000

Depreciation of goodwill

The Bangalore Bench of the Income-tax Tribunal held that the taxpayer cannot claim depreciation on assets acquired through an amalgamation, including goodwill, more than the depreciation that would be allowable to the amalgamating company. The case is: United Breweries Ltd. Read an October 2016 report of KPMG [PDF 315 KB]

Compensation to retiring partners is Goodwill , Depreciation allowed

CA Satbir Singh — Tue, 03 May 2016 13:34:59 +0000

Issue

Whether the payments made to retiring partners in the nature of compensation can be termed as goodwill and subsequently eligible for depreciation?”

Held

The Supreme Court in the case of SMIFS Securities Ltd. was dealing with the question as to whether ‘goodwill’ is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said section. The Assessing Officer had held that ‘goodwill’ is not an asset falling under Explanation 3 to section 32(1) of the Act. The Supreme Court held that Explanation 3 states that the expression “asset” shall mean intangible assets, being know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3indicates that goodwill would fall under the expression “any other business or commercial rights of similar nature”. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). The court was, accordingly, of the view that “goodwill” is an asset under Explanation 3(b) to section 32(1) of the Act, and accordingly, answered the question in favour of the assessee.

HIGH COURT OF GUJARAT

Principal Commissioner of Income-tax-2

Swastik Industries

MS. HARSHA DEVANI AND G.R. UDHWANI, JJ.

TAX APPEAL NOS. 153 & 157 OF 2016

MARCH 21, 2016

Sudhir M. Mehta, Advocate for the Appellant.

ORDER

Ms. Harsha Devani, J. – In all these appeals under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the appellant – revenue has called in question the common order dated 29.05.2015 made by the Income Tax Appellate Tribunal, Ahmedabad “C” Bench (hereinafter referred to as “the Tribunal”) in the corresponding appeals, by proposing the following common question, stated to be a substantial question of law :

“Whether on facts and in the circumstances of the case and in law, the ITAT was right in treating the payments made to retiring partners in the nature of compensation can be termed as goodwill and subsequently eligible for depreciation?”

2. The assessment years are 2003-04 to 2006-07 and 2008- 09. The facts and circumstances of all the five cases are similar except for the assessment years and the amounts. Since the controversy involved in all these appeals is common, the same were heard together and are disposed of by this common order.

3. For the sake of convenience, reference is made to the facts as appearing in ITA No.203/Ahd/2012 for assessment year 2003-04. The assessee is a partnership firm engaged in the business of doing job work of embroidery. The assessee filed its return of income for assessment year 2003-04 on 30.06.2003 declaring total loss of Rs.2,18,480/-, which came to be accepted under section 143(1) of the Act. Thereafter, the assessment came to be reopened by issuing notice under section 148 of the Act. The Assessing Officer, upon perusing the depreciation chart furnished by the assessee along with return of income, noticed that the assesses had claimed depreciation of Rs.4,86,443/- on goodwill. The Assessing Officer was of the view that the assessee was not eligible to claim depreciation of goodwill and accordingly, by an order dated 22.10.2010 under section 147 read with section 143(3) of the Act disallowed the claim of depreciation on goodwill and made an addition of Rs.4,86,443/-. The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), who held that the assessee was not eligible for depreciation on goodwill and upheld the disallowance. The assessee carried the matter in further before the Tribunal and succeeded.

4. Mr. Sudhir Mehta, learned Senior Standing Counsel for the appellant reiterated the grounds stated in the memorandum of appeal and submitted that the Tribunal has failed to appreciate that the assessee had made payment to retiring partners which was in the nature of compensation and had been brought in the books as goodwill, and as such the same would by no stretch of imagination fall within the purview of the expression goodwill. It was submitted that the payment of compensation for surrendering rights in the firm was a capital expenditure on which no depreciation was allowable, and hence, the depreciation claimed on goodwill cannot be allowed. It was, accordingly, urged that the appeals do give rise to a question of law, as proposed or as may be formulated by the court.

5. This court has considered the submissions advanced by the learned counsel for the appellant and has also perused the impugned order passed by the Tribunal as well as the orders passed by the lower authorities.

6. The facts as emerging from the record are that the assessee had shown acquisition of goodwill of an amount of Rs.19,45,774/- and had claimed depreciation of Rs.4,86,443/- @ 25% on the goodwill in assessment year 2003-04. It was the case of the assessee that an amount of Rs.35,00,000/- had been paid to the retiring partners as compensation on retirement from the business of the firm and in the books of account, the payment was technically shown as goodwill. In fact, the same was paid for acquiring commercial rights and was, therefore, eligible for depreciation under the head “intangible assets”. The Assessing Officer was of the view that under section 32 of the Act, depreciation on goodwill is not an allowable expense, as goodwill is neither a tangible asset nor an intangible asset. He, accordingly, disallowed the claim of depreciation of Rs.4,86,443/- on goodwill for the said assessment year and added the same to the total income of the assessee. The Commissioner (Appeals), upon appreciation of the evidence on record, found that the assessee had mentioned the payment made to the retiring partners in the fixed assets schedule as goodwill. That no commercial rights over and above the rights already enjoyed by the firm were acquired by it by virtue of making payment to the retiring partners and hence, the payments made by the firm cannot be said as made for acquiring any commercial right. The Commissioner (Appeals), accordingly, held that since no commercial rights have been acquired by the firm, no depreciation was admissible on goodwill and accordingly, disallowed the depreciation. Thus, both the Commissioner (Appeals) as well as the Assessing Officer have proceeded on the footing that the amount paid to the retiring partners constituted ‘goodwill’ on which depreciation was not allowable. The contention raised in the memorandum of appeal with regard to the amount not being ‘goodwill’, therefore, is not borne out from the findings recorded by the Assessing Officer and the Commissioner (Appeals). The Tribunal, in the impugned order, has not accepted the assessee’s contention that the payment was for acquiring commercial rights and has proceeded on the footing that the payment was in the nature of ‘goodwill’ and placing reliance upon the decision of the Supreme Court in the case of CIT v. SMIFS Securities Ltd. [2012] 348 ITR 302 has allowed the claim for depreciation.

7. The Supreme Court in the case of SMIFS Securities Ltd. (supra) was dealing with the question as to whether ‘goodwill’ is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said section. The Assessing Officer had held that ‘goodwill’ is not an asset falling under Explanation 3 to section 32(1) of the Act. The Supreme Court held that Explanation 3 states that the expression “asset” shall mean intangible assets, being know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3indicates that goodwill would fall under the expression “any other business or commercial rights of similar nature”. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). The court was, accordingly, of the view that “goodwill” is an asset under Explanation 3(b) to section 32(1) of the Act, and accordingly, answered the question in favour of the assessee.

8. In the present case, from the findings recorded by the Assessing Officer, the Commissioner (Appeals) as well as the Tribunal, it is an undisputed fact that the payment made to the retiring partners has been considered to be goodwill. The Supreme Court in the above decision has held that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Thus, the Tribunal has merely applied the above decision of the Supreme Court to the facts of the present case. Under the circumstances, it is not possible to state that there is any infirmity in the impugned order passed by the Tribunal so as to give rise to a question of law, much less, a substantial question of law, warranting interference.

9. The appeals, therefore, fail and are, accordingly, dismissed.