CIT vs. Smifs Securities Ltd (Supreme Court)

DATE: (Date of pronouncement)
DATE: August 24, 2012 (Date of publication)

Click here to download the judgement (smifs_securities_depreciation_goodwill.pdf)

“Goodwill” is an intangible asset eligible for depreciation u/s 32

Pursuant to an amalgamation of another company with the assessee, the difference between the consideration paid by the assessee and the net value of assets of the amalgamating company was treated by the assessee as “goodwill” and depreciation of Rs. 54 lakhs was claimed thereon u/s 32(1)(ii). The AO rejected the claim on the ground that (i) “goodwill” was not an “intangible asset” as defined in Explanation 3 to s. 32(1) and (ii) the assessee had not paid anything for the same. The Tribunal and High Court upheld the assessee’s claim. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

Explanation 3 to s. 32 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. The words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, “Goodwill” is an asset under Explanation 3(b) to s. 32(1) & eligible for depreciation. Though the AO held that the assessee had not “paid” anything for the goodwill, this cannot be accepted because (a) the CIT (A) & Tribunal (correctly) held that that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted “goodwill” and (b) this aspect was not challenged by the department before the High Court.

3 comments on “CIT vs. Smifs Securities Ltd (Supreme Court)
  1. vswami says:

    For an UPDATE >

    In one’s independent perspective, in most decided court cases, all necessary propositions, based on the FIRST PRINCIPLES have not been suitably framed and adequately addressed. Had that been done, may be, the issue (s) would have been differently decided in the Revenue’s favour!
    OVER to tax pundits at large, for an insight and concerted deliberation

  2. vswami says:


    For further deliberation on the lines earlier indicated:
    !. Only with the objective of overriding the SC Judgment in B.C. Srinivasa Setty’s case, the provisions governing taxation of ‘capital gains’ came to be amended; refer sec. 55 (2) (a).
    Even so, the amended provision reads:
    “(2) For the purposes of sections 48 and 49,” cost of acquisition”,-

    (a) in relation to a capital asset, being goodwill of a business,…. –

    (i) in the case of acquisition of SUCH asset by the assessee by, PURCHASE from a previous owner, means the amount of THE PURCHASE PRICE ; and

    (ii) in any other case[ not being a case falling under sub- clauses (i) to (iv) of sub- section (1) of section 49], shall be taken to be nil;…”

    (FONT supplied- to focus on)

    II. On the other hand, sec 32, which provides for depreciation allowance, in clause (ii) of sub-sec (1), ‘good will’ is not specifically included.

    Further, according to a harmonious reading and clear understanding of the entire scheme of the provisions of the said section, and in terms thereof, there is no scope for claim of depreciation on ‘good will’- be it self-generated or purchased.

  3. vswami says:

    ADD-on (wprt claim by a person carrying on any profession):

    In terms of sub-sec (1) sec 32 , on a wholesome / conjoint reading, depreciation is entitled to be allowed, also on depreciable assets acquired and used for the purposes of ‘profession’.
    However, turning to clause (ii), if closely read, as highlighted below, :
    “know-how, patents, copyrights, trademarks, licences, franchises or ANY OTHER BUINESS OR COMMERCIAL RIGHTS of similar nature, being intangible assets…. owned, by the assessee and used for the purposes of the business OR PROFESSION, the following deductions shall be allowed—”
    clarity seems to be wanting ; in that, whether or not intiangible assets used for profession ,- not being for business and / or , in any case, not being ‘commercial rights’ or of ‘simlar nature’ qualify for allowance.

    May be a lacuna; if so, and if unintended, needs to be specifically clarified !

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