Depreciation on Intangible? Reassessments

[vyakul]

More number of cases were taken up for scrutiny and re assessments were also being made for the companies that claimed depreciation on intangible. I.e. Goodwill. No compete fees.

The vendor decides to sells his business / unit for a consideration that includes the commercial right to carry on the business as an ongoing basis. The agreement also provides scope for the vendor after selling shall not enter into this business for a period of time usually called as "No compete fees". The purchaser pays consideration for these intangible and usually names it as "Goodwill" and accordingly use that as head of accounting.

As per IT, The term intangible asset is a one that is ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

Apparently the term "goodwill or no compete fee "dont appear in the said list but means only that.

The AO is of the opinion that goodwill / no compete fee is not an intangible asset  and depreciation could not be provided.

Is this view is acceptable? Is there any decided case on this issue? Can you pls help us out

sathya
vyakul@gmail.com

[bhaveshformals]

If the asset is not mentioned in the block of asset then no depreciation is allowed even though it is a Capital Expenditure.
See Hoogly Mills Co. Ltd.287 ITR 333

[vyakul]

The asset forms part of block of asset and grouped under "intangble" and eligible to claim 25%. It is just that the term Goodwill / no compete fee dont find place in that definition.
sathya

[bhaveshformals]

YEs exactly,
That is why there can be no depreciation for Goodwill.


Bhavesh Savla

Keep Smiling.

[probal_shome]

There is a judgement of the Bombay Tribunal I found on itatindia.com which holds that goodwill is not an intangible asset.

ITAT, MUMBAI BENCHES 'H', MUMBAI

R. G. KESWANI

v

ACIT

ITA NO. 1463/Mum./2005

February 19, 2008

RELEVANT EXTRACTS:

**        **        **        **        **        **        **        **        **        **        **        **

12.       We heard both sides in detail and considered the matter. The statutory expression of the provision granting depreciation on intangible asset is that -

            " knowhow, patents, copyrights trademarks, licences, franchise or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998."

(Emphasis provided by us)

13.       A reading of the above statutory expression brings home the point that the law has specified items of intangible assets eligible for depreciation in the following categories:-

            (i)         Knowhow

            (ii)        Patents

(iii)               Copyrights

(iv)              Trade marks

(v)                Licences

(vi)              Franchises



14.       As seen above, the law has specified six categories of intangible assets entitled for depreciation. Therefore, it is very obvious that all intangible assets are not eligible for depreciation allowance.

15.       In the present case, the amount of Rs.25,00,000 was paid by the assessee  towards the acquisition of goodwill. Therefore, the said payment does not come under either knowhow, patents, copyrights, trademarks, licences, franchises. The only remaining category is the residual one "any other business or commercial rights of similar nature". It is to be seen that any other business or commercial rights are not by themselves intangible asses eligible for depreciation. Those rights must be of similar nature; all similar nature to knowhow, patents, copyrights, trademarks, licences, franchises. Any business or commercial rights not similar in nature to the above mentioned six items cannot be treated as intangible assets qualified for depreciation.

16.     This is because "any other business or commercial rights of similar nature" provided as a residual category is found in the company of expression like knowhow. patents, copyrights, trademarks, licences, franchise:-, and therefore, in view of the principle of ejusdem generis, the above expression '"any other business or commercial rights"' has to be read in the company of the preceding words. Ejusdem generis rule is the rule of generic words following more specific one. The rule is that when general words follow specific words of same nature, the general words must be confined to the things of the same kind as those specified. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like knowhow, patents, copyrights, etc. form a distinct genesis or category inasmuch as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression "any other business or commercial rights of similar nature" also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in Sec.32(1)(ii), the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to knowhow, patents, copyrights, etc.


On the issue as to whether non-compete consideration constitutes an intangible asset, there is an adverse judgement of the Bombay ITAT. I'll try and pull it out soon.

Regards,

Probal.

[vyakul]

Many thanks for all the responses so far.
I will divide the question components  as two part
1) Good will.
The company values all the tangible and provide a value for it. Over and about the tangibles, The company also tries to value all their intangibles such as their existence, Brand loyalty, trademarks,franchisee, the employees technical know how etc. All these are internally self generated and hence not accounted. At the time of sale, They also want to provide a value.  In such cases, they create a business transfer agreement and  pay over and above the tangible value of asset . For the intangible they provide a  common term called "Goodwill" and create that as accounting head. This goodwill includes all  the terms such as franchisee, technical know how, trademarks.
2) No compete fee.
Because the purchaser wants to continue the business and avoid the competition from the vendor,He pays a specific sum from prohibiting him to carry on the business.  No body wants to buy all assets from the vendor and see him doing the same business. Technically this is a commercial right which he buys that prevents the vendor to carry on the business with the same name and trade. This is a commercial right that is bought.
Our question is
Suppose  The  purchaser  purchases a brand as an individual item and values them, the depreciation is provided.
Then why cannot the depreciation be provided if he buys this brand and along with other things like loyalty, employee technical know how, Their franchisees trademarks etc.
sathya
vyakul@gmail.com

[pawansingla]

Dear Friends,
Kindly look for Bombay High Court Judgment of Piaggio cars pvt ltd. I have written citation in my diary and will revert back to you after a week. Secondly Ahmedbad Tribunal in case of Bharatbhai J Vyas and Delhi Tribunal in case of Guruji Entertainment has also held that Deepreciation is not allowable on Goddwill. As regarding Deprecition on Non-compete fees , i have copy of one unreported judgement of A'bad Tribunal which also  says depreciation is not allowable on Non-Compete fees.The Bombay High Court though in favoyr of assessee is not direct judgment.

Pawan Singla