The income tax department has sought the Supreme Court?s intervention in deciding whether ?goodwill? is an intangible asset entitled for depreciation.
A bench headed by Chief Justice SH Kapadia has issued a notice to soft drinks major Hindustan Coca Cola Beverages (HCCB) on this issue raised by the revenue, which had asked the company to pay R27.93 crore for the assessment year 2001-02.
Challenging the Delhi High Court judgment that ruled in favour of HCCL, the department argued that the definition of intangible assets in Explanation 3 of Section 32 of the Income Tax Act, 1961, did not include goodwill though items like knowhow, copyright, patents, trademarks, franchises or any other business or commercial rights of similar nature were specifically mentioned.
HCCL had claimed around R71 crore as depreciation on the understanding that the consideration was paid to acquire certain commercial rights in the nature of intangible capital assets. Such intangible assets were termed as ?goodwill? by the taxpayer in its books of account.
It mentioned that ?goodwill of the company comprised payment made to bottlers at the time of acquisition of their business and the difference between the consideration paid for business and the value of tangible assets determined by a reputed valuer?.
While the assessing officer had accepted the depreciation claim of the assessee, the Commissioner had directed the department to revise the assessment on the basis that goodwill generated in a business cannot be described as an asset entitled to depreciation under the Act. Further, it said that the depreciation provision in the Act did not include goodwill as an intangible asset. Aggrieved by this order, HCCL had moved the Income Tax Appellate Tribunal, which held in favour of the company.
Even the Delhi High Court upheld the view that goodwill in the cola major?s case was in substance similar to tangible assets and included industrial information like database of the territory relating to customer preferences, distribution networks, etc. Hence, in effect, it was knowhow.
The high court held that non-monetary assets could not be seen or touched or physically measured, but were created. Such assets assumed diverse forms like copyrights, patents and trademarks, which arose on acquisition or were internally generated. The business or commercial rights in the context of the Act were rights that were obtained for effectively carrying on the business and commerce. The term ?commerce? was wide enough to encompass many a facet within its fold. The high court further clarified that the true basis of depreciation allowance should be the character of the asset and not its description.