B. Ravindran Pillai v. CIT

Month – Year : September 23,2010 Petitioner : Sri B. Ravindran Pillai Respondent : The Commissioner of Income Tax Depreciation allowable on Goodwill under Section 32(1)(ii) of the

Income Tax Act,1961 The appellant purchased a hospital in Quilon (kollam) with its land,

building, equipment, staff, name, trade mark and goodwill◦ Immovables are covered by one sale deed, ◦ movables covering trade mark, goodwill etc. are covered by another sale deed.

Trade name was transferred as “Upasana Hospital”. The value of the goodwill : Rs.2 crores.

Depreciation claimed on goodwill : claimed on written down value. ◦ Returns filed for a few years got accepted and scrutiny assessment was made for

the first time only for the assessment year 2004- 05 . In the scrutiny assessment for the assessment year 2004- 05, the Assessing

Officer held that “goodwill” is not covered by section 32(1)(ii) of the Act. ◦ The assesse is not entitled to depreciation, even though it got allowed for earlier

years.

B. Ravindran Pillai v. CIT

The question to be considered is whether goodwill falls within the ambit of the residuary item referred to in section 32(1).

The earlier act stated that the depreciation would be calculated on the following basis:

(i) tangible assets: buildings, machinery, plant or furniture. (ii)intangible assets: Know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, There was no law stating whether

◦ GOODWILL should be classified as an asset? ◦ depreciation should be calculated on GOODWILL?

The assesse claimed that the goodwill paid was for ensuring retention of clientele and continued business in the hospital. Hence it should be an asset on which depreciation can be claimed..

Case Importance

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“(i) Without resorting to the residuary entry the assesse was entitled to claim depreciation on the name, trade mark and logo under the specific head provided u/s.32(1)(ii) which covers trade marks and franchise.

(ii). By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assesse and the benefit derived by the assesse was retention of continued trust of the patients who were patients of the previous owners.

(iii) When the goodwill paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial rights and it was comparable with trade mark, franchise, copyright, etc., referred to in the first part of clause (ii) of section 32(1)

OUTCOME: Goodwill covered by the above provision of the Act entitled the assesse for depreciation.”

Outcome Of The Case

For easy reference we extract hereunder section 32(1):

In respect of depreciation of (i) buildings, machinery, plant or furniture, being tangible assets; (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,owned, wholly or partly, by the assessee and used for the purposes of the business or

profession, the following deductions shall be allowed . . .”

Principal of Law

It helps us to calculate the taxable income (by considering depreciation calculated on the value paid for GOODWILL.

It acts as a future reference for various companies which involves GOODWILL as an asset.

Application of the case