Background:
Assessee is a share broker and the main source of income is generated through brokerage. During the year, the assessee has purchased entire clientele business of M/s. Ashmavir Financial Consultants Pvt. Ltd. (AFC) by assigning all clients to the assessee for a consideration of Rs. 2.50 crores . Assessee booked these expenses as purchase of goodwill and has claimed 25% of depreciation amounting to Rs. 62,50,000 thereon.
After considering the provisions of section 32, AO was of the opinion that in the said provision, it is apparently clear that goodwill as such does not find any reference and accordingly, disallowed the claim of depreciation on account of goodwill at Rs. 62,50,000.
Assessee’s contentions:
- By paying Rs. 2.50 crores, the assessee has acquired a right to directly deal with 3709 clients of M/s. AFC which in itself is a commercial right eligible for depreciation.
Tax Authority’s arguments:
- Depreciation is allowable only to assets which keep depreciating over a period of time due to damage, wear and tear and obsolescence whereas, clients do not depreciate and moreover, they are tangible. Therefore, they do not fulfil the conditions of intangibility.
- Any capital asset tangible or intangible has to be put to use. The commercial right that the assessee has claimed to have purchased has not been put to use during the year
- AFC was not a Member of the Stock Exchange and therefore, it could not have solicited independent business.
- The sum of Rs. 2.50 crores has been paid for extinguishment of M/s. AFC.
HELD:
- AFC has transferred its entire retail clientele to the assessee for a consideration of Rs. 2.50 crores. The only issue to be decided is, whether this constitutes or creates an intangible asset eligible for depreciation under section 32 (1) (ii) of the Act
- A perusal of the provision of section 32(1)(ii) suggests that certain intangible assets on which depreciation could be claimed are – knowhow, patents, copy rights, trade marks, licenses, franchise or any other business or commercial rights of similar nature.
- The expression “any other business or commercial rights of similar nature” by itself would mean to include all kinds of commercial rights.
- The Rule of EJUSDEM GENERIS is required to be applied which means that words of a general nature following specific and particular words should be constitute as limited to things which are of same nature as those specified.
- By getting a right over 3709 clients of AFC, such right is used as a tool to carry on the business by the assessee.
- Commercial rights gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customer associate with such assets.
- Reliance is placed on Delhi High Court ruling in the case of AREVA T & D India Ltd. v. Dy. CIT [2012] 345 ITR 421