B.RAVEENDRAN PILLAI, SREEVALSAM vs. THE COMMR. OF INCOMETAX

JUDGMENT Ramachandran Nair, J. The question raised in this Income Tax Appeal filed by the assessee is whether he is entitled to depreciation on goodwill under Section 32(1)(ii) of the Income Tax Act (hereinafter called "the Act"). Appellant purchased a Hospital in Quilon with it's land, building, equipments, staff, name, trademark and goodwill as a going concern under two separate sale deeds. While immovables are covered by one sale deed, movables covering trade mark, goodwill etc. are covered by another sale deed. Schedule B of the sale deed second abovereferred produced in this appeal describe the trade name transferred as "Upasana Hospital". In Schedule B besides the name and get up, the parties have given the emblem or trademark of the Hospital purchased by the appellant. Under the sale deed, the value of goodwill which includes the name of the Hospital and it's logo and trademark is declared as Rs.2 crores. In the income tax returns filed subsequent to purchase of the Hospital, assessee claimed depreciation on goodwill on the value shown in the sale deed. In subsequent years depreciation on goodwill was claimed on the written down value. It seems the returns filed for a few years got accepted and scrutiny assessment was made for the first time only for the assessment year 2004-2005. In the return filed for this assessment year, the assessee's claim for depreciation was on a written down value of Rs.55,37,109/- and the depreciation claimed at 25% was Rs.13,84,277/-. In the scrutiny assessment for the assessment year 2004-2005, the Assessing Officer held that “goodwill” is not covered by Section 32(1)(ii) of the Act and so much so, assessee is not entitled to depreciation, even though depreciation claimed on goodwill got allowed for earlier years. The appeals filed by the assessee before the C.I.T.(Appeals) and the Tribunal were also unsuccessful and hence the assessee has filed this appeal under Section 260A of the Act contending that assessee is entitled to depreciation on goodwill under Section 32(1)(ii) of the Act. We have heard Adv. Sri.P.Balakrishnan appearing for the appellant-assessee and Standing Counsel appearing for the respondent.

"It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in customers. It is the magnetic quality of a particular trade of business which attracts customers to it as a matter of course. This quality springs from and is developed by various contributing factors that earn a reputation for honest dealing, quality and standard. It is an intangible asset being the whole advantage of the reputation and connections formed with the customers together with the circumstances which make connections durable. It is the component of total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features." the assessee with it's name and trade mark as a going concern involves any purchase of goodwill. Admittedly the Hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. It obviously had the name of a successful Hospital and that is why the assessee chose to continue the same business with the same name. It is the reputation of the Hospital that brings patients to it and the same may involve the quality of Doctors, staff, equipments and other facilities available in the Hospital. Even after purchase of the Hospital by the assessee, all the facilities and name continued to be the same and therefore, patients may not know even the change of management of the Hospital when they go for treatment in the Hospital after it's purchase by the assessee. The purpose of purchasing a business concern, whether it be Hospital or Hotel, is to ensure continuity of business with the same reputation. What is most important in the purchase of a Hospital, in our view, is the name of the Hospital and what is more important in this case is that the Hospital after purchase by the assessee continued to be run in the very same building, in the very same premises, in the very same town and with the same name. So much so, the purpose of paying a very huge amount for goodwill is for maintenance of the continued reputation of the Hospital which was run in the same name for several years. The assessee's intention is only to earn good business in the Hospital and so much so, purchase of Hospital as a going concern with it's name and trade mark is nothing but acquisition of goodwill earned by the Hospital and it cannot be termed anything other than a commercial or business right. In fact, if the previous owner of the Hospital wanted to retain the name, logo or trade mark of the Hospital even after sale of building and premises, he could have retained the same without transferring it to the appellant-assessee. By transferring the right to use the name of the Hospital itself, the previous owner has transferred the goodwill to the appellant-assessee and the benefit derived by the appellant-assessee is retention of continued trust of the patients who were patients of the previous owners. When the goodwill paid is for ensuring retention and continued business in the Hospital, it is certainly for acquiring a business and commercial rights and it is certainly comparable with trade mark, franchise, copyright etc., referred to in first part of sub-clause (ii) of Section 32(1) and so much so, in our view, goodwill is covered by the above provision of the Act entitling the assessee for depreciation. We, therefore, allow the appeal by reversing the orders of the Tribunal and that of the lower authorities and by directing the Assessing Officer to revise the assessment by granting depreciation on the written down value of goodwill to the appellant-assessee.

C.N.RAMACHANDRAN NAIR Judge K.SURENDRA MOHAN Judge pms