The petitioner purchased a hospital including its assets and goodwill valued at Rs. 2 crores. The petitioner claimed depreciation on the goodwill in tax filings. The Commissioner of Income Tax did not allow the depreciation, holding that goodwill is not covered under section 32(1)(ii) of the Income Tax Act. On appeal, the Kerala High Court reversed this decision and held that goodwill is comparable to other intangible assets listed under section 32(1)(ii) such as trademarks and franchises. Therefore, the petitioner is entitled to claim depreciation on the goodwill acquired during the hospital purchase.

2.  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.

3.  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..

4.  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.”

5. 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. . .”

6.  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.