JOGINDER SINGH, JUDICIAL MEMBER 
AND SANJAY ARORA, ACCOUNTANT MEMBER

ORDER

Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-XI, Mumbai ('CIT(A)' for short) dated 28.04.2008, dismissing the assessee's appeal contesting its assessment vide order dated 28.02.2006 u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2003-04.

2. The issue arising in the instant appeal is the maintainability in law of the assessee's claim for deprecation on 'Goodwill'. The same, claimed at Rs. 5,41,399/- per the return of income, stands now claimed at Rs. 6,63,384/- per the additional ground. In-as-much as, therefore, the additional ground concerns the correct quantification of the assessee's claim for depreciation, which is the subject matter of appeal, we consider it as intrinsic to the issue arising in this appeal and, consequently, admit the same.

3. The brief facts of the case are that the assessee is a partnership firm in the business of supply of equipments for shooting and editing telefilms, etc. with computerized digital graphics on hire, since 10.04.1995. Two of its partners, holding 20% share each in the profits (or losses) of the firm, retired there-from during the financial year 2001-02, the previous year corresponding to the immediately preceding assessment year (i.e., A.Y. 2002-03), and were paid their share of 'goodwill' at an aggregate of Rs. 26,53,536/-, as under:

The assessee's claim of deprecation on goodwill, as an intangible asset of the firm, to which account the said sum was capitalized in its books of account, was negated by the Revenue and, further, confirmed by the Tribunal following its decision in R.G. Keswani v. Asstt. CIT [2009] 116 ITD 133 (Mum.). 'Goodwill', it was the constant refrain, is not an intangible asset within the meaning ofExplanation 3(b) to section 32(1)(ii), which reads as under, following the principle of ejusdem generis:

'Depreciation.
32. (1) In respect of depreciation of -

Explanation 3. - For the purposes of this sub-section, the expression "assets" shall mean -

The matter has since been clarified by the apex court vide its decision in CIT v. Smifs Securities Ltd. [2012] 348 ITR 302/210 Taxman 428/24 taxmann.com 222 (SC), so that 'goodwill' is, following the said principle, a depreciable asset under Explanation 3(b) to section 32(1). The decision by the tribunal in its' own case, as well as by the Revenue authorities, per their respective orders, for the immediately preceding year, would therefore be to no avail. Further, no depreciation having been admittedly allowed for the immediately preceding year, the written down value (WDV) of the relevant block of assets, which consists only of 'goodwill' at Rs. 26.54 lacs, and not the amount arrived at by reducing there-from the assessee's claim for depreciation for the said preceding year, i.e., Rs. 4,87,943/-, since disallowed. This is as the WDV is, by definition, to be computed by reducing the deprecation 'actually allowed', which expression stands explained per a host of decisions, to mean depreciation, as actually allowed as against a notional disallowance. No deprecation having been allowed for A.Y. 2002-03, the WDV of the relevant block of assets shall continue to be at Rs. 26.54 lacs, resulting in an enhancement in the assessee's claim vis-à-vis as made per its return, i.e., by deducting depreciation claimed for the said preceding year. This sums up the assessee's case as made before us.

4. We have heard the parties, and perused the material on record.

The assessee's case is principally legal. Though claimed to be covered in its favour by the decision by the apex court in Smifs Securities Ltd. (supra), the same, notwithstanding the applicability of the said decision, in-as-much as it settles the issue of 'goodwill' being an intangible asset u/s.32(1)(ii) r/w Explanation 3(b) thereto, fails. The reason for the same, even as observed during hearing, is that no 'goodwill' has been actually acquired by the firm on the payment of the impugned sum/s. The relevant clauses, identically worded for both the retirement deeds, i.e., dated 30.05.2001 and 31.01.2002 (PB pgs.33-36, 37-40), i.e., except for the amount involved and its payment details, read as under (PB pgs.33 to 36):

[(*) Rs. 11,00,000/- in case of Mr. Razak Sheikh]

Firstly, therefore, there is nothing on record to show that the sums stated in the retirement deeds are paid over and above the balance outstanding in the capital (or the current) account of the retiring partners. True, in that case the payments, to that extent, would get debited to their respective accounts, and not to the 'goodwill' account, as stated by the ld. Authorized Representative (AR), the assessee's counsel, during hearing, upon being so queried, but this would need to be demonstrated, as the retirement deeds clearly specify only these sums to be paid to the retiring partner/s toward the purchase of their share in the partnership and all capital effects. The book value of a partner's capital account only represents his share in the partnership, including undefined share in its assets. As such, the payments agreed to be paid to the retiring partners include that due on account of their capital as outstanding in the firms' books of account. So, however, this aspect only involves the quantum or the amount which could be considered as paid toward 'goodwill' and, accordingly, verifiable with reference to the assessee's books by the Assessing Officer (A.O.), where and if we were to accept its claim in principle. In fact, the payment to Mr. Razak Sheikh under the retirement deed is only Rs. 11 lacs, so that the nature of the additional payment to him (Rs. 3.04 lacs) would have to be ascertained in-as-much as the accounting entries cannot be treated as conclusive. Then, again, the question is as to the basis of the said accounting treatment?

Be that as it may, what has been paid is not by the firm per se, but by the continuing partners, toward the purchase of the share of the retiring partners in the assets of the firm - nothing more and nothing less. The said payment shall not by itself create a capital asset in the hands of the firm. Goodwill, tenancy rights and permit licence, already exist with the firm prior to the retirement/s, and continues therewith, post it, as do all other assets, in-as-much as the business survives the retirement/s, which is thus on a going concern basis. That is, there is no accretion to the asset base of the assessee-firm. What all has been done by and through the said payment to the retiring partners - which could be financed by either borrowing capital or introducing funds by the continuing partners, is that they have thereby ensured that there is no depletion in the capital base of the firm. The share in the assets, albeit undefined, which prior to the retirement/s vested in five partners, does with three continuing partners subsequent to the second retirement. Rather, as apparent from the balance-sheet for the year ending 31.03.2003 (PB pgs.4-17), another partner holding 12.5% share (in the profit and loss of the firm) retired during that year, leaving only two partners, i.e., Vinod S. Choudhary and Naresh S. Choudhary, with 50% share each as on 31.03.2003. No change in the goodwill account is observed for that year, so that apparently no payment, strangely, was made to the third retiring partner, i.e., Sireh Kanwar Bafna.

Continuing further, the only difference between these intangible assets, i.e., goodwill, tenancy rights and permit licence, and the other assets of the firm, is that while the latter are accounted, the former are not. This is for the reason that these are self generated and no cost has been incurred by the firm for their acquisition. The payment to the erstwhile partners would not imply acquisition of these assets, but is in fact toward the share of the retiring partners in the existing assets. And this is precisely what the retirement deed/s, per clauses (1) to (5), explicitly state. We may explain this by an example. An asset, say, land and building, outstands in the firm's books at Rs. 10 lacs. Its market value on the date of retirement is Rs. 60 lacs. The share of the retiring partners in the unrealized value, holding 40% share therein, would thus work to Rs. 20 lacs, which is paid by the continuing partners. Debit of this sum to the relevant asset account would not increase the cost of the land and building in the hands of the firm to Rs. 30 lacs, i.e., the amount at which the said account would thus get reflected in its books. The additional sum being invested by the continuing partners, so that it increases their capital contribution in the firm, accountancy would suggest a credit to their respective capital accounts in the ratio in which they pay, or agree to bear the additional payment. As regards the firm, which is under the Act, a person separate and distinct from its partners for the time being, it continues to be the owner of the assets both prior and subsequent to the retirement/s or payment/s, so that all that has altered is the value of the asset in its books. In fact, the proper accounting (subject of course to the partnership deed specifying any differently in the matter) would be to recognize the full value of the asset in the accounts, crediting each partner to the extent of his share therein. In the context of 'goodwill', a self generated asset, which therefore does not appear on the firms' books, it would translate into reflecting the same in its accounts at its full value, at Rs. 60 lacs (say). Each of the partners immediately before retirement would stand to be credited to the extent of his share therein. It is this share for and toward which the payment is being made by the firm, implying the continuing partners of the firm. So done, which represents the correct accounting treatment, it would make it inconsequential as to, firstly, when the payment to the retiring partners (say, at Rs. 24 lacs) is made and, two, how is the same financed. In this context, we observe that the second retiring partner, Mr. Razak Sheikh, is paid, apart from Rs. 11 lacs in cash/cheque, in kind, by way of takeover of four debtors, aggregating in value to Rs. 79,310/-. The firm follows cash method of accounting, so that it recognizes revenue only on receipt basis. There is, accordingly, no question of any trade debtor standing in its books. The takeover of the debtor accounts however implies that the amount in respect thereof stands crystallized and taken into account, i.e., for the purpose of settlement of the retiring partner's share, at the values stated. The same, as far as the firm is concerned, have been realized at the said amount/s, which therefore ought also to have been accounted for; crediting, firstly, the revenue account by debiting the account of the respective debtors, and then crediting them with corresponding debit/s to the retiring partner taking over or purchasing the same.

Coming back to our discussion in the matter, the ld. AR upon being questioned likewise during hearing, would explain as to why the firm has rightly considered the payment to the erstwhile partners as resulting in the firm acquiring 'goodwill'. There was, firstly, no dispute between the parties on this, the sole ground on which depreciation was disallowed by the Revenue, which found the tribunal's 'acceptance', is of goodwill being not a qualifying asset under Explanation 3(b) to section 32(1)(ii). The retiring partners, he continued, could start their own venture, greatly impeding the firm's, whose name carries a brand value in the trade, built over time, prospects/business. It is to restrain them from so doing that the payment, by purchasing their share in the intangible assets of the firm, had been made. On being pointed out that the (retirement) agreement does not restrain the outgoing partner's from carrying trade, he would state that they have in fact not. The argument or explanation does not carry the assessee's case any further; what being explained is the rationale of the payment, which is neither doubted or in dispute. The retiring partner/s having a share in the firm's assets, including intangible assets, was paid toward the same. This would enable the firm to function as a business unit/enterprise just as it did prior to the retirement/s. All that, therefore, is lost thereto is, of course, the human resource represented by or in the form of the two retiring partners. Had they also partook a part of the firm's assets along with, it would have meant that the retirement/s is accompanied by a depletion of or an impairment in its capital structure or it's profit making apparatus to that extent. As such, all that the payment signifies is that the firm has been able to retain its' operational capability consequent to the retirement/s. There is no purchase or acquisition of any asset, tangible or intangible. Rather, to the extent goodwill of the firm is attached to the partners, representing its human - and thus most vital, resource, a part of the goodwill of the firm stands definitely eroded.

As regards the retention of the operational capability, to what extent it materializes is something that lies in the womb of future, and would surely depend upon if the retiring partners actually worked in the relevant trade after retirement, as also the area of their operations. Further, one of the two partners also taking over some debtor accounts would rather suggest of their continuing, or intending to continue to work. There is, in fact, as stated earlier, no restrain placed upon them in the matter. Be that as it may, that is something that would not detain us in this matter in-as-much as this neither flows from the retirement deed nor is contended by either party; we having explained the nature of the payment to be an attempt to ensure, as far as possible, the maintenance of the functional capacity of the firm, i.e., post retirement, by the continuing partners, who have an identity separate from the firm. No 'goodwill' or any other tangible or intangible asset, thus, stands acquired by the firm consequent to the payment to the retiring partners in pursuance of the retiring deed/s. Rather, the second retiring partner, having along with the other continuing partners, acquired share (20%) in the goodwill of the firm of the first retiring partner, the payment to him subsequently includes his share in the said share, so that there is in fact to that extent a double payment, i.e., vis-à-vis the total share in the firms' assets of the two partners. Considering, however, the transaction in right perspective, i.e., as one between the partners inter se, would resolve such issues, which arise only on misconstruing the transactions as one of purchase/acquisition of goodwill by the assessee-firm.

With regard to the contention of this aspect being not in dispute, the same is again misconceived. Neither the view of the assessee nor of the Revenue is binding on the appellate court or tribunal. It is the correct legal position that is relevant and not the view that the parties may take of their rights in the matter (refer: CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC); and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)). Reference in this context may also be made to the decision by Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351/66 Taxman 27 (Bom.)(FB). Further, the tribunal for A.Y. 2002-03 did not either examine this transaction or issue any finding in the matter. The assessee's counsel, conceding to the issue being covered against it by the decision by the tribunal, it foreclosed the matter, stating so. Reference in this regard is made to para 3 of the tribunals' order for A.Y. 2002-03 (in ITA No. 7435/Mum/2005 dated 28.10.2009), which reads as under:

'3. It was submitted by the ld. counsel of the assessee that this issue may be decided against the assessee in light of the decision of the Tribunal in the case of R G Keswani v. Asstt. CIT [2009] 116 ITD 133 (Mum). Therefore, we decide this issue against the assessee.'

5. The assessee's ground no. 1 is, in view of the foregoing, dismissed.

6. We, next, take up the assessee's additional ground. We having already found that no goodwill stands acquired by the assessee firm upon the impugned payment/s, the question of the extent of the depreciation thereon does not arise for consideration. So, however, our order being appealable and, accordingly, subject to modification, we may dwell, albeit briefly, on this aspect of the matter as well.

7. We have heard the parties, and perused the material on record.

Firstly, as stated here-in-before, the nature of the additional payment of Rs. 3,03,536/- to the second retiring partner not arising out of his retirement deed, would have to be examined/determined. On merits, we again find the assessee's claim as not tenable. Without doubt, no depreciation, as is apparent, has been allowed on goodwill, and it is only the depreciation as actually allowed that would be eligible for being deducted in computing the WDV of the relevant block of assets (refer: Madeva Upendra Sinai v. Union of India [1975] 98 ITR 209 (SC)). At the same time, however,Explanation 5 below section 32(1)(ii), reading as under, inserted by Finance Act, 2001 w.e.f. 01.04.2002, cannot be lost sight of:

'Depreciation.

32. (1) In respect of depreciation of -
(i) …………
(ii) …………
Explanation 5. - For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income.'

The same, in effect, states that depreciation allowance qua any depreciable asset would have to be necessarily allowed while computing the total income for any year. The assessee's claim stands denied by the Revenue. We have confirmed the same, for a different reason though, disputing not the eligibility to depreciation per se, but on the factual aspect of acquisition of the goodwill at a cost. This finding shall relate back to the date of transaction/s, i.e., 30.05.2001 and 31.01.2002. On the legal aspect, the assessee's claim for depreciation would stand covered by the decision by the apex court in Smifs Securities Ltd. (supra), which shall again relate back in time, i.e., to the year since which the substituted s.32, providing for depreciation on intangible assets, came into effect, i.e., 01.04.1999. That is, the same shall apply equally for A.Y. 2002-03, i.e., as to the current year. Even otherwise, each year is an independent unit of assessment, and therefore the claim for one year cannot be allowed to prejudice or influence that for another. The non-claim or not pressing of its claim for depreciation by the assessee has been specifically removed by law as a ground for not giving effect to the provision of depreciation. The factual finding with regard to the nature of the transaction crystallizes on its occurring, while the decision by the apex court settling the law in the matter would also relate back to the date of the extant law. Such a course is even otherwise incumbent on the A.O. in view of the Board Circular No. 68 dated 17.11.1971, clarifying of a position inconsistent with a subsequent decision by the apex court to be a mistake rectifiable u/s.154, i.e., were the assessee to move him in time. Further, this would equally apply to the order by the tribunal (i.e., for A.Y. 2002-03) in-as-much as it would also be said to bear the same mistake. That the assessee conceded to the said position, even otherwise not material from the standpoint of law (refer:C. Parakh & Co. (India) Ltd. (supra)), stands specifically removed by law as a consideration qua the claim for depreciation. The A.O. in our view is thus obliged in law to allow depreciation for A.Y. 2002-03 while giving effect to our order, read with the order of the hon'ble court, if any, modifying it, with which it will stand to merge. Accordingly, the assessee, in the event of our view of it having not acquired 'goodwill', or any other depreciable asset for that matter, thus, i.e., upon payment of the impugned sums to the retiring partners, gets reversed to any extent, so that the assessee's claim becomes valid (to that extent), the same shall have to be allowed. The assessee shall, therefore, upon a favorable verdict by the hon'ble high court, be (actually) allowed depreciation both for the current year as well as for the immediately preceding year in accordance with law. This is more so as the two amounts are interrelated. We, therefore, without prejudice to our decision that the assessee's claim for depreciation is not valid, hold that the same shall in any case be restricted to the claim as preferred per the original return. The assessee's claim for additional depreciation, on the basis of having not been allowed deprecation for A.Y. 2002-03, is accordingly rejected; that for the said year standing to be allowed, to it. We decide accordingly.

8. In the result, the assessee's appeal is dismissed.