In the instant case, M/s. YSN was amalgamated with assessee-company and the assets and liabilities of YSN were transferred to the assessee-company. In the process of amalgamation goodwill had arisen in the books of assessee. The AO held that goodwill was not an asset falling under Explanation 3 to section 32(1) and denied assessee's claim for depreciation. On appeal, the CIT(A) held in favour of assessee as under, which was confirmed by the ITAT:
Aug 28, 2012
1 The assets and liabilities of M/s. YSN were transferred to the assessee for a consideration;
2 The difference between the cost of an asset and the amount paid constituted goodwill; and
3 The assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased.
1 Explanation 3(b) to section 32(1) states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature;
2 The principle of 'ejusdem generis' would strictly apply while interpreting the expression 'any other business or commercial rights of similar nature' used in explanation 3(b) to section 32(1); and
3 Following the principle of 'ejusdem generis', goodwill would fall under the expression 'any other business or commercial right of a similar nature'.
Thus, 'Goodwill' is an asset under Explanation 3(b) to section 32(1) of the Act and entitled for depreciation – CIT v. SMIFS SECURITIES LTD.  24 taxmann.com 222 (SC)