The Pune bench of the Income Tax Appellate Tribunal (ITAT) held that the depreciation under Section 32(1)(ii) of the Income Tax Act, 1961 cannot be allowed when no goodwill has been acquired by a subsidiary company nor by any purchase.
The assessee is an Indian company. During the year under consideration, the assessee acquired its subsidiary company ‘Reyami Millennium Interior Pvt Ltd’ (RMIPL) as a going concern. Pursuant to the approved scheme of arrangement when all assets and all liabilities were pulled in the books of account, the assessee recorded the resultant debit figure of ₹2,99,42,138/- as goodwill.
A claim of depreciation under Section 32(1)(ii) of the Income Tax Act thereon at 25% was made in return for income filed by the assessee and was disallowed by the Assessing Officer (AO) while framing regular scrutiny assessment under Section 143(3) of the Income Tax Act.
The Authorised Representative adverting to the scheme of the arrangement, share a valuation report detailing the swap ratio and relevant part of Accountings Standards-14 (AS-14), submitted that pursuant to an approved scheme of amalgamation, the assessee acquired its subsidiary company at a price exceeding net assets value which resulted into the purchase of goodwill.
The said goodwill was arisen in terms of ‘AS-14’ on account of excess of combined value of its investment into subsidiary and value of consideration paid in terms of scheme. To drive home his contention for claim of depreciation, he strongly pressed into service the decision of Supreme Court in CIT Vs Smifs Securities Ltd.
The Departmental Representative submitted that as the matter-of-fact subsidiary RMIPL had no goodwill in its books as on the date of its acquisition by the assessee. Further the assessee did fail to prove any excess purchase consideration paid by it over the value of net assets taken over under the scheme. Thus, the assessee has neither acquired any goodwill from its subsidiary nor it has purchased by way of excess payment. This being the factual position, there remain no scope for recording goodwill in its books, consequently any claim for depreciation thereon is like rain without clouds.
The Two-member bench comprising of S S Viswanethra Ravi (Judicial member) and G.D. Padmahshali (Accountant member) held that the appellant did neither acquired any goodwill from its subsidiary RMIPL nor it has made any excess payment towards purchase consideration over and above value of net asset acquired under the scheme.
Therefore, it gave rise to no goodwill in the hands of the appellant assessee, resultantly no claim of depreciation thereagainst could arise. In these facts and circumstances, the bench countenanced the disallowance for foregoing reasons. Thus, the appeal of the assessee was dismissed.
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