Disallowance of Depreciation on Goodwill: ITAT Upholds Claim as Intangible Asset Eligible u/s 32 [Read Order]

The Hyderabad Bench of Income Tax Appellate Tribunal(ITAT) upheld the depreciation claim on goodwill, affirming it as an intangible asset eligible under Section 32 of Income Tax Act,1961.

The Revenue-appellant appealed against the order passed by Commissioner of Income Tax(Appeals)[CIT(A dated  19.08.2024 for the Assessment Year 2018-19. In this case,East India Petroleum Limited,respondent-assessee,provided terminalling services for oil marketing companies at Visakhapatnam Port, Andhra Pradesh. It filed its income tax return on October 30, 2018, for the assessment year 2018-19, declaring an income of ₹31,38,15,690.

M/s Rushikonda Petroleum Projects Private Limited (RPPPL) was amalgamated with the assessee effective April 1, 2017, as per an National Company Law Tribunal (NCLT) order dated January 11, 2019. Following this, a revised return was filed on March 30, 2019, declaring nil income and claiming a tax refund of ₹9,23,40,520.

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During scrutiny, the AO found that RPPPL, formed in 2016, had borrowed funds from Axis Finance Ltd. to acquire a 51% stake in the assessee. The amalgamation created goodwill of ₹88,21,86,061, on which depreciation of ₹22,05,65,250 was claimed. The AO disallowed this, stating that depreciation under Section 32 required the asset to be used in business, which was not the case. The claim had also not been made in the original return.

The assessee had also claimed ₹18,68,28,250 as interest expenditure on the loan taken over from RPPPL. The AO ruled that the loan was used to buy shares of the respondent-assessee, making the interest ineligible for deduction under Section 37(1). Both depreciation and interest claims were disallowed.

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The assessee appealed to the CIT(A) against the disallowance of depreciation on goodwill and interest expenditure. Citing a Supreme Court ruling, it argued that goodwill from amalgamation qualified as an intangible asset eligible for depreciation under Section 32. It also contended that the loan from Axis Finance Ltd. was used for business purposes, making the interest deductible.

The CIT(A) ruled in favor of the assessee, stating that goodwill from amalgamation qualified for depreciation under Section 32. It also found that the ₹116 crore loan was used for business, allowing the interest deduction under Section 36(1)(iii). The AO was directed to delete both disallowances.

Read More:Goodwill is an Intangible asset, Depreciation Allowable u/s 32(1) of Income Tax Act: ITAT

The matter was brought before the ITAT, which examined the arguments, case laws, and financial records. The tribunal noted that the goodwill stemmed from an NCLT-approved amalgamation and was recognized under the purchase method in accordance with AS-14. It highlighted that the AO had not raised any objections to the amalgamation scheme.

The appellate tribunal clarified that the 5th proviso to Section 32(1) restricted depreciation on pre-existing assets of the amalgamating company but did not apply to goodwill created during amalgamation. Since the goodwill was first recorded in the books of the amalgamated entity and did not exist in the subsidiary’s accounts, it qualified for depreciation under Section 32(1).

The two member bench comprising k.Narsimha Chary(Judicial Member) and Manjunatha G(Accountant Member) relied on the Supreme Court’s ruling in Smifs Securities Ltd. and similar ITAT decisions, concluding that the depreciation claim on goodwill was neither erroneous nor unsustainable.

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Addressing the AO’s argument that the goodwill was not used in business, the ITAT stated that for intangible assets, the term ‘use’ should be interpreted practically, and the mere existence of goodwill met this criterion under Section 32 of the Act.

In light of these findings, the tribunal upheld the CIT(A)’s decision, allowing the depreciation claim on goodwill and ruling that the AOhad wrongly disallowed it.

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