Goodwill is Intangible Asset, Claim of Depreciation u/s 32(1) of Income Tax Act Allowable: Delhi HC [Read Order]

In a recent decision the Delhi High Court observed that goodwill is intangible asset and claim of depreciation under Section 32(1) of the Income Tax Act, 1961 is allowable.

The respondent. M/s Eltek SGS Pvt Ltd, had amalgamated with M/s Valere Power India Limited in terms of a Scheme of Amalgamation which came to be sanctioned by the Delhi High Court on 05 February 2014. The Assessment Officer had added a sum of Rs.6,17,30,352/- on account of disallowance of depreciation on goodwill that was created as a result of amalgamation.

Aggrieved by the aforesaid, the respondent had preferred an appeal before the CIT (Appeals). The CIT (Appeals) found that since goodwill had come to be created by virtue of the merger in terms of the Scheme approved by the Court, depreciation on goodwill to the extent of Rs. 6,17,30,352/- was correctly claimed by the assessee. It was this decision of the CIT (Appeals) which was assailed by the appellants.

The Counsel appearing in support of the appeal contended that it would be the provisions of Section 49 of the Income Tax Act which would apply and that both the CIT (Appeals) as well as the ITAT have clearly erred in holding otherwise.

The Counsel referred to the definition of “cost of acquisition” as spelt out in Section 55(2) of the Income Tax Act and which had defined that expression to also include goodwill of a business or profession or a trademark or brand name associated with the business or profession or any other intangible asset. It is in the aforesaid context that learned counsel for the appellant had sought to rely upon Section 49 and more particularly Section 49(1)(e) of the Income Tax Act thereof.

In Commissioner of Income Tax, Kolkata vs. Smifs Securities Limited, it was held by the Supreme Court that goodwill is an intangible asset which would clearly fall within the ambit of Explanation 3 to Section 32(1) of the Income Tax Act. It was in the aforesaid backdrop that it ultimately upheld the depreciation claimed in terms of Section 32 of the Income Tax Act.

A Division Bench comprising Justices Yashwant Varma and Dharmesh Sharma observed that “It is well settled that a transfer in terms of a scheme of amalgamation which is sanctioned is accomplished by operation of law as opposed to an act of parties. It is in that backdrop that the decision in Smifs assumes significance. The judgment rendered by the Supreme Court in Smifs clearly recognises goodwill to be an intangible asset and on which depreciation can clearly be claimed in terms of Section 32(1) of the Income Tax Act.”

To Read the full text of the Order CLICK HERE

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