ITAT allows Depreciation claimed on self-valued, unsubstantial intangibles declared as ‘Customers Contract’ and ‘Goodwill’ [Read Order]

The Income Tax Appellate Tribunal (ITAT), New Delhi Bench allowed the depreciation claimed under Section 32 of Income Tax Act on self-valued, unsubstantial intangibles declared as ‘customers contract’ and ‘goodwill’.

During the year under assessment, the assessee, M/s. Infrasoft Technologies Ltd has acquired certain business interests from M/s. KPIT Cummins Infosystems Ltd. for a consideration of Rs.19,02,00,000 out of which an amount of Rs.6,52,80,577 and Rs.10,89,60,000 has been shown as goodwill and customer contract respectively.

The assessee has claimed investment in two intangible assets and claimed depreciation thereon. The intangible assets have been acquired by the assessee by virtue of the Business Transfer Agreement entered into between the assessee and M/s. KPIT Cummins Infosystems Ltd. for acquiring BFSI Software Services business comprising target customer contracts, target employees, and target assets.

The AO has disallowed goodwill and customer contract merely on the basis of surmises. The consideration paid on account of customer contract and goodwill has been classified as intangible assets just to reduce its tax liability by wrongfully claiming goodwill and customer contract.

However, the CIT(A) held that the Assessing Officer is wrong in disallowing depreciation under section 32 claimed on self-valued, unsubstantial intangibles declared as ‘customers contract’ and ‘goodwill’, whereas no such breakup was part of agreement with KPIT.

The two-member bench of Judicial Member, Kuldip Singh, and Accountant Member, R.K. Panda noted that despite the fact that the assessee has given the complete details of agreement vide which tangible and intangible assets of running business of M/s. KPIT Cummins Infosystems Ltd. was purchased as per valuation report, AO has disallowed the depreciation on goodwill and customer contracts by ignoring the settled principle of law that goodwill or customer contracts duly recorded in the audited financials are eligible for depreciation being intangible assets under section 32 (1)(ii) of the Act.

“We are of the considered view that CIT (A) has rightly deleted the disallowance made by the AO by following the settled proposition of law” the ITAT while dismissing the appeal filed by the Revenue said.