Depreciation On Goodwill allowable Where Excess Consideration Paid For Business Acquisition: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that depreciation can be claimed on the goodwill that arises as a result of a business acquisition where the consideration paid is in excess of the value of the tangible assets.

The Tribunal held that the excess consideration is goodwill/commercial rights that are eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.

The assessee, Kovalam Resort Private Limited, obtained a running five-star hotel business undertaking by a court-approved business acquisition for a lump sum consideration of ₹500 crore. In its return of income, the assessee claimed a depreciation allowance for tangible assets acquired and goodwill arising from the excess consideration paid over the value of identifiable assets.

During assessment, the Assessing Officer restricted the depreciation on tangible assets by adopting the written down value (WDV) of assets in the hands of the transferor and held the balance consideration to be attributable to land, thus disallowing the depreciation on goodwill. The Commissioner (Appeals) partly allowed the AO’s action but rejected the assessee’s alternative claim on depreciation on goodwill.Aggrieved, the assessee approached the ITAT.

The assessee argued that the purchase of the hotel business was made for a lump sum, and that since the depreciation on tangible assets was limited by applying the proviso to Section 32(1), the balance amount could not be ignored or arbitrarily allocated to land. The assessee argued that the excess cost of purchase represented goodwill and other commercial rights such as brand, customers, operating licenses, business reputation, and lasting business advantages that were acquired as part of the running business.

The assessee further argued that goodwill is an “intangible asset” specifically recognized under Section 32(1)(ii). The assessee relied on valuation reports filed before the assessing authority and judicial precedents, including the Supreme Court decision in CIT v. Smifs Securities Ltd., to support the argument that goodwill on acquisition is eligible for depreciation.

The Revenue has argued that goodwill was not separately identified or valued in the acquisition agreement, and thus no depreciation could be allowed on the same. It was further submitted that the excess consideration over the value of depreciable assets was correctly attributed to land, which is a non-depreciable asset. The Revenue has also submitted that in the absence of any specific allocation of consideration to goodwill in the acquisition agreement, the assessee’s claim is only an afterthought and not in accordance with the acquisition agreement.

Allowing the appeal, the appellant tribunal comprising Justice Anikesh Banerjee[Judicial Member] Makarand Vasant Mahadeokar[Accountant Member]held that in a situation where a business is acquired for a lump sum consideration, the difference between the purchase consideration and the value of identifiable tangible assets necessarily represents goodwill or commercial rights.

The Tribunal held that such goodwill is within the definition of “intangible assets” eligible for depreciation under Section 32(1)(ii).

The Bench also held that the Commissioner (Appeals) was wrong in not entertaining the assessee’s additional grounds of appeal on the issue of goodwill, especially when the valuation information was already available on record.

The case was remanded to the Assessing Officer to recalculate the depreciation on tangible assets using the DVO values and also to allow depreciation on goodwill.

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