Depreciation on Goodwill Arising from Amalgamation Allowed in Book Profits: ITAT Rules in Favour of S.C. Johnson Pvt. Ltd. [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi, has upheld a corporate taxpayer’s accounting treatment of goodwill arising out of amalgamation, ruling that amortization of goodwill is allowed while computing book profits under Section115JB of the Income Tax Act, 1961.

The appellant, S.C. Johnson Pvt. Ltd., following amalgamation of its subsidiaries Roshni Appliances Pvt. Ltd. and KAPL under a scheme approved by the Delhi High Court, had recognized goodwill in its books using the purchase method. The goodwill, amounting to over ₹538 crores, was amortized over five years, and one-fifth of the amount was claimed in the computation of book profits.

The Assessing Officer (AO) disallowed this claim, applying the pooling of interest method prescribed under Accounting Standard 14, and made additions exceeding ₹100 crores to book profits for Assessment Years (AY) 2007-08 and 2008-09.

Appearing through K. M. Gupta and Shruti Khimta, the appellant argued that its accounting treatment was consistent with the High Court–approved scheme of amalgamation and supported by its statutory auditors. It was submitted that under either pooling of interest or purchase method, the financial effect would be revenue-neutral, and disallowance of depreciation on goodwill was unwarranted.

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The appellant relied on the Mumbai Tribunal’s decision in Toyo Engineering India Ltd (2008). to argue that depreciation on goodwill is permissible.

Appearing for the Revenue Authorities, Mahesh Kumar, contended that the pooling of interest method was mandatory under Accounting Standard 14 in the given circumstances and that the AO was within his powers to recompute book profits accordingly. It was argued that the adjustment made by the AO was justified to prevent an inflated claim of amortization.

The bench of Judicial Member, Anubhav Sharma and Accountant Member, Manish Agarwal ruled in favour of the assessee. The Tribunal observed that under either accounting method, the ultimate financial results would be similar, and hence the assessee’s claim could not be disallowed.

The Tribunal noted that the Delhi High Court had approved the amalgamation scheme recognizing the purchase method, the company’s audited balance sheet disclosures, and the auditors’ notes supporting the purchase method.

Accordingly, the ITAT directed deletion of the additions made to book profits, holding that amortization of goodwill was allowable under Section 115JB.

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