Depreciation on Goodwill Arising from Amalgamation Valid: ITAT Clarifies Prospective Effect of Finance Act Amendments [Read Order]
The Tribunal ruled depreciation on goodwill generated through amalgamation is permissible for assessment years before AY 2021–22, recognizing it as an intangible asset under Section 32.
Amalgamation - valid - Taxscan
Amalgamation - valid - Taxscan
The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has ruled in favor of the assessee on the issue of depreciation on goodwill, holding that depreciation is allowable on goodwill arising from amalgamation for the assessment years under dispute. The Bench also clarified that the Finance Act, 2021 amendment excluding goodwill from the ambit of depreciation under Section 32 applies prospectively and does not affect earlier years.
The Appellant, Nirma Limited, a public company engaged in the manufacture of detergents, soda ash, and other industrial products, had claimed depreciation of ₹9.71 crore in Assessment Year (AY) 2015–16 and ₹7.28 crore in Assessment Year 2016–17 on goodwill created during the amalgamation of Saurashtra Chemicals Ltd. pursuant to a scheme sanctioned by the Board for Industrial and Financial Reconstruction (BIFR).
The Assessing Officer (AO) had disallowed the depreciation claim contending that SCL was a sick company with no commercial reputation, and that the goodwill claimed was merely an accounting entry without any real consideration being paid.
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The AO further relied on the absence of recorded goodwill in the books of SCL and cited judicial precedents including CIT v. B.C. Srinivasa Shetty (1981) and Rustom Cavasjee Cooper v. Union of India (1970) to conclude that depreciation on such notional goodwill was impermissible.
The Commissioner of Income Tax (Appeals) upheld this disallowance, treating the differential figure between assets and liabilities as a capital reserve.
Representing the appellant, Bandish Soparkar and Hemanshu Shah argued that goodwill arising on amalgamation constitutes an intangible asset within the meaning of Section 32(1)(ii) of the Income Tax Act, 1961. They relied on the Supreme Court’s judgment in CIT v. Smifs Securities Ltd. (2012) and earlier coordinate bench rulings in Nirma’s own case for Assessment Years 2012–13 to 2014–15, where similar depreciation claims had been allowed.
Representing the Revenue, Alpesh Parmar contended that the goodwill was self-generated and had no actual cost of acquisition. He further argued that depreciation was not allowable since Saurashtra Chemicals Ltd. had no goodwill recorded in its books, making the value in Nirma’s hands nil.
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The Bench comprising of Judicial Member, Sanjay Garg and Accountant Member, Makarand V. Mahadeokar, ruled in favor of Nirma Limited. It held that the goodwill arising on amalgamation qualifies as an intangible asset eligible for depreciation in line with the ruling in Smifs Securities Ltd. (supra).
The Bench further emphasized that once depreciation is granted in earlier years, the written down value of the block of assets becomes final and carries statutory protection under section 43(6) of the Act. The AO cannot reopen or tamper with the block of assets by re-examining earlier claims already accepted.
The Tribunal also referred to the legislative amendments made by the Finance Act, 2021, including changes to sections 2(11), 32(1)(ii), 43(6)(c)(ii), 50, and 55, which specifically excluded “goodwill of a business or profession” from the block of intangible assets and withdrew depreciation benefits prospectively from AY 2021–22.
Therefore, the Tribunal deleted the disallowances and ruled in favour of the assessee.
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