Depreciation on Goodwill from HC Approved Amalgamation not a Representation of Land Value: ITAT upholds deletion of Disallowance [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal (ITAT) upheld the depreciation on Goodwill from the High Court-approved amalgamation and dismissed the AO’s Claim that it represented land value.

The assessee_, Yola Stays Limited, is a company engaged in the business of real estate building. The assessee filed the return of income for AY 2016-17, declaring a total income of Rs 2,52,66,410/-. The case was selected for scrutiny, and the statutory notices were duly served on the assessee.

The AO noticed that the assessee had claimed depreciation @ 25% on the addition made to intangible assets and called on the assessee to furnish the relevant details in this regard. The assessee submitted that in accordance with the Scheme of Arrangement/ Amalgamation as approved by the Hon'ble Bombay High Court vide order dated 31.07.2015 M/s Rishiraj Enterprises Ltd. (REL) 100% subsidiary of the assessee company, got amalgamated with the assessee.

The assessee further submitted that as per the High Court order, the excess of investments as against the net assets of REL was recorded as goodwill in the books of the assessee and depreciation is claimed on the goodwill so acquired. The AO, after perusing the details furnished by the assessee, held that the depreciation is not allowable on land or on any appreciation in its value, as the Income Tax Act does not permit depreciation on land.

Therefore, the goodwill of ₹12.83 crore claimed as an intangible asset was, in substance, the value of land, and depreciation on it was inadmissible. Additionally, since the amalgamation was between a holding and subsidiary company, the AO noted that the exact rationality and quantum of the transaction could not be independently verified, casting doubt on the genuineness of the claimed goodwill.

The assessee was aggrieved by the order of the AO filed an appeal before the CIT(A). The CIT (A) gave relief to the assessee by placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. [2012].

The Revenue, aggrieved by the order, filed an appeal against the order of the CIT(A).

The assessee argued that the reasons for the AO to make the addition are based on the suspicion that the goodwill recorded in the books of the assessee is towards the land, which, according to the AO, is the only asset in the books of the amalgamating company. The assessee further argued that the primary objective of the amalgamation is to combine resources and the expertise of both companies since both are involved in the business of construction and development activities.

The Tribunal observed that it is clear that the Hon'ble High Court has approved the scheme of amalgamation, where the deficit, if any, between the book value of assets acquired and the consideration paid would be accounted as goodwill.

The tribunal noted that though the AO is contending that the assessee has indirectly acquired the land as a reason for denying depreciation on Goodwill, the AO did not record any adverse finding about the determination of the consideration paid by the assessee. It is a settled position that before the amendment to section 32, there is no restriction on claiming depreciation on goodwill.

It was further observed that when the consideration paid is in excess of the book value, then it is the accepted accounting practice, which is approved in the assessee's case by the High Court, that the difference be accounted as goodwill. Accordingly, the two-member bench comprising Saktijit Dey (Vice President) and Padmavathy S (Accountant Member) held that there is no reason to interfere with the decision of the CIT(A) in deleting the disallowance made by the AO.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates