Depreciation Of Goodwill Acquired Pursuant To Slump Sale Under Business Transfer Agreement Is Allowable U/s 32(1): Mumbai ITAT
Pankaj Bajpai
6 Feb 2024 7:22 AM GMT
Emphasizing that although Section 32 of Income tax Act, 1961 was amended by the Finance Act, 2021 wherein it was stated that 'goodwill' is not an intangible asset eligible for depreciation was applicable prospectively with effect from AY 2021-22, the Mumbai ITAT held that claim of depreciation of goodwill acquired pursuant to slump sale under a Business transfer agreement is allowable...
Emphasizing that although Section 32 of Income tax Act, 1961 was amended by the Finance Act, 2021 wherein it was stated that 'goodwill' is not an intangible asset eligible for depreciation was applicable prospectively with effect from AY 2021-22, the Mumbai ITAT held that claim of depreciation of goodwill acquired pursuant to slump sale under a Business transfer agreement is allowable under Section 32(1).
The ITAT Member comprising of ABY T. Varkey (Judicial Member) and Amarjit Singh (Accountant Member), observed that “The goodwill in question is thus noted to be in the nature of acquired goodwill and the price paid by the appellant, irrespective of the fact that it was paid to related party, constituted the cost of acquisition in the hands of the appellant, in terms of Section 43(1) of the Act. The aforesaid material information, according to us, is sufficient to entertain the claim for depreciation on the goodwill acquired by the appellant”. (Para 21)
As per the brief facts of the case, the assessee company was engaged in the business of rendering IT enabled services. The assessment in its case was passed under Section 144C(1) read with Section 143(3) proposing to make transfer pricing adjustment on account of shortfall in prices of shares issued to the associate enterprises (AE) and interest on deemed loan which was challenged before DRP and jurisdictional High Court.
During the pendency of objections before DRP, jurisdictional HC held that the issue of shares at premium by assessee/Appellant (VISPL) to its non-resident holding company did not give rise to any income from an admitted international transaction. Consequently, the DRP allowed assessee's objection. Subsequently, assessee filed an additional claim of depreciation on goodwill acquired under slump sale of call centre business (CCB) of VEGL, which was rejected by the AO.
The Coram observed that the power of CIT(A) as well as ITAT are wide enough to entertain the assessee's plea for depreciation on goodwill, which has not been claimed in the return of income placed on record before the AO.
The Coram went on to rely on the judgment of the Apex Court in the case of CIT verses Smifs Securities Ltd. (348 ITR 302), wherein it was held that goodwill acquired on amalgamation (being difference between the net book value of assets and consideration paid) was a capital right which would fall under the expression 'any other business or commercial right of a similar nature' and hence eligible for depreciation while computing business income.
The ITAT also followed the decision of the Bombay High Court in CIT verses Birla Global Asset Finance Co. Ltd (221 Taxman 176), wherein depreciation on goodwill arising pursuant to acquisition of the retail business arm of its associate concern by way of a scheme of arrangement on going concern basis was allowed under Section 32.
On the contention of reasonableness of the valuation exercise of the goodwill raised by the Department, the ITAT pointed that it is indeed true that since the transaction was with a related party, the fair market valuation ought to be examined, but at the same time, on the specific facts of the instant case, it is necessary to also take cognizance of the material information that the excess consideration (towards goodwill) paid by the assessee to VEGL was offered as taxable capital gain in its hands.
Thus, remarking that since the goodwill of VEGL's CCB business was self-acquired having Nil cost, the entire excess consideration was offered to tax as capital gains by VEGL, the ITAT observed that it was not a case that the assessee or related party had obtained any undue tax benefit on account of this transaction involving acquisition/sale of goodwill.
Therefore, the ITAT allowed the assessee's appeal and concluded that the assessee was legally entitled to claim depreciation on the goodwill acquired pursuant to slump sale acquisition under business transfer agreement.
Counsel for Appellant: Fereshte Sethna
Case Title: Vodafone India Services Pvt Ltd verses DCIT
Case Number: ITA. No.2241/Ahd/2018
