The Mumbai Bench of the Income Tax Appellate Tribunal examined whether goodwill arising from an amalgamation qualifies as an intangible asset eligible for depreciation under Section 32 of the Income-tax Act, 1961. The assessee had recognized goodwill in its books pursuant to an amalgamation carried out under the purchase method and claimed depreciation on it. The Assessing Officer disallowed the claim, contending that goodwill is not specifically listed as a depreciable intangible asset. The dispute eventually reached the Tribunal, which evaluated the applicability of the Supreme Court’s ruling in Smifs Securities Ltd. and the nature of goodwill arising from business combinations.
Background of the Case
- The assessee had undergone amalgamation with another entity.
- Pursuant to the amalgamation, the assessee recorded goodwill in the books of accounts, representing:
- Excess consideration paid
- Over the net value of identifiable assets and liabilities acquired
- The assessee claimed depreciation on goodwill under Section 32(1)(ii) of the Income-tax Act, treating goodwill as an intangible asset.
Assessment Proceedings
- The Assessing Officer (AO) disallowed the depreciation, arguing:
- Goodwill is not a specifically listed intangible asset under Section 32.
- The goodwill arising out of amalgamation is not eligible for depreciation.
CIT(A)’s Order
- CIT(A) upheld the AO’s view and confirmed disallowance, stating:
- Goodwill arising from amalgamation does not fall under the category of “business or commercial rights.”
Assessee’s Contentions
The assessee argued before the Tribunal that:
- Supreme Court in Smifs Securities Ltd. (2012) has clearly held that goodwill is an intangible asset eligible for depreciation u/s 32.
- Goodwill represents:
- Business claims
- Reputation
- Customer relationships
- Expected economic benefits
- The goodwill acquired was for business consideration and is not self-generated; therefore, it qualifies under the expression “any other business or commercial rights of similar nature”.
ITAT’s Findings
The Tribunal allowed the claim and held:
(a) Goodwill = Intangible Asset
- Following the Supreme Court judgment in Smifs Securities Ltd., goodwill falls under “business or commercial rights” and therefore is an intangible asset eligible for depreciation.
(b) Goodwill arising from amalgamation is not different
- The nature of goodwill remains the same whether:
- Purchased directly, or
- Arises through amalgamation
- Such goodwill represents valuable commercial rights.
(c) Accounting recognition is valid
- Recognition of goodwill as per:
- AS-14 (Accounting Standard for Amalgamation)
- And purchase method
is acceptable and cannot be disregarded by the tax department.
(d) Depreciation allowable
- Since the goodwill was acquired and recorded in the books, depreciation is allowable u/s 32.
Decision
✔ Depreciation on goodwill arising from amalgamation is allowable.
✔ Goodwill qualifies as an intangible asset under Section 32(1)(ii).
✔ AO directed to allow depreciation as claimed.