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2018 (5) TMI 2076 - AT - Income TaxDisallowance u/s 32 - goodwill shown by the assessee in its books was an unreal and artificially inflated one - HELD THAT - Assessee had worked out the share swap ratio considering net worth of the rental division of M/s. Mtandt Ltd transferred to it and divided such net worth with value of its own share as on 31.12.2011. The valuation of the rental division was supported by a certificate issued by a competent Chartered Accountant and Revenue has not placed anything on record to prove that the valuation was unfair or incorrectly done. In our opinion goodwill which came into the books of the assessee on account of rounding off of the decimal in share swap ratio was not an artificial one. Issue of equity shares by the assessee to M/s. Mtandt Ltd was not artificial but real. Even in the case of Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT considered goodwill was result of an scheme of amalgamation which is not much different from a scheme of demerger. In the circumstances, we are of the opinion that the lower authorities fell in error in disallowing the claim of depreciation. Orders of the lower authorities are set aside. Depreciation claimed by the assessee stands allowed.
Issues Involved:
1. Disallowance of depreciation on goodwill. 2. Validity of the valuation method employed for goodwill. 3. Applicability of judicial precedents regarding depreciation on goodwill. Issue-wise Detailed Analysis: 1. Disallowance of Depreciation on Goodwill: The primary issue in this appeal was the disallowance of depreciation amounting to ?20,94,801/- claimed on goodwill by the assessee. The assessee company had acquired a division of M/s. Mtandt Ltd through a scheme of demerger approved by the Hon’ble Jurisdictional High Court. The net worth of the rental division transferred was ?11,04,23,771/-. The assessee issued shares worth ?12 Crores, resulting in a balance sum of ?95,76,229/- being treated as goodwill. The claim of depreciation on this goodwill was initially allowed for the assessment year 2013-14 but disallowed for the impugned assessment year by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals). 2. Validity of the Valuation Method Employed for Goodwill: The Commissioner of Income Tax (Appeals) disallowed the depreciation on the grounds that the value fixed for the rental division and the share issue ratio was artificial. The Commissioner observed that the goodwill was merely an adjustment entry between the asset value and the value of share allotment, and thus, the depreciation claimed was considered artificially created. The Commissioner cited various judicial precedents to support the view that mere accounting entries did not justify the claim of depreciation on goodwill. 3. Applicability of Judicial Precedents Regarding Depreciation on Goodwill: The assessee relied on the judgment of the Hon’ble Apex Court in the case of CIT vs. Smifs Securities Ltd, 348 ITR 302, which held that goodwill is an asset under Explanation 3(b) to section 32(1) of the Income-tax Act, 1961, and thus, depreciation on goodwill is allowable. The Tribunal noted that the valuation of the rental division was supported by a certificate issued by a competent Chartered Accountant, and the Revenue did not provide any evidence to prove that the valuation was unfair or incorrect. The Tribunal concluded that the goodwill resulting from the rounding off of the decimal in the share swap ratio was not artificial and that the issue of equity shares by the assessee to M/s. Mtandt Ltd was real. The Tribunal found that the lower authorities erred in disallowing the claim of depreciation and thus allowed the appeal of the assessee. Conclusion: The Tribunal set aside the orders of the lower authorities and allowed the depreciation claimed by the assessee on goodwill, reaffirming the applicability of the judicial precedent set by the Hon’ble Apex Court in the case of CIT vs. Smifs Securities Ltd. The appeal of the assessee was allowed, and the order was pronounced on May 30, 2018, at Chennai.
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