2020 (1) TMI 1637 - AT - Income Tax

Disallowance of depreciation on the cost of know how and intangibles - goodwill as acquired during business acquisition/amalgamation - Assets acquired by the Appellant from ORG of their division of Adex Business purchased along with all assets and liabilities merely because the amount was shown in the balance sheet under the compendious heading of goodwill - as per CIT-A amount paid by the assessee over and above the value of net assets of Adex Business was to be treated to have been paid towards goodwill HELD THAT - Claim of depreciation on goodwill in the case before us falls within the four corners of the judgement of CIT, Kolkata Vs. Smifs Securities Limited 2012 (8) TMI 713 - SUPREME COURT - As is discernible from the financial statements of the assessee company before us, the excess consideration paid by the assessee company over and above the value of the net assets on acquisition of Adex Business had been considered as goodwill by the assessee company in its books of account. Be that as it may, the assesses claim of depreciation on the excess payment had been declined by the CIT(A), for the reason, that no depreciation was allowable on goodwill . As pursuant to the judgment of Smifs Securities Limited the issue as regards allowability of depreciation on goodwill is no more res integra. As such, the claim of depreciation raised by the assessee on the amount of excess payment which was capitalised in its books of account as goodwill , is found to be in order. We direct the A.O to allow depreciation on the goodwill that was capitalised by the assessee in its financial statements. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on the cost of know-how and intangibles.
2. Classification of excess payment as goodwill.
3. Basis for bifurcation of the payment towards goodwill, know-how, and intangibles.
4. Eligibility of depreciation on goodwill.

Detailed Analysis:

Disallowance of Depreciation on Know-How and Intangibles:
The primary issue in the appeal was whether the CIT(A) erred in upholding the disallowance of depreciation on the cost of know-how and intangibles acquired by the appellant. The appellant had purchased the Adex Business from ORG, including all its assets and liabilities, for Rs. 11,44,77,378/-. The appellant claimed that the amount paid included costs for know-how and intangibles, which should be eligible for depreciation at 25% as per IT Rules. However, the CIT(A) upheld the A.O's view that no bifurcation of payment towards know-how and intangibles was provided in the business transfer agreement, thus disallowing the depreciation claim.

Classification of Excess Payment as Goodwill:
The appellant argued that the excess payment over the net assets value should be bifurcated into goodwill and other intangible assets. The A.O and CIT(A) concluded that the entire excess payment should be classified as goodwill since the business transfer agreement did not specify any bifurcation. The auditor of the appellant also capitalized the excess payment as goodwill in the financial statements without claiming depreciation.

Basis for Bifurcation of Payment:
The appellant provided a bifurcation of the payment, attributing 1/3rd towards goodwill and the remaining 2/3rd towards know-how and intangibles. However, the A.O and CIT(A) found no basis or supporting material for such bifurcation in the business transfer agreement or any other documents. Consequently, they rejected the appellant's claim of depreciation on the bifurcated amounts.

Eligibility of Depreciation on Goodwill:
The CIT(A) and A.O's stance that no depreciation was allowable on goodwill was challenged by the appellant. The Tribunal referred to the Supreme Court's judgment in the case of CIT, Kolkata Vs. Smifs Securities Limited (2012) 348 ITR 302 (S.C), which held that goodwill is an asset under "Explanation 3(b)" to Sec. 32(1) of the Act and is eligible for depreciation. The Tribunal observed that the appellant's claim of depreciation on goodwill falls within the purview of this judgment.

Conclusion:
The Tribunal concluded that the appellant's claim for depreciation on goodwill is valid as per the Supreme Court's judgment in Smifs Securities Limited. The Tribunal directed the A.O to allow depreciation on the goodwill of Rs. 11,44,77,378/- capitalized by the appellant in its financial statements. The order of the CIT(A) was set aside, and the matter was restored to the file of the A.O for giving effect to the Tribunal's observations. The "Ground of appeal No. III" raised by the appellant was allowed.

Order Pronouncement:
The judgment was pronounced in the open court on 10.01.2020, allowing the appellant's claim for depreciation on goodwill and directing the A.O to implement the Tribunal's decision.