2019 (4) TMI 1471 - AT - Income Tax

Disallowance on account of depreciation on goodwill - extra consideration paid for acquisition of assets - AO submitted that the assessee has failed to demonstrate before the AO towards the bonafides of creation of goodwill - HELD THAT - The essential controversy involves maintainability of claim of depreciation on cost of goodwill by the assessee. The assessee has claimed extra consideration paid towards acquisition of net value of assets of Interkraft Autocity Pvt. Ltd. with a view to acquire the dealership of Mercedes-Benz embedded with the concern covering the state of West Bengal and entire North-East. Thus, there can be no quarrel that extra consideration paid for acquisition of assets and the business of the concern represents cost of goodwill. This being so, the assessee would be entitled in law for claim of depreciation thereon in view of case of Smiffs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT . Therefore, we find no infirmity in the conclusion drawn by the CIT(A) in favour of the assessee. Thus, we decline to interfere. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of depreciation on goodwill amounting to ?93,75,000/-.

Detailed Analysis:

1. Disallowance of Depreciation on Goodwill:
The primary issue in this case is the disallowance of depreciation on goodwill amounting to ?93,75,000/- by the Assessing Officer (AO). The assessee company, engaged in the dealership of Mercedes-Benz, expanded its business by acquiring Interkrafts Autocity Pvt. Ltd., a dealership in Kolkata, for ?12.85 crores. The acquisition included tangible assets worth ?5.34 crores and the remaining ?7.50 crores was categorized as goodwill. The assessee claimed depreciation on this goodwill.

The AO denied the depreciation claim, arguing that the assessee failed to justify the substantial payment for goodwill and questioned the valuation, noting that the goodwill in Interkraft's books was only ?1 crore. The AO also highlighted discrepancies in the financial statements of related entities and doubted the necessity and valuation of the goodwill.

CIT(A) Decision:
The assessee appealed to the CIT(A), who after considering the facts and submissions, found the claim of depreciation on goodwill to be justified. The CIT(A) noted that the acquisition was part of the assessee's business strategy to expand in the North-East region, which increased their market share from 9% to 12% of all India Mercedes-Benz sales. The CIT(A) emphasized the commercial benefits of acquiring an established business with ready infrastructure and workforce, which saved time and effort compared to setting up a new dealership.

The CIT(A) also referenced several judicial precedents, including the Delhi High Court's decision in Areva T & D India Ltd. vs. DCIT and the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which upheld the allowability of depreciation on goodwill. The CIT(A) concluded that the payment for goodwill was justified and the depreciation claim was valid.

Tribunal Decision:
The Revenue appealed against the CIT(A)'s decision to the ITAT. The Departmental Representative (DR) reiterated the AO's arguments, while the Assessee's Representative (AR) defended the claim, citing the agreement for asset acquisition and the judicial precedents supporting depreciation on goodwill.

The Tribunal, after considering the submissions and the order of the CIT(A), upheld the CIT(A)'s decision. It agreed that the extra consideration paid over the net value of tangible assets represented the cost of goodwill and was eligible for depreciation. The Tribunal referenced the Gujarat High Court's decision in DCIT vs. TGB Banquets & Hotels Ltd. and the Supreme Court's decision in Smifs Securities Ltd., affirming the allowability of depreciation on goodwill.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming that the assessee was entitled to claim depreciation on the goodwill amounting to ?93,75,000/-. The decision was pronounced in open court on 27/03/2019.