2020 (8) TMI 594 - AT - Income Tax

Depreciation on goodwill arising out of amalgamation - assessee is engaged in the business of manufacturing and sale of printed self-adhesive stripes, labels, glow signs and all kind of trade and advertising material, trading of car accessories - Addition in the case of the assessee by observing that the goodwill arose on account of market value of immovable assets which were higher than their book value - HELD THAT - The excess of liabilities over net assets was treated as goodwill and the depreciation for the same was claimed by the assessee treating the said goodwill as an intangible asset. AO had observed that there is no question of any goodwill prevailing in the books of FSPL in view of the fact that, it had incurred losses. This observation of the AO is not tenable in view of the fact that whether the unit is incurring losses or not, has got nothing to do with the existence of goodwill prevailing in the said unit. Goodwill would arise on account of various factors such as continuing clients, continuing business relationship, established set up for smooth conduct of business, continuing business, commercial and industrial rights and licenses to the successor company / merged entity. These commercial, business and industrial rights were duly acquired by the assessee company through a scheme of merger and due consideration passed on for the same by way of allotment of shares. Same would factually tantamount to acquisition of goodwill. Since, the goodwill is an intangible asset, within the meaning of Section 32 in the form of industrial, business and commercial rights, the assessee would be eligible for depreciation u/s.32 of the Act. We find that the ld. CIT(A) had observed that goodwill in the instant case had arose on revaluation of properties which is factually incorrect as observed hereinabove by us i.e the value of assets and liabilities were recorded at book values only pursuant to merger. We find that lower authorities had placed reliance on the decision in the case of Jaypore Sugar Co.Ltd., 2010 (12) TMI 258 - ITAT, VISAKHAPATNAM to support their proposition. We find that subsequent to this decision, the Hon ble Supreme Court in the case of CIT vs. Smifs Securities Ltd.. 2012 (8) TMI 713 - SUPREME COURT had specifically held that goodwill arising on account of amalgamation would constitute intangible asset eligible for depreciation u/s.32. We hold that assessee is entitled for depreciation claimed @25% on goodwill valued. Disallowing depreciation on capital assets purchased - HELD THAT - We find that the aluminium frames that were purchased were duly utilized in the business of the assessee and finished product generated thereon, had been sold and hence, duly reported by the assessee. Hence, there cannot be any dispute on the same. However, the assessee was not able to prove beyond doubt, the suspicion that arose in the minds of the revenue in respect of these parties appearing to be in the negative list of sales tax department of Government of Maharashtra. In these circumstances, it could be safely concluded that assessee could have purchased these capital goods from the grey market in order to save the liability of VAT. Since the items purchased were capital goods, which is not in dispute, hence, we hold that the depreciation attributable to that VAT portion alone should be disallowed in the hands of the assessee. Needless to mention that assessee could be entitled for depreciation on these capital assets on recurring basis year on year on the basis of return down value of each year. Accordingly, grounds raised by the assessee in this regard are partly allowed.

Summary

Issues Involved:
1. Entitlement of the assessee to depreciation on goodwill arising out of amalgamation.
2. Validity of claiming depreciation on goodwill through revised computation instead of a revised return.
3. Justification for disallowance of depreciation on capital assets purchased and used by the assessee.

Issue-Wise Detailed Analysis:

1. Entitlement of the Assessee to Depreciation on Goodwill Arising Out of Amalgamation:
The primary issue in this appeal was whether the assessee was entitled to claim depreciation on goodwill arising from the merger of the Safety Products Division of M/s Forma Sports Pvt. Ltd. (FSPL) with the assessee company. The goodwill was recorded due to the difference between the book value of net assets and the face value of equity shares issued. The Assessing Officer (AO) disallowed the depreciation claim, arguing that the goodwill was self-generated and not a commercial right. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the goodwill arose from the market value of immovable assets, which was not in line with the High Court's order. However, the Tribunal found that the goodwill arose from the merger, which was duly approved by the Bombay High Court. The Tribunal cited the Supreme Court decision in CIT vs. Smifs Securities Ltd. (348 ITR 302), which held that goodwill arising from amalgamation constitutes an intangible asset eligible for depreciation under Section 32 of the Income Tax Act. Consequently, the Tribunal allowed the assessee's claim for depreciation on goodwill.

2. Validity of Claiming Depreciation on Goodwill Through Revised Computation Instead of a Revised Return:
The assessee did not claim depreciation on goodwill in the original return but did so through a revised computation during the assessment proceedings. The AO and CIT(A) rejected this claim, stating that deductions must be claimed in the return of income. The Tribunal referred to the Ahmedabad Tribunal's decision in CIT vs. Zydus Wellness Ltd. (162 ITD 604) and the Bombay High Court's ruling in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (349 ITR 336), which held that appellate authorities have the jurisdiction to entertain new claims even if not made in the original return. Following these precedents, the Tribunal allowed the assessee's claim for depreciation on goodwill through revised computation.

3. Justification for Disallowance of Depreciation on Capital Assets Purchased and Used by the Assessee:
The final issue involved the disallowance of depreciation on capital assets purchased from M/s Deep Enterprises and Mahabir Enterprises, which were listed as suspicious parties by the Sales Tax department. The AO disallowed the depreciation, suspecting purchases from the grey market to avoid VAT. The Tribunal acknowledged that the assessee provided invoices, delivery challans, and bank statements showing payments by crossed account payee cheques. However, due to the suppliers' dubious status, the Tribunal concluded that the assessee might have purchased the capital goods from the grey market. Therefore, the Tribunal disallowed depreciation attributable to the VAT portion but allowed depreciation on the capital assets on a recurring basis.

Conclusion:
The appeal was partly allowed, granting the assessee depreciation on goodwill and capital assets (excluding the VAT portion), while emphasizing the entitlement to depreciation on a recurring basis.