2023 (8) TMI 681 - HC - Income Tax

Depreciation on goodwill that was created as a result of amalgamation - whether goodwill is an intangible asset which would clearly fall within the ambit of Explanation 3 to Section 32(1) of the Act? - HELD THAT - Section 47 in express terms excludes the transfer of a capital asset in terms of a scheme of amalgamation. We further find that the provisions of the Act referred to by learned counsel for the appellant are placed in a Chapter dealing with the Capital Gains . That Chapter itself pertains to profits or gains arising from the transfer of a capital asset. However, it is well settled that a transfer in terms of a scheme of amalgamation which is sanctioned is accomplished by operation of law as opposed to an act of parties. It is in that backdrop that the decision in Smifs assumes significance. The judgment rendered in Smifs 2012 (8) TMI 713 - SUPREME COURT clearly recognises goodwill to be an intangible asset and on which depreciation can clearly be claimed in terms of Section 32(1) of the Act. Decided in favour of assessee.

Summary

Issues involved:
The correctness of the order dismissing the appeal by the Income Tax Department regarding the deletion of disallowance on account of depreciation on goodwill.

Summary:

Issue 1: Disallowance of depreciation on goodwill
The appellant challenged the deletion of disallowance on account of depreciation on goodwill resulting from an amalgamation. The respondent had amalgamated with another company, creating goodwill as per a sanctioned Scheme of Amalgamation. The Assessment Officer disallowed depreciation on goodwill, leading to an appeal before the CIT (Appeals) where the claim of depreciation was upheld. The ITAT upheld the decision based on the Supreme Court judgment in Commissioner of Income Tax, Kolkata vs. Smifs Securities Limited (2012) 13 SCC 488, which recognized goodwill as an intangible asset eligible for depreciation under Section 32(1) of the Income Tax Act, 1961.

Issue 2: Interpretation of relevant provisions
The appellant argued that Section 49 of the Act should apply, citing the definition of "cost of acquisition" in Section 55(2) to include goodwill and other intangible assets. However, the court noted that Section 47 expressly excludes the transfer of a capital asset in a scheme of amalgamation. The provisions referred to by the appellant are in a chapter related to "Capital Gains," while the transfer in an amalgamation scheme is recognized by law, not by the parties. The judgment in Smifs affirmed goodwill as an intangible asset eligible for depreciation under Section 32(1) of the Act.

Based on the above analysis, the appeals were dismissed as the court found no merit in the appellant's arguments, upholding the decision to allow depreciation on goodwill created through the amalgamation process.