2024 (7) TMI 27 - AT - Income Tax

Depreciation on goodwill - assessee has taken over the business of (DICEIPL) vide transfer agreement - DR contended that there were no tangible or intangible assets with the assessee and hence the claim of the assessee i.e depreciation on goodwill is not allowable - HELD THAT - AO has basically gone by the presumption that the share holding pattern of the assessee company and of the seller company DICEIPL is same. It observed that this observation of the AO is factually incorrect as evident from the share holding pattern, submitted by assessee. Perusal of the above chart would show that both the parties are not related parties and hence the AO has erred in making adverse comments. Observation of the AO that there was no intangible asset transferred to the assessee by the seller company is also not correct because law in this regard has already been settled in the case of CIT Vs. SIMS securities 2012 (8) TMI 713 - SUPREME COURT wherein the Hon ble Supreme Court has held that excess amount paid over and above to the net asset value would be treated as goodwill. Hon ble Supreme Court in this case has further held that goodwill is in the nature of any other commercial or business right under the category of intangible assets. Recipient company has offered the excess amount as short-term capital gain and the same has been accepted by the Revenue and in such a situation the ratio laid down by the coordinate bench in the case of I B seeds 2022 (6) TMI 1295 - ITAT BANGALORE Thus we are of the view that the authorities below are not correct in disallowing the claim of the assessee on depreciation. We hold accordingly and direct the AO to allow appreciation on goodwill.

Summary

Issues:
1. Disallowance of depreciation on goodwill
2. Disallowance on account of provisions for warranty
3. Disallowance under the head shared service cost

Analysis:

1. Disallowance of Depreciation on Goodwill:
The Assessing Officer (AO) disallowed depreciation on goodwill, stating that there was no valuation report on the date of business transfer and no mention of goodwill in the transfer agreement. The AO alleged that the assessee and the related company were related parties. The assessee contended that the excess price paid for goodwill was based on a valuation report using the discounted cash flow method. The Tribunal observed that the parties were not related as per shareholding patterns. Referring to legal precedent, the Tribunal held that excess payment over net asset value constitutes goodwill, an intangible asset. The Tribunal noted that the Revenue accepted the excess payment as short-term capital gain in the recipient company's hands, thus allowing the depreciation on goodwill claimed by the assessee.

2. Disallowance on Account of Provisions for Warranty:
The AO disallowed provisions for warranty, citing transactions between related parties. The Tribunal directed the issue to be re-examined based on additional evidence submitted by the assessee. The matter was restored to the AO for fresh examination.

3. Disallowance under the Head Shared Service Cost:
The AO disallowed shared service costs, stating that the necessity of high spending on professional services was not proven. The Tribunal ordered a fresh examination of this issue based on additional evidence presented by the assessee under Rule 29 of the ITAT Rules.

In conclusion, the Tribunal allowed the appeal on the disallowance of depreciation on goodwill, directed a re-examination of the provisions for warranty and shared service costs, and dismissed the appeal on the disallowance of legal and professional fees. The appeal was partly allowed for statistical purposes.