2011 (1) TMI 1226 - AT - Income Tax

Claim of depreciation on intangible assets - goodwill - facts of the case, the assessee is engaged in the business of mining, export of iron ore, ship and crane building. From the AY under consideration the assessee undertook business of manufacture of pellets after amalgamation of Mandovi Pellets Ltd. ( MPL for short), into Chowgule and Co. Ltd. as a going concern pursuant to approval of scheme by the order of the HC. HELD THAT - In this view of the matter there being no goodwill (intangible asset) on which depreciation can be said to have been allowed to the undertaking in the scheme of amalgamation nor any actual cost having been incurred by the amalgamating company as well as by the amalgamated company, the claim made by it in the return of income for the year under consideration with regard to goodwill (intangible asset) which has been found only a fictitious asset in the hands of the appellant and also the claim of depreciation amounting to Rs. 11,51,47,507 being 25 per cent. of Rs. 46,05,90,029 is neither bona fide nor tenable and thus the learned CIT(A) was justified in his conclusion in rejecting the appellant's claim. The appellant has also raised an alternative plea to allow deduction for capital loss. Considering the entire material on record and no specific argument having been made at the time of hearing of this appeal, we find that the assessee has incurred loss in acquisition of an undertaking which is a capital loss to it. The same, therefore, cannot be allowed as deduction and as such the alternative plea so made being devoid of any merit, stands rejected. In the overall conspectus we find no merit in the grounds raised in appeal by the assessee. The same stands rejected and the appeal stands dismissed. In the result, the appeal stands dismissed.

Issues Involved:
1. Disallowance of depreciation on intangible assets described as 'goodwill'.
2. Evaluation of the nature and treatment of goodwill in amalgamation.
3. Claim for the entire amount as revenue expenditure if depreciation is disallowed.
4. Examination of the accounting treatment and its compliance with standard practices.
5. Consideration of alternative plea for deduction of capital loss.

Detailed Analysis:

1. Disallowance of Depreciation on Intangible Assets Described as 'Goodwill':
The primary issue concerns the disallowance of depreciation claimed by the assessee on goodwill arising from the amalgamation of Mandovi Pellets Ltd. (MPL) with Chowgule and Co. Ltd. The assessee claimed depreciation of Rs. 11,51,47,507, which was 25% of Rs. 46,05,90,029, the value of the goodwill. The Assessing Officer disallowed this claim, stating that the goodwill was self-generated and not acquired on amalgamation, as per section 32(1)(ii) of the Income-tax Act, which does not recognize goodwill as a depreciable asset.

2. Evaluation of the Nature and Treatment of Goodwill in Amalgamation:
The Assessing Officer found that the goodwill was a balancing figure post-amalgamation and not an acquired asset. The scheme of amalgamation approved by the High Court stated that any shortfall in net assets would be debited to the goodwill account. The assessee argued that the goodwill represented intangible assets like know-how and brand value, which should be depreciable. However, the Assessing Officer and the Commissioner of Income-tax (Appeals) held that the goodwill was self-generated and not an actual cost incurred by the assessee, thus not eligible for depreciation.

3. Claim for the Entire Amount as Revenue Expenditure if Depreciation is Disallowed:
The assessee alternatively claimed that if depreciation on goodwill was disallowed, the entire amount should be treated as revenue expenditure. This claim was also rejected by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals), who found that the expenditure was capital in nature and not eligible for deduction as revenue expenditure.

4. Examination of the Accounting Treatment and Its Compliance with Standard Practices:
The assessee followed the 'purchase method' of accounting as per Accounting Standard 14 (AS-14) prescribed by the Institute of Chartered Accountants of India. The Assessing Officer noted that AS-14 mandates the treatment of goodwill as an asset but does not explicitly allow for its depreciation. The Commissioner of Income-tax (Appeals) supported this view, emphasizing that accounting standards cannot override specific provisions of the Income-tax Act regarding depreciation.

5. Consideration of Alternative Plea for Deduction of Capital Loss:
The assessee's alternative plea for allowing deduction of the goodwill amount as a capital loss was also rejected. The Commissioner of Income-tax (Appeals) found that the loss incurred was capital in nature and not deductible. The assessee's claim was considered inconsistent and lacking credible evidence of actual cost incurred for acquiring goodwill.

Conclusion:
The appeal was dismissed, with the ITAT upholding the disallowance of depreciation on goodwill and rejecting the alternative claims. The judgment emphasized the distinction between accounting practices and statutory provisions of the Income-tax Act, reaffirming that self-generated goodwill arising from amalgamation does not qualify for depreciation or revenue expenditure deductions.

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