2023 (12) TMI 631 - AT - Income Tax

Depreciation on goodwill claimed on acquisition of its subsidiary - claim of depreciation u/s 32(1)(ii) thereon @25% was made in return of income filed by the assessee was disallowed by the Ld. AO while framing regular scrutiny assessment u/s 143(3) - in view of AO, since under approved scheme of arrangement the subsidiary company had no intangible assets to be transferred to the assessee company, therefore the question of accounting for cost of goodwill in terms of explanation 7 to section 43(1) no longer arise - HELD THAT - Basically, goodwill comes into existence in two scenarios i.e., either acquired or purchased and more specifically (1) Acquisition when a company (acquirer/transferee) acquires any other company (transferor) which has goodwill in its books prior to its acquisition by acquirer, and (2) Purchased when a company (acquirer/transferee) acquires any other company (transferor) at a payment consideration in excess of net assets value of transferor. Under Income tax laws it is a settled proposition that, acquirer/transferee company subject to provisions of section 43 r.w.s 32 of the Act is entitled to claim depreciation u/s 32(1)(ii) of the Act on goodwill which is either acquired or purchased by an excess payment of consideration over net asset value taken over or by former combined modes. In the instant case, we note that, the assessee company was holding 95% of total equity share capital of its subsidiary RMIPL prior to execution of scheme of arrangement. It remained an undisputed fact that, the subsidiary company RMIPL had no goodwill in its books of accounts as on the date of its acquisition by its holding company, the appellant. Therefore, the question of transfer of any such amount of goodwill while recording assets of subsidiary company into its books in first place uncloudly failed. That is to say there was no acquisition of goodwill by the assessee while acquiring its subsidiary RMIPL. Consequently, on this issue, both the tax authorities came to a rightful conclusion that, when RMIPL had no goodwill in its books of account, then the question of recording the same in its books doesn t arise and resultant claim of depreciation thereagainst was baseless. This being the factual position, we see no reasons to hold otherwise in the absence of any deprecative material placed and brought to our notice by the appellant company. Whether the assessee company purchased any goodwill by an excess payment consideration over and above the value of net asset of its subsidiary company RMIPL acquired under approved scheme? - total value of purchase consideration under the approved scheme of arrangement payable was to be worked out with reference to 3,125 equity share @ price of ₹142.08/per share. The resultant consideration paid/payable by the appellant under approved scheme, as rightly submitted by the Ld. AR that, was even much less than the value of net assets acquired by it. This being the factual admitted position, there was no scope of purchase of goodwill by excess payment of purchase consideration. The wholesome findings Ld. CIT(A) remained flawless to the effect that, the amount of goodwill supposedly claimed by the assessee can be traced into accounting entries passed by the assessee, which reveals that the appellant company has simply recognised the balancing figure i.e., excess of its cost of investment in RMIPL over Net Assets taken over by it as goodwill purchased. This treatment however, in our considered view is neither in accordance with the approved scheme of arrangement nor in consonance with the mandatory AS-14 issued by the Institute of Chartered Accountant of India. In nutshell, the material placed on records and the argument advanced beyond an iota of doubt establishes that, the appellant did neither acquired any goodwill from its subsidiary RMIPL nor it has made any excess payment towards purchase consideration over and above value of net asset acquired under the scheme. Therefore, it gave rise to no goodwill in the hands of the appellant assessee, resultantly no claim of depreciation thereagainst could arise. In these facts and circumstances, we countenanced the disallowance for foregoing reasons. All the grounds of appeal stand adjudicated accordingly. Decided against assessee.

Summary

Issues Involved:
1. Denial of claim for depreciation on goodwill.
2. Determination of whether goodwill was acquired or purchased.

Summary:

Issue 1: Denial of claim for depreciation on goodwill

The appeal concerns the assessee's claim for depreciation on goodwill arising from the acquisition of its subsidiary, 'Reyami Millennium Interior Pvt Ltd' (RMIPL). The assessee recorded a debit figure of Rs. 2,99,42,138/- as goodwill and claimed depreciation under section 32(1)(ii) of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed this claim during the regular scrutiny assessment under section 143(3) of the Act. The assessee's appeal to the Commissioner of Income Tax (Appeals) [CIT(A)] was unsuccessful, leading to the present appeal before the ITAT.

Issue 2: Determination of whether goodwill was acquired or purchased

The ITAT examined whether the goodwill claimed by the assessee was either acquired or purchased. The assessee argued that the goodwill arose from the excess of the investment value over the net assets of RMIPL, citing Accounting Standards-14 (AS-14) and the Supreme Court decision in 'CIT Vs Smifs Securities Ltd.' The Revenue countered that RMIPL had no goodwill in its books at the time of acquisition and that the assessee did not pay any excess consideration over the net assets value to justify the creation of goodwill.

Findings:

1. The ITAT noted that the assessee held 95% of RMIPL's equity prior to the scheme of arrangement. It was undisputed that RMIPL had no goodwill in its books at the time of acquisition. Thus, no goodwill was acquired by the assessee, and the claim for depreciation was baseless.

2. The ITAT further examined whether the assessee purchased goodwill by paying an excess consideration. The acquisition resulted in an excess net assets value of Rs. 20,07,862/-, and the purchase consideration was determined based on a fair market value of Rs. 142.08 per share. The ITAT found that the consideration paid was less than the net assets value, indicating no purchase of goodwill.

3. The ITAT upheld the CIT(A)'s findings that the assessee merely recognized a balancing figure as goodwill, which was not in accordance with the approved scheme or AS-14. The assessee neither acquired nor purchased any goodwill, and thus no depreciation claim could arise.

Conclusion:

The ITAT dismissed the appeal, affirming the disallowance of the depreciation claim on goodwill. The order was pronounced in open court on October 30, 2023.