2024 (2) TMI 634 - AT - Income Tax

Depreciation on goodwill - Business acquired in amalgamation - HELD THAT - In the instant case, the business of KSPL was acquired by KIPL by way of a court approved scheme of amalgamation and it is for this acquisition of business, KIPL had discharged the consideration in form of issue of equity shares to the shareholders of KSPL. In order to determine the consideration, the enterprise value of the business undertaking of KSPL was arrived at Rs. 289.30 crores on the basis of the valuation report obtained from SSPA Co. Chartered Accountants, which represents the fair value to be paid for acquiring the business undertaking as a whole Including all tangible assets and intangible assets. KSPL was engaged in stock broking business as well as other business relating to depository participant. The company had a strong customer base, and had a wide network and efficient technological process systems. These benefits represent any other business or commercial rights of similar nature being intangible assets as referred to in section 32(1) of the Act which is eligible for depreciation under the Act. The amount of consideration (in form of issue of shares) paid in excess of net assets of KSPL is attributable to such intangible benefits which is nothing but represents payment towards goodwill. The excess consideration discharged by KIPL over net assets of KSPL represents the amount paid by KIPL towards acquisition of bundle of business and commercial rights which represents goodwill. In the absence of such intangible asset, KIPL would have to commence the business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the appellant got an up and running business. Such excess payment thus denotes goodwill which in no way can be regarded as outcome of revaluation of any amount. Considering the ratio laid down by the Hon'ble Supreme Court in case of Smits Securities 2012 (8) TMI 713 - SUPREME COURT thus, KIPL is eligible for depreciation on goodwill recognized in course of the Scheme u/s 32 of the Act and as a consequence, the Appellant is also eligible to claim depreciation u/s 32 of the Act as the case made out by the appellant appears to have merit and deserves to be allowed. This particular aspect of the matter has not been considered by the Ld. CIT(A) in its proper perspective rather he was not correct in forming an opinion that the main object of amalgamation was to create to claim depreciation and the scheme of arrangement was only a device of tax evasion and such claim of depreciation was not a genuine one, giving a complete go by to the sanction given by the Hon ble Jurisdictional High Court upon considering various aspects of the Scheme, the documents and also the representations received from different regulatory authorities including the report of the Official Liquidator and Income Tax department and furthermore, the affidavit filed by the RD, holding that the arrangement is in the interest of the shareholders and the creditors of all the companies as well as in public interest. Depreciation on goodwill claimed by the predecessor for the period from 01.04.2015 to 14.03.2016 has been allowed by the ITAT. Accordingly, the claim of depreciation by the appellant on the very same goodwill for remaining period (from 15.03.2016 to 31.03.2016) deserves to be allowed by following order of ITAT passed in the case of the predecessor - we allow the appeal preferred by the appellant with a direction upon the Ld. AO to allow the claim of depreciation on goodwill made by the appellant. The appeal preferred by the appellant is, thus, allowed.

Summary

Issues Involved:
1. Disallowance of depreciation on goodwill.
2. Validity of assessment order passed in the name of a non-existent entity.
3. Treatment of brought forward unabsorbed depreciation.

Summary:

1. Disallowance of Depreciation on Goodwill:
The appellant argued that the disallowance of depreciation on goodwill by the Revenue authority under Section 32(1) of the Income Tax Act, 1961, was unsustainable, citing the Supreme Court's decision that goodwill is eligible for depreciation. The appellant's goodwill arose from a court-sanctioned amalgamation scheme, which was approved by the Gujarat High Court. The Assessing Officer (AO) disallowed the depreciation, asserting that the amalgamation's primary purpose was tax evasion. However, the tribunal found that the scheme was genuine and in public interest, as sanctioned by the High Court, and directed the AO to allow the depreciation claim. The tribunal emphasized that the goodwill was not artificially created but resulted from a legitimate business transaction.

2. Validity of Assessment Order in the Name of a Non-Existent Entity:
The appellant contended that the assessment order was invalid as it was passed in the name of KIPL, a non-existent entity post-conversion into LLP. However, this ground was dismissed by the First Appellate Authority, and the appellant pressed the matter only on merit before the tribunal. The tribunal did not delve into this issue further as it was not actively pursued by the appellant.

3. Treatment of Brought Forward Unabsorbed Depreciation:
The appellant treated the brought forward unabsorbed depreciation of KIPL as that of the LLP post-conversion. The AO disallowed this, as the initial depreciation claim on goodwill was not allowed. The tribunal, however, directed the AO to allow the carried forward unabsorbed depreciation, aligning with their decision to allow depreciation on goodwill.

Conclusion:
The tribunal allowed the appeals, directing the AO to allow depreciation on goodwill and the carried forward unabsorbed depreciation, emphasizing the legitimacy and court approval of the amalgamation scheme.