2009 (8) TMI 1157 - AT - Income Tax

Tribunal upholds disallowance of depreciation on goodwill & recalculated set off of losses under Section 80-IA.

The Tribunal dismissed the appeals, upholding the disallowance of depreciation on goodwill and the recalculated set off of losses under Section 80-IA. The ... Depreciation on goodwill - consequential claim on WDV - exchange ratio for amalgamation - Claim denied as value of the asset is not a depreciable one - HELD THAT:- We are of the view that the assessee has not established that it has acquired any rights of either commercial or business nature while valuing the goodwill. It is a balancing figure at the time of amalgamation and the focus of the entire valuation report is on fair exchange ratio for merger and allotment of shares of the amalgamated company to the shareholders of the amalgamating companies. Since there are no business or commercial rights involved in paying the amount and the goodwill is being a balancing amount in the scheme of amalgamation after the fair value arrived at for merger of the companies, the facts of the case do fall within the propositions laid by the Hon'ble Tribunal in the case of Bharatbhai J. Vyas v. ITO [2005 (8) TMI 279 - ITAT AHMEDABAD-C]. In the present case the goodwill simpliciter is valued at ₹ 3,05,91,000 and there were no business or commercial rights involved in that goodwill accounted by the assessee. In view of this while agreeing with the principle laid down in the abovesaid case that goodwill simpliciter is not eligible for depreciation we are not in agreement with the proposition laid down by the learned counsel that the amount accounted for by the assessee can be bifurcated into goodwill simpliciter at ₹ 50 lakhs and the balance for other commercial rights. Since no commercial rights are said to have been acquired by the assessee company under the scheme of amalgamation, we are not persuaded by the submissions of the learned counsel. Moreover in the provisions of s. 32(1)(ii) while mentioning the various intangible assets specifically and also mentioning business or commercial rights of similar nature, the legislature has specifically excluded the word 'goodwill' because it cannot be considered as a commercial or business right. Moreover, as rightly considered by the AO this goodwill is not purchased from any other person but has been acquired in the course of amalgamation in assessee's own books of account as a balancing figure for the assets acquired and the price paid. In view of these provisions, it is very clear that goodwill simpliciter cannot be considered for allowance of depreciation. In view of this we are in agreement with the orders of the AO and the CIT(A) on this issue and hold that assessee's claim of depreciation on goodwill cannot be allowed on the facts of the case. Accordingly ground No. 1 in all the years is rejected. Deduction u/s 80IA - Set off of losses and unabsorbed depreciation of the units carried forward - assessee claimed deduction under s. 80-IA on profits from Unit 3 and Unit 4 without setting off unabsorbed depreciation/losses whereas the other two units were under losses - HELD THAT:- This issue is crystallised by the decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. [2004 (3) TMI 9 - SUPREME COURT] wherein it was held that s. 80-IB has an overriding effect on all other sections in Chapter VI-A. It is now settled law that while computing gross total income necessary set off has to be given to the unabsorbed depreciation while computing income under the head the business or profession and the brought forward losses while arriving at the gross total income. In view of this, the contentions of the assessee cannot be accepted and the orders of the AO and the CIT(A) on this issue arc upheld. Accordingly ground No. 2 in all the appeals is rejected. Issues Involved:1. Claim of depreciation on goodwill.2. Set off of losses after allowing deduction under Section 80-IA.Detailed Analysis:1. Claim of Depreciation on Goodwill:The main issue in the assessment year 2001-02 was the assessee's claim for depreciation on goodwill, which was disallowed by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the goodwill should be considered as a business or commercial right eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. The AO, however, held that goodwill is not explicitly mentioned in the Act as eligible for depreciation and is not similar to other specified intangible assets like know-how, patents, copyrights, trademarks, licenses, or franchises.During the relevant year, three group companies merged into the assessee company, creating goodwill of Rs. 3,05,91,000, on which the assessee claimed depreciation at 25%. The AO disallowed this claim, stating that the goodwill was self-generated and not purchased, and thus not eligible for depreciation. The CIT(A) upheld this view.The assessee's counsel argued that the goodwill was acquired through amalgamation and should be considered a commercial right, citing valuation reports and previous Tribunal decisions. However, the AO distinguished goodwill from other intangible assets, noting that goodwill is not protected under any statute, is not separable or identifiable, and cannot be sold independently of the business.The Tribunal analyzed the facts and found that the goodwill was a balancing figure in the amalgamation process, not a specific business or commercial right. The Tribunal referenced previous cases, including Bharatbhai J. Vyas v. ITO, where it was held that goodwill simpliciter does not qualify for depreciation as it does not constitute a business or commercial right of similar nature to those specified in Section 32(1)(ii).The Tribunal concluded that the assessee did not acquire any special business or commercial rights through the amalgamation and that the goodwill was merely an accounting entry. Therefore, the claim for depreciation on goodwill was disallowed, and the Tribunal upheld the orders of the AO and CIT(A).2. Set Off of Losses After Allowing Deduction Under Section 80-IA:The second issue pertained to the set off of losses and unabsorbed depreciation of units carried forward. The assessee claimed deduction under Section 80-IA on profits from Unit 3 and Unit 4 without setting off unabsorbed depreciation/losses from other units. The AO recalculated the claim, holding that unabsorbed depreciation of eligible units must be set off against the total gross income before considering the deduction under Section 80-IA. Consequently, no deduction under Section 80-IA was allowed due to the absence of positive income.The Tribunal referenced the Supreme Court decision in IPCA Laboratory Ltd. v. Dy. CIT, which held that Section 80-IB has an overriding effect on all other sections in Chapter VI-A. It is established law that necessary set off must be given to unabsorbed depreciation and brought forward losses while computing the gross total income. Therefore, the Tribunal upheld the orders of the AO and CIT(A) on this issue, rejecting the assessee's contentions.Conclusion:The appeals were dismissed as the Tribunal upheld the disallowance of depreciation on goodwill and the recalculated set off of losses under Section 80-IA.