2019 (12) TMI 1645 - AT - Income Tax

Tribunal Upholds Depreciation on Goodwill Decision

The Tribunal upheld the CIT(A)'s decision to allow depreciation on goodwill, citing judicial consistency and legal provisions. The Tribunal emphasized ... Depreciation on goodwill - goodwill in subject was acquired during merger of two companies - AO disallowed the depreciation on goodwill merely on the ground that the goodwill is not reflected in the post-merger audited financial statement and the tax audit report of the assessee - HELD THAT:- As decided in M/s Shristi Infrastructure Development Corporation Ltd. [2019 (9) TMI 1700 - ITAT KOLKATA] assessee has submitted that post approval of merger by the Hon’ble High Court of Delhi and Hon’ble Calcutta High court, the audited financial statement clearly reflected the amount of goodwill that arose pursuant to the merger. The same was also filed with the A.O - Though in the tax audit report the tax auditor has not considered the depreciation on goodwill, but the same cannot be the basis of disallowance. We find that such disallowance made by the Assessing Officer is erroneous. On appeal by assessee, CIT(A) has appreciated the facts of the assessee company and deleted the addition. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order - Decided against revenue. Issues Involved:1. Disallowance of depreciation on goodwill.Issue-wise Detailed Analysis:Disallowance of Depreciation on Goodwill:Background and AO's Case:The Revenue's primary contention in this appeal was against the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to delete the disallowance of depreciation on goodwill amounting to Rs. 1,87,50,000 made by the Assessing Officer (AO). The AO disallowed the depreciation on the grounds that the goodwill was not reflected as an asset in the financial statements and tax audit report for the financial year 2006-07.Assessee's Argument:The assessee argued that the goodwill arose from the merger of Shristi Infrastructure Development Corporation Limited and Peerless Abasan Finance Limited, approved by the Delhi and Calcutta High Courts. The goodwill, amounting to Rs. 10 crores, was recorded in the books during the financial year 2006-07. The assessee cited Section 32(1) of the Income Tax Act, 1961, which allows depreciation on intangible assets, including goodwill. The assessee referenced the Supreme Court’s decision in Commissioner of Income Tax vs. Smifs Securities Ltd [2012] 24 taxmann.com 222 (SC), which held that depreciation is allowable on goodwill arising from mergers. The assessee also pointed out that the depreciation on goodwill was allowed in the previous assessment year 2011-12 by the CIT(A).CIT(A)'s Decision:The CIT(A) observed that the AO did not give due cognizance to the relevant financial statements and submissions of the assessee. The CIT(A) noted that the AO's disallowance was based solely on the absence of goodwill in the post-merger financial statements and tax audit report, without considering the audited financial statements for FY 2006-07, which clearly reflected the goodwill amount. The CIT(A) emphasized that depreciation on goodwill is allowable under Section 32(1)(ii) of the Act, supported by the Supreme Court's decision in Smifs Securities Ltd. Consequently, the CIT(A) allowed the depreciation claim on goodwill.Tribunal's Analysis:The Tribunal upheld the CIT(A)'s decision, emphasizing judicial consistency. It noted that the CIT(A) had followed his order on the same issue in the preceding assessment year 2011-12. The Tribunal referenced its coordinate bench's order in ACIT vs. M/s Shristi Infrastructure Development Corporation Ltd., which upheld the CIT(A)'s action in the earlier assessment year. The Tribunal reiterated that depreciation on goodwill is allowable under Section 32(1) of the Act, supported by the Supreme Court’s decision and other judicial pronouncements. The Tribunal found no distinction in facts or law that would warrant a different conclusion.Conclusion:The Tribunal concluded that the CIT(A) correctly deleted the disallowance of depreciation on goodwill. The Revenue's appeal was dismissed, and the CIT(A)'s findings were upheld. The order was pronounced in the open court on 31.12.2019.