2022 (7) TMI 268 - AT - Income Tax

Tribunal allows depreciation claim on acquired goodwill, emphasizing excess consideration eligibility.

M/s. AVIS Hospitals India Limited Versus The ACIT, Circle-1 (1) Hyderabad

The Tribunal allowed the assessee's claim for depreciation on goodwill acquired through a slump sale, overturning the decisions of the Assessing Officer ... Depreciation on goodwill - assessee company acquired the Hyderabad business of Beams Hospitals Private Limited as a going concern and on a slump sale basis by paying a consideration - HELD THAT:- As transfer is not between same group concerns or related concerns. Therefore, the decision relied by the ld.CIT-DR is not applicable to the facts of the present case. In view of the above discussion and respectfully following the decisions cited ZYDUS WELLNESS LTD. [2019 (2) TMI 1775 - SC ORDER],TRIUNE ENERGY SERVICES PRIVATE LIMITED [2015 (11) TMI 1218 - DELHI HIGH COURT] AND SMIFS SECURITIES LTD. [2012 (8) TMI 713 - SUPREME COURT] we hold that the ld.CIT(A) is not justified in denying the claim of depreciation on goodwill claimed by the assessee. We, therefore set aside the order of the ld.CIT(A) and allow the claim of depreciation on goodwill for the impugned assessment year. The grounds raised by the assessee on this issue are accordingly allowed. Issues Involved:1. Whether depreciation on goodwill acquired through a slump sale is allowable under Section 32 of the Income Tax Act.2. Whether the valuation of goodwill needs to be substantiated through a valuation report.Issue-wise Detailed Analysis:1. Depreciation on Goodwill:The primary issue revolves around the assessee's claim for depreciation on goodwill acquired through a slump sale. The assessee acquired the Hyderabad business of Beams Hospitals Pvt Ltd as a going concern for Rs. 7.94 crores, with Rs. 3.31 crores allocated to fixed assets and Rs. 3.96 crores to goodwill. The assessee claimed depreciation on this goodwill at 25%. The Assessing Officer (AO) disallowed the depreciation claim, stating that the assessee did not provide a valuation report for the goodwill, and as per Section 32 read with Section 43(6)(a), depreciation is allowable only on the actual cost of the asset acquired during the previous year. The AO distinguished the case from Triune Energy Services Pvt Ltd (Delhi High Court) and rejected the claim.On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the Supreme Court in CIT vs. Smifs Securities Limited allowed depreciation on goodwill acquired through amalgamation and recognized as per Accounting Standards, not on self-generated goodwill. The CIT(A) concluded that the goodwill in question was internally generated and not eligible for depreciation under Section 32.The Tribunal considered various arguments and precedents. The assessee argued that the excess consideration paid over the net tangible assets represented commercial benefits, constituting goodwill eligible for depreciation. The Tribunal found merit in the assessee's arguments, citing the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which recognized goodwill as an asset under Explanation 3(b) to Section 32(1) and eligible for depreciation. The Tribunal also referenced other judgments, including PCIT vs. Zydus Wellness Ltd. and Triune Energy Services (P.) Ltd. vs. DCIT, which supported the claim for depreciation on goodwill acquired through a slump sale.2. Valuation of Goodwill:The AO's disallowance was partly based on the absence of a valuation report for the goodwill. The assessee contended that a valuation report was unnecessary since the goodwill was determined as the excess of the purchase consideration over the value of fixed assets. The Tribunal agreed, noting that the consideration paid in excess of tangible assets' value was rightly classified as goodwill, and further valuation was not warranted. The Tribunal emphasized that the goodwill arose from the acquisition and was not internally generated, thus eligible for depreciation.Conclusion:The Tribunal concluded that the CIT(A) was not justified in denying the claim for depreciation on goodwill. The Tribunal set aside the CIT(A)'s order and allowed the assessee's claim for depreciation on goodwill for the assessment year, aligning with the principles established in relevant judicial precedents.Order:The appeal filed by the assessee was allowed, and the order was pronounced in the Open Court on 27th June 2022.