Income Tax Department's Appeal Dismissed: Goodwill Depreciation Upheld

The appeal by the Income Tax Department challenging the deletion of disallowance on account of depreciation on goodwill was dismissed. The court upheld the decision to allow depreciation on goodwill created through an amalgamation process, in line with the Supreme Court's recognition of goodwill as an intangible asset eligible for depreciation under Section 32(1) of the Income Tax Act, 1961. The court rejected the appellant's arguments regarding the interpretation of relevant provisions, emphasizing that the provisions related to "Capital Gains" did not apply in the context of a scheme of amalgamation where the transfer is recognized by law.

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Issues involved:
The correctness of the order dismissing the appeal by the Income Tax Department regarding the deletion of disallowance on account of depreciation on goodwill.

Summary:

Issue 1: Disallowance of depreciation on goodwill
The appellant challenged the deletion of disallowance on account of depreciation on goodwill resulting from an amalgamation. The respondent had amalgamated with another company, creating goodwill as per a sanctioned Scheme of Amalgamation. The Assessment Officer disallowed depreciation on goodwill, leading to an appeal before the CIT (Appeals) where the claim of depreciation was upheld. The ITAT upheld the decision based on the Supreme Court judgment in Commissioner of Income Tax, Kolkata vs. Smifs Securities Limited (2012) 13 SCC 488, which recognized goodwill as an intangible asset eligible for depreciation under Section 32(1) of the Income Tax Act, 1961.

Issue 2: Interpretation of relevant provisions
The appellant argued that Section 49 of the Act should apply, citing the definition of "cost of acquisition" in Section 55(2) to include goodwill and other intangible assets. However, the court noted that Section 47 expressly excludes the transfer of a capital asset in a scheme of amalgamation. The provisions referred to by the appellant are in a chapter related to "Capital Gains," while the transfer in an amalgamation scheme is recognized by law, not by the parties. The judgment in Smifs affirmed goodwill as an intangible asset eligible for depreciation under Section 32(1) of the Act.

Based on the above analysis, the appeals were dismissed as the court found no merit in the appellant's arguments, upholding the decision to allow depreciation on goodwill created through the amalgamation process.

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