Depreciation on goodwill disallowed when no actual goodwill acquired in subsidiary purchase under section 32(1)(ii)

The ITAT Pune dismissed the assessee's appeal challenging disallowance of depreciation on goodwill claimed during acquisition of its subsidiary. The assessee held 95% equity in subsidiary RMIPL and claimed 25% depreciation under section 32(1)(ii) on goodwill arising from the acquisition. The tribunal found that RMIPL had no goodwill in its books prior to acquisition, and the purchase consideration paid was less than the net asset value acquired. Therefore, no goodwill was either acquired or purchased through excess payment. The assessee's accounting treatment of recognizing balancing figure as goodwill was held improper and not in accordance with the approved scheme or AS-14. Consequently, no depreciation claim could arise on non-existent goodwill.

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Issues Involved:
1. Denial of claim for depreciation on goodwill.
2. Determination of whether goodwill was acquired or purchased.

Summary:

Issue 1: Denial of claim for depreciation on goodwill

The appeal concerns the assessee's claim for depreciation on goodwill arising from the acquisition of its subsidiary, 'Reyami Millennium Interior Pvt Ltd' (RMIPL). The assessee recorded a debit figure of Rs. 2,99,42,138/- as goodwill and claimed depreciation under section 32(1)(ii) of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed this claim during the regular scrutiny assessment under section 143(3) of the Act. The assessee's appeal to the Commissioner of Income Tax (Appeals) [CIT(A)] was unsuccessful, leading to the present appeal before the ITAT.

Issue 2: Determination of whether goodwill was acquired or purchased

The ITAT examined whether the goodwill claimed by the assessee was either acquired or purchased. The assessee argued that the goodwill arose from the excess of the investment value over the net assets of RMIPL, citing Accounting Standards-14 (AS-14) and the Supreme Court decision in 'CIT Vs Smifs Securities Ltd.' The Revenue countered that RMIPL had no goodwill in its books at the time of acquisition and that the assessee did not pay any excess consideration over the net assets value to justify the creation of goodwill.

Findings:

1. The ITAT noted that the assessee held 95% of RMIPL's equity prior to the scheme of arrangement. It was undisputed that RMIPL had no goodwill in its books at the time of acquisition. Thus, no goodwill was acquired by the assessee, and the claim for depreciation was baseless.

2. The ITAT further examined whether the assessee purchased goodwill by paying an excess consideration. The acquisition resulted in an excess net assets value of Rs. 20,07,862/-, and the purchase consideration was determined based on a fair market value of Rs. 142.08 per share. The ITAT found that the consideration paid was less than the net assets value, indicating no purchase of goodwill.

3. The ITAT upheld the CIT(A)'s findings that the assessee merely recognized a balancing figure as goodwill, which was not in accordance with the approved scheme or AS-14. The assessee neither acquired nor purchased any goodwill, and thus no depreciation claim could arise.

Conclusion:

The ITAT dismissed the appeal, affirming the disallowance of the depreciation claim on goodwill. The order was pronounced in open court on October 30, 2023.

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