Depreciation on goodwill from amalgamation allowed even without original claim under Section 32(1) Explanation 5

The ITAT Hyderabad allowed the assessee's appeal regarding depreciation on goodwill acquired through amalgamation. The Tribunal held that appellate authorities can consider additional depreciation claims even if not raised in original or revised returns, citing Goetze (India) Ltd. The Tribunal ruled that goodwill arising from excess consideration paid during amalgamation is eligible for depreciation, following Smifs Securities. Under Explanation 5 to Section 32(1), depreciation must be allowed regardless of whether claimed by the assessee. The Revenue is obligated to allow such depreciation, and the disallowance was deleted.

---

---

Issues Involved:
1. Whether the assessee can claim additional depreciation on goodwill not claimed in the original return.
2. Whether depreciation on goodwill arising from amalgamation is allowable under the Income Tax Act.

Summary:

Issue 1: Claim of Additional Depreciation on Goodwill Not Claimed in Original Return

The assessee, engaged in providing IT-enabled services, acquired the entire shareholding of SNL Financials (India) Private Limited, recording excess purchase consideration as 'goodwill'. While filing the return for AY 2018-19, the assessee inadvertently did not claim additional depreciation on this goodwill. The Assessing Officer, in the draft assessment order, did not consider this additional claim made through a revised computation of income. The Dispute Resolution Panel (DRP) upheld this decision, stating that errors or omissions in the return can only be rectified by filing a revised return within the prescribed time under section 139(5) of the Income Tax Act. The DRP emphasized that the Assessing Officer is not empowered to entertain such claims outside the revised return mechanism.

Issue 2: Allowability of Depreciation on Goodwill Arising from Amalgamation

The assessee argued that goodwill is a depreciable asset as per the Supreme Court's decision in Smifs Securities and that depreciation should be allowed irrespective of whether it was claimed in the original return, per Explanation 5 to Section 32(1) of the Act. The DRP, however, distinguished the Smifs Securities case, stating it did not consider specific provisions relevant to the issue, such as Explanation 7 to Section 43(1) and Explanation 2(b) to Section 43(6)(c) of the Act, and thus denied the claim.

The Tribunal, referencing the Supreme Court's decision in Goetze (India) Ltd., held that appellate authorities can consider additional claims not raised in the original or revised return. The Tribunal found that the goodwill acquired due to amalgamation is eligible for depreciation, as established in Smifs Securities. It rejected the DRP's reasoning that certain provisions were not considered in Smifs Securities, noting that legislative amendments excluding goodwill from intangible assets for depreciation purposes only came into effect from 01/04/2021. The Tribunal emphasized that until this amendment, goodwill was part of the block of intangible assets eligible for depreciation.

Conclusion:

The Tribunal concluded that the disallowance of the claim for depreciation on goodwill by the authorities below is unsustainable. It ordered that the claim for deduction of depreciation on goodwill be allowed, thus allowing the appeal of the assessee. The decision was pronounced in the open court on December 26, 2023.

---