Depreciation on goodwill acquired through slump sale allowed under Section 32(1) despite new claim

ITAT Mumbai held that depreciation on goodwill acquired through slump sale is allowable under Section 32(1). The tribunal ruled that first appellate authority can entertain new claims if made bonafide, distinguishing Goetze India Ltd. The appellant's claim for depreciation on goodwill valued at Rs. 160 crores was accepted, following SC precedent in Smifs Securities Ltd. Revenue's objections regarding valuation methodology and related party transaction were rejected. AO directed to compute and allow depreciation accordingly. Appeal allowed.

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Issues Involved:
1. Non-allowance of depreciation claimed on goodwill.
2. Legal admissibility of the claim for depreciation on goodwill.
3. Valuation of goodwill for the purpose of depreciation.

Summary:

Issue 1: Non-allowance of Depreciation Claimed on Goodwill
The appellant, an ITES company, filed its return of income for AY 2009-10, declaring an income of Rs. 21,51,35,898/-. During the scrutiny, the AO made a transfer pricing adjustment but did not entertain the appellant's additional claim for depreciation on goodwill acquired under a slump sale of the Call Centre Business (CCB) from Vodafone Essar Gujarat Ltd. (VEGL). The Ld. CIT(A) rejected the claim, stating that the appellant failed to establish the actual creation of goodwill and that the valuation report lacked a clear basis for the goodwill valuation.

Issue 2: Legal Admissibility of the Claim for Depreciation on Goodwill
The Tribunal noted that the appellant raised the claim for depreciation on goodwill for the first time during the assessment proceedings, citing the Supreme Court's decision in CIT v. Smifs Securities Ltd. The Tribunal held that while the AO is restricted from admitting new claims not made in the return of income, the appellate authorities, including the Tribunal, have the jurisdiction to entertain such claims. The Tribunal referred to the decision of the Hon'ble Bombay High Court in CIT Vs Pruthvi Brokers & Shareholders Private Limited, affirming that the appellate authorities can entertain new claims if the grounds are bona fide.

Issue 3: Valuation of Goodwill for the Purpose of Depreciation
The Tribunal examined the prevailing legal position and the facts of the case. It noted that the Supreme Court in CIT v. Smifs Securities Ltd. held that goodwill acquired on amalgamation is a depreciable asset. The Tribunal also considered the amendments made by the Finance Bill, 2021, which excluded goodwill from the ambit of 'intangible asset' for depreciation purposes, but noted that these amendments are applicable prospectively from AY 2021-22. Therefore, for AY 2009-10, the depreciation on goodwill is allowable.

The Tribunal found that the valuation of goodwill at Rs. 160 crores by the appellant was supported by an independent valuer's report and that the excess consideration paid was offered to tax as capital gains by VEGL. The Tribunal rejected the Revenue's objections regarding the valuation, stating that the appellant's acquisition of goodwill was genuine and the valuation was reasonable based on the facts and circumstances prevailing at the time of the transaction.

Conclusion
The Tribunal allowed the appeal, directing the AO to compute and allow the depreciation on goodwill in accordance with the law. The appeal of the assessee was thus allowed.

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