2023 (2) TMI 1391 - AT - Income Tax

Depreciation on goodwill created post-demerger must be apportioned based on days of asset usage under Section 32(1) proviso.

PMV Maltings Pvt. Ltd. Versus ACIT, Circle-19 (2), New Delhi

ITAT Delhi dismissed the assessee's appeal regarding depreciation on goodwill created post-demerger. The tribunal held that depreciation on goodwill ... Disallowance of depreciation on goodwill raised by the assessee post demerger - whether goodwill is not covered under the definition of intangible assets u/s 32? - HELD THAT:-Gains arising on transfer of a capital asset in a scheme of amalgamation/demerger to the amalgamated/resulting company being an Indian Company is exempt. Depreciation to amalgamated company and amalgamating company in the year of amalgamation and depreciation to demerged company and the resulting company in the year of demerger shall be apportioned in the ratio of the number of days for which the assets were used. By the virtue of proviso to Section 32(1), the depreciation in the hands of the assessee is allowable only to the extent, as if, demerger has not taken place. Therefore, the assessee being a demerger company cannot be allowed depreciation on the assets created as a consequence of the scheme which is more than the deprecation allowable earlier entity. Amalgamation and demerger are by nature meant for better business purposes and are generally revenue neutral. Appeals are hereby dismissed. ISSUES PRESENTED and CONSIDEREDThe primary issue considered in this judgment is whether the assessee is entitled to claim depreciation on goodwill created as a result of a demerger under Section 32 of the Income Tax Act, 1961, for the assessment years 2014-15 and 2015-16. The core legal questions include:Whether goodwill qualifies as an intangible asset eligible for depreciation under Section 32 of the Act.The applicability of the Supreme Court's decision in CIT v. Smifs Securities Ltd., which held that goodwill is a depreciable asset.The impact of amendments to the Act effective from April 1, 2021, which exclude goodwill from the definition of depreciable assets.The treatment of depreciation claims in the context of demergers, particularly in light of the provisions under Section 32(1) and related sections regarding asset transfers in demergers.ISSUE-WISE DETAILED ANALYSIS1. Depreciation on Goodwill as an Intangible AssetRelevant Legal Framework and Precedents: The legal framework involves Section 32 of the Income Tax Act, which allows depreciation on tangible and intangible assets, including goodwill as per the Supreme Court's ruling in CIT v. Smifs Securities Ltd. The Court recognized goodwill as an intangible asset eligible for depreciation.Court's Interpretation and Reasoning: The Tribunal acknowledged the Supreme Court's decision that goodwill is an intangible asset. However, it noted that the amendment effective from April 1, 2021, specifically excludes goodwill from depreciable assets, although this amendment does not apply to the assessment years in question.Key Evidence and Findings: The assessee created goodwill following a demerger, with a net goodwill value of Rs. 16,62,37,413/-. The assessee claimed depreciation on this goodwill for the assessment years 2014-15 and 2015-16.Application of Law to Facts: The Tribunal considered the legal provisions and the nature of the transaction, concluding that the goodwill created post-demerger qualifies for depreciation under the law applicable during the relevant assessment years.Treatment of Competing Arguments: The assessee argued for depreciation based on existing laws and precedents, while the Revenue contended that the principles of amalgamation and demerger should lead to a consistent treatment of depreciation claims.2. Depreciation Claims in DemergersRelevant Legal Framework and Precedents: Section 32(1) and related provisions govern the treatment of depreciation in demergers, ensuring that the aggregate deduction does not exceed what would have been allowable if the demerger had not occurred.Court's Interpretation and Reasoning: The Tribunal emphasized that depreciation claims post-demerger should not exceed the depreciation allowable to the predecessor entity. The principle of revenue neutrality in demergers was highlighted.Key Evidence and Findings: The Tribunal reviewed the assets and liabilities transferred during the demerger and the value of goodwill created. The provisions under Section 43(1) and the explanations therein were examined to determine the allowable depreciation.Application of Law to Facts: The Tribunal applied the legal provisions to conclude that the assessee's depreciation claim should be limited to the extent allowable as if the demerger had not taken place.Treatment of Competing Arguments: The Tribunal considered the arguments regarding the nature of demergers and the purpose of depreciation provisions, ultimately siding with the principle that demergers should not result in additional depreciation benefits beyond what was previously allowable.SIGNIFICANT HOLDINGSCore Principles Established: The Tribunal reaffirmed that goodwill is an intangible asset eligible for depreciation under the law applicable to the assessment years in question. However, it emphasized that the aggregate depreciation claim should not exceed what would have been allowable in the absence of a demerger.Final Determinations on Each Issue: The Tribunal concluded that the assessee's claim for depreciation on goodwill, while permissible under the applicable law, should be restricted in accordance with the provisions governing demergers. The appeals were dismissed, affirming the disallowance of the depreciation claim as it exceeded the allowable limit.