Depreciation on goodwill allowed for business acquisition through transfer agreement despite Revenue's objections

ITAT Bangalore allowed depreciation on goodwill claimed by assessee who acquired business through transfer agreement. Revenue contended no tangible/intangible assets existed, making depreciation inadmissible. Tribunal found AO's presumption about identical shareholding patterns between assessee and seller company factually incorrect. Relying on SC precedent in CIT v. SIMS Securities, excess payment over net asset value constitutes goodwill as intangible asset eligible for depreciation. Since recipient company offered excess amount as short-term capital gain accepted by Revenue, depreciation claim was valid. AO directed to allow depreciation on goodwill.

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Issues:
1. Disallowance of depreciation on goodwill
2. Disallowance on account of provisions for warranty
3. Disallowance under the head shared service cost

Analysis:

1. Disallowance of Depreciation on Goodwill:
The Assessing Officer (AO) disallowed depreciation on goodwill, stating that there was no valuation report on the date of business transfer and no mention of goodwill in the transfer agreement. The AO alleged that the assessee and the related company were related parties. The assessee contended that the excess price paid for goodwill was based on a valuation report using the discounted cash flow method. The Tribunal observed that the parties were not related as per shareholding patterns. Referring to legal precedent, the Tribunal held that excess payment over net asset value constitutes goodwill, an intangible asset. The Tribunal noted that the Revenue accepted the excess payment as short-term capital gain in the recipient company's hands, thus allowing the depreciation on goodwill claimed by the assessee.

2. Disallowance on Account of Provisions for Warranty:
The AO disallowed provisions for warranty, citing transactions between related parties. The Tribunal directed the issue to be re-examined based on additional evidence submitted by the assessee. The matter was restored to the AO for fresh examination.

3. Disallowance under the Head Shared Service Cost:
The AO disallowed shared service costs, stating that the necessity of high spending on professional services was not proven. The Tribunal ordered a fresh examination of this issue based on additional evidence presented by the assessee under Rule 29 of the ITAT Rules.

In conclusion, the Tribunal allowed the appeal on the disallowance of depreciation on goodwill, directed a re-examination of the provisions for warranty and shared service costs, and dismissed the appeal on the disallowance of legal and professional fees. The appeal was partly allowed for statistical purposes.

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