2025 (5) TMI 806 - AT - Income Tax

Depreciation on Goodwill from Amalgamation Allowed Under Section 32; Interest on Business Expansion Loan Deductible

Deputy Commissioner of Income Tax Circle-8 (1) (incharge) Hyderabad Versus East India Petroleum Limited, Hyderabad

ITAT Hyderabad held that depreciation on goodwill arising from amalgamation is allowable, as the goodwill acquired by the amalgamated company represents a ... Disallowance of depreciation on goodwill - Scheme of amalgamtion approved by NCLT - HELD THAT:- In this case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets of amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of M/s.Smifs Securities Ltd [2012 (8) TMI 713 - SUPREME COURT]. In any way, in a subsequent decision in the case of M/s. Altimetrik India Pvt.Ltd [2022 (5) TMI 722 - ITAT BANGALORE] had considered an identical issue and after considering decision of the United Breweries Ltd. [2016 (9) TMI 1527 - ITAT BANGALORE] held that consideration paid by the amalgamated company over and above net assets of amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is a capital asset eligible for depreciation. Therefore, from the above facts, it is very clear that in the given facts & circumstances of the case, the 5th proviso to section 32(1) has no application and further, in absence of any other possible view, view taken by the AO while allowing depreciation on goodwill in the assessment proceedings, cannot be held to be erroneous or unsustainable under the law. The term user u/s 32 of the Act should be interpreted in the context of intangible assets. The word user shall have a wider meaning in the context of intangible assets. The existence of goodwill arising from the amalgamation tantamount to user. Intangible assets are creation of human mind and do not have physical existence like plant, building, machinery etc. In the context of intangible assets, the word user has to be interpreted in a practical manner and if we go by the facts in the present case, the goodwill comes into existence w.e.f. 01.04.2017, by order of NCLT, amalgamating two companies from the appointed date. Section 32 in the form of depreciation confers the benefit to the assessee and the word used should be interpreted in such a manner, which will enable the assessee to obtain the benefit intended by the legislature. And in this behalf, it is relevant to refer to the Hon'ble Supreme Court in the case of Mysore Minerals Limited [1999 (9) TMI 1 - SUPREME COURT]. Therefore, we are of the considered view that the reasons given by the Assessing Officer to disallow the depreciation is totally incorrect, devoid of merit and thus, rejected. Thus, assessee is eligible for depreciation on goodwill created on account of amalgamation. Disallowance of interest paid on loan borrowed - HELD THAT:- If the loan is borrowed for controlling interest in any company by acquiring shares, then the said purchase of shares tantamount to expansion of business and therefore, any interest paid on borrowed capital for the purpose of business should be allowed as deduction. In the present case, there is no dispute with regard to the fact that the amalgamated company has borrowed loan from Axis Finance Limited for the purpose of acquiring shares of assessee company, which was held by M/s Energy Infra Limited, Mauritius and therefore, in our considered view, interest paid on said loan is deductible u/s 36(1)(iii). AO without appreciating relevant facts simply disallowed interest u/s 37(1) - CIT(A), after considering the relevant facts has rightly deleted the addition. Therefore, we are inclined to uphold the order of the Ld.CIT(A) and reject the grounds taken by the Revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:Whether depreciation on goodwill arising from the amalgamation of two companies, recognized as an intangible asset in the books of the amalgamated company, is allowable under section 32(1)(ii) of the Income Tax Act, 1961, particularly when the goodwill was created pursuant to an NCLT-approved scheme of amalgamation with an appointed date preceding the order date.Whether the 5th proviso to section 32(1) of the Act restricts the claim of depreciation on goodwill arising out of amalgamation, especially when such goodwill is a balancing figure arising for the first time in the books of the amalgamated company.Whether the interest paid on loan borrowed by the amalgamating company to acquire shares of the amalgamated company, which loan liability was subsequently taken over by the amalgamated company pursuant to the scheme of amalgamation, is deductible under section 36(1)(iii) of the Act or disallowable under section 37(1) as capital expenditure.The interpretation of the term 'used for the purpose of business' in relation to intangible assets like goodwill for claiming depreciation under section 32.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Allowability of depreciation on goodwill arising from amalgamationRelevant legal framework and precedents: Section 32(1)(ii) of the Income Tax Act allows depreciation on intangible assets, including goodwill, which is defined under Explanation 3(b) as 'any other business or commercial rights of similar nature.' The 5th proviso (now 6th proviso) to section 32(1) restricts the aggregate depreciation allowance in cases of succession or amalgamation to prevent double claims by predecessor and successor companies.The Supreme Court in CIT Vs. Smifs Securities Ltd. held that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii). Subsequent High Court and Tribunal decisions have reaffirmed this principle.Court's interpretation and reasoning: The Tribunal examined the scheme of amalgamation sanctioned by the NCLT, wherein the amalgamated company took over all assets and liabilities of the amalgamating company from the appointed date. The excess of liabilities over assets (approximately Rs. 88.2 crores) was accounted as goodwill in the books of the amalgamated company in accordance with Accounting Standard 14 (AS-14) issued by ICAI, applying the 'purchase method' of accounting.The Tribunal interpreted the 5th proviso to section 32(1) narrowly, holding that it only restricts aggregate depreciation claims on assets existing in the hands of both predecessor and successor companies to avoid double depreciation in the year of amalgamation. It does not restrict depreciation on new assets, such as goodwill, created for the first time in the books of the amalgamated company as a result of the amalgamation.The Tribunal further reasoned that the goodwill in this case was not pre-existing in the amalgamating company but arose due to the excess consideration paid over net asset value, constituting a new intangible asset acquired by the amalgamated company. Therefore, depreciation on such goodwill is allowable under section 32(1)(ii).Key evidence and findings: The scheme of amalgamation, approved by the NCLT, the accounting treatment under AS-14, and the absence of goodwill in the amalgamating company's books were critical facts. The Tribunal also noted that the Assessing Officer did not dispute the existence of goodwill but disallowed depreciation on the ground that the asset was not 'used' in the business during the relevant year.Application of law to facts: The Tribunal applied the legal principle that goodwill is an intangible asset eligible for depreciation and held that the 5th proviso to section 32(1) does not apply to goodwill created post-amalgamation. It also interpreted 'use' of intangible assets broadly, recognizing the existence of goodwill as tantamount to its use in business.Treatment of competing arguments: The Revenue argued that depreciation on goodwill should be disallowed because the asset was not used during the relevant year and that the 5th proviso restricts such claims. It also relied on a Tribunal decision distinguishing cases where goodwill existed pre-amalgamation. The Tribunal rejected these contentions, relying on authoritative Supreme Court and Tribunal decisions and interpreting the proviso narrowly.Conclusions: Depreciation on goodwill arising from amalgamation, recognized as an intangible asset in the books of the amalgamated company, is allowable under section 32(1)(ii). The proviso restricting aggregate depreciation claims applies only to assets common to predecessor and successor companies and not to goodwill created anew by amalgamation. The existence of goodwill itself satisfies the 'use' condition for claiming depreciation.Issue 2: Deductibility of interest on loan taken by amalgamating company to acquire shares of amalgamated companyRelevant legal framework and precedents: Section 36(1)(iii) allows deduction of interest on capital borrowed for the purpose of business. Section 37(1) disallows expenditure of capital nature. The Supreme Court in S.A. Builders Ltd. and various High Court decisions have held that loans taken to acquire controlling interest in a company for business expansion qualify as business loans, and interest thereon is deductible.Court's interpretation and reasoning: The Tribunal examined the facts that the amalgamating company borrowed a loan from Axis Finance Ltd. to acquire shares of the amalgamated company from a third party. At the appointed date, the amalgamating company did not hold these shares. The loan liability and interest were taken over by the amalgamated company pursuant to the amalgamation scheme.The Tribunal held that since the amalgamating and amalgamated companies were engaged in similar businesses, acquiring shares to consolidate control amounted to business expansion. The loan was therefore borrowed for business purposes, and interest paid on such loan is deductible under section 36(1)(iii).Key evidence and findings: The scheme of amalgamation, the nature of business of both companies, the purpose of loan utilization, and the fact that loan liabilities were transferred to the amalgamated company were pivotal. The Assessing Officer's disallowance under section 37(1) was based on the premise that the loan was capital in nature for acquiring own shares, which the Tribunal rejected.Application of law to facts: The Tribunal applied the principle that borrowing to acquire controlling interest in a company engaged in similar business is for business purposes. The transfer of loan liability and interest to the amalgamated company under the scheme further supports the deduction claim.Treatment of competing arguments: The Revenue contended that the loan was capital in nature, used to acquire shares, and thus interest was not deductible. The Tribunal rejected this, relying on judicial precedents and the factual matrix showing business purpose.Conclusions: Interest on loan borrowed by the amalgamating company to acquire shares of the amalgamated company, which loan liability was subsequently taken over by the amalgamated company, is deductible under section 36(1)(iii) as interest on capital borrowed for business purposes. The disallowance under section 37(1) was erroneous.Issue 3: Interpretation of 'used for the purpose of business' in relation to intangible assets like goodwillRelevant legal framework and precedents: Section 32 requires that an asset must be used for business to claim depreciation. The Supreme Court in Mysore Minerals Ltd. Vs. CIT held that the term 'use' should be interpreted practically, especially for intangible assets.Court's interpretation and reasoning: The Tribunal reasoned that intangible assets like goodwill do not have physical existence but are creations of the human mind. Therefore, the concept of 'use' must be construed broadly. The existence of goodwill arising from amalgamation itself constitutes use for business purposes.Key evidence and findings: The goodwill arose on the appointed date pursuant to the NCLT order and was recorded in the books of the amalgamated company. The Assessing Officer's contention that the asset was not used because the order was passed after the relevant year was rejected.Application of law to facts: The Tribunal applied the principle that intangible assets are 'used' by their mere existence and recognition in the business accounts, satisfying the condition for depreciation.Treatment of competing arguments: The Revenue argued the asset was not used during the relevant year. The Tribunal rejected this, emphasizing a practical and purposive interpretation.Conclusions: The term 'used for the purpose of business' in section 32 must be interpreted broadly for intangible assets. Goodwill recognized on amalgamation is deemed used from the appointed date, enabling depreciation claims.3. SIGNIFICANT HOLDINGSThe Tribunal made several crucial legal determinations, including the following verbatim excerpts:'The 5th proviso to section 32(1) of the Act... only determines amount of depreciation to be claimed in the hands of predecessor / amalgamating company and in hands of the successor or amalgamated company... It does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation.''Accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company is nothing but purchase of goodwill and thus, the assessee has rightly claimed depreciation on said goodwill in terms of section 32(1) of the Income Tax Act, 1961.''The existence of goodwill arising from the amalgamation tantamounts to user and therefore, the word user should be interpreted in such a manner, it will enable the assessee to obtain the benefit intended by the legislature.''Once the loan is taken in the ordinary course of business and the said loan is utilised for acquiring controlling interest in any company, which gives business advantage in the long run, then, the same cannot be considered as not for the purpose of business and therefore, invoking provisions of section 37(1) of the Act... is not in accordance with law.''Any loan borrowed to purchase shares so as to have effective control, in order to expand its business, then the investment in shares was for expansion of business of the assessee and therefore, any loan borrowed for the purpose of purchase of shares would necessarily becomes the loan borrowed for the purpose of business of the assessee and any interest paid on such loan needs to be allowed u/s 36(1)(iii) of the Act.'Core principles established include:Goodwill arising for the first time in the books of the amalgamated company pursuant to an NCLT-approved amalgamation scheme is an intangible asset eligible for depreciation under section 32(1)(ii).The 5th proviso to section 32(1) restricts aggregate depreciation claims only on assets existing in both predecessor and successor companies and does not restrict depreciation on newly created goodwill in amalgamation.The term 'used for the purpose of business' in relation to intangible assets must be interpreted broadly, and goodwill's existence suffices as use.Interest on loans taken to acquire controlling shares in a company engaged in similar business, which loan liability is taken over by the amalgamated company, is deductible under section 36(1)(iii) as interest on capital borrowed for business purposes.Disallowance of such interest under section 37(1) is incorrect where the expenditure is covered under specific provisions of the Act.Final determinations on each issue were in favor of the assessee, upholding the CIT(A)'s deletion of additions disallowing depreciation on goodwill and interest on loan, and dismissing the Revenue's appeal.