Delhi High Court: Depreciation Allowable on Goodwill Without Paying Cash For Acquisition

Delhi High Court: Depreciation Allowable on Goodwill Without Paying Cash For Acquisition

According to the Court, goodwill being a non-tangible asset, is eligible for depreciation under Section 32(1) of the Income Tax Act

The Delhi High Court has held that depreciation is allowable on goodwill arising in a scheme of amalgamation even though no cash payment is made for the acquisition.

The bench comprising Justice Yashwant Varma and Justice Dharmesh Sharma observed that Sections 49 and 55(2) dealt with ‘capital gains’ arising on the sale of goodwill and not with respect to depreciation on goodwill. Also, Section 47 excluded the transfer of capital assets in a scheme of amalgamation from the purview of capital gains.

The respondent/assessee was amalgamated with Valere Power India Limited on 5 February 2014, in terms of a Scheme of Amalgamation, sanctioned by the court.

The assessing officer (AO) added a sum of Rs.6,17,30,352 on account of the disallowance of depreciation created because of the amalgamation on goodwill.

Thereafter, the respondent approached the Commissioner of Income Tax (Appeals), who observed that since goodwill was created by virtue of the merger in terms of the scheme approved by the court, the assessee had rightly claimed depreciation on goodwill.

However, the revenue department challenged the CIT(A) order before ITAT.

The tribunal held that goodwill, being a non-tangible asset, was eligible for depreciation under Section 32 of the Income Tax Act.

The department referred to the definition of the ‘cost of acquisition’ in Section 55(2), which included the goodwill of a business or profession, a trademark or brand name associated with the business or profession, or any other intangible asset. The appellant relied on Section 49 and Section 49(1)(e).

However, the high court rejected the contention of the department. It held that a transfer in terms of a sanctioned scheme of amalgamation was accomplished by operation of law as opposed to an act of parties.

The judges ruled that goodwill was an intangible asset on which, under Section 32(1), depreciation could be claimed.