Depreciation on goodwill to amalgamated company upheld as AO took a plausible view

Depreciation on goodwill in the hands of amalgamated company upheld as Assessing Officer had taken a plausible view in line with supreme court judgment.

In a recent judgment, Hon’ble Supreme Court has dismissed the appeal of the Revenue against the judgment of Gujarat High Court upholding depreciation on goodwill in the hands of amalgamated company as Assessing Officer had taken a plausible view sustainable in the eye of law.

ABCAUS Case Law Citation:
4916 (2025) (12) abcaus.in SC

In the instant case, the respondent assessee company had filed return of income for assessment year 2015-16 declaring a loss. The case was selected for complete scrutiny and assessment was completed u/s 143(3) of the Act accepting the return of income filed by the assessee.

Subsequently, the Pr. CIT noticed that pursuant to the order of Hon’ble High Court of Gujarat sanctioning the composite scheme of arrangement in the nature of amalgamation or demerger, one group company (demerged company) got demerged and was transferred to and vested in the assessee company. According to the said scheme all “assets and liabilities” of the merged company as on the appointed date was transferred to and vested in the assessee company.

It was further noted by the Pr. CIT that in the process of demerger, goodwill being difference between net assets and shares to be issued was credited by the assessee company on which depreciation was claimed for the year under consideration.

The Pr. CIT observed that no goodwill was reflected in the balance sheet of the demerged entity prior to the demerger. This indicated that the aforesaid goodwill was a self acquired asset, the actual cost of which in the hands of the demerged company was “Nil”. Therefore, WDV of goodwill would also be “Nil” in assessee’s hands being the resulting company in view of the explanation to section 43(6) of the Act.

The Pr.CIT further noted that 6th Proviso to section 32(1) of the Act makes it clear that the depreciation in the hands of the resulting company is to be calculated at the prescribed rates on the WDV of the assets in the books of the demerged company, which in this case would be “Nil” as the WDV of the corresponding assets itself was “Nil”.

As a result, the PrCIT held that Assessing Officer wrongly accepted the claim of depreciation on goodwill created by virtue of demerger scheme without examining the provisions of explanation 2 to section 43(6) r.w.s. 32 of the Act due to which the assessment order passed u/s. 143(3) of the Act had become erroneous in so far as the same is prejudicial to the interest of the Revenue within the meaning of section 263 of the Act.

On appeal by the assessee, the Tribunal opined that the Principal CIT had erred in facts and in law in invoking the provisions of Section 263 of the Act and hence set aside the order.

The Hon’ble High Court noted that the Tribunal had found that the assessee had furnished various factual and legal submissions where the assessee relied upon the judgment of Hon’ble Supreme Court.

The Hon’ble High Court noted that the Tribunal had observed that the Assessing Officer had considered the action of granting approval and also the Valuation Report. Since therefore the Assessing Officer had examined the aspect of the assessee’s claim during the course of acceptance, in the opinion of the Tribunal, the Assessing Officer while passing order under Section 143(3) of the Act had taken a plausible view

sustainable in the eye of law. Relying on the decision, it was held that the assessee company is entitled to claim depreciation on goodwill expended at the time of amalgamation of companies.

The Hon’ble High Court also noted that the Hon’ble Supreme Court had held that Explanation 3 states that the expression `asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).

The Hon’ble High Court also noted that in the said case, Apex Court had held the assets and liabilities of merged company were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill because of which the market worth of the company stood increased.

As a result, the Hon’ble High Court dismissed the appeal of the Revenue holding that no substantial question of law arose for consideration.

Not satisfied with the judgment of the High Court, the Department challenged it before the Hon’ble Supreme Court by way of filing a Special Leave Petition. However, the Apex Court dismissed the SLP with the following observations;

“We have perused the order impugned to assess whether a lenient view on the delay be taken. Upon perusal of the impugned order, we do not find any such error which may give rise to a question of law. Consequently, this petition is dismissed both on the ground of delay as well as merits.”

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