When amalgamation is done in larger interest of business, depreciation on goodwill generated in the course of amalgamation allowable – ITAT
In a recent judgment, ITAT Rajkot has held that when the amalgamation was done in the larger interest of business, depreciation should be allowable on the goodwill generated in the course of amalgamation.
ABCAUS Case Law Citation:
4717 (2025) (08) abcaus.in ITAT
In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition on account of depreciation claim on goodwill.
The respondent assessee was a Private Limited Company. The assessee`s case was selected for complete scrutiny under CASS. During the course of scrutiny proceedings, it was observed by the assessing officer that two companies were amalgamated with the assessee company vide order of National Company Law Tribunal (NCLT).
The AO noted that as a result of the amalgamation, the assessee reported an addition of intangible asset in the form of Goodwill claimed Depreciation thereon. It was further noted that the excess share consideration paid by the assessee company over book value of both the transferor companies, had been recorded as Goodwill in the books.
The AO was of the view that the assessee had adopted a colourable device to create artificial goodwill without any actual financial pay-out in its books. The assessee clarified that it was in the business of real estate activities. Before amalgamation, it had income originating from real estate transactions. The Transferor Company -1 was actively engaged in the business of developing residential and commercial real estate projects, infrastructure facilities and operating commercial malls and Transferor company -2 was engaged in the business of maintenance and management of malls and commercial facilities There was a good opportunity by merging all the three companies to create financial and operational synergy in real estate sector.
The assessee submitted that there were various commercial reasons of the merger. All the companies were engaged in different activities but in relation to real estate sector. Hence even though doing different business activities the businesses of all the three companies complimented each other. There was a high scope of gaining financial and operational synergy by combining staff and resources of all the three companies.
The assessee also submitted that the amendments made by Finance Act, 2021 in relation to depreciation on Goodwill, being prospective in nature, makes it clear that the depreciation on goodwill should be allowed.
However, the AO disagreed with the asessee and the amount claimed by the assessee as ‘Depreciation on Goodwill’ was disallowed and added back to the total income of the assessee.Â
The Tribunal observed that that merger was not intended for providing any financial stability to the transferor companies’ business prospects as alleged by the AO. Nowhere had the same been mentioned in the rationale of the scheme. What was intended by virtue of the scheme is “greater financial strength” and “optimum utilization of common resources”. There were various commercial reasons of the merger i.e. (a) All the companies were engaged in different activities but in relation to real estate sector. Hence, even though doing different business activities, the businesses of all the three companies complimented each other. There was a high scope of gaining financial and operational synergy by combining staff and resources of all the three companies. It was envisaged to create one single entity by encompassing different business operations in one legal entity. Each Company would leverage off of the other company’s strengths,(b) The merger would lead to creating a strong entity wherein fund raising would have been easier because of wealth consolidation under one roof which would also help the assessee in pooling of resources to their common advantage, resulting in more productive utilization of the said resources and (c) It was a cost-efficient decision to merge the three companies so as to save on certain fixed expenses like ROC filings, audit etc. which needs to be done for any legal entity. Such compliance burden would reduce resulting in resources being diverted to much productive use. The business of Transferor Companies was acquired as a going concern. With this acquisition, the Appellant had not only acquired the Transferor Companies specialized business and tangible assets but also a host of intangible assets which are mandatory and necessary for carrying on the business.
The Tribunal also observed that the assessee as well as the transferor companies had intimated the income tax authorities and had invited representations in connection with the proposed scheme. However, no objections in relation to the scheme were received from the income tax department. In the absence of any objections, it is presumed that the same is accepted by the Department. The intimations for final hearing was again sent to the income tax department. The department chose to remain silent the second time as well from which it can be clearly presumed that the income tax authorities had no question regarding the scheme of amalgamation.
The Tribunal further observed that based on the principles of commercial expediency, various Courts have held that if an assessee incurs expenditure, as a prudent businessman and in the larger interest of his business, such expenditure should be allowable as tax deductible. In the assessee`s case also the amalgamation was done in the larger interest of business and hence depreciation should be allowable on the goodwill generated in the course of amalgamation. It is settled proposition that commercial transactions are in the domain of the businessman and tax authorities cannot intervene in realm of intricacies of commercial expediencies involved in these arrangements. It needs to be appreciated that while it is the function of tax authorities to examine the nature and related documents for the transaction, the commercial wisdom of the taxpayer to conduct the business should not be challenged.
The Tribunal noted that the goodwill arose due to excess consideration paid over net assets taken, calculated on the basis of fair value. The scheme of amalgamation was legally approved under the Companies Act by the NCLT. The recognition of goodwill and claim of depreciation was as per Accounting Standard -14, issued by ICAI. The amalgamation had commercial rationale and led to operational and financial synergy. The assessee also relied on judicial precedents.
The Tribunal held that there was no error in the conclusion drawn by the CIT(A) and rightly allowed the depreciation on goodwill.
Accordingly, the appeal of the Revenue was dismissed.
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