Resulting company is entitled to claim depreciation on goodwill expended at the time of amalgamation of companies.
In a recent judgment, the Hon’ble Supreme Court has dismissed the Special Leave Petition filed by the PCIT approving the judgment of the High Court that the assessee company is entitled to claim depreciation on goodwill expended at the time of amalgamation of companies
ABCAUS Case Law Citation:
4525 (2025) (04) abcaus.in SC
The respondent assessee company filed return of income for relevant Assessment Year declaring loss. The case was selected for complete scrutiny and assessment was completed u/s. 143(3) of the Act vide order accepting the return of income filed by the assessee.
Subsequently, the Pr. CIT noticed that pursuant to the order of Hon’ble High Court sanctioning the composite scheme of arrangement in the nature of amalgamation or demerger, one company got demerged and was transferred to and vested in the assessee company. The appointed date for the said demerger was during the relevant previous year . According to the said scheme all “assets and liabilities” of the demerged company as on the appointed date was transferred to and vested in the assessee company.
The Pr. CIT observed that in the process of demerger, goodwill amounting to Rs. 275 crores being difference between net assets and shares to be issued was credited by the assessee company on which depreciation amounting 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”. Since, the actual cost of the goodwill in the hands of the demerged company was “Nil”, which should naturally follow that the WDV of the same would also be “Nil” in its hands.
Therefore, the PCIT was of the view that after demerger, WDV of the same has to be taken “Nil” in the hands of the assessee company, being the resulting company in view of the explanation to section 43(6) of the Act which provides that the WDV of the block of the assets in the hands of resulting company (assessee company) shall be the WDV of the block of assets of the demerged company immediately before the demerger.
Further, the Pr. CIT observed 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”.
Thus, the Pr. CIT was of the view that the depreciation claimed on the aforesaid goodwill was not allowable under the Act to the assessee company. The Pr. CIT, came to the conclusion 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 an appeal filed by the assessee before the Tribunal, the Tribunal opined that the Principal CIT had erred in facts and in law in invoking the provisions of Section 263 of the Act.
The Tribunal observed that the issue regarding the claim of depreciation in the hands of the demerged company was inquired during the course of assessment proceedings. Further, during the course of assessment, the assessee had furnished various factual and legal submissions in respect of its claim of depreciation on goodwill, wherein the assessee relied on the judgment of the Hon’ble Supreme Court in support of its claim for deprecation of goodwill by assessee company.
The Tribunal also observed that the extract of board resolution passed by the meeting of board of directors and order passed by the High Court granting approval to the aforesaid said of demerger and also the valuation report prepared by the approved valuer were all submitted before the Assessing Officer during the course of assessment proceedings, for his consideration.
The Tribunal held that the Assessing Officer had examined the aspect of assessee’s claim of depreciation during the course of assessment proceedings, factually as well as legally, while allowing the assessee’s claim of depreciation on goodwill. Accordingly, the Tribunal seta side the revisional order.
The Pr CIT challenged the order of the Tribunal before the High Court and submitted that Assessing Officer had failed to follow the explanation 2B to Section 43(6) of the Act where it is made clear that the WDV of the block of assets in the hands of the resulting company shall be the WDV of the block of assets of the demerged company immediately before merger. Hence the Assessing Officer wrongly allowed the depreciation on self generated goodwill.
The Hon’ble High Court observed that the Assessing Officer had examined the aspect of the assessee’s claim during the course of acceptance, and therefore 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 of the Hon’ble Supreme Court, 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 further observed that in the judgment of the Hon’ble Supreme Court relied upon by the assessee and accepted by the AO, it was held that `Goodwill’ is an asset under Explanation 3(b) to Section 32(1) of the Act and the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee company stood increased.
As a result, the High Court dismissed the appeal holding that no substantial question of law arose.
Not satisfied, the Pr CIT filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court challenging the order of the High Court.
The Hon’ble Supreme Court dismissed the SLP observing as under,
“A Special Leave Petition against the relied upon judgment has been dismissed by this Court. Hence, no case for interference with the impugned order is made out. The Special Leave Petition is accordingly dismissed”.
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