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Depreciation On Goodwill Created Through Scheme Of Amalgamation Allowed

Cause Title : Commissioner Of Income Tax vs M/s Eltek Sgs Pvt. Ltd., Delhi High Court, ITA 475/2022

Date of Judgment/Order : 01.08.2023

Corum : Hon'ble Mr. Justice Yashwant Varma & Hon'ble Mr. Justice Dharmesh Sharma

Citied: Commissioner of Income Tax, Kolkata vs. Smifs Securities Limited, (2012) 13 SCC 488

Background

The respondent had amalgamated with M/s Valere Power India Limited in terms of a Scheme of Amalgamation which came to be sanctioned by Delhi High Court on 05 February 2014. As per the scheme of amalgamation, where value of liabilities and amount of equity capital allotted /payment to the equity shareholders exceeds the value of assets of the transferor company taken over, such excess shall debited to the goodwill account. Accordingly, the assessee claimed on depreciation on goodwill which claim was denied by the AO. On appeals, the CIT (Appeals) as well as the Appellate Tribunal allowed the depreciation. Hence this appeal.

Judgment

The High Court referring to the judgment of the Hon'ble Supreme Court in Smifs (supra) observed that the IT Dept. contended that it would be the provisions of Section 49 of the Income Tax Act which would apply and that both the CIT (Appeals) as well as the ITAT have clearly erred in holding otherwise. Learned counsel referred to the definition of “cost of acquisition” as spelt out in Section 55(2) of the Act and which had defined that expression to also include goodwill of a business or profession or a trademark or brand name associated with the business or profession or any other intangible asset.

Section 49 deals with cost with reference to certain modes of acquisition while Section 55 refers to the meaning of "cost of acquisition".

The HC observed that the provisions of the Act referred to by learned counsel for the appellant are placed in a Chapter dealing with the “Capital Gains”. That Chapter itself pertains to profits or gains arising from the transfer of a capital asset and Section 47 of the Act in express terms excludes the transfer of a capital asset in terms of a scheme of amalgamation.

The HC then rejecting the view of the Dept. held that it is well settled that a transfer in terms of a scheme of amalgamation which is sanctioned is accomplished by operation of law as opposed to an act of parties. The assessee's the goodwill has enumerated from the decision of the Hon'ble High Court and not out of accounting principles. It is in that backdrop that the decision in Smifs assumes significance. The judgment rendered by the Supreme Court in Smifs clearly recognises goodwill to be an intangible asset and on which depreciation can clearly be claimed in terms of Section 32(1) of the Act.


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