In a significant relief to corporates undergoing amalgamation, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that goodwill arising on amalgamation is an intangible asset eligible for depreciation under Section 32 of the Income Tax Act.
The decision in Eltek SGS Pvt. Ltd. vs. ACIT (ITA No. 5531/Del/2019, A.Y. 2012–13) reinforces settled judicial precedent laid down by the Delhi High Court in the case of Triune Energy Services (P) Ltd., ensuring that companies continue to claim depreciation on goodwill arising due to mergers or amalgamations.
Issue at Hand
The Assessing Officer (AO) during assessment proceedings disallowed the depreciation claim of ₹23,41,920 made by the assessee on goodwill recorded in its books after amalgamation.
AO’s Reasoning:
- The AO argued that goodwill is not an intangible asset as defined under Section 32(1)(ii).
- As such, depreciation on goodwill was not allowable in the AO’s view.
The CIT(A) upheld this disallowance, leading the assessee to file an appeal before the ITAT.
What the Law Says — Section 32(1)(ii)
Section 32(1)(ii) of the Income Tax Act allows depreciation on intangible assets, including:
- Know-how
- Patents
- Copyrights
- Trademarks
- Licenses
- Franchises
- Any other business or commercial rights of similar nature
The key phrase is “any other business or commercial rights of similar nature”, which has been interpreted by various courts to include goodwill, especially in the context of amalgamations and mergers.
ITAT’s Analysis and Findings
The ITAT took a consistent view, aligning with precedents from the Supreme Court and the Delhi High Court.
Reliance on Triune Energy Services (P) Ltd.
The ITAT relied on the decision of the Delhi High Court in Triune Energy Services (P) Ltd. v. DCIT (2016) 237 Taxman 270 (Delhi HC), where it was held:
Goodwill is an intangible asset eligible for depreciation under Section 32(1)(ii), as it falls within the scope of business or commercial rights of similar nature.
Key Observations by ITAT:
- The goodwill arose due to amalgamation, which is a recognized business restructuring.
- The amalgamation was approved by the Delhi High Court, and all entries were reflected in the assessee’s books of account.
- The claim of depreciation on goodwill was legitimate, as it represented a commercial right derived post-amalgamation.
- The AO and CIT(A) failed to appreciate the binding nature of jurisdictional High Court decisions.
Tribunal’s Conclusion:
The issue is no longer res integra. The Hon’ble Jurisdictional High Court in the case of Triune Energy Services Pvt. Ltd. has held that goodwill arising on amalgamation is eligible for depreciation. We, therefore, direct the AO to allow the same.
Final Verdict
The ITAT allowed the depreciation claim of ₹23,41,920 on goodwill and directed the deletion of the disallowance made under Section 32 by the AO.
Legal Precedents Cited
- Triune Energy Services Pvt. Ltd. v. DCIT (Delhi HC, 2016)
Goodwill arising on amalgamation held to be a depreciable intangible asset. - CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC)
Landmark Supreme Court ruling recognizing goodwill as eligible for depreciation.
Key Takeaways
- Goodwill generated on amalgamation is an intangible asset eligible for depreciation.
- The phrase “commercial rights of similar nature” under Section 32(1)(ii) includes goodwill.
- Jurisdictional High Court decisions are binding on subordinate tax authorities, including the AO and CIT(A).
- Companies undergoing mergers should ensure that goodwill is properly recognized in the books to avail depreciation benefits.