Depreciation Allowable On Goodwill Though No Actual Cash Payment Made For Acquisition: Delhi High Court

The Delhi High Court has held that depreciation is allowable on goodwill arising in a scheme of amalgamation even though no actual cash payment was made for the acquisition of goodwill.

The bench of Justice Yashwant Varma and Justice Dharmesh Sharma has observed that sections 49 and 55(2) deal with ‘capital gains’ arising on the sale of goodwill and not with respect to depreciation on goodwill. Section 47, in express terms, excludes the transfer of capital assets in a scheme of amalgamation from the purview of capital gains.

The respondent/assessee was amalgamated with M/s Valere Power India Limited in terms of a Scheme of Amalgamation, which came to be sanctioned by the Court on February 5, 2014.

The Assessment Officer had added a sum of Rs. 6,17,30,352 on account of the disallowance of depreciation on the goodwill that was created as a result of amalgamation.

The respondent had preferred an appeal before the CIT (Appeals). The CIT (Appeals) found that since goodwill had come to be created by virtue of the merger in terms of the Scheme approved by the Court, depreciation on goodwill was correctly claimed by the assessee.

The appellant/department challenged the order passed by CIT (A) before the ITAT. The ITAT has held that goodwill, being a non-tangible asset, is eligible for depreciation under Section 32 of the Income Tax Act.

The department referred to the definition of "cost of acquisition" as spelt out in Section 55(2). Section 55(2) had defined the expression "cost of acquisition" to also include the goodwill of a business or profession, a trademark or brand name associated with the business or profession, or any other intangible asset. The appellant had sought to rely upon Section 49, and more particularly Section 49(1)(e).

The court, while rejecting the contention of the department, held that a transfer in terms of a scheme of amalgamation that is sanctioned is accomplished by operation of law as opposed to an act of parties.

The court ruled that goodwill is an intangible asset on which depreciation can clearly be claimed in terms of Section 32(1).

Case Title: PCIT Versus M/S Eltek Sgs Pvt. Ltd.

Citation: 2023 LiveLaw (Del) 668

Date: 01.08.2023

Counsel For Appellant: Sanjay Kumar, Easha, Hemlata Rawat

Counsel For Respondent: Piyush Kaushik

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