Depreciation Is Permissible On Goodwill Acquired Without Actual Payment Made During Acquisition: Delhi HC
The Delhi High Court has observed that goodwill is an intangible asset under Explanation 3 to Section 32 (1) of the Income Tax Act, 1961 (Act). Therefore, even if it is acquired without any actual payment during an amalgamation, depreciation can be claimed upon it for taxation purposes.
The Bench comprising Justice Yashwant Varma and Justice Dharmesh Sharma observed, “As is manifest from the aforesaid judgment, it was categorically held that goodwill is an intangible asset which would clearly fall within the ambit of Explanation 3 to Section 32(1) of the Act. It was in the aforesaid backdrop that it ultimately upheld the depreciation claimed in terms of Section 32”.
Advocate Sanjay Kumar appeared for the Appellant and Advocate Piyush Kaushik appeared for the Respondent.
The Income Tax Department/Appellant (Department) had filed an appeal before the Commissioner of Income-Tax (Appeals) (CIT Appeals) which allowed the Respondent to claim depreciation on the goodwill during an acquisition. The Appellant then challenged the order of the CIT Appeals before the Income Tax Appellate Tribunal (ITAT), wherein the ITAT dismissed the appeal. Therefore, the Department filed a set of Appeals challenging the order of ITAT.
The Bench noted that Sections 49 and 55(2) of the Act deal with the taxation of profits (capital gains) when selling goodwill. The Court observed that these sections do not cover claiming depreciation on goodwill. The Court referred to a Supreme Court Judgement in the case of Commissioner of Income Tax, Kolkata vs. Smifs Securities Limited [(2012) 13 SCC 488], and emphasized that these sections address distinct taxation aspects related to goodwill.
“The aforesaid submission, however, clearly loses sight of the fact that Section 47 in express terms excludes the transfer of a capital asset in terms of a scheme of amalgamation… However, 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. 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”, the Bench noted.
Accordingly, the Court dismissed the Appeals.
Cause Title: Pr. Commissioner Of Income Tax-1 v M/S Eltek Sgs Pvt. Ltd.
