Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Tribunal allows depreciation on
goodwill arising on amalgamation in a subsequent year, where such claim not challenged in year of
amalgamation; on merits, observes claim is not otherwise allowable
November 7, 2019
In brief
Recently, the Ahmedabad bench of the Income-tax Appellate Tribunal (Tribunal), while dealing with the depreciation claim on goodwill arising on amalgamation, allowed it in the second year on the
“principle of consistency”, as the claim was not disallowed in the first year of claim. However, the Tribunal, on merit, observed that the intent of the Legislature is to make the amalgamation schemes tax neutral for companies as well as shareholders. The Tribunal further noted that the depreciation claimed on goodwill arising upon amalgamation impacts such tax neutrality, and hence is unwanted under the provisions of law.
In detail
Facts
• A company was amalgamated with the taxpayer1 pursuant to a scheme of amalgamation approved by the High Court of Gujarat.
• The taxpayer acquired all the assets and liabilities/
general reserve/
investment allowance reserve/ balance of profit and loss account at the book value shown by the amalgamating company in its books of accounts.
1 ITA Nos.1439/Ahd/2011, 42/Ahd/2012, 597/Ahd/2014,
• The taxpayer issued shares valuing more than the net assets acquired by it from the amalgamating company.
• The excess consideration was treated as goodwill in the taxpayer’s books of accounts.
• Depreciation was claimed on such goodwill for tax purpose in the financial year (FY) 2005-06.
• The tax officer (TO) did not dispute the taxpayer’s claim for depreciation in the said FY, nor was any action taken to reopen the assessment or to revise the
2249/Ahd/2018 & IT(SS)A No.
357/Ahd/18
order disputing the deduction allowed for depreciation on goodwill it had acquired under the scheme of amalgamation.
• The TO determined the value of intangible assets/
goodwill in the hands of the taxpayer at nil and disallowed the claim of depreciation on such goodwill for the subsequent FY, i.e. the year under consideration.
• The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the TO’s order.
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Issue before the Tribunal Whether the CIT(A) had erred in disallowing the depreciation claim on goodwill?
Taxpayer’s contention
• All assets and liabilities of the amalgamating company, including intangible assets, such as licences, trademark and other commercial rights of similar nature eligible for depreciation under section 32 of the Income-tax Act, 1961 (Act) were acquired in the amalgamation.
• Depreciation claimed in the first year, i.e., FY 2005-06 was undisputed and accepted.
• Actual cost was incurred by issuing shares for the acquisition of assets.
Therefore, the same should have been allowed as
deduction by depreciation or as revenue expenditure.
• Depreciation on goodwill was allowed and correctly granted as per law in the assessment order for FY 2005-06, being the first year of claim. The CIT(A) did not disputed this submission.
• There were certain intangibles with the
amalgamating company such as technical know-how for products, environmental clearances from the government for a chemical plant, other commercial rights, etc., although not recorded in its books of accounts in view of Accounting Standard 26.
However, their value cannot be ignored for the purpose of goodwill in the hands of the amalgamated company.
• The provisions of Explanation 7 to section 43(1) of the Act and Explanation (2b) to
2 CIT v. Excel Industries Limited [2013]
358 ITR 295 (SC)
section 43(6) of the Act, deals with determination of cost/
written down value (WDV) of asset already recorded in the books of accounts of the amalgamating company and does not deal with the intangible asset acquired in amalgamation.
Revenue’s contention
• All the assets and liabilities under the scheme of amalgamation have been transferred at book value, and therefore, there is no question of recording goodwill.
• Intangible assets acquired by the taxpayer from the
amalgamating company were not appearing in the balance sheet of the amalgamating company. Therefore, the actual cost of the intangible asset is zero, as per
Explanation 7 to section 43(1) of the Act.
• In addition, there was no block of assets for the impugned intangibles;
therefore, the WDV of such blocks shall be treated at nil as per Explanation to section 43(6) of the Act.
Tribunal’s ruling
• Once the TO allowed the deduction for depreciation claimed by the taxpayer, it is debarred from rejecting the claim of the taxpayer in the subsequent year on the WDV carried forward from the previous FY.
• The Revenue was required to challenge the claim of the taxpayer in the first year itself, which it did not do;
therefore, it can be presumed that the depreciation claimed in the first year has attained finality. The claim of the taxpayer should be allowed
on the basis of principles of consistency. For this, reliance was placed on the decision of the Supreme Court.2
• Therefore, the taxpayer is eligible for deduction of depreciation under section 32 of the Act.
• Despite the above conclusion, from the perspective of completeness, the merits of the case were also discussed.
• The Tribunal further noted that on a combined reading of the various merger-related provisions under the Act, the intention of the legislature in introducing the
amalgamation scheme was to achieve tax neutrality for the companies as well as the shareholders and not to provide a tax planning mechanism to either.
• The provision of section 32 of the Act requires allowing depreciation to the
amalgamated company in the same manner and to the same extent that would have been allowed to the amalgamating company, had there been no amalgamation.
• For the purpose of computing depreciation, the actual cost/
WDV of the assets acquired in the scheme of amalgamation in the hands of the
amalgamated company will continue to be the same as it would have been in the hands of the amalgamating
company in the event there had been no amalgamation.
• Indeed, no intangible asset/
goodwill was recorded in the books of the amalgamating company for the intangible assets/ goodwill, being self- generated assets.
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• Thus, it was observed that the transaction for claiming deduction on account of depreciation is an
arrangement for claiming higher depreciation, which is unwanted under the
provisions of law.
• However, ultimately, the depreciation claim for FY 2006-07 is to be allowed on
the principle of consistency and the taxpayer’s ground of appeal is allowed. Similarly, the depreciation claim for FY 2007-08 is also allowed.
The takeaways
Amidst all the talk about depreciation on goodwill arising on amalgamation being closely monitored by the tax authorities,
the observation made by the Tribunal about non-allowability of the depreciation in case of amalgamation would become relevant.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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