Case Law Details
Manjushree Technopack Limited Vs PCIT (ITAT Bangalore)
PCIT’s 263 Order Quashed: Goodwill Depreciation Allowed in Slump Sale Acquisition
In a significant ruling, the Bangalore ITAT quashed a revision order passed under section 263, holding that the PCIT wrongly treated a slump sale acquisition as an amalgamation while questioning depreciation claimed on goodwill arising from the acquisition of a business undertaking. The Tribunal observed that Manjushree Technopack had acquired the business of National Plastics through a Business Transfer Agreement (BTA) on a slump sale basis and had claimed depreciation on goodwill and other intangible assets after obtaining valuation reports and after detailed scrutiny by the Assessing Officer.
The Tribunal noted that the very foundation of the PCIT’s revisionary action was flawed because the provisions relating to amalgamation and WDV continuity were inapplicable to a slump sale transaction. It further held that where two plausible views exist and the Assessing Officer has adopted one after conducting enquiries, the assessment order cannot be branded as erroneous and prejudicial to the interests of the Revenue merely because the PCIT prefers another view. The Tribunal also observed that judicial precedents on depreciation of goodwill support the existence of a debatable issue, thereby taking the matter outside the scope of section 263.
On the issue of business acquisition expenses such as valuation fees, consultancy charges and legal fees incurred for acquiring the business, the Tribunal relied on Supreme Court jurisprudence and held that expenditure incurred for facilitating the smooth conduct and expansion of an existing business could not be treated as capital merely because it related to an acquisition. Since the Assessing Officer had examined the claim and adopted a legally sustainable view, revision under section 263 was held to be unjustified. Accordingly, the entire revisionary order was quashed and the assessee’s appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. ITA No.1282/Bang/2025 is filed by Manjushree Technopack Limited [the assessee/appellant] against the revisionary order passed u/s. 263 of the Income Tax Act, 1961 [the Act] by the Principal Commissioner of Income Tax, Bengaluru-2 [ld. PCIT] for the AY 2020-21 dated 31.3.2025 wherein it is held that the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.9.2022 is erroneous and prejudicial to the interests of the revenue and therefore the assessment order was set aside for the purpose of making fresh assessment where the ld. AO is directed to revise the assessment after disallowing the assessee’s claim for depreciation on goodwill after verifying the allowability of business acquisition expenses.
2. The assessee is aggrieved with the same and has preferred this appeal.
3. Briefly stated the facts of the case show that assessee is engaged in the business of providing packaging solutions, manufacturing and selling PET, plastic performs and containers etc., filed its return of income on 29.1.2021 at a total income of Rs.76,99,37,680. This return was picked up for scrutiny and assessment order was passed u/s. 143(3) r.w.s. 144 of the Act on 28.9.2022 at an assessed income of Rs.85,33,54,936.
4. The ld. PCIT on examining the records of the assessee found that the ld. AO has allowed the claim of depreciation on total addition of Rs.139,02,99,000 of intangible assets which was paid for acquisition of the business of National Plastics on slump sale basis as per the Business Transfer Agreement [BTA] dated 21.10.2019 at a total consideration of Rs.162,94,54,643. The ld. PCIT noted that assessee has been allowed depreciation on goodwill having cost of Rs.80 Crores being the excess consideration charged over the net assets acquired. He noted that the net consideration was Rs.162,94,54,643 against the net assets acquired of Rs.82,94,54,643 resulting into goodwill of Rs.80 Crores. The ld. PCIT was of the view that the assessee did not acquire any goodwill which is a self-generated asset, does not have any cost and therefore depreciation on the intangible asset should have been allowed. Further, the ld. AO has allowed business acquisition expenses of Rs.2.56 Crores which is in fact capital expenditure. Thus, show cause notice was issued to the assessee.
5. The assessee submitted that assessee acquired the business of National Plastics for a total consideration of Rs.16,294 lakhs where the tangible assets are Rs.2,391 lakhs and intangible assets are Rs.5,903 lakhs and balance sum of Rs.8,000 lakhs is goodwill. Further the expenses paid of Rs.2.56 Crores is valuation fees paid to Ernst & Young for structuring & consultancy fees along with consultancy fees paid to KPMG and Khaitan & Co. LLP as legal fees. The assessee submitted that the actual cost of goodwill is Rs.8,000 lakhs and therefore depreciation is allowable to the assessee.
6. The ld. PCIT after considering the provisions of depreciation u/s. 32 of the Act and the provisions of section 43(6) of Written Down Value [WDV], held that the actual cost of goodwill to the amalgamating company shall be the same as it would have been if that company had continued to hold the capital assets for its own business. Thus, according to the ld. PCIT, the valuation of goodwill of National Plastics is NIL, the WDV of the same in the hands of the assessee is also NIL. The ld. PCIT further held that the decision of Hon’ble Supreme Court in the case of Smifs Securities, 348 ITR 302 and the decision of the Hon’ble Karnataka High Court in the case of Manipal Universal Learning P. Ltd., 359 ITR 369 does not apply to the facts of the case. Further he relied upon the decision of United Breweries Ltd. in ITA No.722/Bang/2014 dated 30.9.2016 and quoted it extensively and held that no depreciation is allowable on the goodwill. He was of the view that the ld. AO has not examined the goodwill in the hands of the amalgamating company, National Plastics and depreciation thereon and further depreciation claimed on the goodwill was allowed by the AO without reference to the 6th proviso to section 32(1) which is applicable in the case of amalgamation. Further the AO has not followed the decision of the jurisdictional Tribunal in the case of United Breweries.
7. With respect to the business acquisition expenses, it was also not verified by the AO and therefore the revisionary order was passed u/s. 263 of the Act on 31.3.2025.
8. Contesting the revisionary order, the ld. AR submitted that there is no amalgamation carried out by the assessee and the business of National Plastics was purchased by the assessee by Business Transfer Agreement [BTA] dated 21.10.2019 recorded by ld. PCIT. Thus, the ld. PCIT has misdirected himself by considering that there is an amalgamation. He submits that in the case of business acquisition by BTA, the assessee purchased the business of National Plastics wherein tangible assets of Rs.23 crores and intangible assets other than goodwill of Rs.59 crores as well as goodwill of Rs.80 crores was purchased on the total purchase consideration of Rs.162.94 Crores. Thus it was further stated that there is no amalgamation. He further referred to the assessment order stating that the ld. AO has also referred to the valuation report of the assets & liabilities acquired. The total issue was examined of depreciation and based on that, a show cause notice dated 14.9.2022 was issued. Based on that, the valuation report of National Plastics dated 1.6.2020 was examined by the ld. AO and thereafter the residual value of the goodwill was also verified. The ld. AO further referred to the depreciation schedule of the assessee and further on the basis of the BTA, he noted certain discrepancies and thereafter disallowed depreciation of Rs.5,34,68,611. Thus, he stated that the claim of the assessee was allowed after complete verification.
9. He further submitted that the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. in 348 ITR 302 has categorically held that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act and the same is eligible for depreciation. He further referred to the fact that no doubt goodwill is depreciable asset has also been accepted by the Statute. Even otherwise, he submitted that the ld. PCIT himself has recorded 3 different decisions as well as there are several decisions of various Courts stating that in such cases depreciation on goodwill is allowable. However, he submitted that where on similar set of facts, divergent views are available and when the AO has take one of the plausible views, the jurisdiction of the ld. PCIT to revise the assessment order cannot be allowed. He relied upon the decision of the Hon’ble Supreme Court in the case Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83. Thus, he says that the ld. PCIT is not correct in invoking jurisdiction u/s. 263 of the Act.
10. With respect to the second issue, he submitted that the expenditure incurred by the assessee for effecting business reorganization cannot be disallowed u/s. 37(1) of the Act as it is necessary for the smooth and efficient conduct of the assessee’s business. This issue is squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of CIT v. Bombay Dyeing Manufacturing Co. Ltd., 219 ITR 521. Accordingly he submitted that the order passed by the ld. PCIT is not sustainable.
11. The ld. DR vehemently supported the order of the ld. PCIT. It was submitted that the ld. PCIT has correctly held that the order passed by the ld. AO is incorrect as erroneous and prejudicial to the interests of the Revenue as it has allowed depreciation claimed by the assessee on goodwill, without verifying the fact that there is no cost incurred by the assessee. With respect to the expenditure incurred by the asse for acquisition of the business, the ld. DR relied on the decision of Genpact Services LLC v. DCIT in 149 com 22 wherein it was held that such expenditure gives an enduring benefit to the assessee and are capital in nature and therefore the liability of such expenditure without verification by the ld. AO makes the order erroneous and prejudicial to the interests of the Revenue. The ld. DR also relied upon the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. which clearly held that when the AO accepted the claim of the assessee in absence of any supporting material without making any meaningful enquiry and passes the order, such orders are correctly revised by the PCIT.
12. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The brief facts of the case show that on the issue of depreciation on goodwill, the assessee has acquired the business of National Plastics which is also engaging in the business of manufacturing of spraying and dispensing systems and solutions as a going concern. In that circumstances, the assessee entered into a BTA dated 21.10.2019 to acquire the business of that entity on slump sale basis for a total consideration of Rs.162,94,54,643. The assessee on the basis of various valuation reports determined the value of net assets at Rs.23,90,54,643, goodwill at Rs.80 Crores, Intellectual Property Rights at Rs.40.57 Crores, Customer Relationship of Rs.13.28 Crores and Non-compete fees of Rs.5.19 Crores. As there was a slump sale agreement by entering into BTA, the individual value of assets was assigned by the assessee for recording in the books of account on the basis of valuation report of individual assets. The assessee claimed depreciation on tangible and intangible assets. This was allowed by the ld. AO after verifying the valuation report pointing out discrepancies therein and thereafter disallowing the depreciation to the extent of Rs.5,34,68,611.
13. The ld. PCIT on revision referred to the provisions of section 32 of the Act and also definition of Written Down Value u/s. 43(6) of the Act. He further referred to Explanation 7 which is in relation to Scheme of Amalgamation and held that the ld. AO has incorrectly allowed depreciation to the assessee on goodwill. In fact, Explanation 7 applies to the transaction of amalgamation with respect to the assets acquired. The provisions of section 43(6)(c)(i)(C) applies. The ld. PCIT thus was incorrect in considering the purchase of business by slump sale with the transaction of amalgamation. Therefore, the basic premise on which the provisions of section 263 of the Act are initiated by the ld. PCIT itself is incorrect. On this issue itself, on this ground, the revisionary order is not sustainable.
14. Further, the order of the ld. PCIT itself refers to several decisions of the High Court and Coordinate Benches which show that there may be conflicting decisions or possible two plausible views on the issue of allowance of goodwill in such kind of transaction. Thus, on the issue where there may be possibly two conceivable opinions and the AO adopts one of them, it cannot be said that such order is erroneous so far as it is prejudicial to the interests of the Revenue. Thus, in such a situation, the jurisdiction of the revisionary authority cannot be allowed.
15. Thus, we hold that on this issue, the order of the ld. PCIT in holding that the ld. AO allowing depreciation on goodwill in slump sale transaction is erroneous and prejudicial to the interests of the Revenue is not sustainable.
16. On the second issue of certain professional charges paid to various firms for the purposes of valuation, legal fees, structuring and consulting fee of Rs.2.56 Crores allowed by the ld. AO considering them as revenue expenditure, but the Id. PCIT was of the view that this expenditure is capital in nature. The ld. PCIT in para 12 of his order has only in one line has given his decision that allowing these expenditure without carrying out necessary verification makes the assessment order erroneous. However, we find that where the assessee pays such kind of fees, the Hon’ble Supreme Court has held that acquisition of a company for necessary and smooth conduct of the assessee’s business incurring certain expenditure towards professional charges is services rendered in connection with amalgamation was incurred on carrying on of assessee’s business and therefore allowable as a revenue expenditure. Such was the mandate of the Hon’ble Supreme Court in the case of CIT v. Bombay Dyeing Mfg. Co. Ltd., 219 ITR 521.
17. In the decision of the Coordinate Bench in the case of Genpact Services LLC relied upon by the ld. DR, we find that the decision of the Hon’ble Supreme Court was not at all considered and further that decision also recorded a fact that assessee was never into the business of debt collection and service business. In the case before us, the assessee is also manufacturing and selling PET plastic performs and containers which has acquired the business of National Plastics which is also in the manufacturing of spraying and dispensing systems. Thus, the decision relied upon by the ld. DR does not support the case of the Revenue.
18. In view of the above facts, we hold that the revisionary order passed u/s. 263 of the Act dated 31.3.2025 for AY 2020-21 is not sustainable and hence quashed.
19. Accordingly the appeal of the assessee is allowed.
Order pronounced in the open court on 15th June, 2026.
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