Netscout Systems Industrial Private Limited Vs DCIT (ITAT Mumbai Bench)
Section 32(1)(Ii): Goodwill Bought For ₹1—When Excess Liabilities Are The Real Price, The Balancing Figure Is Not An Imaginary Asset
Going concern acquired for a token ₹1
The assessee, engaged in software design, development & technical support, acquired the business of Tektronix India Pvt. Ltd., an unrelated party, as a going concern under a Business Transfer Agreement dated 10.07.2015.
The transaction was structured as a slump sale for a lump-sum consideration of ₹1, without assigning separate values to the individual assets & liabilities.
Upon consolidating the assets & liabilities taken over, the liabilities exceeded the assets by ₹2,19,37,364. The assessee recognised this difference as goodwill in its books & claimed depreciation at 25% amounting to ₹54,84,341 u/s 32(1)(ii).
AO calls goodwill a mechanical balancing entry
The AO disallowed depreciation because the BTA did not assign any specific value to goodwill or other individual assets.
According to him, goodwill represented merely a mechanically derived balancing figure arising from excess liabilities. No separate valuation exercise had identified customer contracts, licences, know-how or other commercial rights.
The AO relied principally upon the first-round decision in DCIT v. Toyo Engineering India Ltd., together with R.G. Keswani v. ACIT & United Breweries Ltd.
He distinguished CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC) on the ground that Smifs concerned amalgamation involving payment of actual consideration exceeding the book value of net assets, whereas the present goodwill allegedly arose from a self-generated accounting entry.
The CIT(A) endorsed this reasoning & also enhanced the book profit u/s 115JB by the same amount of ₹54.84 lakh.
The precedent supporting the disallowance had itself disappeared
Before the ITAT, the assessee pointed out that the first-round order in Toyo Engineering, on which the lower authorities had placed primary reliance, had been quashed by the Bombay High Court on 30.10.2012.
The High Court restored the matter to the Tribunal for fresh adjudication. In the second round, the Tribunal followed Smifs Securities & allowed depreciation on goodwill, observing that Revenue had not established that the claim was non-genuine.
The Tribunal in the present case observed that a disallowance could not survive upon a precedent which had been set aside by the jurisdictional High Court & reversed on remand.
The very foundation used to distinguish Smifs Securities had therefore ceased to exist.
Excess liabilities were the real economic consideration
The ITAT placed particular reliance upon Gati Kintetsu Express Pvt. Ltd. v. DCIT, ITA Nos. 2829 to 2833/Mum/2023, dated 13.05.2024.
In that case, a going-concern business was acquired without payment of separately stated monetary consideration. The liabilities assumed exceeded the assets taken over & the excess was recorded as goodwill.
The Coordinate Bench held that assumption & subsequent discharge of excess liabilities constituted real economic consideration for acquiring the business, its goodwill & bundle of commercial rights.
The absence of a conventional cash price did not mean that the undertaking was acquired free of cost. Taking over liabilities beyond the value of assets imposes a genuine economic burden upon the transferee.
The present case was materially identical. The assessee acquired not merely isolated assets but the operating business of Tektronix India together with its business information, contracts, records, trained workforce, commercial connections & other advantages of a functioning enterprise.
The excess liabilities taken over represented consideration for that composite bundle.
A slump sale cannot be faulted for being a slump sale
The Revenue argued that the BTA did not allocate individual values to the assets, liabilities or commercial rights acquired.
The ITAT observed that non-allocation is inherent in the nature of a slump-sale transaction, where an undertaking is transferred for a lump-sum price without assigning independent values to its components.
The absence of individual valuation could not, by itself, reduce the resultant goodwill to a fictitious book entry.
The Tribunal also drew support from I & B Seeds Pvt. Ltd. v. DCIT, Thermo Fisher Scientific India Pvt. Ltd. v. DCIT & ACIT v. Dorma India Pvt. Ltd., which recognised that goodwill arising from the excess of consideration or liabilities over the value of tangible assets represents acquired business or commercial rights eligible for depreciation.
The Tribunal further noted that the Finance Act, 2021 amendment excluding goodwill from depreciable intangible assets operates prospectively from AY 2021-22. TaxGuru’s Finance Act 2021 material records the amendment to section 32.
Finance Act, 2021 cannot travel back to AY 2016-17
The Finance Act, 2021 amended section 32 to exclude goodwill from depreciable intangible assets.
However, the amendment operates prospectively from AY 2021-22. It has no application to AY 2016-17.
For the year under appeal, the law declared in Smifs Securities continued to apply. Goodwill representing acquired commercial rights therefore remained an intangible asset eligible for depreciation u/s 32(1)(ii).
The ITAT consequently allowed depreciation of ₹54,84,341 on goodwill of ₹2.19 crore.
MAT addition falls with the normal disallowance
The enhancement of book profit u/s 115JB was made solely as a consequence of disallowing depreciation under the normal provisions.
Once the Tribunal held that depreciation was legally allowable, the very basis of the corresponding MAT adjustment disappeared.
The AO was directed to recompute book profit u/s 115JB without adding ₹54.84 lakh.
TDS credit follows the income—not Form 26AS timing
The assessee also claimed TDS credit of ₹71,94,612, reflected in Form 26AS for AY 2017-18, although the corresponding income had accrued & was offered to tax in AY 2016-17.
The ITAT held that section 199 requires TDS credit to be granted in the year in which the corresponding income is assessable, irrespective of the year in which the deductor reported the tax, subject to factual verification.
The issue was restored to the AO to verify the return, books & Form 26AS. If the income was taxed in AY 2016-17, the corresponding TDS credit was directed to be granted in that year.
Decision
The ITAT held that goodwill of ₹2,19,37,364 arising from the going-concern acquisition represented genuine business & commercial rights acquired against the economic consideration of excess liabilities assumed.
Depreciation of ₹54,84,341 u/s 32(1)(ii) was allowed, the consequential MAT addition was deleted & the TDS-credit issue was restored for limited verification.
Cases D`iscussed
- DCIT v. Toyo Engineering India Ltd., ITA No. 3279/Mum/2008.
- CIT v. Smifs Securities Ltd., 348 ITR 302 (SC).
- Gati Kintetsu Express (P.) Ltd. v. DCIT, ITA Nos. 2829 to 2833/Mum/2023, order dated 13.05.2024.
- I & B Seeds (P.) Ltd. v. DCIT, [2022] 142 taxmann.com 274 (Bangalore-Trib.).
- Thermo Fisher Scientific India (P.) Ltd. v. DCIT, [2023] 155 taxmann.com 346 (Mumbai-Trib.).
- ACIT v. Dorma India (P.) Ltd., ITA Nos. 1664 to 1666/Chny/2019, order dated 20.11.2019.
- R.G. Keswani v. ACIT, (2009) 116 ITD 133 (Mum).
- United Breweries Ltd., [2016] 76 taxmann.com 103 (Bang.).
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 20.01.2026 passed by the learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi [“CIT(A)-NFAC”] under section 250 of the Income-tax Act, 1961 [“the Act”], arising out of the assessment order dated 22.12.2018 passed under section 143(3) of the Act for Assessment Year 2016-17, whereby the claim of depreciation of Rs. 54,84,341/- on goodwill has been disallowed, the resultant book profit under section 115JB has been enhanced by an identical amount.
2. The assessee has raised the following grounds of appeal, which, for convenience, are reproduced in substance:
(i) “General ground challenging the addition of Rs. 54,84,341/- and computation of total income at Rs. 9,25,66,541/- as against the returned income of Rs. 8,70,82,200/-.
(ii) That the CIT(A)-NFAC erred in confirming disallowance of depreciation of Rs. 54,84,341/- (being 25% of Rs. 2,19,37,364/-, representing excess of liabilities over assets) by not treating the said excess, arising on acquisition of the business of Tektronix India Private Limited (an unrelated party) on a going-concern basis under a Business Transfer Agreement [“BTA”] dated 10.07.2015, as an intangible asset eligible for depreciation under section 32(1)(ii) of the Act.
(iii) Alternatively and without prejudice to ground (ii), that the CIT(A)-NFAC erred in not allowing a revenue deduction of Rs. 96,84,272/- (being the difference between the adjusted goodwill of Rs. 2,19,37,363/- and the original goodwill of Rs. 1,22,53,090/-) representing non-recoverable current assets/excess liabilities relatable to the business of Tektronix India Private Limited.
(iv) That the CIT(A)-NFAC erred in confirming the enhancement of book profit under section 115JB of the Act by Rs. 54,84,341/- being the depreciation so disallowed.
(v) That the CIT(A)-NFAC erred in denying credit for TDS of Rs. 71,94,612/- reflected in Form 26AS for A.Y. 2017-18, even though the corresponding income had accrued and was offered to tax in A.Y. 2016-17, and such credit ought to have been allowed for A.Y. 2016-17 read with sections 198 and 199 of the Act.”
3. Brief facts of the case are that the assessee, engaged in the business of software design, development and technical support, e-filed its return of income on 30.11.2016 declaring total income of Rs. 8,70,82,200/-. The case was selected for scrutiny under CASS and assessed under section 143(3) of the Act. During the year, the assessee had acquired the business of Tektronix India Private Limited on a going-concern, slump-sale basis under the BTA dated 10.07.2015, for a lump-sum consideration of Re. 1/-, without assigning values to individual assets and liabilities. Upon consolidation of the net assets and liabilities taken over, the assessee recorded goodwill of Rs. 2,19,37,364/- in its books, being the excess of liabilities over assets taken over, and claimed depreciation thereon at 25% amounting to Rs. 54,84,341/- under section 32(1)(ii) of the Act.
4. The Assessing Officer disallowed the claim principally on the ground that (a) the BTA at clause 2.4 records the transfer as a slump sale for lump-sum consideration “without values being assigned to individual assets and liabilities”, so that no specific valuation was ever ascribed to goodwill; (b) relying on DCIT v. Toyo Engineering India Ltd., ITA No. 3279/Mum/2008 (order dated 25.05.2012), R.G. Keswani v. ACIT (2009) 116 ITD 133 (Mum) and United Breweries Ltd. [TS-553-ITAT-2016 (Bang)], the AO held that in the absence of a specific valuation exercise, the goodwill so recorded was a mere book entry and not a “business or commercial right” within the meaning of section 32(1)(ii); and (c) the decision of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd., (2012) 348 ITR 302 (SC) was distinguished on facts, since that case arose from amalgamation where actual consideration exceeding book value of net assets had been paid, whereas in the present case the AO viewed the goodwill as a mechanically derived balancing figure.
5. In appeal, the learned CIT(A)-NFAC, vide the impugned order, confirmed the disallowance for the same reasons as the AO, holding (at paragraph 8) that the difference between liabilities taken over and book value of assets is only a balancing figure and not a “business or commercial right” acquired at cost, that Toyo Engineering India Ltd. (as relied upon by the AO) and R.G. Keswani (supra) squarely applied, and that Smifs Securities Ltd. (supra) was factually distinguishable as it did not deal with a self-generated balancing entry of this nature. The CIT(A)-NFAC also rejected the alternative claim for revenue deduction of Rs. 96,84,272/- (ground iii above) holding that the write-off of pre-BTA receivables and adjustment of liabilities were capital in character, going to the cost of the goodwill/business acquired, and that the conditions of section 36(1)(vii) read with section 36(2) were not satisfied since the relevant debts had never been credited to the assessee’s own income. Consequentially, at paragraph 9, the enhancement of book profit under section 115JB by the disallowed depreciation was also upheld, following Apollo Tyres, on the footing that once depreciation is held inadmissible under the normal provisions, Explanation 1 to section 115JB mandates its add-back to book profit.
6. Before us, the learned Authorised Representative (“ld.AR”) for the assessee, while reiterating the submissions made before the lower authorities, made an important additional submission bearing directly on the very decision on which both the AO and the CIT(A)-NFAC have placed sole reliance for treating the goodwill as a mere book entry, namely, DCIT v. Toyo Engineering India Ltd. (ITA No. 3279/Mum/2008, order dated 25.05.2012). It was submitted that the said order of the Tribunal was carried in appeal by the assessee therein before the Hon’ble Bombay High Court, and the Hon’ble High Court, vide its order dated 30.10.2012 in Income Tax Appeal (L) No. 1330 of 2012, quashed and set aside the order of the Tribunal dated 25.05.2012 on the goodwill issue and restored the matter to the file of the Tribunal for fresh decision on merits and in accordance with law. On remand, the Tribunal, in the second round, following the ratio of the Hon’ble Supreme Court in Smifs Securities Ltd. (supra), decided the issue of allowability of depreciation on goodwill in favour of the assessee, holding that the Revenue had not brought any material to show that the claim of depreciation was not genuine, and that the difference between book value of assets and liabilities transferred was liable to be treated as goodwill eligible for depreciation.
6.1 The learned AR accordingly submitted that the very foundation on which the AO and the CIT(A)-NFAC have distinguished Smifs Securities Ltd. (supra) and disallowed the claim, namely, the first-round order in Toyo Engineering India Ltd., no longer survives, having been quashed by the jurisdictional High Court and reversed by the Tribunal itself on remand. The learned AR placed particular and pointed reliance on the decision of the Coordinate Bench of this Tribunal at Mumbai in Gati Kintetsu Express (P.) Ltd. v. DCIT, ITA Nos. 2829 to 2833/Mum/2023, order dated 13.05.2024, submitting that the facts of that case are similar to the facts of this case before us: there too, the Business Transfer Agreement did not provide for payment of consideration by the assessee to the transferor, and the liabilities taken over by the assessee exceeded the assets of the undertaking taken over, giving rise to a negative net worth recorded as goodwill/intangible assets. It was submitted that the Tribunal, at paragraph 11 of its order, specifically rejected the very objection raised by the AO and the CIT(A)-NFAC in the present case namely, that absence of stated consideration under the BTA renders the goodwill a mere book entry holding that discharge of the excess liability taken over is itself in the nature of consideration for the business and commercial rights, including goodwill, acquired under the BTA.
6.2 In addition, and in support of the same conclusion, the learned AR relied on the following decisions:
(a) I & B Seeds (P.) Ltd. v. DCIT, [2022] 142 taxmann.com 274 (Bangalore-Trib.) — negative net worth arising on slump sale, and holding that the amendment to section 32 by the Finance Act, 2021 excluding goodwill from depreciable assets operates only prospectively from A.Y. 2021-22;
(b) Thermo Fisher Scientific India (P.) Ltd. v. DCIT, [2023] 155 taxmann.com 346 (Mumbai-Trib.) — depreciation on goodwill generated on slump sale;
(c) ACIT v. Dorma India (P.) Ltd., ITA Nos. 1664 to 1666/Chny/2019, order dated 20.11.2019 (ITAT-Chennai) — holding that excess payment made over the net tangible assets acquired under a slump-sale agreement is attributable to intangible assets acquired and is to be treated as goodwill eligible for depreciation.
6.3 The learned Departmental Representative (“ld.DR”), on the other hand, supported the orders of the authorities below and submitted that the BTA in the present case admittedly did not assign any value to individual assets or liabilities, that the consideration was a token Rs. 1/- , and that in the absence of a valuation exercise ascribing a specific value to any identifiable commercial right (customer contracts, licences, know-how, etc.), the goodwill was rightly treated as a book entry not eligible for depreciation.
7. We have heard the rival submissions and perused the material on record, including the assessment order, the order of the CIT(A)-NFAC, the BTA dated 10.07.2015, and the decisions cited.
7.1 It is not in dispute that the assessee acquired the going concern business of Tektronix India Private Limited, an unrelated party, under the BTA dated 10.07.2015, and that upon consolidation of the assets and liabilities taken over, the assessee recognized goodwill of Rs. 2,19,37,364/- in its books, representing the excess of liabilities over the book value of assets taken over, and claimed depreciation thereon at Rs. 54,84,341/-. The entire edifice of the disallowance rests on the proposition, borrowed principally from the first round decision of this Tribunal in DCIT v. Toyo Engineering India Ltd. (ITA No. 3279/Mum/2008, order dated 25.05.2012), that goodwill computed as a balancing figure, without a specific valuation exercise, is a “mere book entry” incapable of supporting a claim for depreciation under section 32(1)(ii).
7.2 As noticed above, that very decision was quashed by the Hon’ble Bombay High Court vide order dated 30.10.2012 in Income Tax Appeal (L) No. 1330 of 2012, and the matter was restored to the file of the Tribunal for fresh adjudication. On remand, the Tribunal after considering the ratio of the Hon’ble Supreme Court in Smifs Securities Ltd. (supra) decided the very same issue in favour of the assessee, holding that the Revenue had not placed any material to show that the goodwill was not genuine or that it was not eligible for depreciation. Since the decision relied upon by the AO and the CIT(A)-NFAC as the principal plank for distinguishing Smifs Securities Ltd. (supra) has itself been reversed in the manner set out above, the foundation of the disallowance no longer survives. It would, in our view, be incongruous to sustain a disallowance built upon a precedent that has since been set aside by the jurisdictional High Court and reversed by this very Tribunal on remand.
7.3 We attach particular importance, however, to the decision of the Coordinate Bench of this Tribunal at Mumbai in Gati Kintetsu Express (P.) Ltd. v. DCIT (ITA Nos. 2829 to 2833/Mum/2023, order dated 13.05.2024), since it meets the precise objection raised by the AO and the CIT(A)-NFAC in the present case more directly than any of the other decisions cited before us. In that case, as recorded at paragraph 9 of the order, the Business Transfer Agreement dated 13.02.2012, under which the assessee acquired the express distribution and supply chain business of Gati Ltd. on a going-concern basis, “did not provide for payment of consideration” by the assessee to the transferor; the liabilities taken over by the assessee were in excess of the assets of the undertaking, and the assessee treated this excess of liability over assets, amounting to Rs. 125.06 crores, as goodwill/intangible assets and claimed depreciation thereon. Both the AO and the CIT(A) in that case disallowed the claim on the ground, materially identical to the ground taken by the authorities below in the present case, that no monetary consideration had been paid and that the amount was nothing but an accounting entry to the surplus liabilities received.
7.4 Dealing with this objection at paragraph 11 of its order, the Coordinate Bench held that it did not agree with the allegation of the lower authorities that no consideration had been paid for acquiring the intangibles, including the business and commercial rights and goodwill. The Tribunal found that the assessee had acquired liabilities in excess of the assets, that this excess liability was discharged by the assessee over subsequent years, and that the liability so discharged and paid was in the nature of consideration for acquiring the intangible business and commercial rights and goodwill. In other words, the absence of a stated monetary consideration in the transfer agreement was held not to be determinative; the assumption, and subsequent discharge, of liabilities in excess of the assets taken over was itself recognised as real economic consideration passing for the going concern, including its goodwill. The Coordinate Bench accordingly set aside the disallowance and directed the AO to allow depreciation on the goodwill so recorded.
7.5 The parallel with the facts before us is direct and, in our view, decisive. Here too, the BTA dated 10.07.2015 does not provide for any real monetary consideration, the stated consideration being a token Re. 1/- and the goodwill of Rs. 2,19,37,364/- has arisen solely because the liabilities taken over by the assessee under the BTA exceeded the assets taken over. Applying the ratio in Gati Kintetsu Express (P.) Ltd. (supra), the assumption of this excess liability by the assessee, in consideration of acquiring the goingconcern business of Tektronix India Private Limited together with its business and commercial rights, is itself in the nature of consideration for the goodwill so recorded; the mere absence of a separately stated monetary consideration, or of a clause in the BTA assigning individual values to assets and liabilities, cannot by itself reduce the goodwill so arising. Being a decision of a Coordinate Bench of this very Tribunal at Mumbai on facts that are materially indistinguishable from those before us, we respectfully follow the ratio of Gati Kintetsu Express (P.) Ltd. (supra) on this issue.
7.6 We are also of the view that the mere fact that the BTA, being structured as a slump sale, does not assign values to individual assets and liabilities cannot, without more, be a ground to treat the resultant goodwill as ineligible for depreciation. That, indeed, is the very nature of a slump sale, and the decisions in I & B Seeds (P.) Ltd. (supra), Thermo Fisher Scientific India (P.) Ltd. (supra) and Dorma India (P.) Ltd. (supra) — each concerned with goodwill computed as the excess of liabilities over assets, or of consideration over net tangible assets, taken over under a slump-sale/business transfer agreement lend further, corroborative support to the same conclusion, holding that such goodwill represents the value of the bundle of business and commercial rights (business claims, business information, records, contracts, trained workforce and the like) acquired along with the tangible assets, and is eligible for depreciation under section 32(1)(ii) as “any other business or commercial right of a similar nature”, applying the ratio of Smifs Securities Ltd. (supra). We further note that the Co-ordinate Bench in I & B Seeds (P.) Ltd. (supra) has held that the amendment to section 32(1) by the Finance Act, 2021 excluding goodwill from the block of depreciable intangible assets operates only prospectively, with effect from A.Y. 2021-22, and has no application to A.Y. 2016-17, being the year under appeal before us.
7.7 We find that the decisions relied upon by the lower authorities, R.G. Keswani v. ACIT (supra) and United Breweries Ltd. (supra) proceed substantially on the same reasoning as the first-round order in Toyo Engineering India Ltd. (supra), namely, absence of individual valuation or stated consideration renders goodwill a mere book entry; that reasoning, for the reasons discussed above and in light of the ratio in Gati Kintetsu Express (P.) Ltd. (supra), does not survive. We are, therefore, unable to sustain the disallowance on the basis of these decisions.
7.8 We accordingly hold that the goodwill of Rs. 2,19,37,364/- arising to the assessee on acquisition of the business of Tektronix India Private Limited under the BTA dated 10.07.2015 on a goingconcern, slump-sale basis, is an intangible asset eligible for depreciation under section 32(1)(ii) of the Act, and the depreciation of Rs. 54,84,341/- claimed thereon is allowable. Ground Nos. (i) and (ii) raised by the assessee are allowed.
7.9 Ground No. (iii), being raised only in the alternative and without prejudice to ground (ii), does not survive for adjudication in view of our findings above, and is accordingly dismissed as infructuous.
8. Ground No. (iv) — enhancement of book profit under section 115JB: Since we have deleted the disallowance of depreciation of Rs. 54,84,341/- under the normal provisions of the Act, the very basis for the corresponding addition to book profit under Explanation 1 to section 115JB which was made consequential to, and only for the reason of, the disallowance under the normal provisions, no longer survives. The AO is directed to recompute the book profit under section 115JB without the addition of Rs. 54,84,341/-. Ground No. (iv) is allowed.
9. Ground No. (v) — TDS credit of Rs. 71,94,612/-: The assessee’s grievance is that credit for TDS of Rs. 71,94,612/- reflected in Form 26AS for A.Y. 2017-18 has been denied for A.Y. 2016-17, even though the corresponding income was offered to tax in A.Y. 2016-17. Section 199 of the Act read with the applicable Rules requires that credit for tax deducted at source be given for the assessment year in which the corresponding income is assessable, irrespective of the year in which the deductor has reported the deduction in Form 26AS, provided the assessee is able to establish that the income has in fact been offered to tax in the year for which credit is claimed. Since this requires verification of facts, we restore this ground to the file of the AO with a direction to verify, from the return of income, books of account and Form 26AS, whether the income corresponding to the TDS of Rs. 71,94,612/- has been offered to tax by the assessee in A.Y. 2016-17, and, if so found, to allow credit for the said TDS in A.Y. 2016-17 in accordance with sections 198 and 199 of the Act and the Rules made there under, after affording the assessee a reasonable opportunity of being heard. Ground No. (v) is allowed for statistical purposes.
10. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 08.09.2026.
