ITAT Kolkata Allows Tata Consumer’s Goodwill and Brand Depreciation

Tata Consumer Products Limited Vs ACIT (ITAT Kolkata)

Goodwill Arising on Demerger Eligible for Depreciation Before AY 2021-22: Brands and Distribution Network Also Qualify

Facts and controversy

Tata Consumer Products Limited challenged an assessment framed pursuant to directions of the Dispute Resolution Panel. The principal dispute concerned depreciation on goodwill, brands and distribution network acquired through the demerger of Tata Chemicals Limited’s consumer products business. Other issues involved disallowance under section 14A and consideration of a deduction under section 80G.

Under an NCLT-sanctioned scheme, the consumer products undertaking vested in the assessee as a going concern with effect from 1 April 2019. The assessee issued shares having an aggregate fair value of ₹6,098.87 crore to Tata Chemicals’ shareholders as consideration.

A merchant banker’s purchase-price allocation identified brands and distribution network valued at ₹2,459.01 crore. After deducting these amounts and the value of net tangible assets from the consideration, ₹3,562.41 crore was recognised as goodwill. The assessee claimed depreciation of ₹890.60 crore on goodwill and ₹614.76 crore on brands and distribution network.

These intangible assets had not been recorded in the demerged company’s books or included in its block of assets. Their valuation and acquisition for consideration were not disputed.

Revenue’s objections

The Assessing Officer maintained that restructuring should remain tax neutral and that depreciation could be allowed only with reference to assets and written down values already appearing in the transferor’s records.

The Revenue relied on the sixth proviso to section 32(1), Explanation 7A to section 43(1), and Explanation 2B to section 43(6). It argued that, since the transferor’s cost was nil, the resulting company could not claim depreciation on newly recognised values.

Reliance was also placed on United Breweries Ltd. v. Additional CIT, (2016) 76 taxmann.com 103 (Bangalore-Trib.), and the Finance Act, 2021 amendments excluding goodwill from depreciation. During the hearing, the Revenue additionally characterised the claim as involving tax evasion or leakage.

Tribunal’s reasoning on depreciation

The Tribunal distinguished assets already forming part of the demerged company’s depreciable block from intangible assets first recognised upon acquisition of the undertaking for consideration.

It held that the statutory provisions cited by the Revenue governed continuity of cost, written down value and allocation of depreciation for assets belonging to the transferor’s block. They did not govern the newly recognised intangibles in this case. Once those restrictions were found inapplicable, depreciation fell to be considered under the ordinary provisions of sections 32 and 43.

The Tribunal also rejected the proposition that the transferee’s depreciation depended upon the transferor paying capital gains tax. Such a condition could not be read into the statute merely because a qualifying demerger enjoyed capital gains neutrality.

Following CIT v. Smifs Securities Ltd., (2012) 348 ITR 302 (SC), the Bench held that its principle extended to goodwill arising on demerger. The Revenue could not disregard a binding Supreme Court judgment by asserting that particular statutory provisions had not been considered.

United Breweries was distinguished because that case concerned revaluation of goodwill already recorded in the amalgamating company’s books. Here, the goodwill arose upon demerger and had not formed part of the transferor’s block.

The Tribunal referred to supporting decisions, including Zydus Wellness, Aculife Healthcare, Mylan Laboratories and Takraf India. It held that the Finance Act, 2021 exclusion of goodwill from depreciation operated from AY 2021-22, leaving the earlier position undisturbed. That exclusion did not extend to other qualifying intangible assets such as brands and distribution network.

The belated allegation of tax evasion was also rejected. The commercial rationale had not been challenged during assessment, and the Assessing Officer had not invoked Explanation 3 to section 43(1) to substitute actual cost.

Section 14A and section 80G

The assessee earned exempt dividend income of ₹19.36 crore and voluntarily disallowed ₹62.16 lakh. The Assessing Officer applied Rule 8D and made a further disallowance of ₹8.82 crore.

The Tribunal held that the 2016 amendment to Rule 8D changed the formula, not the requirement to record cogent dissatisfaction with the assessee’s computation having regard to its accounts. Merely stating that the computation did not follow Rule 8D was insufficient. The additional disallowance was deleted, retaining the voluntary amount.

The section 80G claim of ₹7,12,68,956, disclosed in the return schedules, computation and tax audit report but not claimed in Part B-TI because of losses, was remanded to the Assessing Officer for consideration in accordance with law.

Author’s comments

The decision’s central distinction is between revaluing an existing depreciable asset and recognising an acquired intangible supported by consideration and valuation. It should therefore not be read as permitting unrestricted enhancement of depreciable values in every demerger.

For goodwill, the relief is expressly confined to AY 2020-21, before the statutory exclusion became effective. For separately identified brands and distribution rights, the order emphasises their independent character. Careful identification, valuation and purchase-price allocation remain crucial.

The section 14A ruling is equally practical: Rule 8D supplies a computation mechanism only after the statutory dissatisfaction requirement is met. The depreciation claims and additional section 14A disallowance were decided in the assessee’s favour; only the section 80G issue required fresh consideration.

Cases Discussed

• CIT v. Smifs Securities Ltd., (2012) 348 ITR 302 (Supreme Court) — Followed. Goodwill was recognised as an intangible asset eligible for depreciation under Section 32 for the relevant period.
• PCIT v. Aculife Healthcare (P.) Ltd., (2025) 181 taxmann.com 587 (Supreme Court) — Relied upon. The Supreme Court dismissed the Revenue’s SLP concerning depreciation on goodwill arising upon demerger.
• PCIT v. Aculife Healthcare (P.) Ltd., (2025) 477 ITR 392 (Gujarat High Court) — Relied upon. Depreciation on goodwill arising upon demerger was upheld following Smifs Securities.
• Asian Paints Ltd. v. ACIT, 2026 (6) TMI 1339 (Bombay High Court) — Relied upon. The Finance Act, 2021 amendment excluding goodwill from depreciation was held applicable from AY 2021-22.
• PCIT v. Carolina Food and Industries (P.) Ltd., (2025) 172 taxmann.com 44 (Calcutta High Court) — Cited. Relied upon by the assessee in support of depreciation on intangible assets.
• PCIT v. Zydus Wellness Ltd., (2017) 87 taxmann.com 82 (Gujarat High Court) — Followed. Depreciation on goodwill arising from amalgamation was allowed following Smifs Securities.
• Mylan Laboratories Ltd. v. ACIT, (2022) 137 taxmann.com 178 (Telangana High Court) — Relied upon. The High Court declined to admit the Revenue’s appeal concerning goodwill depreciation.
• PCIT v. West Bengal Infrastructure Development Finance Corporation Ltd., (2022) 143 taxmann.com 135 (Calcutta High Court) — Followed. Section 14A disallowance requires the Assessing Officer to record dissatisfaction with the assessee’s computation before applying Rule 8D.
• United Breweries Ltd. v. Additional CIT, (2016) 76 taxmann.com 103 (ITAT Bangalore) — Distinguished. Concerned revaluation of goodwill already recorded in the transferor’s books, unlike goodwill newly recognised upon demerger.
• DCIT v. Indian Cable Net Co. Ltd., 2026 (5) TMI 42 (ITAT Kolkata) — Followed. Allowed depreciation on goodwill arising upon amalgamation.
• Takraf India Pvt. Ltd. v. ACIT, I(TP)A No. 37/Chny/2024 (ITAT Chennai), dated 04.12.2024 — Relied upon. Allowed depreciation on goodwill arising upon demerger.
• Dow Chemical International Pvt. Ltd. v. DCIT, 2024 (11) TMI 1301 (ITAT Mumbai) — Relied upon. Allowed depreciation on goodwill, distribution network and customer relationships arising upon amalgamation.
• Vodafone India Services Pvt. Ltd. v. DCIT, 2024 (2) TMI 519 (ITAT Mumbai) — Relied upon. Treated the Finance Act, 2021 exclusion of goodwill from depreciation as prospective.
• Trivitron Healthcare (P.) Ltd. v. PCIT, (2023) 146 taxmann.com 130 (ITAT Chennai) — Relied upon. Upheld depreciation on goodwill arising upon amalgamation and rejected revision under Section 263.
• ACIT v. FLSmidth (P.) Ltd., (2026) 183 taxmann.com 761 (ITAT Chennai) — Relied upon. Allowed depreciation on goodwill arising upon amalgamation after considering statutory restrictions.
• Mylan Laboratories Ltd. v. DCIT, (2020) 113 taxmann.com 6 (ITAT Hyderabad) — Followed. Allowed depreciation on goodwill arising upon amalgamation and distinguished United Breweries.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This is an appeal preferred by the assessee against the assessment order dated 27.06.2024 for assessment year 2020-21 passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (hereafter referred to as “the Act”) passed after directions of the Ld. DRP dated 19.06.2024 under section 144C(5) of the Act.

2. The first issue is against the disallowance of ₹ 8,82,00,000 under section 14A read with rule 8D of the Income Tax Rules, 1962 (“Rules”).

3. The facts in brief are that in the impugned financial year 2019-20, the assessee had earned dividend income of Rs.19.36 crores which was claimed as exempt under section 10(34). The assessee suo mottu apportioned and disallowed Rs.62,16,000 under section 14A of the Act as expenses relating to earning of exempt income. During the assessment proceedings, the assessee explained the basis of the apportionment vide submissions dated 16.01.2023 and 27.09.2023 before the AO, but in the draft assessment order, the AO worked out the disallowance at Rs.9,44,16,000 by applying rule 8D(2)(ii) and after deducting the suo moto disallowance of Rs.62,16,000,the AO proposed to make further disallowance of Rs.8,82,00,000.

4. The assessee raised its objections before the Ld. DRP but the Ld. DRP held that it was mandatory to compute the disallowance under section 14A as per rule 8D and that as per the amendment made to rule 8D in 2016, the AO no longer had the discretionary power to determine the disallowance on the basis of facts and circumstances of the case. In the final assessment order dated 27.06.2024 passed after Ld. DRP’s direction, the AO disallowed Rs.8,82,00,000 as proposed in the draft assessment order.

5. The Ld. AR submitted that the assessee is a listed company and its employees and infrastructure were involved in trading, production and distribution of tea, coffee, water, etc. Most of the investments of the assessee were strategic investments in group companies out of business expediency for the purpose of expansion of business and not with the objective of trading or earning capital gains or dividend. Such investments were mostly made in earlier years from the assessee’s own funds. The shares in all the six companies, namely Tata Investment Corporation Ltd., Tata Chemicals Ltd., Tata Sons Ltd., Assam Hospital Ltd., Tata Coffee Ltd., and Kanan Devan Hills Plantations Company (Pvt.) Ltd. from which the assessee had received dividend which is exempt under section 10(34) were coming over from earlier years at a cost of Rs. 189.00 crore and the only change was that the assessee sold its shareholding in Tata Chemicals Ltd. during the previous year and paid capital gains tax in terms of section 112A in respect thereof. The only change in respect of the assessee’s other domestic equity investments from which no dividend was received was investment of a further sum of Rs.53.00 crores in Tata Starbucks Pvt. Ltd., a 50:50 joint venture. The Ld. AR submitted that no direct expenses were incurred by the assessee for the purpose of earning dividend falling under section 10(34).The Ld. AR submitted that only some of the assessee’s employees had devoted a part of their time on its investments related work and that the assessee apportioned Rs.62,16,000 out of employee costs as attributable to management of the investments for the purpose of disallowance under section 14A. The assessee’s basis and working with respect to the amount to be disallowed under section 14A was approved by its tax auditors in their report. The Ld. AR submitted that the AO erred in holding that the assessee’s disallowance was not satisfactory because it was not as per rule 8D and the Ld. DRP also in error in proceeding on the basis as if it was mandatory to compute the disallowance as per amended rule 8D. It was submitted that before applying the formula in rule 8D, the AO had to consider the accounts of the assessee and give cogent reasons as to why he was not satisfied as to the correctness of the claim of the assessee in respect of expenditure incurred in relation to the non-taxable income. Reliance in this behalf was placed on the decision of the Hon’ble Calcutta High Court in PCIT v West Bengal Infrastructure Development Finance Corporation Ltd., (2022) 143 taxmann.com 135 (Cal). The AO had not given any reason as to why the assessee’s apportionment was not satisfactory and that the assessee’s working was not as per rule 8D cannot constitute any reason for rejecting the assessee’s apportionment. The Ld. AR submitted that amendment made in rule 8D in 2016 had not done away with the requirement that the AO must record his dissatisfaction with respect to the assessee’s claim before proceeding to apply rule 8D(2). It was submitted that a similar course of action was adopted by the AO in the assessee’s case for AY 2009-10 and the disallowance made in the assessment was deleted by the Ld. Tribunal in ITA No. 1869/Kol/2014. Appeal filed under section 260A before the Hon’ble Jurisdictional High Court, being ITAT 327 of 2018 was dismissed by the Hon’ble Calcutta High Court by its order dated 25.02.2019. The Ld. AR submitted that the Ld. Tribunal has followed its decision for AY 2009-10 in the assessee’s case for AY 2012-13 and 2013-14.

6. Per contra, the Ld. DR submitted that the AO duly recorded his dissatisfaction with the assessee’s suo moto disallowance and had correctly applied rule 8D(2)(ii). It was submitted that the decisions relied upon on behalf of the assessee dealt with the provisions of rule 8D prior to its amendment in 2016 and as such were not applicable. He relied upon the assessment order and DRP’s directions.

7. We have heard both the parties and perused the materials on record. We note that Sub-section (2) of section 14A expressly stipulates that the AO can resort to the method prescribed by the Rules only if he is not satisfied with the correctness of the claim of the assessee. The same statutory requirement also finds place in sub-rule (1) of rule 8D.The Income Tax(Fourteenth Amendment) Rules, 2016 substituted sub-rule (2) and omitted sub-rule (3) of rule 8D thereby introducing a different formula for computing the quantum of disallowance to be made upon application of rule 8D. Alteration of the formula for computing the quantum of disallowance in a case where the AO was not satisfied with the assessee’s claim did not, in any manner, dilute the requirement that the AO must provide cogent reasons as to why he is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to the non-taxable income. The aforesaid 2016 amendment of rule 8D left sub-rule (1) untouched. Sub-rule (1) restates the requirement of section 14A(2) as to when the AO can apply the formula in rule 8D. Hence, it was incumbent upon the AO to consider the assessee’s apportionment and its explanation and upon such consideration give cogent reasons as to why, having regard to the assessee’s accounts, such claim was not satisfactory. In the instant case, no such exercise was carried out by the AO. The AO has observed that “Assessee’s disallowance was found not to be satisfactory as provisions of section 14A clearly provides for the rules/calculation.” and “However, same is found not tenable as per explicit provisions of the Act and various judicial pronouncement”. The assessee’s computation cannot be rejected because it was not as per rule 8D. We find that resort can be had to rule 8D only after rejection of the assessee’s apportionment on cogent grounds. In the instant case, no cogent reasons have been recorded by the AO for not accepting the assessee’s computation and as such there no satisfaction recorded on the part of the AO that the assessee’s claim is not correct. In the absence of such satisfaction, the AO could not have resorted to rule 8D and the disallowance under section 14A has to be limited to the amount suo moto offered by the assessee. Hence, this ground is covered in favour of the assessee by the order dated 13.12.2017 passed by the Ld. coordinate bench in ITA No. 1869/KOL/2014 for A.Y. 2009-10 and the appeal filed by the department was dismissed by the jurisdictional High Court. Further, the issue is also covered against the revenue by the decision of the Hon’ble Calcutta High Court in PCIT v West Bengal Infrastructure Development Finance Corporation Ltd. (supra). Accordingly, we direct the AO to delete the disallowance. The first issue is allowed.

8. The next issue raised in the instant appeal is with regard to disallowance of depreciation claimed under section 32 of the Act.

9. The facts in brief are that the consumer products business of Tata Chemicals Ltd., a listed company, vested in the assessee as a going concern with effect from 1.04.2019 in terms of demerger scheme sanctioned by NCLT on 08.01.2020 ,In terms of the Sanctioned Scheme, the assessee allotted 29,04,21,986 of its equity shares having the aggregate fair value of Rs.6,098.87 crores to the shareholders of Tata Chemicals Ltd. as consideration for acquisition of its consumer products business. The Merchant Bankers appointed by the assessee in their report dated 13.05.2020 identified three brands and distribution network in respect of the consumer products business of Tata Chemicals Ltd. forming part of the business undertaking acquired by the assessee (but not recorded in the books of Tata Chemicals Ltd.) and valued the same at Rs. 2,459.01 crores. After deducting the said amount along with the value of the net tangible assets of the undertaking from the consideration of Rs. 6,098.87 crores, the balance amount of Rs. 3,562.41 crores was identified as goodwill arising upon demerger. The assessee claimed depreciation of Rs.890.60 crore, in respect of goodwill and Rs.614.76 crore in respect of brands and distribution network acquired in terms of the sanctioned scheme against consideration by way of issue of fully paid up equity shares.

10. The assessee’s aforesaid claim of depreciation was disallowed in the assessment order dated 27.06.2024 passed in accordance with DRP’s directions.The Memorandum explaining the provisions in the Finance Bill 2021 which proposed that goodwill be not considered as a depreciable asset and there was to be no depreciation on goodwill with effect from the assessment year 2021-22 onwards was extracted in the assessment order. According to the AO, Parliament’s will was supreme and cannot be overridden by appellate authorities. It was held that business restructuring had to be a tax neutral exercise. The AO further held that depreciation was allowable in accordance with the provisions of the Act only where intangible assets were reflected in the books of the transferor/demerged company prior to restructuring and with reference to their written down value and that depreciation was not allowable in respect of intangible assets arising upon demerger and recorded in the books of the transferee/resulting company for the first time. The AO was aware of the fact that the shareholders of Tata Chemicals Ltd., who had received shares in terms of the sanctioned scheme, would have to pay capital gains tax upon sale of such shares but the AO was of the view that such payment of tax was not going to be immediate. The AO also relied on the decision in United Breweries Ltd. v. Additional Commissioner of Income Tax,(2016) 76 taxmann.com 103 (Bangalore-Trib.). With respect to the decision of the Hon’ble Supreme Court in CIT v Smifs Securities Ltd., (2012) 348 ITR 302 (SC) cited by the assessee, the AO did not follow the same on the ground that certain provisions of sections 32 and 43 had not been considered therein.

11. The Ld. AR submitted that the demerger scheme was formulated with a view to enable Tata Chemicals Ltd. to focus on its basic chemistry and specialty products business and to integrate the consumer products business activities undertaken by both the assessee and Tata Chemicals Ltd. under a single entity .i.e. . the assessee.The scheme provided for vesting of the consumer products business of Tata Chemicals Ltd. in the assessee as a going concern with effect from 1.04.2019 and that in consideration of such vesting, the assessee would issue to the shareholders of Tata Chemicals Ltd. 114 fully paid up equity shares for every 100 shares held in Tata Chemicals Ltd. The said share swap ratio was jointly determined by two Chartered Accountant firms, one appointed by the assessee and the other by Tata Chemicals Ltd. The Ld. AR submitted that both the firms used the income/earning based approach i.e. discounted cash flow method. In terms of market price, they took into consideration the price of the assessee’s shares on the stock exchange. The Ld. AR submitted that the price on the stock exchange for shares of Tata Chemicals Ltd. was in respect of its entire business and not only its consumer products business and as such could not be used. Further, one of the firms also used multiples derived from valuations of comparable companies. The Ld. AR submitted that both the firms agreed that the assessee would have to issue 114 fully paid up equity shares for every 100 fully paid up equity shares of Tata Chemicals Ltd.Further, the Ld. AR submitted that M/s. DSP Merrill Lynch Ltd., an Independent Category-I Merchant Banker, certified that the said share entitlement ratio was fair. The Ld. AR submitted that the Sanctioned Scheme, inter alia, provided that the assessee shall record the assets and liabilities of the demerged undertaking transferred to and vested in it at their respective book values as appearing in the books of account of Tata Chemicals Ltd. The Ld. AR submitted that Clause 3.3.1(ii) provided that the difference between the value of new equity shares issued by way of consideration and the aggregate value of net assets shall be debited to goodwill or as the case may be credited to capital reserve.After receiving the relevant information on the fair value of assets acquired and liabilities assumed, the assessee was to comply with the provisions of Indian Accounting Standard Ind AS 103 and make necessary adjustments such that all identifiable assets acquired and liabilities assumed (including assets and liabilities not specifically recognized by Tata Chemicals Ltd. in its financial statements) were reflected at their fair values as on 01.04.2019 and corresponding adjustments were to be made to goodwill and/or capital reserve as computed in terms of clause 3.3.1(ii) of the Sanctioned Scheme.The petition for sanction of the aforesaid scheme filed before the Ld. NCLT was duly served upon the Central Government and other relevant statutory authorities. The ld. Regional Director, Eastern Region, Ministry of Corporate Affairs stated before the Ld. NCLT that a copy of the scheme was forwarded to the Income Tax Department with a request to forward their comments/observations/objections, if any, but no objection/observation/comment was received.

12. The Ld. AR submitted that in terms of the Sanctioned Scheme, the assessee allotted its equity shares of the fair value of Rs.6,098.87 crores to the shareholders of Tata Chemicals Ltd. M/s Ernst & Young Merchant Banking Services LLP prepared their report dated 13.05.2020 by taking into consideration Indian Accounting Standard Ind AS 103 and apprised the assessee as regards allocation of the said purchase price paid for acquisition of the consumer products business from Tata Chemicals Ltd. According to the said report dated 13.05.2020, the fair value of intangible assets not recorded in the books of Tata Chemicals Ltd. acquired by the assessee by way of brands and distribution network was Rs.2459.01 crore and residual goodwill arising on demerger was Rs.3562.41 crore. In terms of clause 3.3.1(iv) and (v) of the sanctioned scheme, the assessee duly accounted for the said brands and distribution network and goodwill at the fair values determined by the report dated 13.05.2020 as aforesaid. The facts relating to acquisition of the consumer products business of Tata Chemicals Ltd. were duly mentioned in Note 40 of the assessee’s accounts for the financial year ended 31.03.2020.It was submitted that the assessment order and the directions of the Ld. DRP show that it is not in dispute that the aforesaid intangible assets acquired by the assessee were not recorded in the books of Tata Chemicals Ltd. The fair values determined in the valuation report dated 13.05.2020 which identified the aforesaid intangible assets are also not in dispute.

13. The Ld. AR submitted that the assessee’s claim of depreciation is covered by the decision of the Hon’ble Supreme Court in CIT v Smifs Securities Ltd. (supra) and several decisions rendered following the said Apex Court decision and the AO was wholly unjustified in not following the authorities which were binding upon him. With respect to the decision of United Breweries’ case (supra) relied upon on behalf of the revenue, the Ld. AR submitted that it has no application as in that case the amalgamating company owned goodwill as an asset in its books of account and it was such goodwill which was revalued under the amalgamation scheme. The depreciation which was claimed on the revalued figure which was disallowed by the Ld. Tribunal. The Ld. AR submitted that the said decision has no application in respect of goodwill arising or recognized by the assessee upon demerger of Consumer Products Division which was not recorded in the books of Tata Chemicals Ltd. and did not form part of its block of assets. The Ld. AR thereafter submitted that the provisions of sections 32 and 43 referred to by the revenue were not applicable in respect of intangible assets which were not recorded or were not existing in the books of the demerged company viz., Tata Chemicals Ltd. and thus, not forming part of any block of assets in respect of which depreciation was claimed by demerged company. The Ld. AR submitted assessee was entitled to depreciation under section 32 in respect of such intangible assets acquired by it for consideration under the scheme of demerger. It was submitted that the AO fell into error in holding that depreciation was allowable only where intangible assets were reflected in the books of the demerged company prior to the demerger and not in respect of those arising or recognized upon demerger and recorded in the books of the resulting company for the first time. It was submitted that the amendments made by the Finance Act, 2021 providing for discontinuance of depreciation on goodwill with effect from the assessment year 2021-22 and the memorandum explaining the provisions in the Finance Bill 2021 had also been considered in the several decisions allowing depreciation on goodwill arising or recognized upon amalgamation/demerger. The Ld. AR further placed his reliance on the following decisions:-

i. Carolina Food and Industries (P.) Ltd. -vs.- DCIT (I.T.A. No. 2625/KOL/2018 dated 09-09-2022) (Affirmed by Calcutta HC in PCIT. -vs.- Carolina Food and Industries (P.) Ltd (2025) 172 taxmann.com 44 (Cal – HC)

ii. Padmini Products (P) Ltd -vs.- DCIT (2020) 121 Taxmann.com 137 (Karnataka HC)

iii. Mylan Laboratories Ltd -vs- ACIT (2022) 137 Taxmann.com 178 (Telangana HC)

iv. PCIT vs. Aculife Healthcare (P.) Ltd. [2023] 155 taxmann.com 283 (Gujarat) (Affirmed in PCIT vs. Aculife Healthcare (P.) Ltd. [2025] 181 taxmann.com 587 (SC)

v. Ritu Housing Ltd. -vs.- ACIT (I.T.A. No. 185/Kol/2023 dated 30-10-2024)

vi. Keva Fragrances P. Ltd. -vs.- DCIT (ITA No.334/M/2020 dated 02-08-2021)

vii. DCIT -vs.- Indian Cable NetCo ltd (ITA No.1951/KOL/2025 dated 28-04-2026)

viii. Urmin Marketing (P) Ltd -vs.- DCIT (2020) 122 Taxmann.com 40 (Ahmedabad Trib)

ix. Aricent Technologies (Holdings) Ltd. -vs.- DCIT [2019] 109 taxmann.com 47 (Delhi – Trib.)

x. Dow Chemical International Pvt Ltd. -vs.- DCIT (2024) (11) TMI 1301 (Mum- ITAT)

xi. Asian Paints Ltd -.vs.- ACIT (2026) (6) TMI 1339 (Bombay High Court)

xii. I&B seeds Pvt Ltd. -vs.- DCIT (2022) 142 Taxmann.com 274 (Bang Trib)

xiii. Suzlon Energy Ltd -vs.- DCIT (2024) (11) TMI 816 (ITAT Ahmd)

xiv. ACIT. -vs.- Vyoman India Pvt Ltd (ITA No. 458/Mum/2024 dated 17-12-2024)

xv. Nirma Limited (2025) (6) TMI 2060 (ITAT Ahmedabad)

xvi. Sunedison Solar Power India Pvt Ltd -vs.- DCIT (2023) (4) TMI 739 (ITAT Chennai)

xvii. Trivitron Healthcare -vs.- PCIT (2023) 146 taxmann.com 130

xviii. ACIT vs. FLSmidth (P.) Ltd. [2026] 183 taxmann.com 761 (Chennai – Trib.)

xix. Takraf India Private Limited (I(TP)A 37/Chny/2024)

xx. Bodal Chemicals Ltd – TS-991-ITAT-2025(Ahd)

xxi. Reckit Benkiser Healthcare India P. Ltd – TS-933-ITAT-2025(Ahd)

xxii. Atria Convergence Technologies Limited -vs.- DCIT (2026) (5) TMI 1777 – ITAT BANGALORE

xxiii. LNW India Solutions (P.) Ltd. vs. ACIT [2026] 187 taxmann.com 464 (Chennai – Trib.)

xxiv. ACIT -vs.- Lighthouse Learning Private Limited (ITA 5433/Mum/2024) dated 30-01-2026

14. Per Contra, the Ld. DR submitted that the assessee’s claim of depreciation on intangible assets arising or recognized upon demerger was a clear cut case of tax evasion/leakage. This aspect had not been brought to the notice of any judicial authorities so far. It was thereafter submitted that the assessee’s claim of depreciation on intangible assets arising or recognized upon demerger was not allowable as per express mandate of the sixth proviso to section 32(1), Explanation 7A to section 43(1) and Explanation 2B to section 43(6) of the Act. The actual cost of the asset in the hands of the transferor was ‘nil’. Consequentially, cost or the written down value to the transferee would also be ‘nil’. The Ld. DR submitted that depreciation was admissible in respect of intangible assets arising or recognized upon transfer only where the transferor had paid capital gains tax with reference to the consideration received upon transfer and not where no such tax was paid. No special concession had been allowed in cases of amalgamation/demerger and the law explicitly disallowed depreciation in such cases. With respect to the decision of the Hon’ble Apex Court in CIT v Smifs Securities Ltd. (supra) the Ld. DR submitted that the said decision only decided the question as to whether goodwill was an asset for allowance of depreciation under section 32 and did not contain any discussion on various provisions of the of the Act which explicitly disallowed depreciation on intangible assets including goodwill arising or recognized consequent to amalgamation/demerger. The Ld. DR thereafter submitted that depreciation was never allowable on goodwill arising or recognized upon amalgamation/demerger and the amendments made by the Finance Act, 2021 excluded even purchased goodwill from depreciation allowance. Further, the Memorandum explaining the provisions in the Finance Bill, 2021 had taken into consideration the decision of the Hon’ble Supreme Court in CIT v Smifs Securities Ltd. (supra) and was clarificatory. The said Memorandum reflecting the Parliament’s will, which was supreme, had not been brought to the notice of judicial authorities till date. Lastly, the Ld. DR relied on the decision of United Breweries Ltd. v Addl CIT (supra) decided the matter against the assessee.

15. In reply, the Ld. AR submitted that the plea of tax evasion/leakage had been raised for the first time at the time of hearing of the appeal and no such case was or could be made out at the assessment stage. The rationale and objective of the demerger were mentioned in the Sanctioned Scheme and the same was never questioned by the revenue. The AO did not invoke Explanation 3 to section 43(1) in course of the assessment proceedings. It was further submitted that the statute did not stipulate that depreciation was admissible in respect of intangible assets arising or recognized upon demerger only where the transferor/demerged company had paid capital gains tax with reference to the consideration received upon transfer. It was submitted that all the contentions raised on behalf of the revenue had already been dealt with in the decisions relied upon on behalf of the assessee.

16. We have heard both the parties. In a scheme of demerger, the business undertaking of the demerged company is purchased by the resulting company against consideration by issue of shares to the shareholders of the demerged company. As the demerger of a business undertaking may result in taxation of capital gains in the hands of both the demerged company and its shareholders, clauses (vib) and (vid) have been incorporated in section 47 so that the demerger of the undertaking as also issue of shares to the shareholders of the demerged company in consideration of the demerger are not treated as transfer for the purposes of capital gains taxation. However, the shareholders of the demerged company are liable for capital gains tax upon disposal of the shares received by them from the resulting company in consideration of the demerger of the undertaking.

17. It is a requirement of section 2(19AA) that the demerger of an undertaking must be on a going concern basis. In the instant case, where demerger involves listed companies, the provisions of the Companies Act and SEBI Regulations require that the transfer of the business undertaking has to be at a fair value and issue of shares by way of consideration has to be on the basis of a fair share exchange ratio.The fair value of the undertaking would take into consideration all assets and liabilities, whether or not recorded/existing in the books of account of the demerged company and thereafter arrive at the fair value and share exchange ratio. The consideration paid or discharged by the resulting company would be inclusive of the fair value of even those assets and liabilities which are not existing or recognized or recorded in the books of the demerged company. The question is whether the resulting company, having parted with consideration for acquisition of the undertaking, is entitled to depreciation under section 32 of the Act in respect of such assets, not existing or recognized or recorded in the books of the demerged company, which do not form part of its block of assets, and on which no depreciation was claimed by it.

18. Section 32 provides for depreciation allowance in respect of, inter alia, intangible assets acquired by the assessee on or after 01.04.1998 and used for the purposes of its business. Such depreciation is computed as a percentage of the written down value of the assets. Section 43(6) defines “written down value”. In case of assets acquired in the previous year, the actual cost to the assessee is the written down value. Section 43(1) defines “actual cost” to mean the actual cost of the asset to the assessee. When consequent to a demerger, the resulting company comes to acquire or own an intangible asset forming part of the undertaking demerged, which did not exist and was not recognized or recorded in the books of the demerged company and did not form part of its block of assets, then in the normal course, the resulting company, having acquired such asset for consideration should be entitled to depreciation computed as a percentage of the apportioned cost of such asset which, post demerger, is owned and used by it for the purposes of its business. The provisions cited by the revenue, viz. the sixth proviso to section 32(1), Explanation 7A to section 43(1) and Explanation 2B to section 43(6) dealing with depreciation allowance in the hands of the demerged company and/or the resulting company have limited application. The sixth proviso to section 32(1) provides for apportionment of depreciation between the demerged company and the resulting company for the year of demerger in the ratio of the number of days for which an asset was used by each of them so that the aggregate depreciation allowance does not exceed the deduction to which the demerged company would have been entitled if the demerger had not taken place. On a plain reading, the said proviso applies in respect of an asset forming part of the block of assets of the demerged company on which it had been claiming depreciation and provides for proportionate depreciation allowance in the hands of the two companies for the year of demerger. The provisions of Explanation 7A to section 43(1) and its proviso are also for an asset forming part of the block of assets of the demerged company and restrict the actual cost of such asset in the hands of the resulting company to the actual cost/written down value in the hands of the demerged company, whichever is lower. Similarly, Explanation 2B to section 43(6) is applicable in respect of an asset forming part of the block of assets of the demerged company and restricts the written down value of the block of assets in the hands of the resulting company to the written down value of the transferred assets of the demerged company immediately before the demerger. The provisions cited by the revenue are not applicable in respect of assets which were not recognized or recorded or which were not existing in the books of the demerged company and did not form part of its block of assets but arise on demerger and are identified at the instance of the resulting company with consideration being apportioned on the basis of reports obtained from experts. Once application of the said provisions is ruled out in respect of such assets, section 32 will be fully applicable and the resulting company which acquires such assets for consideration, would be entitled to depreciation.

19. The allowance of depreciation under section 32 in the hands of the person who acquires the asset cannot be linked with taxation of the consideration in the hands of the transferor and such a requirement cannot be read into the statute as contended by the department. Under the provisions of the Act, slump sale is taxable but demerger is not. The transferee in either case is entitled to depreciation on the assets acquired as part of the undertaking in accordance with the provisions of section 32 read with section 43. The statute does not stipulate that in respect of assets forming part of the undertaking which were not recognized or recorded or existing in the books of the transferor and did not form part of its block of assets, but which arise because of the transaction and are identified and valued by the transferee who has paid consideration, depreciation will be admissible to the transferee only in case of a slump sale where the transferor pays tax on the consideration but not in case of demerger as per section 2(19AA) where the law does not require the transferor to do so.

20. It is pertinent to note that in CIT v Smifs Securities Ltd. (supra), goodwill had arisen in the books of the amalgamated company upon amalgamation for which it had paid consideration to the amalgamating company. The Hon’ble Supreme Court held that goodwill was an asset in respect of which depreciation was admissible to the amalgamated company. The ratio of said decision will apply also in respect of goodwill arising and recognized on demerger. It is not open to the revenue to contend that any relevant provision of the Act were not considered by the Hon’ble Supreme Court when the matter was decided and the revenue cannot refuse to follow the said binding precedent by saying that provisions relating to calculation of depreciation were not placed before the Hon’ble Supreme Court. The said judgment of the Hon’ble Supreme Court has held the field since 2012 and has been followed in several decisions of the Hon’ble High Courts and the Ld. Tribunal for allowing depreciation on intangibles arising or recognized on amalgamation/demerger., viz., evident from the decisions of the Hon’ble Gujarat High Court in PCIT v Zydus Wellness Ltd., (2017) 87 taxmann.com 82 (Guj.) wherein the decision of Smifs Securities Ltd. (supra) was followed by the Hon’ble High Court while upholding the order of the Ld. Tribunal in allowing depreciation on goodwill arising or recognized on amalgamation. Even the SLP filed by the department being SLP (Civil) Diary No. 29859 of 2018 was dismissed by the Hon’ble Supreme Court by its order dated08.10.2018. Further, in PCIT v Aculife Healthcare (P) Ltd., (2025) 477 ITR 392 (Guj.) depreciation was allowed by the AO on goodwill arising/recognized on demerger following the decision of Smifs Securities Ltd. (supra). The Ld. PCIT by an order under section 263 held that the AO had wrongly allowed the claim for depreciation. The Ld. Tribunal allowed the appeal holding that the AO had followed the judgment of the Hon’ble Supreme Court and had taken a legally sustainable view. Being aggrieved the department preferred an appeal which was dismissed by the Hon’ble Gujarat High Court. The department had thereafter preferred an SLP which was dismissed by the Hon’ble Supreme Court on the ground of delay as well as on merits and the same is reported in (2025) 181 taxmann.com 587 (SC).

21. With respect to the decision in United Breweries’ case (supra), the amalgamating company had goodwill as an asset in its books of account and that under the amalgamation scheme, such goodwill was revalued and depreciation was claimed on the revalued higher figure which was disallowed by the Ld. Tribunal. The said decision does not deal with goodwill arising or recognized on demerger which was not recorded in the books of the demerged company and did not form part of its block of assets.

22. This Bench in DCIT v Indian Cable Net Co Ltd., (2026) (5) TMI 42 (ITAT Kolkata), followed the decision of Smifs Securities Ltd. (supra) and agreed with the view taken by a co-ordinate Bench in Mylan Laboratories Ltd. v DCIT, (2020) 113 taxmann.com 6 (Hyderabad-Trib.) while allowing the claim of depreciation on goodwill arising or recognized on amalgamation. In Mylan Laboratories’ case (supra),the co-ordinate Bench considered, inter alia, the 6th proviso (earlier 5th proviso) to section 32(1) as also the decision in United Breweries’ case (supra.) both of which were held to be inapplicable and the assessee’s claim for depreciation in respect of goodwill arising or recognized on amalgamation was allowed following Smifs Securities’ case (supra). The revenue’s appeal under section 260A on the issue was not admitted by the Hon’ble Telangana High Court (Order dated 31.01. 2022 in ITTA No. 117 of 2021).

23. The memorandum explaining the provisions in the Finance Bill, 2021 and the amendments made by the Finance Act, 2021 make it clear that discontinuance of depreciation on goodwill took effect from AY 2021-22 leaving undisturbed the position prior thereto. The discussion in the memorandum and the depreciation calculation provisions referred to therein do not apply to goodwill not recorded or recognized or existing in the books of the transferor company, not forming part of its block of assets, which arises on amalgamation/demerger. The said memorandum has been placed before and considered in several of the decisions wherein depreciation on goodwill arising or recognized on amalgamation/demerger has been allowed. Further, it has been held that the amendments made by the Finance Act, 2021 discontinuing depreciation on goodwill with effect from AY 2021-22 are prospective. In Asian Paints Ltd. v ACIT, 2026 (6) TMI 1339 (Bom) involving AY 2016-17, the Hon’ble Bombay High Court held that in terms of the amendment made by the Finance Act 2021, goodwill was not to be regarded as an intangible asset eligible for depreciation only from AY 2021-22. In Vodafone India Services Pvt. Ltd. v DCIT, 2024 (2) TMI 519 (ITAT-Mumbai) involving AY 2009-10, upon consideration of the memorandum explaining the provisions in the Finance Bill, 2021, it was held that the amendment to exclude depreciation as an intangible asset eligible for depreciation was prospective and took effect from AY 2021-22. The said memorandum cannot prevail over decisions of the Courts and Tribunals.

24. In the case of Dow Chemical International Pvt. Ltd. v DCIT, 2024 (11) TMI 1301 (ITAT-Mumbai) involving AY 2016-17, the claim for depreciation on intangible assets being goodwill, distribution network and customer relationships arising or recognized on amalgamation was allowed following the decision of Smifs Securities’ case (supra). In that case, the revenue had relied upon the 6th proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) as also the amendments made by the Finance Act 2021 including the memorandum explaining the provisions in the Finance Bill 2021 and the decision of United Breweries’ case (supra).

25. In the case of Trivitron Healthcare (P) Ltd. v PCIT, (2023) 146 taxmann.com 130 (Chennai-Trib) involving AY 2015-16, the AO had allowed depreciation on goodwill arising or recognized on amalgamation but the Ld. PCIT sought to revise the assessment under section 263 on the ground that the decision of the AO was contrary to the 5th (now 6th) proviso to section 32(1) and the decision in United Breweries’ case (supra). The Ld. Co-ordinate Bench followed the decision of Smifs Securities’ case (supra) and the decision of Mylan Laboratories Ltd. (supra) and distinguished the decision in United Breweries’ case (supra) and held that the AO had rightly allowed depreciation.

26. In the case of ACIT v FL Smidth (P) Ltd., (2026) 183 taxmann.com 761 (Chennai-Trib) involving AY 2015-16, the Ld. Co-ordinate Bench allowed the assessee’s claim for depreciation on goodwill arising or recognized on amalgamation after considering the decision of Smif Securities’s case (supra) and the provisions of the 6th proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) which were also referred to by the Ld. DR herein.

27. In the case of Takraf India Pvt. Ltd. v ACIT [IT (TP) A No. 37/CHNY/2024) involving AY 2020-21 decided on 04.12.2024], the Ld. Co-ordinate Bench allowed the claim for depreciation on goodwill arising or recognized on demerger. The said decision was also rendered after taking into consideration the decision of Smifs Securities’ case (supra) and the provisions of sixth proviso to section 32(1), Explanation 7A to section 43(1) and Explanation 2B to section 43(6) as also the amendments made by the Finance Act, 2021 with effect from AY 2021-22.

28. In the instant case before us , the scheme of arrangement by way of demerger of a business undertaking was between two listed companies. The said scheme affected the shareholders of both the companies and the law governing the companies required that the transfer of the business undertaking had to be at a fair value and issue of shares by way of consideration had to be on the basis of a fair share exchange ratio. That is why both the companies engaged valuers to determine such fair value and fair share exchange ratio and had an independent category-I merchant banker examine and give their opinion in respect of such valuation/share exchange ratio. The Sanctioned Scheme specified its rationale and purpose as follows:-

“(a) enable the resulting company to expand its presence in the fast moving consumer goods categories in India and abroad;

(b) result in revenue and cost synergies including from supply chain opportunities, operational improvements, logistics alignment leading to economies of scale, creation of efficiencies and optimization of capital and operational expenditure, leveraging distribution networks, and optimization of overlapping infrastructure;

(c) enhance the financial profile with higher growth, margin expansion and increased cash flows which will provide further headroom for inorganic growth opportunities in India and abroad, and

(d) the shareholders of the demerged company will continue to participate in the growth of larger consumer focused company i.e. the resulting company, while continuing to own shares in the demerged company which will remain focused on the basic chemistry and specialty products business.”

29. In the instant case, it is not in dispute in the instant case that the intangible assets goodwill, brands and distribution network of the consumer products business of Tata Chemicals Ltd. were not recorded or recognized and did not exist in the books of the said demerged company. On demerger, Merchant Bankers appointed by the assessee in their report dated 13.05.2020 identified three brands and distribution network in respect of the consumer products business of Tata Chemicals Ltd. forming part of the business undertaking acquired by the assessee (but not recorded in the books of Tata Chemicals Ltd.) and valued the same at Rs. 2459.01 crore. After deducting the said amount together with the value of the net tangible assets of the undertaking from the consideration of Rs. 6,098.87 crores, the residual amount of Rs. 3,562.41 crores was identified as goodwill arising on demerger (which was also not recorded in the books of Tata Chemicals Ltd.).It is also not in dispute that the said intangible assets were acquired for the consideration mentioned in the said report dated 13.05.2020.

30. In light of the above facts, it has to be held that for AY 2020-21, the assessee is entitled to depreciation in respect of goodwill arising on demerger. Further, the assessee is also entitled to depreciation in respect of brands and distribution network arising on demerger for the same reasons as in respect of goodwill. It is pertinent to mention that the amendments made by the Finance Act, 2021 only provide for discontinuance of depreciation in respect of goodwill and are not applicable in respect of other intangible assets.

31. The contention raised by the revenue, for the first time during the hearing of the appeal that the instant case was one of tax evasion/leakage. But the AO at the assessment stage did not think or say so. The rationale and objective of the demerger mentioned in the Sanctioned Scheme of demerger was never questioned by the revenue either before the Ld. NCLT or in course of the assessment proceedings. If the AO was of the view that the main purpose of the demerger was the reduction of liability to income tax by claiming depreciation with reference to an enhanced cost, Explanation 3 to section 43(1) permitted the AO to determine the actual cost having regard to all the circumstances of the case with the previous approval of the Ld. Joint Commissioner. The AO did not invoke the said provision. Now at the stage of the hearing of the instant appeal, it cannot be contended that the demerger scheme was formulated for tax evasion. The revenue cannot allege tax evasion/leakage in a case such as the instant one, where the law permits the resulting company to claim depreciation with reference to the fair value paid for acquisition of intangible assets arising on demerger which were not recorded or recognized or existing in the books of the demerged company and did not form part of its block of assets. The 2nd issue of claim of depreciation allowance made by the assessee on intangibles is allowed.

32. The last ground is in respect of non-consideration of claim for deduction under section 80G.

33. We have heard the rival contentions and perused the materials on records. During the relevant previous year, the assessee had made donations aggregating to Rs.14,25,37,911 in respect of which it was entitled to 50% deduction under section 80G amounting to Rs.7,12,68,956. The admissible amount of deduction was mentioned at Serial No. 33 of the Tax Audit Report. The details of the donations were mentioned in Schedule 80G to the return. The amount admissible under section 80G was also mentioned in the computation of total income. However, in Schedule Part B-TI of the return, no amount was claimed under Chapter VIA (which includes Section 80G) because of losses. Since the assessment resulted in a positive gross total income because of the disallowances made, it was incumbent upon the AO to consider the assessee’s claim for deduction under section 80G. In view of these facts, the matter is being sent back to the file of the AO to consider the claim of the assessee in accordance with law. The 3rd issue is allowed for statistical purposes.

34. The appeal is allowed partly allowed for statistical purposes.

Order pronounced on 07.10.2026.