Jet Privilege Pvt. Ltd. Vs DCIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT) has delivered a split verdict in a case involving an assessee who acquired the Frequent Flyer Programme (JPFFP) business of M/s. Jet Airways India Ltd. through a slump sale agreement. The core dispute revolved around the assessee’s claim for depreciation on goodwill and other intangible assets that arose from this business transfer, which was executed for a consideration of ₹11,96,21,33,329. While the Tribunal acknowledged the assessee’s entitlement to depreciation on goodwill based on a Supreme Court precedent, it remitted the issue of the quantum of such goodwill back to the Assessing Officer (AO) for further examination.
The assessee had capitalized goodwill amounting to ₹13,013,742,680, along with other intangible assets like a Commercial Agreement (₹448,71,00,000) and Brand/Trade Mark (₹61,65,00,000). The AO had denied depreciation on all three, arguing that the slump sale was a “colorable device” akin to a demerger, and that the other intangibles had nil value in Jet Airways’ books. The Commissioner of Income Tax (Appeals) [CIT(A)] had provided partial relief by allowing depreciation on certain intangibles after adjusting for intangible liabilities based on a valuation report. The Tribunal framed two key questions: whether depreciation on goodwill/intangibles from a slump sale is permissible, and if so, what is the allowable amount in this specific case.
On the first issue, the Tribunal firmly rejected the AO’s contention that the transaction was a demerger, noting the absence of fundamental elements of a demerger such as court approval and the issuance of shares to existing shareholders. Citing the Supreme Court’s landmark judgment in CIT, Kolkata vs. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], the Tribunal upheld the assessee’s right to claim depreciation on goodwill. The Supreme Court in Smifs Securities had held that “goodwill” falls under the ambit of “any other business or commercial rights of similar nature” as defined in Explanation 3(b) to Section 32(1) of the Income-tax Act, 1961, and is therefore considered an asset eligible for depreciation. The Tribunal emphasized that the Revenue had not disputed the allowability of depreciation on goodwill for periods prior to April 1, 2021, as observed by the CIT(A).
However, regarding the quantum of goodwill eligible for depreciation, the Tribunal found discrepancies in the assessee’s computation. It noted that the assessee did not calculate goodwill as the simple difference between the purchase consideration and the net book value of the assets transferred by Jet Airways. Instead, the assessee’s calculation incorporated the value of certain intangible assets based on a valuation report when determining the net asset value. The Tribunal stated that in a slump sale, assets and liabilities are typically recorded at their book value in the purchaser’s books, and any excess consideration is recognized as goodwill. The Tribunal highlighted specific concerns, including the impact of a “Target Net Asset Value” mentioned in the slump sale agreement, the accounting of a Miles Purchase Agreement receivable, potential adjustments to the consideration as per the agreement clauses, and the book value of tangible and intangible assets as per the agreement schedules. Given these complexities and the AO’s assertion that the purchase consideration lacked a substantiated basis, the Tribunal deemed it necessary to remit this limited issue back to the AO for a thorough re-examination. The AO has been directed to call for relevant details from the assessee and determine the correct amount of goodwill eligible for depreciation in accordance with the law, ensuring a reasonable opportunity for the assessee to be heard.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
