ITAT Mumbai in this case was of the view that the perusal of AS 14 does not support the contention of the taxpayer that the investment by the taxpayer over the net assets taken over should be treated as goodwill. It was held that unless the fair valuation of assets, including any goodwill, is carried out and investment is earmarked towards purchase of goodwill, there is no question of apportioning any amount of consideration towards purchase of goodwill. The consideration in the form of cancellation of investments cannot be said to have been made for purchase of assets at book value, when the fair value of each asset and liability is much higher.
Fair value of primary asset being land should have been considered. The Tribunal has observed that if the taxpayer had paid more than the fair market value of assets minus the fair market value of liabilities, then the company could have a case to claim that certain amounts were incurred for goodwill. In the absence of such exercise, there was no goodwill in the nature of commercial rights purchase by the Taxpayer. It was only a book entry which was only another way of disclosing the intrinsic value of the fixed asset of the company.
The Tribunal also ruled that the argument of the Scheme being sanctioned by the High Court was not of any help as the issue on hand was not before the court. Also the decision of the Delhi High Court in the cases of Hindustan Coco Cola Beverages P. Ltd., decision of the Hyderabad Tribunal in A.P. Paper Mills Ltd. and other case laws do not support taxpayer’s contentions since in the aforesaid case laws, there was purchase of goodwill which was in the nature of a commercial right. Consequently the tax department’s appeal was allowed.
In this decision, the Mumbai Tribunal has reconfirmed that in case of purchase of goodwill, same should be eligible for claiming depreciation under 32(1 )(ii) of the Act. The Tribunal has held that decision in the case of Hindustan Coca Cola Beverages was not applicable since in that case, there was purchase of goodwill whereas in the current case, the very purchase of goodwill was not proved by the assessee. The Tribunal has further observed that if the consideration paid by the assessee was more than the fair value of net assets, there could be a case that the amount was incurred for goodwill.
Source- DCIT v. Toyo Engineering India Ltd. (ITAT Mumbai) – (ITA No. 3279/Mum/2008)