Depreciation eligible on goodwill arisen pursuant to business acquisition

Dadha Pharma Distribution Pvt. Ltd. Vs DC/ACIT (OSD) (ITAT Chennai)

The only grievance of the assessee is denial of depreciation on goodwill which has arisen pursuant to business acquisition made by the assessee from M/s. Dadha Pharma Private Limited (DPPL).

In this case it could be seen that the assessee has acquired distribution business of DPPL w.e.f. 30.09.2015 on slump sale basis which postulate passing of consideration without assigning any values to individual assets and liabilities.

It could be seen that the assets and liabilities have been taken over at values as appearing in the financial statements as on 30.09.2015. The excess payment made by the assessee over the book-value of assets and liabilities has been treated as goodwill which is correct accounting treatment and is in accordance with applicable accounting standards. The assessee has paid lump sum consideration of Rs.735 Lacs. Therefore, the observation of Ld. CIT(A) that the assessee has not purchased the goodwill, is not a correct observation. The case law of Hon’ble Delhi High Court in Triune Energy Services (P.) Ltd. V/s DCIT (65 Taxmann.com 288) squarely apply to the facts of assessee’s case. In this case, it was held by Hon’ble Court that where the assessee purchased business as going concern, consideration paid in excess of value of tangible assets was classifiable as goodwill eligible for depreciation.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

Aforesaid appeal by assessee for Assessment Year (AY) 2016-17 arises out of the order of learned Commissioner of Income Tax (Appeals)-1, Chennai [CIT(A)] dated 05.08.2020 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 29.12.2018. The only grievance of the assessee is denial of depreciation for Rs.11,28,444/- on goodwill which has arisen pursuant to business acquisition made by the assessee from M/s. Dadha Pharma Private Limited.

2. The registry has noted a delay of 116 days in the appeal, the condonation of which has been sought by the assessee on the strength of condonation petition. The delay has been attributed to Lockdown situation arising out of Covid-19 Pandemic. The impugned order is stated to have been received by the assessee on 05.08.2020 which fall in the lockdown period during Covid-19 pandemic. Though Ld. DR opposed condonation of delay, however, concurring with assessee’s pleadings, we condone the delay and proceed for adjudication of the same on merits.

3. The assessee has filed written submissions in support of the claim which has been controverted by Ld. Sr. DR on the ground that goodwill has not been purchased by the assessee. Having heard rival submissions, our adjudication would be as under.

4. The assessee being resident corporate assessee has been assessed u/s 143(3) wherein it transpired that the assessee claimed depreciation on goodwill for Rs.11.28 Lacs. The assessee submitted that it acquired distribution business of M/s Dadha Pharma Private Ltd. (DPPL) under a business transfer agreement for lump sum consideration of Rs.735 Lacs. Under the agreement, entire business was taken over as going concern w.e.f. 30.09.2015 and all assets and liabilities have been taken aver at subsisting value as on the date of transfer of business (30.09.2015). The excess consideration so paid by the assessee has been considered as goodwill and accordingly, capitalized in the books. The same being, intangible asset, would be entitled for depreciation. However, rejecting the same Ld. AO denied the depreciation.

5. The Ld. CIT(A) confirmed the stand of Ld. AO on the ground that no values were allocated for individual items of assets and liabilities including goodwill. Accordingly, the assessee did not purchase any goodwill. Aggrieved, the assessee is in further appeal before us.

6. Upon perusal of documents on record, it could be seen that the assessee has acquired distribution business of DPPL w.e.f. 30.09.2015 on slump sale basis which postulate passing of consideration without assigning any values to individual assets and liabilities. The assessee has paid a consideration of Rs.735 Lacs. The assets and liabilities that have been acquired by the assessee are listed at Schedule-1 of the agreement. The assessee has computed the goodwill based on audited financial statements as on 30.09.2015 as under: –

Dadha Pharma Private Limited
Acquisition of Kerala Division of Dadha Pharma Pvt. Ltd
Computation of Goodwill Based on audited financial statements (September 30, 2015)

Upon perusal of the above tabulation, it could be seen that the assets and liabilities have been taken over at values as appearing in the financial statements as on 30.09.2015. The excess payment made by the assessee over the book-value of assets and liabilities has been treated as goodwill which is correct accounting treatment and is in accordance with applicable accounting standards. The assessee has paid lump sum consideration of Rs.735 Lacs. Therefore, the observation of Ld. CIT(A) that the assessee has not purchased the goodwill, is not a correct observation. The case law of Hon’ble Delhi High Court in Triune Energy Services (P.) Ltd. V/s DCIT (65 Taxmann.com 288) squarely apply to the facts of assessee’s case. In this case, it was held by Hon’ble Court that where the assessee purchased business as going concern, consideration paid in excess of value of tangible assets was classifiable as goodwill eligible for depreciation. The further exercise to value goodwill was not warranted. Accordingly, we direct Ld. AO to allow deduction of depreciation as claimed by the assessee.

7. The appeal stands allowed in terms of our above order.

Order pronounced on 05^th May, 2022.