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ITAT allows Vodafone’s claim of depreciation on goodwill; holds amendment to Section 2(11) and Section 32 of the Income Tax Act by the Finance Bill, 2021 with effect from AY 2021-22 applicable prospectively

Introduction: In a significant development for corporate tax jurisprudence, the Income Tax Appellate Tribunal (ITAT) Mumbai has ruled in favor of Vodafone India Services Pvt Ltd, allowing the telecom giant to claim depreciation on goodwill acquired from a slump sale. This decision, pertaining to the case Vodafone India Services Pvt Ltd Vs DCIT, underscores the Tribunal’s interpretation of the amendments to Section 2(11) and Section 32 of the Income Tax Act by the Finance Bill, 2021, as applying prospectively from the Assessment Year (AY) 2021-22.Vodafone India Services Pvt Ltd Vs DCIT (ITAT Mumbai); I.T.A. No.2241/Ahd/2018; 18/12/2023; 2009-10

Mumbai Income Tax Appellate Tribunal (ITAT) held that the assessee was legally entitled to claim depreciation on the goodwill acquired pursuant to slump sale acquisition of Call Centre Business (“CCB”) from Vodafone Essar Gujarat Ltd. (“VEGL”) and directed the AO to compute and allowed the same in accordance with law.

ITAT noted that in the return of income originally filed, the assessee had not claimed depreciation on goodwill. However, pursuant to the judgment rendered by the Hon’ble Apex Court in the case of CIT v. Smifs Securities Ltd. (348 ITR 302) in the year 2012, the assessee became aware that it was legally entitled to claim depreciation u/s 32 of the Income Tax Act on the goodwill acquired from slump sale acquisition; and accordingly raised a claim before the AO during the course of assessment proceedings, which was denied by the AO in light of the decision in Goetze India Ltd. (284 ITR 323). ITAT held that the Hon’ble Court in Goetze (India) Ltd (supra) had only placed fetter on the AO, however, the same would not impinge the powers of Tribunal in doing so. ITAT placed reliance on the decisions of Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders Private Limited (252 CTR 151) and Hon’ble Supreme Court in the case of Jute Corporation of India Ltd. v. CIT (187 ITR 688) to hold that powers of the Ld. CIT(A) being the first appellate authority as well as ITAT were wide enough to entertain the appellant’s plea for depreciation on goodwill, which had not been claimed in the return of income, but relevant facts on the issue were placed before the AO.

The ITAT further held that the legal position on the allowability of depreciation claimed on goodwill had been examined by the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (supra), wherein it was held that goodwill acquired on amalgamation (being difference between the net book value of assets and consideration paid) was a capital right which would fall under the expression ‘any other business or commercial right of a similar nature’ and hence eligible for depreciation while computing business income. It noted that the provisions of Section 2(11) and Section 32 of the Income Tax Act, as amended by the Finance Bill, 2021 with effect from AY 2021-22, wherein it has been provided that the “goodwill” is not an intangible asset eligible for depreciation, is applicable only prospectively from AY 2021-22 and onwards.

ITAT allows Vodafone's claim of depreciation on goodwill

Regarding the valuation of goodwill, ITAT noted that since the goodwill of the business was self-acquired having NIL cost, the entire excess consideration was offered to tax as capital gains by VEGL. Accordingly, it held that it was not a case that the assessee and/or the related party had obtained any undue tax benefit on account of this transaction involving acquisition/sale of goodwill.

The ruling was delivered by the Division Bench of Mumbai ITAT comprising Shri Aby T. Varkey, Judicial Member, and Shri Amarjit Singh, Accountant Member.

Ms. Fereshte Sethna, Founding & Managing Partner, DMD Advocates appeared for the Assessee.

Conclusion: The ITAT Mumbai’s ruling in favor of Vodafone India Services Pvt Ltd marks a pivotal moment in the interpretation of tax laws concerning goodwill depreciation. By acknowledging the prospective application of the amendments introduced by the Finance Bill, 2021, the Tribunal has provided much-needed clarity to businesses on the treatment of goodwill as a depreciable asset. This decision not only reaffirms the tribunal’s authority to entertain claims not made in the original tax return but also sets a precedent for similar cases in the future, ensuring that the principles of justice and fair play remain central to the adjudication process in the realm of tax law.

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April 2024