Depreciation on Goodwill in Slump Sale: Residual Value Recognized as Depreciable Intangible Asset

Depreciation on Goodwill in Slump Sale: Residual Value Recognized as Depreciable Intangible Asset

Issue

Whether depreciation is allowable on “Goodwill” arising in a slump sale when it is calculated as a residual amount (Purchase Consideration minus Fair Value of identifiable assets) rather than being specifically earmarked or paid for as a separate asset.

Facts

• The Transaction: The assessee company acquired a business undertaking via a slump sale (as defined under Section 2(42C)) from a group company for a lump sum consideration.

• Accounting Treatment: Following a Purchase Price Allocation (PPA), the assessee identified the fair value of tangible and specific intangible assets. The excess amount paid was recorded as “Goodwill” in the books of accounts.

• AO’s Disallowance: The Assessing Officer disallowed the depreciation claim, arguing that:

  • No “actual cost” was specifically incurred for goodwill.

  • “Goodwill” was not explicitly listed in the categories of intangible assets under Section 32.

  • It was merely a balancing accounting entry.

Decision

• Nature of Slump Sale: The Court held that in a slump sale, the price is paid for the entire undertaking as a going concern. It is legally and commercially impossible to value every single “intangible” like customer loyalty, market reputation, or business synergy separately.

• Goodwill as “Commercial Rights”: Following the landmark Supreme Court decision in CIT v. Smifs Securities Ltd., “Goodwill” falls under the expression “any other business or commercial rights of similar nature” in Section 32(1)(ii).

• Residual Calculation is Valid: The absence of a specific price tag for goodwill in the agreement does not make it “cost-free.” If the total consideration exceeds the tangible assets, the difference represents the price paid for the “commercial advantage” (Goodwill).

• Conclusion: The excess consideration is indeed “Goodwill” acquired during the slump sale and is eligible for depreciation. [In favour of assessee]

Key Takeaways

• Historical Context: This ruling applies to cases before the Finance Act, 2021. From Assessment Year 2021-22 onwards, the law has been amended to specifically provide that depreciation is NOT allowable on goodwill, even if purchased.

• Purchase Price Allocation (PPA): For years prior to 2021, a PPA report from an independent valuer is the strongest evidence to justify the “actual cost” of goodwill in a slump sale.

• Identity of Assets: While the identity of individual assets is not assigned in a slump sale for tax purposes, for accounting and depreciation purposes, the purchaser is required to allocate the lump sum price.