Depreciation on Goodwill in a Slump Sale (AY 2020-21)

1. The Core Dispute: Valuation vs. Commercial Reality

The assessee-company acquired a manufacturing unit as a going concern through a slump sale. The acquisition price exceeded the value of individual tangible assets, and the difference was recorded as goodwill.

Assessing Officer’s View: The AO disallowed the depreciation, arguing that the Business Transfer Agreement did not have an independent valuation for “goodwill.” He invoked the fifth proviso to section 32(1) (now the sixth proviso), which limits depreciation in cases of succession/amalgamation to the amount allowable to the predecessor.
Assessee’s Stand: The excess consideration represented the value of a “running business” including its intangible rights (licenses, approvals, etc.) necessary for manufacturing.

2. Legal Analysis: Goodwill as an Intangible Asset

The court relied on the established principle that goodwill in a business acquisition is not just a self-serving accounting entry but a bundle of commercial rights.

I. The “Bundle of Rights” Theory

Even if not separately valued, a going concern transfer inherently includes:

Statutory licenses and environmental clearances.
Regulatory permissions and factory licenses.
Business approvals and market advantages.

II. Supreme Court Precedent

The ruling followed the Supreme Court’s judgment in CIT vs. Smifs Securities Ltd., which held that goodwill is an intangible asset under the expression “any other business or commercial rights of similar nature” in Explanation 3 to Section 32(1).

3. The Ruling: Eligibility for AY 2020-21

The court held that for the period before the Finance Act 2021 amendment:

Goodwill arising from a slump sale constitutes an intangible asset eligible for depreciation under Section 32(1)(ii).
The “fifth proviso” could not be used to deny depreciation on an asset (goodwill) that was newly created in the hands of the transferee as a result of a genuine purchase transaction.

Key Takeaways for Taxpayers

The 2021 Cutoff: This ruling is vital for cases pending before April 1, 2021. From AY 2021-22 onwards, the Finance Act 2021 has specifically excluded goodwill from the definition of depreciable assets.
Proof of Acquisition: To support such claims for older years, taxpayers must demonstrate that the “excess” payment was for a running business with tangible regulatory and commercial benefits.
Depreciation Rate: For eligible years, the rate of depreciation on such intangible assets is 25%.

IN THE ITAT MUMBAI BENCH ‘A’

Anshul Speciality Molecules (P.) Ltd.

Deputy Commissioner of Income-tax^*

Amit Shukla, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 7503 (Mum) of 2025
[Assessment year 2020-21]

JANUARY 22, 2026

H.N. Motiwala for the Applicant. Surendra Mohan, SR. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- This appeal by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], dated 24.09.2025, passed under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] for Assessment Year 2020-21, whereby the learned CIT(A) confirmed the assessment order dated 27.09.2022 passed by the Assessing Officer under section 143(3) read with section 144B of the Act.

Facts of the Case

2. The assessee is a private limited company engaged in the business of specialty chemicals. For the assessment year under consideration, the assessee filed its return of income on 04.02.2021, declaring a total income of Rs. 19,60,49,330/-. The return was processed under section 143(1) of the Act on 20.12.2021, determining income at Rs. 19,60,54,970/-. The case was selected for complete scrutiny under CASS. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had, during the relevant previous year, acquired a going concern manufacturing unit from M/s Anmol Antioxidants Pvt. Ltd., Vadodara, by way of slump sale, for an aggregate consideration of Rs. 21,00,00,000/-, pursuant to a Business Transfer Agreement dated 10.02.2020, with effect from 01.03.2020.As per the assessee, the consideration of Rs. 21 crores included Goodwill amounting to Rs. 9,79,55,271/-, representing excess of consideration over the value of assets and liabilities taken over. The assessee claimed depreciation at 12.5%, amounting to Rs. 1,22,44,409/-, under section 32(1)(ii) of the Act. The Assessing Officer examined the claim of depreciation on goodwill and issued notices under section 142(1) calling upon the assessee to furnish details regarding the method of valuation of goodwill, documentary evidence, and the agreement for acquisition.

3. After considering the replies filed by the assessee, the Assessing Officer held that the goodwill was created as a consequence of the Business Transfer Agreement and did not preexist in the books of either the transferor or the assessee. The Business Transfer Agreement did not specify any separate consideration for goodwill. The Assessing Officer also noted that no independent valuation report for goodwill was furnished and the conveyance deeds reflected acquisition only of land and building.

4. Relying upon the decision of the Bangalore Bench of the ITAT in United Breweries Ltd. v. Addl. CIT (Bangalore – Trib.)/(ITA Nos. 722, 801 & 1065/Bang/2014 dated 30.09.2016) and invoking the 5th proviso to section 32(1) of the Act, the Assessing Officer held that depreciation on such goodwill was not allowable.

5. Accordingly, the Assessing Officer disallowed the depreciation of Rs. 1,22,44,409/-, added the same to the income of the assessee, and completed the assessment under section 143(3) read with section 144B of the Act at a total income of Rs. 20,82,99,380/-. Penalty proceedings under section 270A were also initiated.

6. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). Before the CIT(A), the assessee submitted that the acquisition was a slump sale between unrelated parties, and not a case of succession, amalgamation or demerger. The assessee also submitted that the 5th / 6th proviso to section 32(1) was not applicable to slump sale transactions and goodwill arose as the excess of purchase consideration over the net assets acquired and constituted an intangible asset eligible for depreciation. Reliance was placed on the judgment of the Hon’ble Supreme Court in Smifs Securities Ltd., wherein goodwill was held to be an intangible asset eligible for depreciation under section 32(1)(ii).

7. The learned CIT(A), however, did not accept the contentions of the assessee. The CIT(A) held that the goodwill of Rs. 9,79,55,271/- was newly created as a result of the slump sale and did not exist in the books of the transferor. The CIT(A) also observed that the Business Transfer Agreement did not specify any agreed value for goodwill, nor was there a valuation report. Relying on the decision of Co-ordinate Bench in case of United Breweries Ltd. (supra) the CIT(A) held that once the restriction under the proviso to section 32(1) applies, valuation of goodwill becomes irrelevant. Thus, the learned CIT(A) confirmed the disallowance of depreciation on goodwill and dismissed related ground of the appeal.

8. Aggrieved by the order of the learned CIT(A), the assessee is in appeal before us and has raised the following grounds:

“1. On the facts in the circumstances of the case, the learned Commissioner of Income tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, erred in confirming the order of the Assessing Officer in respect of not allowing depreciation of Rs. 1,22,44,409/- on goodwill of Rs. 9,79,55,271/- arose on acquisition of manufacturing unit as going concern from Anmol Antioxidants Pvt. Ltd. on February 10, 2020 on slump sale basis.

2. On the facts and in the circumstances on the case, the said learned Commissioner of Income tax has also erred in not appreciating the fact, that the appellant had acquired manufacturing unit of Anmol Antioxidants Pvt. Ltd. at lump sum price of Rs 21,00,00,000/- while net assets of the said unit were only Rs. 11,20,44,729/-. Thus on the said transaction goodwill arose in the books of the appellant at Rs. 9,79,55,271/- and therefore appellant has claimed depreciation of Rs. 1,22,44,409/- being 50% of 25% i.e. rate of depreciation.

3. On the facts and in the circumstances on the case, the said learned Commissioner of Income tax has also erred in relying on the sixth proviso of section 32(1) of the Act and decision of Bangalore Tribunal in United Breweries Ltd. v. Addl CIT, particularly when that proviso as well as decision are applicable only in case of succession or amalgamation or demerger of the company and not in case of acquisition of business unit of another company.”

9. During the course of hearing before us, the learned Authorised Representative of the assessee reiterated the submissions made before the lower authorities. He invited our attention to the statement titled “Calculation of Goodwill on Acquisition” placed in the paper book (page no. 5), prepared for Accounting Year 2019-20, wherein the manner of computation of goodwill arising on acquisition of the manufacturing unit on slump sale basis has been set out. It was submitted that the assessee acquired the manufacturing unit for a lump sum consideration of Rs. 21,00,00,000/-. Against the said consideration, the fair market value of land and building, as per valuation report, along with the book value of plant and machinery and other tangible assets, aggregating to Rs. 11,20,44,729/-, was taken over. The balance amount of Rs. 9,79,55,271/- was computed and accounted for as goodwill on acquisition, being the excess of consideration paid over the value of tangible assets acquired. The learned Authorised Representative submitted that the said working was duly furnished before the Assessing Officer and forms part of the record.

10. The learned Authorised Representative further drew our attention to Annexure-5 titled “Licenses and Approvals”, forming part of the Business Transfer documentation, which enumerates various statutory approvals, consents, licences and permissions transferred along with the business as a going concern. These include, inter alia, environmental clearances, pollution control consents, factory licence, GMP certificate, narcotic licence, methanol licence, boiler licence, SSI registration and other regulatory approvals necessary for carrying on the manufacturing activity. It was submitted that these licences, approvals and regulatory permissions, though not separately valued in the Business Transfer Agreement, constitute valuable commercial and business rights enabling the assessee to carry on the acquired business without interruption. According to the learned Authorised Representative, such commercial rights and advantages, including intangibles such as trademarks and business rights, which were not individually identifiable or separately valued, are inherently embedded in the excess consideration paid and have rightly been subsumed and recognised as goodwill in the books of the assessee.

11. The learned Authorised Representative thus contended that the goodwill so recognised represents not merely an accounting residual but embodies commercial rights, business advantages, licences, approvals and other intangibles acquired as part of the slump sale of a going concern. He submitted that depreciation claimed on such goodwill was therefore in accordance with law and the provisions of section 32(1)(ii) of the Act.

12. The learned Authorised Representative further placed reliance on the judgment of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (SC), wherein the Hon’ble Supreme Court has held that goodwill is an intangible asset falling within the expression “any other business or commercial rights of similar nature” under section 32(1)(ii) of the Act and is therefore eligible for depreciation. It was submitted that the goodwill arising in the present case on acquisition of a going concern for a lump-sum consideration squarely falls within the ratio laid down by the Hon’ble Supreme Court, and accordingly, the depreciation claimed thereon is legally permissible.

13. The learned Authorised Representative also placed reliance on the judgment of the Hon’ble Bombay High Court in CIT v. Grindwell Norton Ltd. [2025] 483 ITR 651 (Bom), dated 07.06.2023, which is the jurisdictional High Court. It was submitted that the issue relating to allowability of depreciation on intangible assets including goodwill under section 32(1)(ii) stands squarely covered in favour of the assessee by the said decision.

14. Per contra, the learned Departmental Representative relied upon the orders of the Assessing Officer and the learned CIT(A), NFAC. The learned Departmental Representative submitted that the lower authorities have correctly appreciated the facts and law and have rightly held that the goodwill claimed by the assessee was not acquired for a specific consideration, but was created as a consequence of the slump sale transaction.

15. We have carefully considered the rival submissions, perused the orders of the lower authorities, examined the material placed on record, including the computation of goodwill on acquisition and the annexures evidencing licences and approvals, and duly considered the judicial precedents relied upon by both the parties.

16. It is an undisputed fact that the assessee acquired a manufacturing unit as a going concern on slump sale basis for a lump sum consideration of Rs. 21,00,00,000/-. The assessee allocated the consideration towards identifiable tangible assets based on fair market value and book values, and the residual amount of Rs. 9,79,55,271/- was recognised as goodwill on acquisition. It is also borne out from record that various statutory licences, environmental clearances, factory licence, regulatory permissions and business approvals, necessary for carrying on the manufacturing activity, stood transferred as part of the going concern, though not separately valued.

17. The goodwill so recognised is therefore not a self-serving book entry, but represents the excess consideration paid for acquisition of business and commercial rights embedded in a running business, including licences, approvals, regulatory permissions and business advantages.

18. The issue whether goodwill constitutes an intangible asset eligible for depreciation is no longer res integra. The Hon’ble Supreme Court in Smifs Securities Ltd. (supra) has categorically held that goodwill falls within the ambit of “any other business or commercial rights of similar nature” under Explanation 3(b) to section 32(1).

The Hon’ble Supreme Court has held as under:

“A reading the words „any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression „any other business or commercial rights of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).”(para 4)

The Hon’ble Supreme Court further observed:

“5. In the circumstances, we are of the view that ‘Goodwill’ is an asset under Explanation 3(b) to Section 32(1) of the Act.”

Thus, the legal position is settled that goodwill arising as a result of acquisition of a business is an intangible asset eligible for depreciation under section 32(1)(ii).

The Hon’ble Bombay High Court in Grindwell Norton Ltd. (supra) has reaffirmed the above principle and expressly followed Smifs Securities Ltd. The Hon’ble High Court observed:

“As regards question (a) is concerned, Mr. Suresh Kumar in fairness agreed that it would be covered by the judgment of the hon’ble apex court in CIT v. Smifs Securities Ltd.. following CIT v. Smifs Securities Ltd., had held that the contention of the Revenue that intangible assets like business and commercial brand equity are goodwill on which depreciation is not allowable is not correct.”

19. The jurisdictional High Court having affirmed the allowability of depreciation on goodwill, the Tribunal is bound to follow the same in judicial discipline.

20. The Revenue has placed reliance on the decision of the Bangalore Bench of the Tribunal in United Breweries Ltd. On careful examination, we find that the said decision is clearly distinguishable on facts and in law. In United Breweries Ltd., the goodwill arose pursuant to amalgamation of a wholly owned subsidiary, and the Co-ordinate Bench therein applied the fifth proviso to section 32(1), which restricts the aggregate depreciation allowable to the amalgamating and amalgamated company to what would have been allowable had the amalgamation not taken place. The Co-ordinate Bench specifically held that “the said judgment [Smifs Securities Ltd.] would not override the provisions of 5th proviso to Section 32(1) of the Act which restricts the claim in the cases specified thereunder.” Thus, the disallowance in United Breweries Ltd. was not on the ground that goodwill is not an intangible asset, but on the statutory restriction applicable in cases of amalgamation, where depreciation in the hands of the successor cannot exceed what was allowable in the hands of the predecessor.

21. In the present case, however, the acquisition is not by way of amalgamation, demerger or succession covered under section 170, but is a slump sale between unrelated parties. The fifth proviso to section 32(1) is therefore not attracted. Consequently, the very foundation on which United Breweries Ltd. was decided does not exist in the present case.

22. Further, even in United Breweries Ltd., the Tribunal unequivocally accepted the principle that goodwill is eligible for depreciation under section 32(1)(ii), subject only to statutory restriction under the proviso.

23. In view of the settled legal position laid down by the Hon’ble Supreme Court in Smifs Securities Ltd., as reaffirmed by the Hon’ble jurisdictional High Court in Grindwell Norton Ltd., and having regard to the fact that the present case involves acquisition of a going concern by slump sale, we hold that the goodwill arising on such acquisition constitutes an intangible asset eligible for depreciation under section 32(1)(ii).

24. The reliance placed by the Revenue on United Breweries Ltd. is misplaced, being factually and legally distinguishable. Accordingly, the disallowance of depreciation of Rs. 1,22,44,409/-made by the Assessing Officer and sustained by the CIT(A) is unsustainable.

25. The disallowance of depreciation of Rs. 1,22,44,409/-claimed on goodwill is deleted. The Assessing Officer is directed to allow depreciation on goodwill in accordance with law while giving effect to this order. The grounds raised by the assessee are allowed accordingly.

In the result, the appeal filed by the assessee is allowed.