Depreciation on Goodwill Arising from Amalgamation is a Valid Claim.

Issue

Can a company claim depreciation under Section 32 of the Income-tax Act on goodwill that was recognized in its books as a result of a High Court-sanctioned amalgamation, where such goodwill represents the excess of the consideration paid over the fair value of the net assets acquired?

Facts

The assessee company amalgamated with another company, BEIPL, under a scheme sanctioned by the High Court.
As consideration, the assessee issued its own shares to the shareholders of BEIPL.
The value of the shares issued exceeded the value of the net assets acquired from BEIPL. This excess amount was recognized as “goodwill” in the assessee’s books of account, as prescribed by the amalgamation scheme.
The assessee claimed depreciation on this goodwill as an intangible asset under Section 32.
Both the Assessing Officer and the Commissioner (Appeals) disallowed this claim.

Decision

The court ruled in favour of the assessee, holding that the disallowance of depreciation on goodwill was incorrect.
It held that goodwill acquired during an amalgamation is an intangible asset, and its “actual cost” can be determined.
The excess of the consideration paid over the value of the net assets acquired constitutes the actual cost of the goodwill.
Therefore, the assessee was entitled to claim depreciation on this goodwill under Section 32.

Key Takeaways

Goodwill is a Depreciable Asset: Goodwill generated through a business acquisition or amalgamation is recognized as an intangible asset and is eligible for depreciation under Section 32.
Cost of Acquisition: The cost of such goodwill is the difference between the total consideration paid (in cash, shares, or other forms) and the net value of the assets taken over.
High Court Sanction Matters: An amalgamation scheme sanctioned by a High Court, which prescribes the accounting treatment for recognizing goodwill, provides a strong basis for its valuation and subsequent depreciation claim for tax purposes.

IN THE ITAT AHMEDABAD BENCH ‘B’

Bakeri Projects (P.) Ltd.

Deputy Commissioner of Income-tax

DR. BRR Kumar, Vice President
and Ms. Suchitra Kamble, Judicial Member

IT Appeal No. 785 (Ahd.) of 2023
[Assessment year 2016-17]

OCTOBER 10, 2025

S.N. Soparkar, A.R. for the Appellant. R.P. Rastogi, CIT-D.R. for the Respondent.

ORDER

Ms. Suchitra Kamble, Judicial Member.- This is an appeal filed against the order dated 11-08-2023 passed by National Faceless Appeal Centre (NFAC), Delhi for assessment year 2016-17.

2. The grounds of appeal are as under:-

“1.

The order of the Learned CIT(A) dated 11.08.2023 (hereinafter referred to as the ‘impugned order’) is cryptic and passed without assigning any reasons.

The Learned CIT(A) and AO have erred in disallowing depreciation under Section 32 of the Act on goodwill recognized in the course of amalgamation scheme. The CIT(A) and AO failed to appreciate that goodwill is an asset under Explanation 3(b) to Section 32(1) of the Act.

The Learned CIT(A) and AO have erred in holding that amalgamation is a colourable device through which goodwill has been created by entities of the same group, leading to consequent tax evasion, as no reasons are thereafter discussed for forming this conclusion. Said conclusion is derived only on the of assumptions and presumptions.

The learned CIT(A) and AO have failed to appreciate that in absence of goodwill forming part of assets in the books of the amalgamating company or in absence of goodwill forming part of block of assets as per tax records of the amalgamating company, Explanation (7) to section 43(1) and Explanation (2) to section 43(6) of the Act are not applicable in case of BPPL Therefore, the Learned CIT(A) has wrongly concluded that learned AO has rightly invoked the 5th Proviso (Now 6 Proviso) of Section 32(1) of the Act. Thus under section: 32 of the Act, depreciation should be allowable to BPPL on actual cost of good will recorded in its books of accounts, being excess of consideration over amount if net assets of BEIPL recorded in books of BPPL, since it reflects the actual cost incurred by BPPL towards goodwill.

The learned CIT(A) and AO have failed to consider that Goodwill does not indicate mere revaluation of an existing asset. It represents the excess consideration paid by BPPL over net assets of BEIPL taken over by BPPL on account of certain intangible benefits acquired by BPPL on acquisition of BEIPL’s business under the Scheme (such as brand, loyal customer base, trust & quality, competent workforce, and decades of experience).

Initiation of Penalty proceedings under section 274 read with section 271(1)(c) is unjust, unreasonable and therefore, bad in law.

The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.

Total Tax Effect Rs. 24,03,04,786/-”

3. Bakeri Projects Private Limited (“BPPL”) had filed its return of income for AY 2016-17 on 7 October 2016 declaring total loss of Rs. 20,91,35,518. The case was selected for complete scrutiny under CASS and a notice for e-proceeding under section 143(2) was generated and duly served to the appellant. During the course of the assessment proceedings, the appellant filed detailed submissions before the learned Assessing Officer (“AO”) providing all relevant explanation/information sought by AO along with supporting documentary evidences. During the previous year under consideration, BPPL and Bakeri Engineering and Infrastructure Pvt. Ltd (“BEIPL”) entered into scheme of arrangement (“the Scheme”) for amalgamation of BEIPL with BPPL from appointed date of 1 April 2015 which was duly approved by the Honorable High Court of Gujarat vide order dated 29 October 2015. Pursuant to the Scheme, BPPL issued shares to the shareholders of BEIPL in consideration of net assets of BEIPL based on the valuation report obtained from an independent valuer. The assessee had accounted for the scheme of amalgamation in accordance with Purchase Method as per Accounting Standard 14 “Accounting for Amalgamations” (“AS 14”). As per the accounting treatment pre scribed in the scheme sanctioned by the High Court of Gujarat, the excess of consideration discharged by BPPL (being the shares issued to the shareholders of transferor company, i.e. BEIPL) over amount of net assets of BEIPL was recognised as goodwill in the books of BPPL in compliance with AS-14. Relying on various judicial precedents including that of Supreme Court and Gujarat High Court, assessee claimed depreciation of Rs. 24,03,04,786 under section 32(1)(ii) of the Income-tax Act, 1961 (“the Act”) during the year under consideration on the goodwill of Rs. 96,12,19,145 recognized during the course of amalgamation. The AO has disallowed the said depreciation on goodwill at Rs. 24,03,04,786/-.

4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.

5. The ld. A.R. submitted that the Assessing Officer as well as CIT(A) erred in disallowing depreciation u/s. 32 of the Act on goodwill recognized in the course of amalgamation scheme. The goodwill is an asset under explanation 3(b) to section 32(1) of the Act. The conclusion of the Assessing Officer as well as CIT(A) that amalgamation is a colourable device through which goodwill has been created by entity of the same group leading to consequent tax evasion is not justified as it is based only on the assumptions and presumptions. The ld. A.R. submitted that the Assessing Officer as well as the CIT(A) failed to appreciate that in absence of goodwill forming part of the assets in the books of the amalgamating company or in absence of goodwill forming part of block of assets as per tax records of the amalgamating company Explanation (7) to Section 43(1) and Explanation (2) to Section 43(6) are not applicable in case of the assessee. Thus, the ld. A.R. submitted that the CIT(A) wrongly concluded that the Assessing Officer has rightly invoked the 5^th proviso (now 6^th proviso) of Section 32(1) of the Act. Under section 32 of the Act, depreciation should be allowable to BPPL on actual cost of goodwill recorded in its books of account, being excess of consideration over amount if net asset of BEIPL recorded in books of BPPL, since it reflects the actual cost incurred by BPPL towards goodwill. The ld. A.R. submitted that goodwill does not indicate mere re-valuation of an existing asset. But it represents the excess consideration paid by BPPL over net asset of BEIPL taken over by BPPL on account of certain intangible benefits acquired by BPPL on acquisition of BEIPL’s business under the scheme such as brand, loyal customer base, trust and quality, competent workforce and decades of experience. The ld. A.R. relied upon the various decisions of the Tribunal as follows: