Depreciation Claimed on Non-Compete Fees Is Unsustainable, But Goodwill Arising from Slump Sale Qualifies for Depreciation

ORDER

Sandeep Singh Karhail, Judicial Member.- The assessee has filed the present appeal against the impugned order dated 30/12/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year for the assessment year 2018-19.

2. In this appeal, the assessee has raised the following grounds: –

Ground 1: The learned CIT-A erred in law in not granting opportunity of personal hearing to the appellant despite a specific request being made in the submissions

Ground 2: On the facts and in the circumstances of the case, the CIT-A erred by failing to adjudicate upon the Ground no. 1 relating to the violation of the Principles of Natural Justice by the Ld. Assessing Officer.

Ground 3: The learned CIT-A erred in law and in facts, in stating wrong Assessment Year in the impugned Order Under section 250.

Ground 4: On the facts and in the circumstances of the case erred in upholding disallowance of depreciation on Intangible Assets (Goodwill and Non-Compete Fees) arising from an acquisition on a going concern on a Slump Sale basis.

3. The only issue that arises for our consideration, in the present case, pertains to the disallowance of the claim of depreciation on intangible assets, i.e. goodwill and non-compete fees.

4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a private domestic company engaged in the business of manufacturing transformer radiators and tanks. For the year under consideration, the assessee filed its return of income on 12/10/2018, declaring a total income of Rs. 1,33,10,200. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that a substantial addition of intangible assets has been reported during the year under consideration in the income tax return filed by the assessee. As per the assessee, during the financial year 2009-10, the sole proprietary concern, M/s Techno Electricals, was converted into the existing private limited company, i.e. M/s Hi-tech Radiators Private Ltd, through a slump sale transaction. During the assessment proceedings, the assessee submitted that this transaction generated the goodwill amounting to Rs. 4,46,07,462 and non-compete fees amounting to Rs. 50 lakh, which was recognised as intangible assets in the books of account. It was further submitted that these intangible assets were never considered for the purpose of calculation of gross block of intangible assets from the assessment year 2010-11 to 2017-18, and were added for the first time to the block of assets in the financial year 2017-18, relevant to the year under consideration, and depreciation of Rs. 1,11,51,866 and Rs. 12,50,000, was claimed in respect of goodwill and non-compete fees, respectively, during the year under consideration. As per the assessee, the goodwill qualifies for depreciation in the nature of “any other business or commercial rights of a similar nature” under section 32(1) of the Act, read with Explanation-3 to the said section. In this regard, the assessee relied upon the decision of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd.  348 ITR 302 (SC).

5. The Assessing Officer (“AO”), vide order dated 30/06/2021 passed under section 143(3) read with section 144B of the Act, held that the main question that needs to be examined is not whether depreciation is allowable on goodwill, but whether depreciation is allowable on goodwill acquired during amalgamation. The AO held that, as per section 32(1) of the Act, the depreciation in case of any block of assets is to be computed on the written down value of the block of assets, which we shall have the same meaning as in section 43(6)(c) of the Act. Further, by referring to the provisions of Explanation 7 to section 43 (1) of the Act, the AO held that in the case of amalgamation, the capital asset transferred by the amalgamating company to the amalgamated company shall have the same actual cost, which it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its business. Accordingly, the AO held that, as in the present case, the actual cost of the goodwill in the case of the proprietary concern was Nil, the actual cost in the case of the assessee shall also be Nil. Further, by referring to the provisions of Explanation 2 to section 43(6)(c) of the Act, the AO held that since the written down value of the intangible asset in the books of the proprietary concern was Nil, the actual cost would remain Nil in the hands of the assessee. By referring to the provisions of 6^th proviso (5^th proviso before the Finance Act, 2015) to section 32(1) of the Act, the AO held that the depreciation needs to be restricted to the value considering that the amalgamation has not taken place and since, in the present case, in the hands of the proprietary concern, the depreciation was Nil, there cannot be depreciation in the hands of the assessee company. In this regard, the AO also placed reliance upon the decision of the Coordinate Bench of the Tribunal in United Breweries Ltd. v. Addl. CIT  (Bangalore – Trib.). Accordingly, the AO disallowed the claim of depreciation of Rs. 1,11,51,866 on goodwill and Rs. 12,50,000 on non-compete fees.

6. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the disallowance of depreciation claim by the assessee on goodwill and non-compete fees. In this regard, the learned CIT(A) also relied on the amendment by the Finance Act, 2021 and held the said amendment to be prospective in nature. Being aggrieved, the assessee is in appeal before us.

7. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the Hon’ble Supreme Court in Sharp Business System v. CIT 484 ITR 509 (SC), has held that the payment of non-compete fee is a revenue expenditure under section 37(1) of the Act. Accordingly, the learned AR submitted that since the noncompete fee has been held to be revenue expenditure, the claim of depreciation by the assessee on the same is now unsustainable. Further, the learned AR submitted that since the expenditure on the non-compete fee was incurred in the financial year 2009-10 and not claimed in that year, the said expenditure cannot be claimed in the year under consideration. As regards the depreciation claimed on goodwill, the learned AR submitted that the assessee purchased assets and liabilities of the proprietary concern by way of slump sale and consideration paid, by way of issuance of shares, over and above the net asset value of the proprietary concern was considered as goodwill and non-compete fees by the assessee in its books of accounts. The learned AR submitted that even though goodwill and noncompete fees were recognised in the books of accounts in the year of acquisition, i.e. the financial year 2009-10. However, no depreciation was claimed by the assessee till the year under consideration, and even the Department never gave any depreciation to the assessee in the earlier assessment years. By placing reliance on various judicial pronouncements, the learned AR submitted that all the contentions of the Revenue have already been considered by the Coordinate Benches of the Tribunal, and the issue of depreciation on goodwill arising out of an amalgamation/slump sale transaction has been decided in favour of the taxpayer. The learned AR further submitted that the amendment by the Finance Act, 2021, whereby goodwill of the business has been excluded for the purpose of claim of depreciation under section 32 of the Act, is prospective in nature, and thus is not applicable to the year under consideration.

8. On the contrary, the learned Departmental Representative (“learned DR”), vehemently relying upon the order passed by the lower authorities, submitted that the amendment by the Finance Act, 2021, to the provisions of section 32 of the Act has a retrospective applicability, and thus has rightly been invoked by the learned CIT(A) for rejecting the claim of the assessee.

9. We have considered the submissions of both sides and perused the material available on record. During the financial year 2009-10, the sole proprietary concern, M/s Techno Electricals, was converted into a private limited company, i.e. M/s Hi-tech Radiators Private Ltd. Vide Deed of Conveyance dated 01/10/2009, the assessee agreed to acquire the running business of M/s Techno Electricals along with all its assets and liabilities pertaining to its business. As a consideration, the assessee company issued 5,00,000 equity shares of Rs. 100 each at a premium of Rs. NIL per share to the proprietor of M/s Techno Electricals. As the total consideration paid by the assessee, by way of the issuance of shares, exceeded the total value of assets after reducing the total value of liabilities of the proprietary concern, the balance amount was recognised by the assessee as noncompete fees and goodwill in its books. Accordingly, Rs. 50 lakh was considered as non-compete fees and Rs. 4,46,07,462 was considered as goodwill by the assessee in its books of accounts. However, the assessee did not claim depreciation on the non-compete fees and goodwill in any of the previous assessment years, and only in the year under consideration the assessee claimed the depreciation for the first time.

10. Insofar as the depreciation claimed on non-compete fees, the learned AR, during the hearing, fairly submitted that the issue whether non-compete fees are revenue or capital expenditure has recently been settled by the Hon’ble Supreme Court in Sharp Business System (supra). The learned AR submitted that, pursuant to the decision of the Hon’ble Supreme Court in Sharp Business System (supra), non-compete fees can be allowed only as a revenue expenditure under section 37(1) of the Act. Accordingly, the learned AR submitted that in view of the law laid down by the Hon’ble Supreme Court, the assessee’s claim of depreciation on non-compete fees is unsustainable. Having considered the aforesaid submissions, the depreciation claimed by the assessee on non-compete fees is rejected.

11. As regards the depreciation claimed by the assessee on goodwill, as per the assessee, the goodwill recognised in its books of accounts pursuant to the slump sale transaction falls within the ambit of the expression “business or commercial rights of similar nature” under section 32(1)(ii) of the Act. In this regard, the assessee placed reliance upon the decision of the Hon’ble Supreme Court in Smifs Securities Ltd. (supra). However, the AO rejected the plea of the assessee observing as follows: –

“Disallowing the claim of depreciation on the following grounds –

The submissions of the assessee have been carefully considered but not found acceptable for the reasons discussed and explained above. The assessee has failed to controvert the above facts and has been unable to justify his claim for depreciation on this asset. Considering the facts and the judicial decisions discussed above and relying on the decision of ITAT Bangalore in the case of United Breweries Ltd. (TS-553-ITAT-2016-Bang, the depreciation claimed by the assessee is not allowable and amount of Rs.1,24,01,866/- claimed as depreciation for the intangible assets are disallowed. Relying on the decision of ITAT Bangalore in the case of United Breweries Ltd. (TS-553-ITAT-2016-Bang), in which the ITAT considered the assessee’s (amalgamated /successor company) claim of depreciation on goodwill arising on amalgamation applying 6th proviso to section 32(1) for AY 2008-09, and held that assessee cannot claim depreciation on assets acquired under amalgamation, more than the depreciation allowable to amalgamating company, the generation of goodwill amounting to Rs.4,46,07,462/- & non-compete fees amounting to Rs.50,00,000/-, and the subsequent claim of depreciation during the year for Rs.1,24,01,866/-is hereby disallowed and added to the total income.”

12. Therefore, from the careful perusal of the findings of the AO, it is evident that the claim of depreciation on goodwill was denied by placing reliance upon the provisions of 6th proviso (5th proviso before the Finance Act, 2015) to section 32(1), Explanation 2 to section 43(6), and Explanation 7 to section 43(1) of the Act. We find that while considering a similar issue, the Coordinate Bench of the Tribunal in Dow Chemical International (P.) Ltd. v. Dy. CIT  (Mumbai – Trib.), after considering similar provisions as relied upon by the Revenue in the present case for denying the claim of the assessee, observed as follows: –

“22. As regards the reliance placed by the Revenue upon the sixth proviso to section 32(1) of the Act, we are of the considered view that the sixth proviso to section 32(1) of the Act presupposes that there exists a depreciable asset in the block of the amalgamating company which is transferred on amalgamation and depreciation is allowable to both the amalgamating company and the amalgamated company on the same asset. Accordingly, the said proviso provides a mechanism for splitting depreciation on such asset transferred by the amalgamating company between the amalgamating and amalgamated company, in a manner that the aggregate depreciation should not exceed the threshold provided in the said proviso. We find that the Hon’ble Karnataka High Court in Padmini Products (P.) Ltd. v/s DCIT, reported in  (Karnataka) held that fifth proviso (now sixth proviso) to section 32(1)(ii) of the Act restricts aggregate deduction by the predecessor and successor and if in a particular year there is no aggregate deduction, the provisions of the proviso shall not be applicable. It was further held that until and unless it is the case of aggregate deduction, the proviso has no role to play. Thus, adverting to the facts of the instant case, since the amalgamating company did not have any goodwill recorded in its books of accounts or as part of a block of depreciable assets, prior to amalgamation, therefore the question of claim of depreciation on goodwill by the amalgamating company does not arise in the instant case. Accordingly, we are of the considered view that the provisions of the sixth proviso to section 32(1) of the Act are not applicable to the facts of the present case since the goodwill did not exist in the books of the amalgamating company but has arisen in the process of amalgamation.

23. Further, the Revenue has placed reliance upon the provisions of Explanation 7 to section 43(1) of the Act which provides that when a capital asset is transferred by an amalgamating company to the amalgamated company, the actual cost of the transferred capital asset in the hands of the amalgamated company is to be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business. Further, reliance has also been placed upon the provisions of Explanation 2(b) to section 43(6) of the Act, which lays down a similar principle as Explanation 7 to section 43(1) of the Act and provides that actual cost of the block of assets in the case of amalgamated company shall be the Written Down Value of the block of assets in the case of amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. Thus, from the careful perusal of the aforesaid provisions, it is evident that the same pre-supposes either the existence of a block or the value of goodwill forming part of such block or the asset has actual cost to the amalgamating company. However, in the instant case, as noted above, the goodwill arising on account of amalgamation was neither reflected as an asset nor was part of the block of assets belonging to the amalgamating company. We find that while considering the applicability of the provisions of the sixth proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) of the Act in a similar factual matrix wherein the goodwill as claimed by the taxpayer represents the difference between the purchase consideration and value of the net assets acquired on amalgamation, the coordinate bench of the Tribunal in Urmin Marketing (P.) Ltd. v/s DCIT, reported in  (Ahd.-Trib.) held that since the taxpayer had not acquired any goodwill from the amalgamating company, therefore these provisions are not applicable. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: –

24. Therefore, respectfully following the aforesaid decision of the coordinate bench of the Tribunal in Urmin Marketing (P.) Ltd. (supra), we are of the considered view that provisions of the sixth proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) of the Act have no applicability to the facts of the present case.”

13. Further, in the aforesaid decision, the Coordinate Bench also considered similar reliance placed by the Revenue on the decision of the Coordinate Bench of the Tribunal in United Breweries Ltd. (supra) and observed as follows: –

“26. The Revenue, vide its written submissions, has relied upon certain judicial pronouncements, which have been dealt with hereunder: –

…….

(e) Lastly, the decision in the case of United Breweries Ltd. v/s Addl. CIT, reported in  (Bangalore – Trib.), relied upon by the lower authorities, the value of goodwill in the books of the amalgamating company was only Rs.7.45 crore which has been shown by the taxpayer at Rs.62.30 crore and accordingly, it was held that the taxpayer has failed to justify the valuation of goodwill at Rs.62.30 crore. However, there is no dispute regarding the value of goodwill in the present case. We find that for a similar reason the coordinate bench of the Tribunal in Aricent Technologies (Holdings) Ltd. v/s DCIT, in ITA No.90/Del/2013 distinguished the aforesaid decision in United Breweries Ltd. (supra). Thus, we are of the considered view that the reliance placed on the aforesaid decision is misplaced.”

14. Further, the Coordinate Bench in the aforesaid decision also rejected the reliance placed on the amendment vide Finance Act, 2021, and held that the said amendment is effective from 01/04/2021 and would accordingly apply to the assessment year 2021-22 and subsequent assessment years. The relevant findings of the Coordinate Bench, in the aforesaid decision, are reproduced as follows: –

“27. Further, the reference in the impugned order to the amendment made vide Finance Act, 2021 is also of no help to the Revenue as the said amendment in relation to the allowance of depreciation on goodwill is effective from 01/04/2021 and would accordingly apply to the assessment year 2021-22 and subsequent assessment years. This aspect is evident from page 71 of the Memorandum Explaining the Provisions in the Finance Bill, 2021. Even the decision of the coordinate bench of the Tribunal in I&B Seeds (P) Ltd v/s DCIT, reported in  (Bang-Trib.) held that amendment in section 32(1) by Finance Act, 2021 to the effect that no depreciation was allowable on goodwill would take effect from 01/04/2021 and would be applicable from assessment year 2021-22 and subsequent years.”

15. Therefore, in view of the facts and circumstances of the present case and respectfully following the decision of the Coordinate Bench cited supra, we are of the considered view that the assessee is entitled to claim depreciation on goodwill arising on account of slump sale transaction under section 32 of the Act. Accordingly, the AO is directed to allow the claim of depreciation on goodwill. As a result, the impugned order on this issue is set aside. As a result, Ground No. 4 raised in assessee’s appeal is partly allowed.

16. In view of our aforesaid findings, the remaining grounds raised by the assessee need no separate adjudication.

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