Depreciation on goodwill arising out of amalgamation

Facts:

Assessee had sought approval from Gujarat High court for demerger of its flour division and that of amalgamation with another company. Accordingly the return with NIL income was revised. It was noticed that the purchase consideration for the amalgamation was more than the value of the assets taken over. The additional consideration was recognized as goodwill and depreciation was claimed on the same. The AO sought to assume that the share premium over the face value was not to be allowed thus no goodwill arose on the amalgamation and thus disallowed the depreciation claim as well. On higher appeal CIT(A) upheld the order of the AO. On further appeal -

Held in favour of the assessee that the AO cannot read a non-existent transaction of redrawing the consideration by not recognising the goodwill and accordingly the depreciation claim on goodwill also needs to be upheld. The valuation report behind the amalgamation cannot be questioned.

Ed. Note: The claim of depreciation on intangible assets has a cessation of late post Finance Act, 2020. Even in such cases at best the revenue can disallow the depreciation by not recognizing the goodwill but the accounting of goodwill cannot be found fallacious based on GAAP. The issue here will always be going forward there will be no depreciation allowable on goodwill besides no cost of acquisition will also be acceptable. Finance Bill, 2023 also plays/reiterates the same tune/song.

Case: Real Eco-Energy Ltd. v. ITO 2023 TaxPub(DT) 1176 (Ahmedabad SMC Bench)