ACIT-16(1), MUMBAI, MUMBAI vs. FOUNTAINHEAD ENTERTAINMENT PVT. LTD., MUMBAI

The Revenue has raised the following grounds of appeal: 1. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in allowing depreciation on goodwill by ignoring that the acquisition cost was Nil ( relying on Explanation 7 to Section 43(1)), failing to recognize goodwill created on amalgamation as a self-generated asset and disregarding the retrospective amendment from the Finance Act 2021. 2. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in allowing depreciation on goodwill by ignoring that the decision of the Hon’ble Supreme Court in CIT V. Smifs Securities Ltd. [2012]348 ITR 302 (SC) is restricted to the interpretation that goodwill is a capital asset under the category of intangible and that the depreciation is allowable to it under section 32(1). There was no occasion for Hon’ble SC to adjudicate as to whether the actual cost of goodwill acquired by the amalgamated company is to be taken as Zero in view of provisions of explanation 7 to section 43(1) and explanation 2 to section 43(6)(c) or that no depreciation is allowable due to provision of sixth proviso 2 ( earlier fifth proviso) to Section 32(1), as these issues were not agitated before Hon’ble SC. 3. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in allowing depreciation on goodwill by ignoring that the facts and circumstances in the present case are fundamentally different from the facts in Smifs Securities, rendering such reliance misplaced and legally untenable? 3. The grounds raised by the Revenue relate to the deletion of the disallowance of depreciation of Rs.7,60,76,908/- claimed by the assessee on goodwill. Being interconnected, these grounds are taken up together.

The facts, in brief, are that the assessee is a company engaged in the business of event management, including developing, promoting, marketing, organizing and managing events, products, brands and corporate functions. The assessee filed its original return of income on 17.10.2016 declaring a total loss of Rs.41,28,678/-. Subsequently, a revised return was filed on 29.03.2017 declaring a total loss of Rs.7,67,05,542/-. As recorded in the appellate order, the revised return was processed under section 143(1) of the Act on 07.12.2017 without any adjustment to the returned loss.

On the basis of the aforesaid information, the AO issued a notice dated 23.03.2023 under section 148A(b) of the Act. The assessee furnished its reply on 03.04.2023. Thereafter, an order under section 148A(d) was passed and a notice under section 148 was issued on 06.04.2023. In response, the assessee filed its return of income on 04.05.2023. The loss adopted in the final computation in the assessment order was Rs.7,67,05,542/-. During the reassessment proceedings, the AO issued notices under sections 142(1) and 143(2) of the Act. The assessee furnished replies dated 03.07.2024 and 30.10.2024 and also responded on 13.03.2025 to the show-cause notice dated 06.03.2025 concerning the proposed disallowance of depreciation on goodwill.

The particulars of the business acquisition, as recorded in the CIT(A)’s order, were as follows: Particulars Amount Fixed assets Rs.18,16,062/- Loans and advances Rs.5,12,80,028/- Accounts receivable Rs.2,36,88,903/- Cash balance Rs.3,90,38,893/- Less: Liabilities Rs.4,81,31,517/-

Before the AO, the assessee submitted that the goodwill arose upon acquisition of the business through a slump sale and represented the excess consideration paid over the value of the net assets acquired. It was contended that such goodwill constituted an intangible asset eligible for depreciation under section 32(1)(ii) of the Act as applicable to the assessment year under consideration. The assessee relied, inter alia, on the decision referred to in ground No.2 above. The assessee further submitted that the amendment introduced by the Finance Act, 2021 excluding goodwill from depreciable assets applied from assessment year 2021-22 onwards and that it had discontinued claiming depreciation on goodwill from that assessment year.

The AO did not accept the explanation. In paragraph 10 of the assessment order, the AO examined the provisions concerning actual cost and written-down value and held that, since the written-down value of goodwill in the hands of the predecessor was nil, its cost in the hands of the assessee would also be nil for the purpose of depreciation. In this regard, the AO invoked Explanation 7 to section 43(1) and Explanation 2 to section 43(6)(c) of the Act. The AO also relied on the sixth proviso to section 32(1), taking the view that depreciation allowable upon succession could not exceed the depreciation that would have been allowable had the succession not taken place.

The AO further observed that the Supreme Court decision relied upon by the assessee dealt with the character of goodwill as an intangible asset and did not adjudicate the restrictions arising from the aforesaid provisions. 4

Aggrieved, the assessee preferred an appeal before the CIT(A) on 19.04.2025. Before the CIT(A), the assessee reiterated that the business had been acquired on a slump-sale basis for actual consideration and that the goodwill represented the excess of such consideration over the net assets acquired. It was submitted that the provisions concerning amalgamation invoked by the AO did not apply to the transaction and that the amendment introduced by the Finance Act, 2021 did not affect the claim for assessment year 2016-17.

The CIT(A), in paragraph 4 of the impugned order, under “Analysis & Adjudication”, accepted the assessee’s contentions. The CIT(A) recorded that the assessee had purchased the entire business of Oranjuice Entertainment on a slump-sale basis under the Business Transfer Agreement dated 13.10.2015 and had recognised the excess purchase consideration of Rs.30,43,07,631/- as goodwill. The CIT(A) held that the exclusion of goodwill from the definition of intangible assets by the Finance Act, 2021 operated from assessment year 2021-22 and did not apply to the assessment year under consideration. The CIT(A) also referred to section 55(2) while considering the purchase consideration attributable to goodwill.

As regards the provisions invoked by the AO, the CIT(A), at page 15 of the impugned order, observed as follows:

Before us, the learned Authorized Representative (AR) reiterated the facts concerning the acquisition of the business, the consideration paid, the computation of goodwill and the depreciation claimed thereon. He drew our attention to the relevant portions of the assessment order, particularly paragraph 10 containing the AO’s reasoning and paragraph 11 recording the disallowance. He also referred to paragraph 4 of the CIT(A)’s order, particularly the findings at pages 14 to 16 concerning the nature of the transaction as a slump sale, the applicability of the provisions invoked by the AO and the effective date of the Finance Act, 2021 amendment. The learned AR relied on the findings recorded by the CIT(A) in support of the relief granted to the assessee.

In support of the assessee’s claim, the learned AR placed reliance on the judgment of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC), dated 22.08.2012. He relied on the recognition of goodwill as an intangible asset under Explanation 3(b) to section 32(1) of the Act. The learned AR further placed reliance on the decision of the Mumbai Bench of the Tribunal in Thermo Fisher Scientific India (P.) Ltd. v. DCIT [2023] 155 taxmann.com 346 (Mumbai – Trib.), in ITA No.769/Mum/2023 for assessment year 2009-10, dated 31.07.2023. He relied on the said

The learned Departmental Representative relied on the assessment order and supported the disallowance of depreciation on goodwill made by the AO.

We have considered the rival submissions, the orders of the authorities below and the decisions placed on record. The controversy is whether depreciation claimed on goodwill arising from the assessee’s acquisition of the business of Oranjuice Entertainment can be denied by treating the transaction as an amalgamation, by assigning nil cost to the goodwill, or by applying the Finance Act, 2021 amendment to assessment year 2016-17.

The nature of the transaction must be determined first. The assessment order itself records that, under the Business Transfer Agreement dated 13.10.2015, the business of Oranjuice Entertainment was transferred to the assessee as a going concern on a slump-sale basis for Rs.37,20,00,000/-. The CIT(A) recorded the same nature of transaction. The net assets acquired were recorded at Rs.6,76,92,369/-, and the balance consideration of Rs.30,43,07,631/- was recognized as goodwill. Neither order records a scheme of amalgamation between the assessee and Oranjuice Entertainment. The Revenue’s description of the transaction as an amalgamation in its grounds cannot displace the transaction recorded by both authorities.

For the assessment year under consideration, section 32(1)(ii), read with Explanation 3(b), provided for depreciation on the specified intangible assets and other business or commercial rights of similar nature. In CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC), the Hon’ble Supreme Court considered whether goodwill fell within that provision. Paragraphs 4 and 5 of the judgment read:

On that question, the decision of the coordinate Bench in Thermo Fisher Scientific India (P.) Ltd. v. DCIT [2023] 155 taxmann.com 346 (Mumbai – Trib.), ITA No.769/Mum/2023, dated 31.07.2023, is directly

The AO also invoked the sixth proviso to section 32(1). The same is reproduced for ready reference – "Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor rand the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." 28. This contention cannot be disposed of solely by stating that there was no amalgamation, because the proviso also refers to specified cases of

The AO referred to United Breweries Ltd. v. Addl. CIT to support his view. The coordinate Bench in Thermo Fisher Scientific India (P.) Ltd. dealt with that decision in paragraph 5.25: “The ratio is in the case of United Breweries Ltd. (supra) is also not applicable over the facts of case as in the said case there was amalgamation of the three wholly owned subsidiaries whereas in the instant case there is a acquisition of units of third parties by way of slump sale.” 31. We adopt that distinction only to the extent supported by the present record: this case concerns a business acquisition under a Business Transfer Agreement, whereas the Revenue’s reasoning treats it as an amalgamation. We do not assume, without the agreement or other evidence before us, that every feature of the third-party acquisitions considered in Thermo Fisher Scientific India (P.) Ltd. is present here. The transaction recorded in the assessment and appellate orders is sufficient to reject the AO’s application of the amalgamation provisions.

The Finance Act, 2021 amendment does not alter that conclusion for AY 2016-17. It excluded goodwill of a business or profession from the scope of depreciable intangible assets with effect from 01.04.2021. The Memorandum explaining the amendment expressly states that it applies to AY 2021-22 and subsequent assessment years. It also recognises that depreciation could have been obtained on goodwill before AY 2021-22 and provides for its treatment in computing cost of acquisition thereafter. The AO’s view that the amendment retrospectively denies the assessee’s claim for AY 2016-17 is inconsistent with that stated commencement and the statutory scheme.

In paragraph 5.27 of Thermo Fisher Scientific India (P.) Ltd., the coordinate Bench concluded: “In view of the above discussion, we concur with the arguments of the learned counsel of the assessee that goodwill arising from transactions of acquisition of units of GSK and CTPL, is eligible for depreciation under the provisions of the Act.” 35. The factual foundation of that conclusion, namely acquisition of a business as a going concern for consideration and recognition of goodwill in 12

In view of the foregoing discussion, we concur with the findings of the learned CIT(A) allowing depreciation on goodwill for the assessment year under consideration. Accordingly, the order of the learned CIT(A) deleting the disallowance of Rs.7,60,76,908/- is upheld. Ground Nos.1 to 3 raised by the Revenue are dismissed.

In the result, the appeal filed by the Revenue is dismissed.