TRENT LIMITED ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 2(3)(1), MUMBAI

In response, the assessee submitted that since the business segment was acquired on a slump sale basis, it had obtained a purchase price allocation report from a registered valuer for allocating the consideration paid between the assets and liabilities taken over. It was submitted that the valuation report determined the values of individual assets and liabilities on a scientific basis for recording the same in the books of account of the assessee in accordance with Indian Accounting Standard (Ind AS) 103.It was further submitted that in case of a slump sale, purchase price allocation between the assets based on a valuation report is considered as the cost base of such assets for tax depreciation purposes, and that the balance consideration is allocated to goodwill. The assessee stated that out of the total consideration of Rs. 87.82 crores, an amount of Rs. 43.77 crores was allocated to tangible and identified intangible assets and the balance amount of Rs. 44.02 crores was allocated to goodwill purchased.

The assessee also referred to the provisions of section 2(11) and section 32(1) of the Act and contended that goodwill is an intangible asset eligible for depreciation under the expression “any other business or commercial rights of similar nature”. Reliance was placed on the decision of the Hon‟ble Supreme Court in the case of Smifs Securities Ltd. (24 taxmann.com 222) in support of the claim that goodwill is an asset under Trent Limited Explanation 3(b) to section 32(1) of the Act. It was also stated that the tax auditors had verified the amount of goodwill recorded and the claim of depreciation thereon in the tax audit report.

The Assessing Officer considered the submissions of the assessee but did not accept the same. He held that no allocable cost was actually incurred for the creation of goodwill and that goodwill is not specifically included in section 32 of the Act for the allowance of depreciation. He further observed that goodwill in general is not a depreciable asset and its value may depend upon how a business is run. According to him, goodwill may appreciate or may not depreciate depending on how the business is run by the acquirer and, therefore, there was no justification to claim depreciation on goodwill. The Assessing Officer noted that the value of goodwill in the block of intangible assets was Rs. 44,05,26,325/-. Depreciation was claimed thereon at the rate of 25 per cent amounting to Rs. 11,01,31,581/-. Accordingly, the claim of depreciation on goodwill was disallowed and added back to the total income. Penalty proceedings under section 270A of the Act were initiated separately for under-reporting of income.

Aggrieved by the said disallowance, the assessee carried the matter in appeal before the CIT(A).Before the CIT(A), the assessee reiterated that the transaction with THPL was a slump sale of a business as a going concern and that the consideration of Rs. 87.82 crores was paid for the entire undertaking comprising assets and liabilities. It was contended that the excess consideration paid over the fair value of the net assets Trent Limited represented goodwill, which embodied various individual intangible assets that could not be independently valued. It was submitted that such goodwill was a purchased goodwill and had been recognised in the books of account based on a valuation report of a recognised valuer. The assessee further contended that depreciation on such goodwill was allowable under section 32(1) of the Act and relied upon judicial precedents, including the decision of the Hon‟ble Supreme Court in the case of Smifs Securities Ltd.(supra).

The CIT(A) recorded that the assessee had entered into a business transfer agreement with THPL, whereby the „value fashion‟ business was transferred as a going concern by way of slump sale for a consideration of Rs. 87.82 crores. He noted the assessee‟s contention that the goodwill represented the excess of consideration over the fair value of net assets and that such excess reflected various individual intangible assets such as contracts, business or commercial rights, licences, reputation and employees, which could not be independently valued but formed part of the slump sale.

The CIT(A) further noted that the Assessing Officer had recorded a factual finding that no amount was actually paid on account of goodwill as such and that the goodwill claimed by the assessee was computed as a residual difference between the total purchase consideration and the net book value of the tangible and intangible assets acquired.

The CIT(A) further observed that the so-called goodwill claimed by the assessee was not based on any identifiable or quantifiable intangible asset but was merely the residual difference between the total purchase consideration and the net book value of the assets acquired. According to him, such method of computation, without specific supporting documentation or identifiable rights, rendered the nature of the claimed goodwill questionable.

The CIT(A) also took note of the amendment introduced by the Finance Act, 2021, whereby “goodwill of a business or profession” was excluded from the definition of “block of assets” under section 2(11) of the Act with effect from 01.04.2021, and depreciation on goodwill was expressly disallowed from assessment year 2021-22 onwards, even where such goodwill had been previously recognised and depreciated.

On the basis of the above factual and legal discussion, the CIT(A) held that although the transaction qualified as a slump sale under section 2(42C) of the Act, the goodwill arising Trent Limited therefrom lacked specific attribution or valuation as a distinct asset. He concluded that since the alleged goodwill was not established as a distinct asset acquired for consideration and in view of the legislative amendment excluding goodwill from depreciable assets, the claim for depreciation on goodwill was not legally sustainable.

Accordingly, the CIT(A) confirmed the disallowance of depreciation on goodwill amounting to Rs. 11,01,31,581/- and dismissed the corresponding ground of appeal raised by the assessee.

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

On the facts and in the circumstances of the case and in law, the Hon’ble Commissioner of Income-tax (Appeals) erred in stating that the goodwill arising on slump was without cost thereby not appreciating the fact that the goodwill was recognised basis the purchase price allocation report obtained by the Appellant.

On the facts and in the circumstances of case and in law, the Hon’ble Commissioner of Income-tax (Appeals) erred in relying on the amendment introduced by Finance Act, 2021 to section 32 of the Act for disallowing depreciation on goodwill arising out of slump sale even when he has observed that the amendment is applicable from AY 2021-22 onwards.”

The learned AR drew our attention to various clauses of the Business Transfer Agreement entered into with Trent Hypermarket Private Limited, particularly the definitions of “Assets”, “Brand”, “Contracts”, “Assumed Employees” and allied schedules forming part of the agreement. It was pointed out that Trent Limited under the said agreement, the transfer comprised not only physical assets but also vendor relationships, intellectual property, brands, contracts, employee base, systems, records and other commercial rights relating to the „value fashion‟ business. According to the learned AR, these collectively constituted the commercial and business rights forming the substratum of goodwill.

The learned AR further placed reliance on the decision of the Co-ordinate Bench in case of Anshul Speciality Molecules Pvt. Ltd. VS DCIT (ITA No. 7503/Mum/2025), in particular referred to paragraph 15 thereof, wherein it has been observed that goodwill in such cases represents a composite of bundled intangibles acquired as part of a going concern. It was contended that the facts of the present case are on the same footing, inasmuch as the assessee acquired an entire business undertaking as a going concern and paid consideration for the same, which stood allocated to tangible assets, identified intangibles and the balance to goodwill based on valuation.

It was thus submitted that the goodwill recognised in the books was not fictitious or self-generated but was a purchased goodwill arising from acquisition of a business undertaking and represented a bundle of valuable commercial and business rights, duly supported by the Business Transfer Agreement and the valuation report. The learned Authorised Representative, therefore, contended that the claim of depreciation on such goodwill was in accordance with law and deserved to be allowed.

The issue arising for adjudication is whether, on the facts and in the circumstances of the case, the excess consideration paid by the assessee for acquisition of the „value fashion‟ business undertaking by way of slump sale is liable to be recognised as goodwill, being a bundle of commercial and business rights, so as to qualify as an intangible asset eligible for depreciation under section 32 of the Act. Corollary thereto is whether the disallowance of depreciation merely on the ground that no specific amount was paid towards goodwill and that such goodwill was computed as a residual figure can be sustained in law.

We have carefully considered the rival submissions, perused the assessment order, the order of the CIT(A), and the material placed on record, including the Business Transfer Agreement and the valuation report. We note that it is an admitted position that the assessee acquired the „value fashion‟ business segment from Trent Hypermarket Private Limited by way of slump sale with effect from 01.10.2017 as a going concern for a lump sum consideration of Rs. 87.82 crores. Under the said agreement, the transfer comprised not only tangible assets but also inventories, contracts, vendor relationships, intellectual property, brands, Trent Limited books and records, information systems, and employees, together with all rights, title and interests relating to the business.

The Assessing Officer disallowed the depreciation on goodwill on the reasoning that no allocable cost was actually incurred for creation of goodwill, that goodwill is not specifically enumerated under section 32 of the Act, and that goodwill, by its inherent nature, may appreciate or may not depreciate depending upon how the business is run. The CIT(A), while noting that the transaction qualifies as a slump sale under section 2(42C) of the Act, held that the goodwill claimed by the assessee was not based on any identifiable or quantifiable intangible asset and was merely the residual difference between the total purchase consideration and the net book value of assets acquired. The CIT(A) further observed that the amount paid was not specifically attributed to goodwill and that, in light of the amendment introduced by the Finance Act, 2021, the claim of depreciation on goodwill is not legally sustainable.

At the same time, the CIT(A) has recorded a categorical finding in paragraph 8.4 of his order that the excess consideration paid by the assessee represents various individual intangible assets such as contracts, business or commercial rights, licences, reputation and employees, which cannot be independently valued but form part of the slump sale agreement, and that the value of such goodwill has been determined by a recognised valuer and is a purchased goodwill recognised consequent to acquisition. Thus, on facts, the CIT(A) has Trent Limited accepted that what was acquired by the assessee was a bundle of commercial and business rights forming part of the transferred undertaking.

The learned AR has drawn our attention to the definitions of “Assets”, “Brand”, “Contracts”, “Books and Records” and allied clauses and schedules of the Business Transfer Agreement, which demonstrate that the transfer was of a complete business undertaking with all its attendant commercial attributes. It was further pointed out that the purchase price allocation was carried out on the basis of a valuation report and that the balance consideration, after allocating value to tangible and identifiable intangible assets, was assigned to goodwill. The learned Departmental Representative, on the other hand, has relied upon the orders of the lower authorities.

The core controversy, in our considered view, is not confined to the arithmetical working of goodwill but relates to the character of what has been acquired by the assessee under the slump sale. Goodwill is not a mere balancing figure but represents the value of a composite bundle of commercial and business rights such as business reputation, customer base, vendor and contractual relationships, trained workforce, brands and other business advantages which enable the transferee to carry on the business as a going concern. In a slump sale, what is transferred is an undertaking as a whole and the consideration is paid for the business as a composite unit and not for individual assets in isolation.

Applying the above principle, what is required to be examined is whether, in substance, the assessee has acquired such bundle of commercial and business rights in the course of slump sale for a consideration exceeding the value of identifiable assets. The absence of a separately earmarked amount described as “goodwill” in the agreement is not determinative. In a slump sale, consideration is paid for the undertaking as a whole and not for its individual components. Therefore, if the consideration exceeds the aggregate value of tangible assets and identifiable specific intangibles, the residual amount necessarily represents the value of commercial rights and advantages inherent in the business transferred.

In the present case, the assessee has acquired an ongoing business as a going concern with its assets, employees, contracts, brands and systems. The excess consideration paid cannot be examined with reference to isolated assets but must be appreciated in the context of acquisition of the entire business structure with its attendant commercial benefits. Such excess, in Trent Limited our considered view, represents the value of a composite bundle of intangibles and commercial rights and partakes the character of goodwill in law.

The observations of the CIT(A) regarding the manner of computation do not detract from this legal position. Once it is accepted that what is acquired is a business undertaking and that consideration has been paid for acquiring the same, the excess of such consideration over the value of identifiable assets is to be attributed to goodwill or business and commercial rights of similar nature. The requirement is not of a separate payment towards goodwill but of acquisition of such rights as an integral part of the transaction.

As regards the reliance placed by the CIT(A) on the amendment introduced by the Finance Act, 2021, the said amendment is admittedly applicable from assessment year 2021- 22 onwards. The assessment year before us is 2018-19. Therefore, the said amendment has no application to the year under consideration and cannot be invoked to deny depreciation which was otherwise allowable under the law prevailing for the relevant year.

In our considered view, the facts on record establish that the assessee has acquired a bundle of commercial and business rights along with the undertaking and that the excess consideration paid is attributable to such rights. Respectfully following the ratio laid down by the Hon‟ble Supreme Court in Trent Limited Smifs Securities Ltd. (supra), we hold that the said amount partakes the character of goodwill and is an intangible asset within the meaning of section 32(1) read with Explanation 3(b) of the Act.

Accordingly, the excess consideration is to be treated as goodwill, being a bundle of business and commercial rights of similar nature, and the assessee is entitled to depreciation thereon in accordance with law. The disallowance made by the Assessing Officer and sustained by the CIT(A) is, therefore, deleted.

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