ACIT CIRCLE 8(3)(1), MUMBAI, MUMBAI vs. GANJAM TRADING CO. PVT. LTD., MUMBAI

From the above, it can be seen that the excess of consideration over the Net Asset Value of the four companies worked out to Rs.854,47,73,594/- and it was accounted as Good will. The assessee claimed depreciation thereon @ 25%, which worked out to Rs 213,61,93,300/-.

“3.3. The reply filed by the assessee company has been duly considered. Goodwill of a business or profession has not been specifically provided as an asset either in the definition under clause 11 of section 2 of the Act or in section 32 of the Act. Probably, what is described as “goodwill” in the balance sheet of business need not always be an intangible asset entitled to depreciation. It should be capable of independent evaluation. Further , in order that an asset may be depreciable , it should lose its value by use. With due respect to the decision of the Hon‟ble Supreme Court in the case of CIT v Smifs Securities Ltd [2012] 348 ITR 302 (SC) reliance is placed on the decision of Delhi High Court in the case of Sharp Business Systems in wherein the Hon‟ble High Court has held that “ but for the ownership of intellectual property or knowhow or license or franchise, it would be unable to either access the advantage or asset the right and the nature of the right mentioned or spelt out in the C.O.No. 99/Mum/2024 provision as against the word „ at large‟ or in legal parlance „ in rem‟. The Hon‟ble Delhi Court also distinguished the term goodwill considered as intangible asset by the Hon‟ble Supreme Court in the case of Smifs Securities Pvt Ltd by stating that every species of right spelt out expressly by the statue- i.e. of the intellectual property right and other advantages such as knowhow, franchise, license etc can be said to be alienable (Transferable). Thus the court has emphasized that, the intangible asset should be the one which is alienable , failing which it cannot be termed as intangible. 3.4 The Bangalore Tribunal in the case of United Breweries while appreciating the findings of the Supreme Court in the case of Smifs Securities (supra) held that claim of depreciation on goodwill arising on amalgamation cannot be allowed. The Tribunal relied on 5th proviso to section 32(1) of the I.T. Act 1961 which provides that depreciation on the assets acquired on amalgamation cannot be more than the deprecation as was allowable to the amalgamated company had the amalgamation not taken place. The Tribunal held that since no depreciation was being claimed on goodwill by the amalgamated company prior to amalgamation, tax payers claim of depreciation on goodwill was required to be restricted to NIL. 3.5 Various case laws quoted by the assessee company were carefully perused and the facts of the present case of the assessee are different from the decisions relied by the assessee company. 3.6 In view of different judicial interpretations and to put the controversy to end the Finance Bill ,2021 has provided that goodwill in general is not a depreciable asset and its value may depend upon how a business runs; goodwill may see appreciation or in the alternative no depreciation in value. Therefore, there may not be a justification of depreciation on goodwill in the manner there is a need to provide for depreciation in case of other intangible assets or plant or machinery. It further clarified that while the Hon‟ble Supreme Court in the case of Smifs Securities has held that goodwill of a business or profession is a depreciable asset, the actual calculation of depreciation on goodwill is dependent upon various provisions and on application of the provisions of the Act the depreciation in some situations would be nil 3.7 Goodwill of a business or profession has not been specifically provided as an asset either in the definition under clause 11 of section 2 of the Act or in section 32 of the Act and the Finance Bill „2021 bill has further clarified the allowability of claim of depreciation on goodwill. However, the claim of depreciation on goodwill is covered by proviso to section 32(1) of the I.T.Act, 1961 which is already provided in the Act and is also relevant to the assessment year under consideration 3.8 In view of the above, the depreciation on goodwill claimed by the assessee company at Rs213,61,93,399/- is disallowed C.O.No. 99/Mum/2024 and added back to the income for the relevant year under consideration.”

“3.27. In the case of Sharp Business System Vs CIT (211 taxman 576) on which the Ld AO has placed reliance, the question arose whether the payment of non-compete fees paid amounts revenue expenditure or capital expenditure. The Hon'ble Delhi High Court held that the non- compete fees paid by the assessee as a consideration for not setting up or undertaking or assisting in the setting up or undertaking any business in India, of selling, marketing and trade of electronic office products for seven years amounted to capital expenditure. It held that such non-compete fees being a right in persona would not fall within the definition of "any other business or commercial right". The present case, relates to acquiring goodwill and distinguishable to the said case relating to payment of non-compete fees…..”

With regard to the decision rendered by Bangalore bench of ITAT in the case of United Breweries (supra), the assessee contended as under:-

“3.28. The AO has also relied on the decision of the Hon'ble Bangalore Tribunal in the case of United Breweries Vs ACIT (76 taxmann.com103) in the assessment order. The said case relates to goodwill generated on merger of wholly owned subsidiary with assessee. The Hon'ble Tribunal held that the claim of depreciation in the hands of the assessee is subjected to the 5 th proviso to section 32(1) and accordingly the claim of depreciation was not allowable. The facts of the present case are distinguishable, as they do not relate to merger of wholly owned subsidiary. Intact, the said decision was considered by the Hon'ble Hyderabad Tribunal in the case of Mylan Laboratories C.O.No. 99/Mum/2024 Ltd. vs.DCIT (113 taxmann.com 6)wherein the Hon'ble Tribunal distinguished the judgment holding as under: "the AO followed the decision of Bangalore bench of ITAT in the case of United Breweries (cited supra )to disallow the claim of depreciation on goodwill. The Tribunal had considered the judgment of the Hon'ble Supreme Court in the case of Smits Securities Ltd.and has held that the Hon'ble Supreme Court has only held that goodwill is an intangible asset and that depreciation is allowable thereon ,but, that it does override the provisions of 5th Proviso to section 32(1) of the Act. We find that the facts of United Breweries are distinguishable from the facts of the case before us, as in the Case of United Breweries, there was a merger with its Wholly owned Subsidiary, whereas in the case of the assessee, it is amalgamation by purchase. Therefore, the decision in the case of United Breweries is not applicable to the case before us."

C.O.No. 99/Mum/2024 However, in some other cases (like that of acquisition of goodwill by purchase) there could be valid claim of depreciation on goodwill in accordance with the decision of Hon'ble Supreme Court holding goodwill of a business or profession as a depreciable asset. It is seen that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill in the manner there is a need to provide for depreciation in case of other intangible assets or plant &machinery. Hence there appears to be little justification In view of above discussion, it has been decided to propose that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. In a case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021- 22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill. Therefore, to give effect to the above decision, it has been proposed to, (a) amend clause (11) of Section 2 of the Act to provide that block of asset shall not include Goodwill of a business or profession; (b) amend clause (ii)of sub-section(1) of section 32 of the Act to provide that goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and therefore not eligible for depreciation. Further, it is also proposed to amend Explanation 3 to sub- section (1)of the said section to provide that goodwill of a business or profession shall not be considered as an asset for the said sub-section. (c) amend section 50 of the Act to provide that in a case where goodwill of a business or profession formed part of a block of asset for the assessment year beginning on the 1st April, 2020 and depreciation has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in the manner as may be prescribed. (d) amend section 55 of the Act by substituting clause (a) of subsection (2) to provide that in relation to a capital asset, being goodwill of a business or profession, or a trademark or brand C.O.No. 99/Mum/2024 name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,- (1) In the case of acquisition of such asset by the assessee by purchase from a Previous owner, means the amount of the purchase price; and (2) in the case falling under sub-clause (i) to (iv)of sub-section (1)of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and (3) in any other case, shall be taken to be nil (e) provide that in case of goodwill of business or profession acquired by the assessee by way of purchase from a previous owner (either directly or through modes specified under sub-clause(i) to (iv) of sub-section(1) of section 49) and any deduction on account of depreciation under section 32 of the Act has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st April, 2021, then the cost of acquisition will be the purchase price as reduced by the depreciation so obtained by the assessee before the previous year relevant to assessment year commencing on 1st April, 2021. These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021- 22 and subsequent assessment years. {Clauses 7.18 and 201)"

The highlighted portion would show that the Parliament has visualized the assessee‟s claim of depreciation would have been allowed up to AY.2020- 21. Accordingly, it has been prescribed that the depreciation allowed shall be deducted from the cost of goodwill for the purpose of computing capital gains. The eligibility to claim depreciation on goodwill was settled by the Hon‟ble Supreme Court in the case of Smifs Securities Ltd. (348 ITR 302) (SC). Hence, in order to overcome the above said decision of the Hon‟ble Supreme Court, the above amendments were brought by the Parliament w.e.f 01-04-2021 through Finance Act, 2021. Hence, it is clear that the C.O.No. 99/Mum/2024 Government was aware that the depreciation will be allowed on goodwill. Further, the amendment made by Finance Act, 2021 has been made applicable from AY.2021-22 onwards. On legal front, the assessee submitted that the above said amendment, being substantive in nature denying the right of the assessee to claim depreciation shall have only prospective effect. In support of this proposition, the assessee placed reliance on the decision rendered by the Hon‟ble Supreme Court in the case of CIT v. Vatika Township P.Ltd. (CivilAppeal No. 8750 of 2014).

C.O.No. 99/Mum/2024 10. The Ld.DR relied upon by the Co-ordinate Benches in the case of Borkar Packaging P Ltd (2010)(131 TTJ 99)(Panaji), wherein the goodwill, being the difference between purchase consideration and NAV of assets was held to be not eligible for depreciation. However, the above said decision has been rendered prior to the decision of the Hon‟ble Supreme Court rendered in the case of Smifs Securities Ltd (supra). Hence, the Revenue cannot take support of the above said decision rendered by the Panaji Bench of ITAT. The Ld,DR also relied upon the decision rendered by the Mumbai Bench of Tribunal in the case of ACIT vs. Dosti Realty Ltd (ITA No.2043/Mum/2022 dated 13-04-2023). In this case, we notice that the Tribunal has doubted the very availability of the Goodwill in the facts prevailing in that case. It was further held by the Tribunal that the decision rendered by the Hon‟ble Supreme Court in the case of Smifs Securities Ltd (surpa) is only an authority only to the extent that goodwill is a depreciable asset. However, in the instant case, we notice that the AO has denied depreciation on Goodwill, but does not doubt the availability of goodwill. The Hon‟ble Supreme Court has accepted in the case of Smifs securities Ltd (supra) that the excess consideration paid by the assessee over the value of net assets acquired should be considered as Goodwill arising on amalgamation and depreciation is allowable thereon.

C.O.No. 99/Mum/2024 13. Before the Ld.CIT(A), the assessee advanced following arguments with regard to the interest disallowance made by the AO:- (a) The assessee is into investment and financing business. The total borrowings on which interest was paid stood at Rs.278.93 crores, while the total advances given or lent stood at Rs.256.78 crores. Hence, the major portion of loan funds has been used for financing activities.

(b) The interest free funds available with the assessee as on 31-03- 2018 was Rs.1031 crores, while the total amount of investments available as on that date was Rs.145.39 crores.

Accordingly, it was submitted that the loan funds were not actually diverted for making investments. Even otherwise, since the interest free funds available with the assessee is more than the value of investment, no disallowance of interest expenses is called for. In support of this proposition, the assessee placed reliance on the decision rendered by the Hon‟ble Supreme Court in the case of CIT vs. Reliance Industries Ltd (Civil Appeal No.10 of 2019) and the decision rendered by the Hon‟ble Bombay High Court in the case of HDFC Bank Ltd (366 ITR 505).

Accordingly, the Ld.CIT(A) deleted the disallowance made by the AO. The Revenue is aggrieved.

C.O.No. 99/Mum/2024 16. We shall now take up the Cross objection filed by the assessee. It is delayed by 28 days. The assessee has filed an affidavit, explaining the delay that the delay has occurred in view of seeking legal advice on the issue of disallowance u/s.14A of the Act in view of various judicial pronouncements. We heard the parties on this issue. Having regard to the submissions made in the petition, we are of the view that there was reasonable cause for the assessee in filing this Cross Objection belatedly. Accordingly, we condone the delay and admit it for hearing.