Delhi High Court: Depreciation Is Allowed On Goodwill Through No Actual Cash Payment Made For Acquisition

Delhi High Court in the case PCIT Versus M/S Eltek Sgs Pvt. Ltd. observed and has held that the depreciation is allowed on goodwill which arises in a scheme of amalgamation even though no actual cash payment was being made for the acquisition of goodwill.
The bench comprising of Justice Yashwant Varma and Justice Dharmesh Sharma in the case observed and has stated that section 49 and section 55(2) deal with ‘capital gains’ which is arising on the sale of goodwill and not with respect to depreciation on the goodwill.
The court stated that section 47 excludes the transfer of capital assets in a scheme of amalgamation from the purview of capital gains.
In the present case, the respondent or the assessee was being amalgated with M/s Valere Power India Limited in terms of a Scheme of Amalgamation, which came to be sanctioned by the said Court on 05.02.2014.
Therefore, the Assessment Officer had added a sum for an amount of Rs. 6,17,30,352 on account of the disallowance of depreciation on the goodwill that was being created as a result of amalgamation.
On the other hand, the respondent has preferred an appeal before the CIT, Appeals. It has been found in the CIT, Appeals that since the goodwill had come to be created by virtue of the merger in terms of the Scheme approved by the Court, depreciation on goodwill was correctly been claimed by the assessee.
Further, the appellant or the department challenged the order passed by CIT (A) before the ITAT. It has been held by the ITAT that the goodwill, being the non-tangible asset, is being eligible for depreciation under Section 32 of the Income Tax Act.
It has also been referred by the department the definition of ‘cost of acquisition’ as spelt out under section 55(2). Therefore, the Section 55(2) had defined the expression, the ‘cost of acquisition’ to also include the goodwill of a business or profession, the trademark or the brand name which is associated with the business or profession, or any other intangible asset.
The appellant in the case also seek reply upon section 49 and more particularly Section 49(1)(e).
The court in the case while rejecting the contentions raised by the department held that the transfer made in terms of a scheme of amalgamation that is sanctioned is accomplished by operation of law as opposed to an act of parties.
Accordingly, the court ruled that the goodwill is an intangible asset on which depreciation can clearly be claimed as it has been stated in terms of Section 32(1).