The Income Tax Appellate Tribunal, Bangalore, has clarified that depreciation on goodwill acquired through a slump sale under a Business Transfer Agreement is permissible, and that the Principal Commissioner cannot invoke revisionary powers under Section 263 merely because of a plausible but disputed interpretation of tax law. This ruling reinforces the principle that revisional jurisdiction cannot be used to substitute one reasonable view for another.
Background & Facts
The Dispute
The appellant, M/s. Manjushree Technopack Limited, acquired the business of National Plastics on a slump sale basis through a Business Transfer Agreement (BTA) dated 21.10.2019 for a total consideration of Rs. 162,94,54,643. The assessee allocated this consideration among tangible and intangible assets, including Rs. 80 crores to goodwill. The Assessing Officer (AO) allowed depreciation on this goodwill after examining valuation reports and disallowing a portion of the claim (Rs. 5,34,68,611) due to discrepancies. The Principal Commissioner of Income Tax (PCIT) later invoked Section 263 to set aside the assessment order, contending that goodwill is a self-generated asset with no cost and that depreciation was wrongly allowed. The PCIT also disallowed Rs. 2.56 crores in professional fees as capital expenditure.
Key Facts
- The BTA dated 21.10.2019 was executed for the acquisition of National Plastics’ business as a going concern
- Total consideration: Rs. 162,94,54,643
- Asset allocation per valuation report:
- Tangible assets: Rs. 23,90,54,643
- Intangible assets (excluding goodwill): Rs. 59,03,00,000
- Goodwill: Rs. 80,00,00,000
- Intellectual Property Rights: Rs. 40,57,00,000
- Customer Relationship: Rs. 13,28,00,000
- Non-compete fees: Rs. 5,19,00,000
- Professional fees paid: Rs. 2.56 crores to Ernst & Young, KPMG, and Khaitan & Co. LLP for valuation, legal, and structuring services
- Assessment order under Section 143(3) read with Section 144B dated 28.09.2022 allowed depreciation on goodwill after scrutiny
- Show cause notice dated 14.09.2022 issued by AO, leading to partial disallowance
- Revisionary order under Section 263 dated 31.03.2025 by PCIT set aside the assessment
Procedural History
- 21.10.2019: Business Transfer Agreement executed
- 29.01.2021: Return of income filed for AY 2020-21
- 28.09.2022: Assessment order passed by AO under Section 143(3) r.w.s. 144B
- 31.03.2025: PCIT issued revisionary order under Section 263
- 12.04.2025: Appeal filed before ITAT Bangalore (ITA No. 1282/Bang/2025)
- 23.03.2026: Hearing conducted
- 15.06.2026: Judgment pronounced
The Parties' Positions
For the Assessee: The transaction was a slump sale under a BTA, not an amalgamation. Goodwill is an intangible asset under Explanation 3(b) to Section 32(1) and eligible for depreciation. The AO conducted a detailed verification. The professional fees were revenue expenditure under Section 37(1), supported by CIT v. Bombay Dyeing Manufacturing Co. Ltd. (219 ITR 521). The PCIT’s revision was an abuse of power where two plausible views existed.
For the Revenue: The AO failed to verify the cost of goodwill in the hands of the transferor (National Plastics). Under Section 43(6) and Explanation 7, goodwill in amalgamation has nil WDV. The professional fees provided enduring benefit and were capital in nature, as per Genpact Services LLC v. DCIT (149 taxmann.com 22). The AO’s order was erroneous and prejudicial to revenue.
Relief Sought
The assessee sought quashing of the PCIT’s revisionary order dated 31.03.2025, restoration of the AO’s assessment order dated 28.09.2022, and confirmation of depreciation on goodwill of Rs. 80 crores and allowance of Rs. 2.56 crores as revenue expenditure.
The Legal Issue
Can the Principal Commissioner invoke revisionary powers under Section 263 of the Income Tax Act, 1961 to set aside an assessment order allowing depreciation on goodwill acquired in a slump sale, where the transaction is not an amalgamation and there exists a plausible, albeit contested, interpretation of the law?
Arguments Presented
For the Appellant
The assessee relied on CIT v. Smifs Securities Ltd. (348 ITR 302), where the Supreme Court held that goodwill is an asset under Explanation 3(b) to Section 32(1) and eligible for depreciation. It emphasized that the transaction was a slump sale under a BTA, not an amalgamation, rendering Explanation 7 to Section 43(6) inapplicable. The AO had conducted a detailed scrutiny, including review of valuation reports and disallowance of a portion of the claim. The professional fees were incurred for the smooth conduct of business and were revenue expenditure under Section 37(1), as held in CIT v. Bombay Dyeing Manufacturing Co. Ltd. (219 ITR 521). The assessee invoked Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) to argue that where two plausible views exist, revision under Section 263 is impermissible.
For the Respondent
The Revenue contended that goodwill is a self-generated asset with no cost, and under Section 43(6) read with Explanation 7, its WDV in the hands of the transferee must be nil if the transferor had no cost. The AO failed to verify the cost of goodwill in the hands of National Plastics. The professional fees were capital in nature, as they conferred enduring benefit, citing Genpact Services LLC v. DCIT. The Revenue argued that the AO’s failure to make a meaningful inquiry rendered the order erroneous and prejudicial to revenue, justifying revision under Section 263.
The Court's Analysis
The Tribunal first addressed the nature of the transaction. It held that the acquisition was effected through a Business Transfer Agreement on a slump sale basis, and not through amalgamation. Therefore, Explanation 7 to Section 43(6), which applies only to amalgamations, was inapplicable. The PCIT erred in treating the slump sale as an amalgamation, which formed the foundation of his revisionary order.
"The basic premise on which the provisions of Section 263 of the Act are initiated by the ld. PCIT itself is incorrect."
The Tribunal further noted that multiple judicial authorities, including the Supreme Court in Smifs Securities, have recognized goodwill as a depreciable asset in the context of business acquisitions. The AO had not merely accepted the claim blindly; he had examined valuation reports, identified discrepancies, and disallowed Rs. 5.35 crores of the claimed depreciation. This demonstrated a meaningful application of mind.
The Tribunal then examined the applicability of Malabar Industrial Co. Ltd. and held that where there are conflicting judicial views on the allowability of depreciation on goodwill, and the AO adopts one plausible view, the order cannot be termed erroneous or prejudicial to revenue. Revision under Section 263 is not a tool for correcting debatable legal interpretations.
On the issue of professional fees, the Tribunal distinguished Genpact Services LLC on facts, noting that the assessee was already engaged in manufacturing and the acquisition was complementary. The fees were incurred for business integration and were revenue expenditure under Section 37(1), as held in Bombay Dyeing.
"The decision of the Coordinate Bench in the case of Genpact Services LLC... does not support the case of the Revenue."
The Tribunal concluded that the PCIT’s order was legally unsustainable on both grounds.
The Verdict
The appeal of the assessee is allowed. The revisionary order dated 31.03.2025 under Section 263 is quashed. The assessment order dated 28.09.2022 is restored. Depreciation on goodwill of Rs. 80 crores is allowed. The professional fees of Rs. 2.56 crores are allowed as revenue expenditure. No further directions are issued.
What This Means For Similar Cases
Depreciation on Goodwill Is Permissible in Slump Sales
- Practitioners may now confidently claim depreciation on goodwill acquired via slump sale under a BTA, provided the valuation is reasonable and documented
- The distinction between amalgamation and slump sale is critical: Section 43(6) and Explanation 7 do not apply to slump sales
- Valuation reports must be maintained to substantiate allocation of consideration to goodwill
Revision Under Section 263 Cannot Be Used to Settle Legal Ambiguities
- Where judicial precedents are conflicting or a plausible view exists, Section 263 cannot be invoked to override the AO’s order
- The burden on the PCIT to prove that the AO’s order is not merely debatable but clearly erroneous and prejudicial is high
- This judgment reinforces Malabar Industrial as a shield against arbitrary revisionary action
Professional Fees in Business Acquisitions Are Revenue Expenditure
- Fees paid for legal, valuation, and structuring services in connection with business acquisitions are generally allowable as revenue expenditure under Section 37(1)
- The key test is whether the expenditure facilitates the conduct of the existing business, not whether it creates a new asset
- Bombay Dyeing remains the authoritative precedent; Genpact is distinguishable where the assessee’s business is complementary
