Section 32(1) IT Act | Goodwill from Pre-2021 Amalgamation Eligible for Depreciation: ITAT Ahmedabad Upholds Smifs Securities Precedent

The Income Tax Appellate Tribunal, Ahmedabad, has reaffirmed that goodwill generated through amalgamation, where no pre-existing goodwill existed in the books of the amalgamating companies, qualifies as a depreciable intangible asset under the Income Tax Act, 1961, prior to the Finance Act 2021 amendments. This decision provides critical clarity for corporate restructuring transactions and reinforces the principle that tax neutrality in amalgamations must be preserved.

Background & Facts

The Dispute

The dispute centers on the assessee’s claim for depreciation on goodwill of Rs. 771.66 crore arising from a composite scheme of amalgamation approved by the National Company Law Tribunal (NCLT) on 29.10.2018. The Assessing Officer (AO) disallowed the depreciation, arguing that goodwill was not acquired through purchase but was self-generated, and that no cash consideration was paid. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, holding that the goodwill was acquired in the process of amalgamation and met the criteria under Section 32(1) read with Explanation 3 to Section 43(1). The Revenue now appeals this decision.

Key Facts

• The assessee, Claris Limited (formerly Altheon Enterprises Limited), is engaged in bio-fuel manufacturing, solar energy trading, tissue culture, and product development.
• On 29.10.2018, the NCLT approved a composite scheme of amalgamation involving Claris Limited and seven entities: Abellon Cleanenergy Limited, Abellon Energy Limited, Athanas Enterprise Private Limited, Claris Capital Limited, Claris Infrastructure Limited, Claris Lifesciences Limited, Dorizoe Lifesciences Limited, Lcubix Infotech Limited, Ogen Nutrition Limited, Pinetops Enterprise Private Limited, and Zivene Design and Development Private Limited.
• Under the Scheme, Claris Limited issued shares to shareholders of the amalgamating companies (AEL, Pinetops, Dorizoe) in exchange for their net assets.
• The excess of consideration paid (share issuance) over the net asset value of the amalgamating companies was accounted for as goodwill in the books of Claris Limited, in compliance with Accounting Standard 14 (AS 14).
• The valuation of the amalgamating companies was conducted by an independent international valuer using the Discounted Cash Flow (DCF) method, which is recognized under Rule 11UA(2)(b) of the Income Tax Rules and by the ICAI Technical Guide.
• The assessee revised its return for A.Y. 2017-18 on 30.11.2018 to reflect the amalgamation, declaring a loss of Rs. 752.51 crore, including the goodwill claim.
• The AO passed the assessment order on 29.12.2019, disallowing depreciation of Rs. 771.66 crore on goodwill, relying on United Breweries Ltd. and arguing that no actual payment was made.
• The CIT(A) deleted the addition on 20.05.2022 for A.Y. 2017-18 and on 08.06.2022 for A.Y. 2018-19, relying on CIT v. Smifs Securities Ltd. (348 ITR 302), Zydus Wellness Ltd., and Urmin Marketing Pvt. Ltd.

Procedural History

• 29.10.2018: NCLT approves composite scheme of amalgamation.
• 30.11.2018: Assessee revises return for A.Y. 2017-18 to reflect amalgamation and claim goodwill depreciation.
• 29.12.2019: AO passes assessment order under Section 143(3), disallowing depreciation of Rs. 771.66 crore.
• 20.05.2022: CIT(A) deletes disallowance for A.Y. 2017-18.
• 08.06.2022: CIT(A) deletes disallowance for A.Y. 2018-19.
• 17.03.2026: Hearing before ITAT Ahmedabad.
• 22.04.2026: ITAT dismisses Revenue’s appeals.

The Parties' Positions

For the Assessee:

• Goodwill was acquired through purchase in the amalgamation process, as per Smifs Securities Ltd. and Zydus Wellness Ltd.
• The DCF valuation by an independent expert is valid and cannot be rejected on mere suspicion.
• Payment through share exchange constitutes valid consideration under CIT v. Mira Exim Ltd. and Urmin Marketing Pvt. Ltd.
• AS 14 compliance and auditor certification validate the accounting treatment.
• The Finance Act 2021 amendments are prospective and do not apply to A.Y. 2017-18 and 2018-19.

For the Revenue:

• No cash payment was made; goodwill is fictitious and self-generated.
• Valuation report does not explicitly mention goodwill value.
• The amalgamation was back-dated to 01.04.2017 to artificially shift income and claim depreciation.
• United Breweries Ltd. supports disallowance where goodwill is inflated.
• The goodwill claim is a colorable device to evade tax.

Relief Sought

The Revenue seeks to set aside the CIT(A) orders and restore the AO’s disallowance of Rs. 771.66 crore for A.Y. 2017-18 and Rs. 771.66 crore for A.Y. 2018-19.

The Legal Issue

The central question was whether goodwill arising from an amalgamation, where no pre-existing goodwill existed in the books of the amalgamating company, qualifies as a depreciable intangible asset under Section 32(1) of the Income Tax Act, 1961, prior to the Finance Act 2021 amendments.

Arguments Presented

For the Appellant/Petitioner

The Revenue contended that goodwill was not acquired through purchase but was merely an accounting entry reflecting the difference between consideration paid and net asset value. It argued that since no cash was paid and no goodwill was recorded in the books of the amalgamating companies, the goodwill was self-generated and thus ineligible for depreciation under Section 32(1). It relied on United Breweries Ltd. to assert that enhancement of goodwill beyond the transferor’s book value is impermissible. It further contended that the DCF valuation was not substantiated and that the back-dating of the demerger to 01.04.2017 was a colorable device to shift income.

For the Respondent/State

The assessee argued that the Supreme Court in CIT v. Smifs Securities Ltd. (348 ITR 302) had unequivocally held that goodwill generated in the course of amalgamation is an intangible asset eligible for depreciation. It emphasized that the term "any other business or commercial rights of similar nature" in Explanation 3 to Section 43(1) includes goodwill by ejusdem generis. It cited Zydus Wellness Ltd. and Urmin Marketing Pvt. Ltd. to show that payment through share exchange is valid consideration. It further argued that the DCF method is statutorily recognized under Rule 11UA and cannot be rejected without specific material defects. The assessee stressed that the Finance Act 2021 amendments, which exclude goodwill from depreciation, are prospective and cannot be applied retrospectively.

The Court's Analysis

The Tribunal examined the legal framework governing depreciation on goodwill prior to the Finance Act 2021. It noted that Section 32(1) allows depreciation on "any intangible asset" as defined in Explanation 3 to Section 43(1), which includes "any other business or commercial rights of similar nature." The Tribunal relied on the Supreme Court’s reasoning in CIT v. Smifs Securities Ltd. that goodwill falls within this category by virtue of ejusdem generis.

"A reading of the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'."

The Tribunal held that the goodwill in question was not self-generated but acquired through purchase in the amalgamation process, as the consideration paid exceeded the net asset value of the amalgamating companies. The fact that the amalgamating companies had no goodwill in their books was immaterial, as the acquisition occurred in the hands of the transferee company.

The Tribunal rejected the Revenue’s reliance on United Breweries Ltd., distinguishing it on facts: in that case, the amalgamating company had recorded goodwill, and the transferee inflated it. Here, no such pre-existing goodwill existed. The Tribunal also dismissed the argument that share exchange was not valid consideration, citing CIT v. Mira Exim Ltd. and Urmin Marketing Pvt. Ltd., which recognize non-cash consideration as valid.

Regarding valuation, the Tribunal held that the AO cannot reject a valuation report by a qualified independent expert merely on suspicion. The DCF method is statutorily recognized under Rule 11UA(2)(b) and endorsed by the ICAI. The AO’s subjective remarks about brand value were insufficient to override a technical valuation.

The Tribunal further noted that the Finance Act 2021 amendments, which explicitly exclude goodwill from depreciation, are prospective and apply only from A.Y. 2021-22. Therefore, they have no bearing on the assessment years under consideration.

The Verdict

The Revenue’s appeals were dismissed. The ITAT upheld the CIT(A)’s order, confirming the assessee’s right to claim depreciation of Rs. 771.66 crore for A.Y. 2017-18 and Rs. 771.66 crore for A.Y. 2018-19 on goodwill arising from amalgamation. The Tribunal directed that the assessment orders be rectified to reflect the allowance of depreciation, and no further action shall be taken to disallow the claim.

What This Means For Similar Cases

Goodwill from Amalgamation Is a Depreciable Asset Pre-2021

• Practitioners may claim depreciation on goodwill arising from amalgamation if the transferee company pays consideration exceeding the net asset value of the transferor, even if the transferor had no goodwill in its books.
• The Smifs Securities precedent remains binding for A.Y. 2020-21 and earlier.
• The burden is on the Revenue to prove the valuation is inflated or fraudulent, not on the assessee to prove the existence of goodwill in the transferor’s books.

Valuation Methodology Must Be Respected

• DCF valuation by independent experts is legally valid under Rule 11UA and cannot be rejected without specific, documented defects.
• AO’s subjective comments on brand value or legacy are insufficient grounds for disallowance.
• Tax authorities must either accept the valuation or obtain a second expert opinion before substituting their own.

Share Exchange Qualifies as Valid Consideration

• Payment of consideration through issuance of shares constitutes valid purchase consideration under Section 55(2)(a)(ii).
• The absence of cash payment does not render goodwill non-depreciable.
• This principle applies to all amalgamations, including those involving unlisted companies.

Prospective Amendments Do Not Apply Retroactively

• The Finance Act 2021 amendments excluding goodwill from depreciation apply only from A.Y. 2021-22.
• Claims made in earlier years remain governed by the law as it stood at the time of assessment.
• Taxpayers may rely on pre-amendment jurisprudence for pending assessments.