India: Consideration paid by combined company exceeding net assets is goodwill, eligible for depreciation

Eligibility of a claim of depreciation on goodwill arising from an amalgamation

Eligibility of a claim of depreciation on goodwill arising from an amalgamation

The Bangalore Bench of the Income-tax Appellate Tribunal issued a decision concerning the eligibility of a claim of depreciation on goodwill arising from an amalgamation.

The tribunal held that the consideration paid by the combined company over and above the net assets of the amalgamating company was to be considered to be goodwill arising on amalgamation and eligible for depreciation.

The case is: Altimetrik India Pvt LTD. v. DCIT

Summary

  • The taxpayer was engaged in the business of rendition of software development services. During assessment year 2015-2016, an amalgamating company, which was a 100% holding company of the taxpayer, was combined with the taxpayer.
  • The Karnataka High Court approved the amalgamation. Pursuant to the amalgamation, goodwill was recorded in the financial statements of the taxpayer and depreciation was claimed.
  • The Assessing Officer disallowed the depreciation and observed that the aggregate deduction in respect of allowable depreciation on goodwill could not exceed the deduction calculated at the prescribed rates (as if amalgamation had not taken place) and that the deduction must be apportioned between the taxpayer and the amalgamating company based on a ratio of the period of the use of the assets. The Dispute Resolution Panel agreed and upheld the order of the Assessing Officer.
  • The taxpayer contended that the goodwill arose for the first time in the books of the taxpayer as a result of the amalgamation. Therefore, the question of apportionment between the amalgamating company and the amalgamated company in the “asset-usage” ratio was not appropriate.
  • The tribunal agreed that the consideration paid by the amalgamated company over and above the net assets of the amalgamating company was goodwill arising on amalgamation and that the claim for depreciation was to be allowed.

Read a February 2022 report [PDF 428 KB] prepared by the KPMG member firm in India

 

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