ITAT Mumbai on Depreciation for Goodwill and Treatment of Transferred Bad Debts

The Income Tax Appellate Tribunal, Mumbai Bench "G", has ruled on a set of connected appeals filed by Gati Kintetsu Express Pvt. Ltd Vs Ass./DCIT (ITAT Mumbai) concerning multiple assessment years, primarily addressing two aspects:

  1. Eligibility of depreciation on goodwill and other intangibles arising from a business transfer under a Business Transfer Agreement dated 13.02.2012; and
  2. Allowability of bad debts and business advances written off, where the underlying business was acquired as a going concern.

The appeals arose from orders passed by the National Faceless Appeal Centre (NFAC) for Assessment Years (AYs) 2013-14 to 2017-18. The Tribunal examined the nature of the business transfer, the characterization of consideration, the treatment of goodwill/intangibles for depreciation under Section 32, and the permissibility of write-off of certain receivables/advances under the Income Tax Act 1961.

Background of the Business Transfer

Under a Business Transfer Agreement (BTA) dated 13.02.2012, the assessee acquired from Gati Ltd. its Express Distribution and Supply Chain division as a going concern.

The BTA expressly provided that the following were transferred as part of the business undertaking:

  • The entire business division on a going concern basis;
  • All properties and assets pertaining to that division;
  • Associated rights, privileges, licences and permissions;
  • Goodwill linked to the business; and
  • Intellectual property and other commercial rights.

In the assessee’s books, the liabilities assumed under the BTA exceeded the value of tangible assets acquired. The excess was recognized as goodwill and other intangible assets, and depreciation was claimed accordingly.

Core Dispute: Depreciation on Goodwill and Intangibles

Claim for AY 2013-14

For AY 2013-14, the assessee recorded goodwill/intangibles arising from the acquisition and claimed depreciation of Rs. 31,26,46,956 under Section 32.

The lower authorities (Assessing Officer and CIT(A)) rejected this depreciation claim on several grounds, including:

  • No direct monetary consideration was allegedly paid by the assessee for the transfer;
  • It was contended that no goodwill was in fact acquired or purchased;
  • The accounting treatment adopted by the transferor (Gati Ltd.) did not, in the Revenue’s view, support the assessee’s recognition of goodwill; and
  • The bar contained in the fifth proviso to Section 32(1) was invoked to deny depreciation.

Assessee’s Stand Before the Tribunal

The assessee contended, relying on the BTA and valuation material, that:

  • The BTA clearly specified that the Express Distribution and Supply Chain business was transferred along with goodwill, commercial rights and other intangible assets;
  • An independent valuer’s report supported that the excess of liabilities over the net tangible assets represented identifiable intangible assets such as:
    • Distribution network;
    • Customer relationships;
    • Marketing and trading reputation;
  • In slump sale/business transfer transactions, the form of consideration (cash vs liabilities assumed) is not decisive; the assumption of liabilities in excess of assets is itself a form of consideration;
  • The goodwill and intangibles so recognized fall squarely within the scope of Section 32 as interpreted by the Supreme Court in CIT v. Smifs Securities Ltd. and other judicial precedents;
  • The fifth proviso to Section 32(1) had been misapplied, and earlier decisions relied upon by the Revenue pre-dated the ratio in Smifs Securities Ltd. and were now distinguishable.

Revenue’s Objections

The Revenue authorities argued that: