ITAT Mumbai Clarifies Goodwill Depreciation and CSR Deduction under Section 80G

1. Background of the Dispute

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of ACIT 7(1)(1) Vs Horizon Packs Pvt. Ltd., dealt with two connected appeals filed by the Revenue for Assessment Years 2018-19 and 2020-21.

The core issues before the Tribunal were:

  1. Whether depreciation on goodwill arising from amalgamation could be denied in subsequent years when it had already been allowed in an earlier scrutiny assessment.
  2. Whether expenditure incurred towards Corporate Social Responsibility (CSR) could be claimed as a deduction under Section 80G for AY 2020-21.

Both appeals were heard together, as the primary controversy relating to depreciation on goodwill was common, and were disposed of through a consolidated order.

2. Facts Relating to Amalgamation and Creation of Goodwill

2.1 Amalgamation Scheme and Creation of Goodwill

During the relevant period, three group entities:

  • Pyramid Packaging Private Limited
  • Monad Technologies Pvt. Ltd
  • Sigma Corru Box Private Limited

were amalgamated with the assessee, Horizon Packs Pvt. Ltd., with effect from 01/04/2016.

Key points of the merger:

  • The scheme of amalgamation was sanctioned by the National Company Law Tribunal (NCLT), Mumbai Bench, vide order dated 22/03/2017.
  • The appointed date of the merger was 01/04/2016.
  • The effective date of implementation was 01/05/2017.

Under this scheme:

  • The assessee paid a total purchase consideration of Rs. 3,38,95,66,300/- for acquiring the three transferor companies.
  • The net asset value of these companies, as on the appointed date, was Rs. 1,75,00,70,889/-.
  • The difference of Rs. 1,63,94,95,411/- between the purchase consideration and the net asset value was recognised as Goodwill in the books of the assessee.

On this goodwill, the assessee claimed depreciation under Section 32 of the Income Tax Act 1961. The Assessing Officer later sought to disallow this depreciation, which became the subject matter of dispute.

2.2 Accounting Treatment of the Merger

The amalgamation was accounted for as a “purchase” in accordance with Accounting Standard 14 (AS 14) “Accounting for Amalgamations”, notified under Section 133 of the Companies Act 2013 read with the relevant Rules.

Accordingly:

  • Assets and liabilities of the transferor companies as on 01/04/2016 were recorded at their fair values.
  • Shares of the assessee were issued to the shareholders of the transferor companies in specified swap ratios.
  • The excess of the purchase consideration over the net value of assets and liabilities taken over was treated as Goodwill, regarded as an intangible asset.

The assessee supported its claim of depreciation by relying on judicial precedent, particularly CIT v. Smifs Securities Ltd. (2012) 348 ITR 302, where the Supreme Court held that goodwill, being the difference between the purchase price and the value of assets received, is eligible for depreciation as an intangible asset under Explanation 3(b) to Section 32(1).

3. Assessment History and Allowance of Depreciation in Earlier Year

3.1 First Claim of Depreciation in AY 2017-18

The first year in which the assessee claimed depreciation on the goodwill arising from the amalgamation was AY 2017-18.