Depreciation on Goodwill from Amalgamation Before AY 2021-22: ITAT Ahmedabad Clarifies Legal Position

The Ahmedabad Bench of the Income Tax Appellate Tribunal in ACIT Vs Claris Limited has reaffirmed that depreciation on goodwill arising out of amalgamation remains allowable for assessment years prior to AY 2021-22. The Tribunal dismissed Revenue’s challenges for AY 2017-18 and AY 2018-19, holding that amendments introduced by the Finance Act 2021 operate prospectively and do not affect earlier years.

The decision is significant for assessees involved in mergers and amalgamations where goodwill emerges as the difference between consideration and net asset value, particularly where the consideration is discharged through issue of shares and goodwill is recognized under Accounting Standard-14.

Background of the Case and Composite Scheme

Business Profile and Return Filings

The assessee company, later known as Claris Limited (earlier Altheon Enterprises Limited), was engaged in multiple businesses including:

  • Manufacturing of solid bio-fuel and wood pallets
  • Trading in solar rooftop and renewable energy devices
  • Trading in tissue culture plants
  • Product development services

For AY 2017-18, the assessee originally filed a return on 06.11.2017 declaring Nil income. Subsequently, a Composite Scheme of Arrangement involving amalgamation and demerger was approved by the Ahmedabad Bench of the National Company Law Tribunal (NCLT) on 29.10.2018.

Pursuant to this NCLT-approved scheme, the assessee:

  • Revised its return of income for AY 2017-18 on 30.11.2018
  • Declared a loss of Rs. 752,51,42,451/-
  • Gave effect to the amalgamation accounting entries as per AS-14

Structure of the Composite Scheme

Under the scheme, Altheon Enterprises Limited (now Claris Limited), an unlisted public company under the Companies Act 1956, entered into a composite arrangement with multiple entities including:

  • Abellon Cleanenergy Limited (ACEL)
  • Abellon Energy Limited (AEL)
  • Athanas Enterprise Private Limited (Athanas)
  • Claris Capital Limited (CCL)
  • Claris Infrastructure Limited (Claris Infra)
  • Claris Lifesciences Limited (CLL)
  • Dorizoe Lifesciences Limited (Dorizoe)
  • Icubix Infotech Limited (Icubix)
  • Ogen Nutrition Limited (Ogen)
  • Pinetops Enterprise Private Limited (Pinetops)
  • Zivene Design and Development Private Limited (Zivene)

The scheme, as sanctioned by NCLT, inter alia provided for:

  • Amalgamation of AEL, Pinetops, and Dorizoe with Altheon (Claris Limited)
  • Issue of shares by Altheon to the shareholders of amalgamating companies
  • Determination of share exchange ratio based on an independent valuation report

Recognition of Goodwill Under AS-14

In implementing the scheme, Altheon:

  • Followed the Purchase Method of accounting under Accounting Standard-14 – Accounting for Amalgamations
  • Recognized goodwill as the excess of consideration (shares issued) over the net assets acquired from AEL and Dorizoe
  • Ensured that the statutory auditor certified compliance with accounting standards notified under Section 133 of the Companies Act 2013

The total goodwill so recognized amounted to Rs. 3086.65 crore, and the assessee claimed depreciation of Rs. 771.66 crore under Section 32(1)(ii) in AY 2017-18 (and correspondingly for AY 2018-19).

Assessment Proceedings and Disallowance by AO

Scrutiny and AO’s Core Objections

The case was selected for limited scrutiny and assessment was completed under Section 143(3) on 29.12.2019. The Assessing Officer:

  • Disallowed the entire depreciation claim of Rs. 771,66,20,460/- on goodwill
  • Determined total income at Rs. 19,14,86,009/-

The AO’s key grounds for disallowance were:

  1. No goodwill in books of amalgamating companies

    • The AO observed that the amalgamating entities (AEL, Dorizoe, etc.) did not carry goodwill in their balance sheets prior to amalgamation.
    • On this basis, the AO rejected the assessee’s claim that goodwill had been “acquired” through amalgamation.

  2. Challenge to valuation and nature of goodwill

    • The AO questioned the valuation methodology, alleging that the goodwill value was artificially inflated to generate a higher depreciation base.
    • He asserted that the valuation report did not properly identify the specific business or commercial rights forming part of goodwill.

  3. Mode and substance of consideration

    • The AO contended that no real outflow occurred, as the only consideration was exchange of shares.
    • According to him, mere issue of shares did not establish any actual cost of goodwill.

  4. Retrospective impact of the scheme

    • The AO disputed the assessee’s claim to depreciation from earlier dates, arguing that the effective dates under the scheme and corporate approvals did not align with the periods for which depreciation was claimed.

  5. Reliance on specific provisions

    • The AO invoked, inter alia, Section 32(1), Section 43(1), Section 43(6)(c), Section 49(1)(iii)(e), and Section 55(2)(a)(ii) to contend that goodwill in this case should be treated akin to self-generated goodwill with Nil cost.