Artificial Goodwill from Intra-Group Amalgamation ineligible for depreciation

 In a recent ruling, the Pune ITAT held that goodwill created pursuant to an internal restructuring, in the absence of genuine commercial benefits, constitutes a colourable device and cannot be treated as a genuine commercial asset eligible for depreciation.

In the present case, the assessee, a wholly owned subsidiary (WOS) of a US-based company. Another group company being a WOS of the same parent was amalgamated into the assessee company, pursuant to a court-approved scheme. In consideration of the amalgamation, the assessee issued equity shares to its holding company based on the prescribed swap ratio, recognised goodwill as the excess of purchase consideration over the net assets acquired and claimed depreciation thereon.
AO disallowed depreciation on the goodwill on the ground that it was artificially created.

The assessee contended that goodwill arose pursuant to a duly approved amalgamation scheme and therefore it qualifies as an intangible asset eligible for depreciation. It was further submitted that the amalgamation generated commercial synergies and could not be regarded as a colourable device.

The Revenue, however, argued that goodwill was artificially created, as both companies were under the same parent and the transaction did not yield any real commercial benefit. It was further held that, in an amalgamation, the assets must be recorded at the same value as reflected in the books of the transferor company. Since no goodwill existed in the books of the transferor company, the assessee was not entitled to claim depreciation on such goodwill.

The ITAT ruled against the assessee, holding that the amalgamation was between commonly controlled entities and lacked real commercial substance. The ITAT further observed that the goodwill did not exist in the books of the transferor and was created through the amalgamation. Accordingly, it held that such goodwill did not represent a genuine commercial asset but was merely a colourable device to claim depreciation.

This ruling underscores that goodwill arising from internal group amalgamations may not qualify for depreciation where it lacks genuine commercial substance. Further, it affirms that the tax authorities may disregard restructuring arrangements undertaken primarily to generate tax deductions without a bona fide business purpose.

Note- With effect from April 1, 2021, depreciation cannot be claimed on the goodwill of a business or profession.