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2020 (8) TMI 594 - AT - Income TaxDepreciation on goodwill arising out of amalgamation - assessee is engaged in the business of manufacturing and sale of printed self-adhesive stripes, labels, glow signs and all kind of trade and advertising material, trading of car accessories - Addition in the case of the assessee by observing that the goodwill arose on account of market value of immovable assets which were higher than their book value - HELD THAT:- The excess of liabilities over net assets was treated as goodwill and the depreciation for the same was claimed by the assessee treating the said goodwill as an intangible asset. AO had observed that there is no question of any goodwill prevailing in the books of FSPL in view of the fact that, it had incurred losses. This observation of the AO is not tenable in view of the fact that whether the unit is incurring losses or not, has got nothing to do with the existence of goodwill prevailing in the said unit. Goodwill would arise on account of various factors such as continuing clients, continuing business relationship, established set up for smooth conduct of business, continuing business, commercial and industrial rights and licenses to the successor company / merged entity. These commercial, business and industrial rights were duly acquired by the assessee company through a scheme of merger and due consideration passed on for the same by way of allotment of shares. Same would factually tantamount to acquisition of goodwill. Since, the goodwill is an intangible asset, within the meaning of Section 32 in the form of industrial, business and commercial rights, the assessee would be eligible for depreciation u/s.32 of the Act. We find that the ld. CIT(A) had observed that goodwill in the instant case had arose on revaluation of properties which is factually incorrect as observed hereinabove by us i.e the value of assets and liabilities were recorded at book values only pursuant to merger. We find that lower authorities had placed reliance on the decision in the case of Jaypore Sugar Co.Ltd., [2010 (12) TMI 258 - ITAT, VISAKHAPATNAM] to support their proposition. We find that subsequent to this decision, the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd.. [2012 (8) TMI 713 - SUPREME COURT] had specifically held that goodwill arising on account of amalgamation would constitute intangible asset eligible for depreciation u/s.32. We hold that assessee is entitled for depreciation claimed @25% on goodwill valued. Disallowing depreciation on capital assets purchased - HELD THAT:- We find that the aluminium frames that were purchased were duly utilized in the business of the assessee and finished product generated thereon, had been sold and hence, duly reported by the assessee. Hence, there cannot be any dispute on the same. However, the assessee was not able to prove beyond doubt, the suspicion that arose in the minds of the revenue in respect of these parties appearing to be in the negative list of sales tax department of Government of Maharashtra. In these circumstances, it could be safely concluded that assessee could have purchased these capital goods from the grey market in order to save the liability of VAT. Since the items purchased were capital goods, which is not in dispute, hence, we hold that the depreciation attributable to that VAT portion alone should be disallowed in the hands of the assessee. Needless to mention that assessee could be entitled for depreciation on these capital assets on recurring basis year on year on the basis of return down value of each year. Accordingly, grounds raised by the assessee in this regard are partly allowed.
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