Depreciation on Goodwill Acquired from Subsidiary Company by Demerger Allowed if Not Previously Claimed or Allowed u/s 32 of Income Tax Act: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the assessee was eligible to claim depreciation on the cost of goodwill acquired from MSN Singapore through a demerger if not previously claimed or allowed under Section 32 of the Income Tax Act.

The assessee SPN India was having a wholly owned subsidiary company named MSM Satellite ( Singapore ) Pte Ltd ( MSM Singapore ). In March, 2005 the above said MSM Singapore had purchased a TV channel named “SAB TV” from a company named M/s Adhikari Brothers for cash consideration. At that point of time, the cash consideration paid had exceeded the net asset value taken over by it by Rs.61.14 crores and hence the above said difference amount of Rs.61.14 crores (Rs.611.48 million) was accounted as “Goodwill” by MSM Singapore in its books of account.

Mr. Percy Pardiwala representing the assessee submitted that the demerger scheme was sanctioned by Bombay High Court on 10th Jan, 2014 and it came into effect from 01-04-2014. It was submitted that the demerger had no tax implication. Further, no consideration was paid to  MSM Singapore for the demerger of the broadcasting division, since net assets taken over by the assessee was netted off against the value of investment.

Further the assets taken over by the assessee included “Goodwill” of Rs.61.148 crores. During the year relevant to AY 2015-16, the assessee claimed depreciation on all the assets including on the value of goodwill so taken over by it. It was submitted that goodwill is an intangible asset and accordingly depreciation was claimed thereon. The AO, referring to certain provisions of the Act, took the view that the depreciation could be allowed on the depreciated value of Goodwill only and not on its original value of Rs.61.148 crores.

The DRP has also observed that the assessee has accounted the residual of consideration as goodwill and hence depreciation cannot be claimed thereon. However, the fact would remain that, it is the MSN Singapore which had accounted the residual consideration as goodwill and not the assessee.

The bench noticed earlier that the broadcasting business of MSM Singapore was demerged and acquired by the assessee. The assets acquired from MSM Singapore included the “Goodwill”. In that process, the goodwill that was available with MSM Singapore in its broadcasting business came to be owned by the assessee. The demerger has become effective as on 1.4.2014 and hence the assessee has claimed depreciation on goodwill for the first time in AY 2015-16. Thus, further noticed that the goodwill had arisen in the hands of MSM Singapore and the assessee has acquired it by way of acquisition of broadcasting business by way of demerger.

The two member bench of the tribunal comprising C V Bhadang (President) and B.R. Baskaran (Accountant Member) concluded that If MSN Singapore has not claimed/has not been notionally allowed depreciation under Section 32 of Indian Income tax Act for any of the years, then the assessee is eligible to claim depreciation on the cost of goodwill acquired from MSN Singapore by way of demerger. Accordingly, this issue was disposed of.

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