Introduction

The case of AVIS Hospitals India Limited, Hyderabad v. Asst. Commissioner of Income Tax, Circle-1(1), Hyderabad adjudicated by the Income Tax Appellate Tribunal (ITAT) on June 27, 2022, addresses the contentious issue of permitting depreciation on goodwill acquired through a slump sale. The appellant, AVIS Hospitals India Limited, contested the disallowance of depreciation claimed on goodwill arising from the acquisition of Beams Hospitals Pvt Ltd. The crux of the dispute revolves around whether the excess consideration paid over the value of tangible assets in a slump sale can be classified as goodwill eligible for depreciation under the Income Tax Act.

The parties involved are:

• Appellant: M/s. AVIS Hospitals India Limited
• Respondent: Shri Rohit Mujumdar, Revenue, Asst. Commissioner of Income Tax

Summary of the Judgment

AVIS Hospitals India Limited filed an income tax return declaring nil income with a current year loss of ₹1,08,85,581/- for the assessment year 2016-17. During assessment, the Assessing Officer (AO) identified that the company had acquired the Hyderabad business of Beams Hospitals Pvt Ltd via a slump sale for ₹7.94 crores. The AO treated ₹3.96 crores of the purchase consideration as goodwill and disallowed the depreciation claimed at 25%, citing the absence of a valuation report for the intangible asset.

The Appellant contended that the excess payment over the net tangible assets represented goodwill arising from acquiring a going concern, hence eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. The AO, however, referred to Section 43(1) and 43(6)(a), interpreting "actual cost" as requiring substantiation through valuation reports, which the Appellant failed to provide.

Upon appeal, the Lifted Commissioner of Income Tax (Appeals) upheld the AO's disallowance, referencing the CIT v. Smifs Securities Ltd. decision and distinguishing it based on the nature of goodwill (internally generated vs. acquired). The Appellant further appealed to the ITAT, citing multiple precedents supporting the allowability of depreciation on acquired goodwill.

The ITAT, after thorough examination, set aside the AO's order, allowing the depreciation claim on goodwill. The Tribunal emphasized the legitimacy of classifying the excess consideration as goodwill arising from a legitimate business acquisition rather than as fictitious or internally generated goodwill.

Analysis

Precedents Cited

The judgment extensively references several key cases to substantiate the Appellant's position:

• CIT v. Smifs Securities Ltd. (Delhi High Court) - Affirmed that goodwill from amalgamation is eligible for depreciation.
• Triune Energy Services Pvt. Ltd. v. DCIT (Delhi High Court) - Held that excess consideration in acquisition as goodwill is depreciable without requiring separate valuation.
• PCIT v. Zydus Wellness Ltd. (Supreme Court) - Reinforced the applicability of depreciation on goodwill even if claimed post initial filing.
• Areva T & D India Ltd. v. DCIT (Delhi High Court) - Recognized specified intangible assets from slump sale as depreciable under Section 32.
• Various ITAT decisions reinforcing the depreciation on acquired goodwill.

Legal Reasoning

The Tribunal's legal reasoning centered on distinguishing acquired goodwill from internally generated goodwill. It acknowledged that Section 32(1)(ii) explicitly includes "any intangible asset", which encompasses goodwill acquired through business acquisition. The absence of a separate valuation report for goodwill was mitigated by the nature of the slump sale agreement, which did not necessitate splitting intangible assets, thus supporting the classification of excess consideration as goodwill.

Furthermore, the Tribunal contrasted the present case with Signode India Ltd. v. DCIT, finding the latter distinguishable due to differences in factual circumstances, such as the absence of related-party transactions and fabricated valuations in the referenced case.

Impact

This judgment reinforces the principle that goodwill arising from the legitimate acquisition of a business as a going concern is eligible for depreciation under the Income Tax Act. It clarifies that detailed valuation reports for goodwill may not be mandatory if the slump sale agreement sufficiently substantiates the classification of excess consideration as goodwill. Future cases involving slump sales and depreciation claims on goodwill will likely reference this judgment to support similar claims.

Additionally, the decision provides clarity on the distinction between acquired and internally generated goodwill, thereby guiding both taxpayers and tax authorities in handling depreciation claims related to intangible assets.

Complex Concepts Simplified

Slump Sale

A slump sale refers to the transfer of an entire business undertaking as a going concern for a lump sum consideration without assigning individual values to the assets and liabilities. It simplifies the transfer process, especially when multiple intertwined assets are involved.

Goodwill

Goodwill is an intangible asset representing the value of a company's reputation, customer base, brand, and other non-physical elements that contribute to its profitability. In accounting, it arises when a company pays more than the fair market value of the net tangible assets during an acquisition.

Depreciation on Goodwill

Under Section 32(1)(ii) of the Income Tax Act, depreciation is allowable on tangible and intangible assets, including goodwill. Depreciation on goodwill accounts for the diminishing value of this intangible asset over time.

Section 32 and Section 43 of Income Tax Act

Section 32 deals with depreciation on assets used for business purposes, while Section 43 defines "actual cost" related to capital assets. The AO's contention was that without a separate valuation of goodwill, the "actual cost" could not be substantiated as per these sections.

Conclusion

The ITAT's decision in AVIS Hospitals India Limited v. ACIT marks a significant affirmation of the tax treatability of goodwill acquired through slump sales. By allowing depreciation on such goodwill, the Tribunal has provided clarity and relief to businesses engaging in acquisitions, ensuring that legitimate intangible asset valuations are recognized for tax benefits. This judgment underscores the judiciary's nuanced understanding of business transactions and intangible assets, aligning tax practices with contemporary business realities.

For practitioners and businesses alike, this case serves as a pivotal reference point for structuring acquisitions and substantiating depreciation claims on intangible assets, thereby influencing future tax planning and compliance strategies.