Depreciation on Goodwill Arising from Slump Sale Allowed by ITAT

ITAT Mumbai held that goodwill arising from a slump sale of a going concern is a depreciable intangible asset under section 32(1)(ii) and allowed the assessee’s claim of depreciation.

The present appeal has been filed by Anshul Speciality Molecules Private Ltd against the DCIT Circle 1(1)(1) in the ITAT Mumbai, challenging the order dated September 24, 2025, passed by CIT(A)/NFAC, Delhi for AY 2020-21.

The assessee is a private limited company engaged in the business of speciality chemicals. For the relevant assessment year, it filed its income tax return on February 4, 2021, declaring a total income of about Rs. 19,60,49,330, which was later slightly adjusted to Rs. 19,60,54,970 while processing under section 143(1). The case was picked up for complete scrutiny under CASS. During assessment, the Assessing Officer noticed that the assessee had purchased a running manufacturing unit from M/s Anmol Antioxidants Pvt. Ltd., Vadodara, through a slump sale vide Business Transfer Agreement dated February 10, 2020, effective from March 1, 2020, for a total consideration of Rs. 21,00,00,000.

Out of this amount, the assessee treated Rs. 9,79,55,271 as goodwill, being the excess of purchase price over the value of assets and liabilities taken over. On this goodwill, the assessee claimed depreciation of 12.5%, amounting to Rs. 1,22,44,409 under section 32(1)(ii). The AO examined this claim and issued notices under section 142(1) asking for details of the valuation of goodwill, supporting documents, and the acquisition agreement.

After considering the replies, the AO said that the goodwill came into existence only because of the Business Transfer Agreement and did not exist earlier in the books of either party. The agreement did not mention any separate price for goodwill, and no independent valuation of goodwill was provided. Also, the sale deeds showed that only land and buildings were purchased, not goodwill. Relying upon the decision of the Bangalore tribunal, AO held that depreciation on such goodwill was not allowable.

The AO did not allow the company to claim depreciation of Rs. 1,22,44,409, saying it was not acceptable. This amount was therefore added back to the company’s income. After doing this, the officer completed the tax assessment and calculated the total taxable income at about Rs 20,82,99,380. Along with this, the officer also started penalty proceedings under section 270A.

The assessee filed an appeal before the CIT(A). The assessee argued that the transaction was a slump sale between unrelated parties and not a case of succession, amalgamation or demerger. Therefore, the 5th/6th proviso to section 32(1) was not applicable. It was further submitted that goodwill arose as the excess of purchase consideration over net assets acquired and qualified as an intangible asset eligible for depreciation under section 32(1)(ii), relying on the previous SC judgement.

However, the CIT(A) rejected these arguments, holding that the goodwill was newly created due to the slump sale and did not exist in the books of the transferor. Accordingly, the disallowance of depreciation on goodwill of Rs 9,79,55,271 was confirmed, and the related ground of appeal was dismissed.

Being aggrieved with the order of the ld CIT(A), the assessee filed an appeal before the Tribunal. After carefully hearing both sides, the tribunal added that the assessee purchased an entire manufacturing unit as a going concern under a slump sale as defined in section 50B of the Income-tax Act, for a total lump-sum consideration of Rs 21,00,00,000. From this total price, the assessee allocated value to the identifiable tangible assets such as land, building, plant and machinery based on their fair market value.

The remaining balance amount of Rs 9,79,55,271 was treated as goodwill on acquisition. It is also clear from the records that important statutory licences, environmental clearances, factory licences, regulatory permissions and other business approvals required to run the manufacturing activity were transferred to the assessee along with the unit, even though these were not valued separately.

the tax department relied on an earlier Bangalore ITAT decision (United Breweries Ltd.) to deny depreciation, but that case does not apply here. In the present case, the business was bought as a going concern through a slump sale between unrelated parties and not through amalgamation, demerger, or succession under section 170. Therefore, the fifth proviso to section 32(1) is not applicable.

The Tribunal held that goodwill arising from a slump sale is an intangible asset eligible for depreciation under section 32(1)(ii). As a result, the disallowance of depreciation of Rs. 1,22,44,409 made by the AO and confirmed by the CIT(A) was found to be incorrect and unsustainable. The disallowance of Rs. 1,22,44,409 depreciation on goodwill is deleted, and the AO is directed to grant depreciation as per law. As a result, the tribunal allowed the assessee’s appeal.