Depreciation Cannot Be Claimed On Goodwill Arising From Unsigned & Unregistered Agreement: ITAT Delhi

On 10 June, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that depreciation cannot be claimed on goodwill arising from an unsigned and unregistered business transfer agreement.

Judicial Member Madhumita Roy and Accountant Member Amitabh Shukla dismissed the appeal filed by Straumann Dental India LLP for Assessment Year 2017-18 and upheld the disallowance of depreciation of Rs 16.16 crore claimed on goodwill.

The Tribunal examined the Business Transfer Agreement and observed that it amounted to “a piece of paper in the eyes of law” and lacks legal sanctity.

Straumann Dental India LLP engaged in the business of dental implants and related products and acquired the business of Equinox Sales India, a sole proprietorship of one of its designated partners, under a Business Transfer Agreement dated 23 August 2016. The taxpayer allocated Rs 129.28 crore out of the total consideration of Rs 134.51 crore towards goodwill and claimed depreciation on that amount.

The Assessing Officer disallowed the claim and held that the predecessor held no identifiable goodwill value. The Commissioner (Appeals) upheld the disallowance, and the taxpayer then approached the Tribunal.

During the proceedings, the Tribunal found inconsistencies in the taxpayer's stand. It noted that the taxpayer claimed no relationship existed between the buyer and seller, even though the seller operated as a sole proprietorship of one of the designated partners of the LLP.

The Bench also examined the Business Transfer Agreement and found that it remained neither registered nor duly signed on behalf of the buyer. It relied on the Punjab and Haryana High Court's decision in Principal Commissioner of Income Tax v. Prahalad Singh and reiterated:

“Without signatures, the document becomes anonymous piece of paper to which no credence can be given.”

The Tribunal further relied on the Supreme Court's ruling in CIT v. Balbir Singh Maini and held that an unregistered agreement has no legal effect and cannot operate in law. It also noted that the taxpayer entered into the transaction before the formation of the LLP and conducted it between related parties, contrary to its own submissions.

Lastly, the Bench concluded that the Business Transfer Agreement lacks legal sanctity and held that goodwill arising from such an arrangement carries no value in the eyes of law. It further held that the taxpayer cannot use such goodwill as a basis to claim depreciation.

Accordingly, the ITAT upheld the disallowance of depreciation of Rs 16.16 crore and dismissed the appeal.

For Assessee: Dr. Rakesh Gupta, Advocate, Shri Saksham Agarwal, Advocate, and Shri Yash Jindal, CA

For Revenue: Ms. Ranu Mukharji, CIT(DR)