ITAT Denies Depreciation On Artificial Goodwill Created Upon Intra-group Amalgamation

The Hon'ble Pune Tribunal in case of Aptara Technologies Private Limited v. DCIT¹ has held that depreciation on goodwill arising pursuant to an intra-group amalgamation is not allowable.

The Tribunal observed that the amalgamation between commonly controlled entities lacked genuineness and did not result in acquisition of any identifiable intangible asset and that the valuation adopted for recording goodwill lacked credibility.

Accordingly, the goodwill was treated as a colourable device intended to claim depreciation and reduce taxable income.

FACTS OF THE CASE

• Aptara Technologies Private Limited (“ATPL” or “the Assessee”) is an Indian company and a wholly-owned subsidiary of its US holding company, Aptara Inc. Along with the Assessee, there is another subsidiary company, Maximise Learning Private Limited ( “MLPL”), which is also 100% owned by Aptara Inc., USA
• Pursuant to a scheme of amalgamation, MLPL was merged with the Assessee. In consideration of the amalgamation, the Assessee issued equity shares to its holding company based on the prescribed swap ratio of 60.72:1
• Pursuant to a scheme of amalgamation, MLPL was merged with the Assessee. In consideration of the amalgamation, the Assessee issued equity shares to its holding company based on the prescribed swap ratio of 60.72:1
• Subsequently, the Assessee bought back a portion of its shares from the holding company at a specified price per share. The Assessee contended that no tax was payable u/s 115QA as there was no “distributed income”
• Pursuant to the amalgamation with MLPL, the Assessee issued 60,72,000 equity shares to discharge the purchase consideration. Based on a valuation report, MLPL's business was valued at INR 24.14 crore and the swap ratio was fixed at 60.72:1
• Accordingly, the Assessee computed the “amount received” per share at INR 39.76 (INR 24.14 crore ÷ 60,72,000 shares) and contended that since this exceeded the buy-back price, there was no distributed income. On this basis, it argued that Section 115QA was not attracted.
• The Assessing Officer rejected the contentions of the Assessee and held that:
  • The goodwill arising on amalgamation was artificially created without any real acquisition of an identifiable intangible asset and, therefore, depreciation was not allowable; and
  • Levied buy-back tax at 20% on the distributed income computed as the difference between buy-back consideration and the actual amount received on issue of shares (i.e., face value).
• The Commissioner of Income Tax (Appeals) [“CIT(A)”] upheld the additions made by the Assessing Officer.

On appeal before the Hon'ble Pune ITAT, the Counsel for the Assessee argued:

• On depreciation of goodwill, the Ld. Counsel for Aptara Technologies Private Limited submitted that the amalgamation was carried out pursuant to a duly approved scheme and was supported by an independent valuation report.
• It was argued that upon amalgamation, the Assessee acquired the entire business of MLPL as a going concern, including its business contracts, customer relationships, workforce and other commercial rights, which collectively constituted goodwill, which is an intangible asset eligible for depreciation u/s 32. The transaction was stated to be commercially justified and not a colourable device.
• On buy-back tax, it was argued that the “amount received” for issue of shares should be computed based on the valuation of the business of MLPL as determined under the amalgamation scheme. Since the per share value so computed exceeded the buy-back price, there was no “distributed income” within the meaning of Section 115QA and, therefore, no tax was leviable.

The Department Representative contended that:

• The amalgamation was between commonly controlled entities and did not involve any real inflow of funds. The goodwill recorded was merely an accounting entry arising from an inflated and inconsistent valuation and did not represent acquisition of any identifiable intangible asset. Accordingly, depreciation was not allowable
• On the issue of buy-back tax, it was argued that the expression “amount received” refers only to actual monetary consideration received on issue of shares and not to notional value determined under a valuation report. The buy-back, according to the Revenue, was structured as a substitute for dividend distribution and squarely attracted Section 115QA.

OBSERVATIONS OF THE PUNE ITAT

• The Income Tax Appellate Tribunal held that while goodwill arising in a genuine amalgamation between unrelated parties may be eligible for depreciation, the present case stood on a different footing
• The amalgamation was between two wholly owned subsidiaries of Aptara Inc., with no change in ultimate ownership and no real inflow of funds, only issuance of shares. The Tribunal observed that no independent commercial acquisition had taken place and no tangible business expansion or improvement in profitability was demonstrated post-merger.
• Distinguishing judicial precedents relied upon by the Assessee including Supreme Court judgement in case of Smifs Securiites, and placed reliance, inter-alia, on the decision in Invesco (India) Pvt. Ltd. v. DCIT (2025), the Tribunal concluded that the goodwill of INR 5.97 crore was an artificial creation arising from an intra-group arrangement. Accordingly, no genuine intangible asset came into existence and claim of depreciation was disallowed.
• On buy-back tax under Section 115QA, the Tribunal rejected the Assessee's computation of “amount received” based on net assets (including goodwill). Since the goodwill itself was held to be artificial, it could not be considered for computing distributed income
• The Tribunal upheld the Assessing Officer's computation of distributed income at INR 4.97 crore and confirmed levy of buy-back tax, observing that the arrangement was structured to distribute profits through buy-back instead of dividend to avoid tax.

Footnote

1 TS-14-ITAT-2026

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