2010 (8) TMI 439 - AT - Income Tax

Revision allowance of depreciation erroneous order - prejudicial to revenue - Held that - if one turns to the order of the ld. CIT, passed under section 263 of the Act, it would be clear that no finding is recorded by the revisional authority to show as to how the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Merely because according to the revisional authority the approvals/registrations etc., amounts to intangible assets was not examined by the Assessing Officer and the Assessing Officer has not applied his mind with respect to the examination and verification regarding allowability of depreciation of assets claimed as intangible assets does not mean that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue - while remanding the matter, the Commissioner of Income-tax ought not to have given a specific direction to complete the assessment in a particular manner. - Order passed by CIT u/s 263 quashed.

Issues Involved:
1. Jurisdiction under Section 263 of the Income-tax Act, 1961.
2. Whether the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue.
3. Violation of principles of natural justice.
4. Allowability of depreciation on goodwill under Section 32(1)(ii) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-tax Act, 1961:
The assessee contended that the Commissioner of Income-tax (CIT) erred in assuming jurisdiction under Section 263 of the Income-tax Act, 1961. The CIT issued a notice for revision under Section 263, observing that the Assessing Officer (AO) allowed depreciation on goodwill without proper application of mind, making the order erroneous and prejudicial to the interests of the revenue. The Tribunal emphasized that for invoking Section 263, the order must be both erroneous and prejudicial to the interests of the revenue. The Tribunal referred to the Supreme Court's interpretation in Malabar Industrial Co. Ltd. v. CIT, which stated that an order is not erroneous if the AO adopted a permissible legal course, even if it resulted in a revenue loss.

2. Whether the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue:
The CIT argued that the AO did not verify whether the licenses/approvals treated as goodwill brought into existence any new asset. The AO's failure to examine the nature of these intangible assets rendered the order erroneous and prejudicial to the revenue. However, the Tribunal noted that the AO had previously accepted the depreciation claim on goodwill for the assessment year 2003-04 and had examined the claim in detail. The Tribunal observed that the AO's acceptance of the claim after due examination does not make the order erroneous or prejudicial to the revenue. The Tribunal cited various cases, including Hindustan Coca Cola Beverages (P.) Ltd. v. Dy. CIT, where it was held that an AO's decision on a possible view cannot be reviewed merely because another view is possible.

3. Violation of principles of natural justice:
The assessee argued that the CIT violated the principles of natural justice by not providing a fair opportunity to present its case. The Tribunal noted that the CIT had issued a show-cause notice and considered the assessee's submissions before passing the order. Therefore, the Tribunal did not find any violation of natural justice principles.

4. Allowability of depreciation on goodwill under Section 32(1)(ii) of the Income-tax Act, 1961:
The Tribunal examined whether the depreciation on goodwill is allowable under Section 32(1)(ii), which includes intangible assets like know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. The Tribunal referred to various judgments supporting the view that goodwill falls under the category of intangible assets eligible for depreciation. Cases like A.P. Paper Mills Ltd. v. Asstt. CIT and CLC Global Ltd. v. Asstt. CIT were cited, where it was held that goodwill, being a commercial right, is entitled to depreciation under Section 32(1)(ii). The Tribunal concluded that the approvals/registrations treated as goodwill by the assessee amounted to intangible assets eligible for depreciation.

Conclusion:
The Tribunal upheld the order passed by the AO, quashing the CIT's order under Section 263. The Tribunal found that the AO's decision to allow depreciation on goodwill was a possible view supported by law, and the CIT was not justified in setting aside the AO's order. The assessee's appeal was allowed.

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