2010 (11) TMI 636 - AT - Income Tax

Rectification of mistakes - Depreciation - whether the purchase consideration paid by the assessee also includes payment for acquisition of intangible assets also which are eligible for depreciation as per the provisions of s. 32(1)(ii) - depreciation on intangible assets is allowable as per provisions of s. 32(1)(ii) but the term goodwill does not find place in the provisions of s. 32(1)(ii) and hence, allowing of depreciation on goodwill is not in accordance with law until and unless it is shown that the value of such goodwill is in fact the value of intangible assets such as know-how, patents, copyrights, trade marks or any other business or commercial rights of similar nature being intangible assets - Hence, to the extent the assessment order was in accordance with law in earlier years, we have approved the same and have directed the AO to allow depreciation on intangible assets as per the provisions of s. 32(1)(ii) but on the remaining amount of goodwill, if any, depreciation is not allowable as per law and hence, on this aspect, it cannot be held that depreciation should be allowed on goodwill as per the principle of consistency although the same is not allowable as per law - Appeal is allowed for statistical purpose Regarding rectification order - held that this rectification was made by the AO on the basis of disallowance of depreciation in asst. yr. 2002-03. That issue has been restored back by us to the file of the AO in asst. yr. 2002-03 also. Similar issue in this assessment year i.e., asst. yr. 2004-05 is also restored back to the file of the AO for fresh decision and hence, on this aspect also, no adjudication is called for at this stage and this issue is also restored back to the AO for fresh decision in the light of final finding on the issue of depreciation in asst. yr. 2002-03 and in the present year - appeal of the assessee is allowed for statistical purposes

Issues Involved:
1. Disallowance of depreciation claim on goodwill/intangible assets.
2. Principle of consistency in allowing depreciation.
3. Addition made by AO based on Transfer Pricing Order.
4. Rectification of carry forward of losses under Section 154.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claim on Goodwill/Intangible Assets:
The assessee, a subsidiary of a German company, acquired a lamp manufacturing division, including tangible and intangible assets, and claimed depreciation on goodwill. The AO disallowed the depreciation on goodwill for the assessment years 2002-03, 2003-04, and 2004-05, which was upheld by the CIT(A). The assessee argued that the intangible assets were essential for business operations and should be eligible for depreciation under Section 32(1)(ii). The Tribunal found that the AO did not examine whether the purchase consideration included intangible assets eligible for depreciation. The Tribunal directed the AO to reassess the value of intangible assets like trademarks, licenses, and other business rights, and allow depreciation accordingly, excluding the portion attributable to goodwill.

2. Principle of Consistency in Allowing Depreciation:
The assessee contended that depreciation on goodwill was allowed in earlier years (1999-2000 to 2001-02) and should be allowed in subsequent years based on the principle of consistency. The Tribunal noted that consistency should be maintained only if the earlier view was in accordance with the law. Since depreciation on goodwill is not explicitly allowed under Section 32(1)(ii), the Tribunal held that consistency cannot perpetuate an error. The AO was directed to allow depreciation only on eligible intangible assets, not on the entire goodwill.

3. Addition Made by AO Based on Transfer Pricing Order:
In the appeal for the assessment year 2004-05, the Revenue challenged the CIT(A)'s deletion of an addition made by the AO based on the Transfer Pricing Officer's (TPO) order. The CIT(A) found that the operating profit of the assessee's manufacturing segment was within the acceptable range of the Arm's Length Price (ALP). The Tribunal upheld the CIT(A)'s decision, noting that the TPO's rectification order also confirmed the operating profit within the acceptable range. Therefore, the Tribunal dismissed the Revenue's appeal.

4. Rectification of Carry Forward of Losses Under Section 154:
The AO passed a rectification order under Section 154, reducing the carry forward of losses for the assessment year 2004-05, based on the disallowance of depreciation in the assessment year 2002-03. The assessee argued that the rectification was done ex parte and should be kept in abeyance until the appeal for the assessment year 2002-03 was resolved. The Tribunal restored the matter to the AO for fresh decision, contingent on the final finding regarding depreciation in the assessment year 2002-03. The AO was instructed to provide the assessee with an opportunity to be heard before passing the consequential order.

Conclusion:
The Tribunal allowed the assessee's appeals for statistical purposes, directing the AO to reassess the depreciation claim on intangible assets and rectify the carry forward of losses based on the final decision on depreciation. The Revenue's appeal was dismissed.

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