2016 (12) TMI 622 - AT - Income Tax

Revision u/s 263 - allowance of depreciation on goodwill - Held that - Assessing Officer has accepted the assessee s claim of depreciation on goodwill on the reduced w.d.v. as on 1/4/2010 after making enquiries, proper verification and application of mind and therefore, ld. Pr. CIT has wrongly assumed the jurisdiction u/s 263 of the Act and the same is uncalled for and unwarranted and deserves to be quashed. We accordingly set aside the order of ld. Pr. CIT passed u/s 263 of the Act and restore that of the Assessing Officer passed u/s 143(3) of the Act dated 30.3.2014. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961.
2. Whether the original assessment order was erroneous and prejudicial to the interests of the Revenue due to the allowance of excess depreciation on goodwill.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263:

The appellant challenged the validity of the order passed by the Pr. CIT under Section 263 of the Income Tax Act, 1961, arguing that the original assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The appellant contended that the Pr. CIT did not have jurisdiction to revise the assessment order as it was based on a legally correct view. The appellant cited that the goodwill depreciation claim was correctly allowed in the original assessment order as per the definition of "written down value" in Section 43 of the Act, which considers only the depreciation actually allowed to an assessee.

The Tribunal observed that the Assessing Officer (AO) had made necessary inquiries and verifications regarding the depreciation claim on goodwill during the assessment proceedings. The AO had asked specific questions about the amortization of goodwill, and the appellant had provided detailed responses and calculations. The Tribunal noted that the AO had applied his mind and adopted a legally possible view, which was one of the permissible interpretations of the law.

The Tribunal referred to the Supreme Court's judgment in Malabar Industrial Company Ltd. vs. CIT, which stated that for the Commissioner to exercise jurisdiction under Section 263, the order must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal also cited the Gujarat High Court's judgment in Pr. CIT vs. Shri Prakash Bhagchand Khatri, which held that the AO's inquiries and application of mind during the assessment proceedings preclude the invocation of Section 263.

2. Whether the Original Assessment Order was Erroneous and Prejudicial to the Interests of the Revenue:

The Pr. CIT argued that the original assessment order was erroneous and prejudicial to the interests of the Revenue because the AO allowed excess depreciation on goodwill. The Pr. CIT contended that the goodwill arose due to the demerger of a business, and depreciation should have been allowed from the appointed date of 1st January 2007, as per the High Court's order. The Pr. CIT claimed that the appellant's depreciation claim from the assessment year 2010-11 resulted in an excess allowance of depreciation for the assessment year 2011-12.

The Tribunal examined the appellant's argument that the AO had correctly allowed depreciation on the written down value of goodwill from the assessment year 2010-11, following the Supreme Court's judgment in Smifs Securities Ltd., which held that goodwill is an asset eligible for depreciation under Section 32 of the Act. The Tribunal found that the AO had made detailed inquiries and verifications regarding the depreciation claim, and there was a full application of mind by the AO.

The Tribunal concluded that the AO had adopted a legally permissible view, and the order was not erroneous. The Tribunal noted that even if the Pr. CIT's view was adopted, it would not have adversely affected the Revenue, as the appellant could have claimed depreciation in earlier years, resulting in either brought forward losses or reduced income for those years.

Conclusion:

The Tribunal held that the Pr. CIT had wrongly assumed jurisdiction under Section 263 of the Act, as the original assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal quashed the Pr. CIT's order and restored the AO's assessment order. The appeal filed by the appellant was allowed.